Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

Intersegmental: Student Fees

The Governor's budget includes numerous proposals relating to student fees. Specifically, the budget proposes to:

• Increase the per unit fee at the California Community Colleges (CCC) by 44 percent—from the current-year rate of $18 per unit to $26 per unit.
• Waive the per unit CCC fee for freshmen who have been redirected from the University of California (UC) and the California State University (CSU).
• Increase resident undergraduate fees at UC and CSU by 10 percent, resident graduate fees by 40 percent, and nonresident tuition by 20 percent.
• Reduce by 25 percent the General Fund subsidy provided to UC professional schools as well as Hastings College of the Law—with the expectation that this reduction would be offset with increases in student fees.
• Establish two new surcharges: (1) an "excess unit" surcharge at UC and CSU for each unit taken in excess of 110 percent of the units required for a baccalaureate degree (for which students would be charged full cost), and (2) a surcharge for CCC students who already have a baccalaureate degree (raising their per unit fee from $18 to $50).

In addition to these budget-year proposals, the administration proposes to establish a long-term undergraduate and graduate fee policy for UC and CSU. The policy would not apply to CCC or professional schools. The administration's policy consists of two major components.

• Modest and Predictable Annual Adjustments. Undergraduate and graduate fees at UC and CSU would increase annually. Typically, fees would increase by the change in per capita personal income, but the policy would allow for increases of as much as 10 percent.
• Differential Rates for Undergraduates and Graduates. Graduate fees would be pegged at 150 percent of undergraduate fees and would be allowed to increase more quickly than undergraduate fees over the next several years until this target was met. (That is, over the near term, graduate fees would not be subject to the 10 percent cap.) Once the target has been reached, graduate and undergraduate fees would be adjusted annually by the same rate (change in per capita income) and both would be subject to the 10 percent cap.

In this chapter, we discuss the Governor's budget and policy proposals relating to (1) undergraduate and graduate fees, (2) professional school fees, and (3) the fee surcharges.

Undergraduate and Graduate Fees

In this section, we assess the administration's proposed long-term fee policy and offer an alternative. We then use this alternative policy to analyze the Governor's budget proposals relating to undergraduate and graduate fees. We recommend the Legislature approve the proposed 10 percent increase in undergraduate fees but adopt a more moderate increase (of 30 percent) in graduate fees. We then use our alternative policy to illustrate how fees might be increased over the next several years. Finally, we recommend the Legislature (1) encourage higher fees for higher-cost graduate programs at CSU (consistent with existing practice at UC) and (2) achieve an additional $9.5 million in General Fund savings by counting summer fee revenue at CSU as available for offsetting General Fund reductions in 2004-05.

Background

California's existing higher education fees are not rooted in a long-term policy that designates how fees should be set and adjusted over time. Instead, existing fees are the result of a series of short-term decisions driven almost entirely by the state's fiscal situation. For example, in the late 1990s, the state actually reduced fees despite a strong economy, healthy rises in per capita income, burgeoning financial aid opportunities, and a general increase in fees across the county. Similarly, over the past two years, student fees have been raised significantly in response to the state's fiscal condition, yet these fee increases have not been linked to any specific fee target or underlying policy rationale.

Not only do California's existing fees lack a long-term policy foundation, they are also very low by various standard measures. Figure 1 compares existing fees at UC and CSU with their comparison institutions and compares CCC fees with the national average. As the figure shows, resident undergraduate and graduate fees at UC and CSU are the lowest of all their public comparison institutions. In the current year, total UC undergraduate and graduate fees are 20 percent less and 25 percent less, respectively, than the average fees charged by its four public comparison institutions. Total CSU undergraduate and graduate fees are less than half the average fees at its 15 public comparison institutions. Fees at CCC are the most anomalous. The current level of $18 per unit is the lowest in the nation and roughly one-fourth of the national average. Furthermore, students currently are paying a small share of their total education costs. In 2003-04, UC, CSU, and CCC students are paying only 26 percent, 17 percent, and 12 percent, respectively, of their total education costs.

Set Fees at Fixed Percentage of Students' Total Education Costs

We recommend the Legislature adopt a long-term statutory policy for the University of California, the California State University, and the California Community Colleges that would set fees at a fixed percentage of students' total education costs. This policy would provide an underlying rationale for fee levels. It also would ensure moderate and gradual fee increases, treat students fairly across time, create incentives for students to hold the segments accountable for keeping costs low and quality high, and formally recognize the private as well as public benefits of higher education.

The Governor's proposed fee policy adheres to two principles that we think are important components of any fee policy: (1) fees should be adjusted annually in a moderate, gradual, and predictable manner; and (2) fees should reflect underlying costs. Thus, the Governor's policy proposal serves as a useful starting point for building a long-term fee policy. However, the Governor's proposal lacks an underlying rationale for fee levels. Instead, it assumes that the current undergraduate fee is appropriate. The graduate fee is then set 150 percent higher than the undergraduate fee and both fee levels are adjusted in tandem annually thereafter.

Adopt Rationale for Fee Levels. Given the current undergraduate fee level is not rooted in an underlying policy basis, we do not think it is a sound foundation for a new long-term policy. In contrast to the Governor's proposal, we recommend the Legislature adopt a long-term statutory policy that provides an underlying rationale for fee levels—that is, an explicit statement about what fee levels should be and how they should be adjusted over time. We specifically recommend that resident fees be linked to a fixed percentage of students' total education costs (for example, 30 percent or 50 percent of total costs). For nonresident students, we recommend setting fees equal to total education costs.

In determining the specific percentage(s) at which to set student fees, the Legislature may want to consider many factors—ranging from fee and financial aid policies at comparison institutions to students' future earnings potential to the public benefit society receives from higher education. For purposes of illustration, at the University of Michigan (UM), Ann Arbor—one of UC's comparison institutions—resident undergraduate tuition is about 28 percent of total per student expenditures. For the University of Wisconsin (UW), Milwaukee—one of CSU's comparison institutions—undergraduate tuition is about 41 percent of total education costs.

Account for Differences in Education Costs. Because the cost of providing graduate education is generally higher than the cost of undergraduate education, our policy proposal would result in graduate fees that are higher than undergraduate fees. Both segments estimate that graduate education costs about 50 percent more than undergraduate education. (Although neither UC nor CSU has conducted a recent study of the difference between undergraduate and graduate education costs, both suggest this type of study would be very intensive because most faculty members have responsibilities for teaching both undergraduates and graduates and their particular mix of responsibilities varies by term.) We think the segments' estimate is reasonable and provides an adequate basis for approximating the costs of graduate education. Therefore, we recommend the Legislature set graduate fees at 150 percent of undergraduate fees.

This differential is similar to that in place at many comparison institutions. Graduate fees at UC's comparison institutions, on average, are 133 percent of undergraduate fees. Among UC's public comparison institutions, UM has the greatest differential—charging resident graduates 52 percent more than resident undergraduates. Graduate fees at CSU's comparison institutions, on average, are 112 percent of undergraduate fees, although UW has a 145 percent differential and Cleveland State University (another of CSU's comparison institutions) has a 151 percent differential.

Set Fee Targets. We recommend the Legislature establish fee targets based upon this long-term policy. For purposes of illustration, Figure 2 shows what the fee targets would be if resident student fees were set at 50 percent of total education costs, nonresident fees were set at 100 percent of total costs, and graduate fees were set at 150 percent of undergraduate fees. As the figure shows, the fee targets for resident undergraduates at UC, CSU, and CCC would be $8,900, $5,800, and $2,300, respectively, whereas the fee target for resident graduates at UC and CSU would be $13,400 and $8,600, respectively.

Benefits of Adopting Explicit Fee Basis. Adopting an explicit policy basis for setting fee levels has numerous benefits. In particular, the percentage-of-total-costs methodology: (1) ensures that different cohorts of students are treated fairly over time, (2) provides direct incentives for students to hold the segments accountable for keeping costs low and quality high, and (3) formally recognizes the private as well as public benefits of higher education. We highlight these benefits below.

• Treats Students Fairly Over Time. Linking fees to a fixed percentage of total education costs would ensure that students attending public colleges and universities over time contribute equally to their college education. This would be fairer than the current practice of reducing students' contribution in good fiscal times and increasing students' contribution in bad fiscal times—that is, having different expectations for different cohorts of students depending on when they attended college. Under our policy alternative, the state's expectation is consistent over time across all cohorts of students.
• Strengthens Accountability. If student fees were linked to total education costs, students would have a greater incentive to hold universities directly accountable for keeping costs low and quality high. This is because a portion of any increase in the cost of education would be automatically passed on to students in the form of higher fees.
• Recognizes Both Public and Private Benefits of Higher Education. Our policy alternative also explicitly recognizes that higher education provides both public and private benefits. Although causation is difficult to assess, many studies have found a very high correlation between individual earnings and level of education attainment. In 2001, for example, the median earnings of males age 25 or older working full-time was $33,000 for those with a high school diploma, $53,100 for those with a baccalaureate degree, $66,900 for those with a Master's degree, and $100,000 for those with a professional degree—more than three times the earnings of a male without a postsecondary degree.

Use New Policy to Develop Budget-Year Plan and Out-Year Implementation Plan

We recommend the Legislature use the percentage-of-total-costs policy to assess the appropriateness of existing fee levels, determine specific fee increases for the budget year, and develop a plan for raising fees over the next several years until the established fee targets have been met. Once met, we recommend the fee levels be adjusted annually holding the percentage-of-total-costs steady.

Once a certain percentage of total education costs has been selected as the underlying basis of student fees, we recommend that current fee levels be examined in relationship to the fee targets. This assessment process then could be used to determine both specific fee increases for the budget year and scheduled fee increases over the next several years.

Distance From Current Rates to Fee Targets Varies. Figure 2 compared existing fee levels with a 50 percent-of-cost fee target for resident students and a 100 percent-of-cost fee target for nonresident students. For resident undergraduate fees, UC's existing fee is closest to the target (at 38 percent beneath target), the community college fee is farthest from the target (at 77 percent beneath target), and CSU's fee is more than 50 percent beneath the target. Resident and nonresident graduate fees at UC and CSU also are considerably lower than the targets. In contrast, nonresident undergraduate fees at CSU are only slightly lower than the target and, at UC, they already are above target (meaning these students already are paying more than their full cost of education). Even if the Legislature selected different targets than used in our illustration, the basic relationships shown would remain the same.

Recommend Adoption of Governor's Resident Undergraduate Fee Proposals. For the budget year, as the first step in linking fees to a percent-of-cost policy, we recommend approving the (1) relatively moderate 10 percent increase in UC and CSU fees and (2) $8 per unit increase in CCC fees. Although CCC fees would experience a larger percentage increase than UC and CSU fees, the amount of the increase for the average full-time student would be $192 per year—still reflecting a very moderate increase. Moreover, raising the per unit fee to $26 would enable financially needy CCC students to obtain the maximum federal Pell Grant. As we discussed in the 2003-04 Analysis, California is the only state in the nation that has such low CCC fees that its financially needy students are not eligible for the maximum Pell Grant award. A per unit fee of $26 is the lowest fee level that would enable CCC students to obtain the maxi mum grant of $4,050, or $112 more than they currently are able to receive. (Given that the Board of Governor's fee waiver program covers all student fees for needy students, this additional Pell Grant assistance would be available to cover a greater share of students' living expenses.)

Recommend Adoption of Governor's Nonresident Graduate Fee Proposals. We also recommend the Legislature approve the 20 percent increase in nonresident graduate fees at UC and CSU. As Figure 2 shows, these students currently are paying considerably less than their full education costs. At both UC and CSU, these fees are less that 80 percent of total costs. Thus, we recommend raising these fees as the first step in linking them with a percent-of-cost policy.

Recommend Moderate Increase in Graduate Fees. Although graduate fees (like undergraduate fees) are considerably beneath the 50 percent-of-cost target, we think the proposed 40 percent fee increases are too large and substantially deviate from the principle that fees be increased gradually and moderately. Additionally, UC already has stated that the Board of Regents is likely either to: (1) increase undergraduate fees by more than 10 percent to reduce the proposed 40 percent graduate fee increases or (2) redirect monies from its undergraduate institutional aid budget to its graduate institutional aid budget. In essence, this latter option would result in undergraduates directly subsidizing graduate students. This would represent a significant deviation from a longstanding UC policy that avoids this kind of direct cross-subsidization. Rather than allowing for these types of deviations, we recommend the Legislature increase graduate fees more moderately (by 30 percent) and then schedule additional increases in future years. Raising graduate fees by 30 percent rather than 40 percent would result in less fee revenue being available to offset General Fund reductions. Specifically, UC and CSU, respectively, would generate $18 million and $15 million less in student fee revenue. We have identified potential savings elsewhere in higher education sufficient to offset this foregone revenue.

Recommend Not Charging Nonresident Undergraduates More Than Full Cost. Although the Governor's budget proposes to increase nonresident undergraduate fees by 20 percent, these students already are paying either more than their full cost of education (at UC) or just slightly less than their full cost of education (at CSU). At UC, nonresident undergraduates are paying about $2,000, or 11 percent, more than their total education costs. For the next few years, we recommend holding these fee levels steady. Once the fee is equal to total education costs, we recommend adjusting it annually so that it continues to equal total costs.

By comparison, nonresident undergraduates at CSU are paying about $500 less than their total costs. In the budget year, we recommend raising the fee by 3.5 percent, such that the new tuition and fee level would equal total education costs. As for nonresidents generally, we recommend annually adjusting the fee level such that it continues to equal total costs. As with lowering the graduate fee increase, lowering the nonresident undergraduate fee increase would result in UC and CSU collecting less fee revenue than under the Governor's budget proposal. Specifically, UC and CSU, respectively, would generate $18 million and $11 million less in student fee revenue. We have identified savings elsewhere in higher education sufficient to offset this foregone revenue.

Develop Out-Year Implementation Plan. We further recommend the Legislature develop an implementation plan that schedules future fee increases. The specific schedule would depend on the percent-of-cost target the Legislature selected. For example, if the target were set at 50 percent of total costs, then UC resident fees could be raised 10 percent annually from 2005-06 through 2010-11, at which time both undergraduate and graduate fees would have reached the target. At CSU, with 10 percent annual increases, undergraduate and graduate fees would reach the 50 percent-of-cost target by 2014-15 and 2017-18, respectively. By comparison, with 10 percent annual increases, CCC fees would not reach the 50 percent-of-cost target until 2020-21. Regardless of the specific targets selected, having a systematic out-year implementation plan would ensure that the fee adjustments needed to reach the selected targets were scheduled in a gradual, moderate, and predictable manner.

Encourage Higher Fees for Higher-Cost Graduate Programs at CSU

We recommend the Legislature encourage the California State University (CSU) to establish higher fees for its higher-cost graduate programs. This would be consistent with current practice at the University of California and most of CSU's comparison institutions, as well as consistent with our recommended long-term fee policy that links student fees with actual education costs. If these higher fees were instituted, we estimate CSU could generate $2 million in additional student fee revenue, thereby providing a like amount of General Fund savings.

Currently, CSU charges the same graduate fee to students enrolled in all its graduate programs. We recommend the Legislature encourage CSU to establish higher fee levels for higher-cost graduate programs, thereby generating additional fee revenue and a like amount of General Fund savings.

Consistent With Fee Structures at Many Other Public Universities. Differential graduate fee levels already exist at UC and at least 10 of CSU's 15 public comparison institutions. These universities have multiple graduate fee levels that vary by graduate program. For example, UC charges higher student fees for Master degree programs in business, nursing, and cinema. Similarly, many of CSU's public comparison institutions charge higher fees for graduate programs in business, engineering, architecture, nursing and other health sciences, and social work. One of the primary reasons these types of programs charge higher fees is because they are more costly to operate. For example, many of these types of programs involve clinical fieldwork or rely on expensive instructional equipment.

Consistent With Alternative Long-Term Fee Policy. Encouraging higher fees for higher-cost programs also would be consistent with the fee policy that we recommend the Legislature adopt for undergraduate and graduate students. This policy, as described above, would connect student fees to education costs. As it applies here, CSU would be allowed to calculate costs separately for certain types of graduate programs, thereby allowing it to set fees that more accurately reflect actual education costs. Currently, although the state General Fund is contributing more to these programs, participating students are not required to pay higher fees than graduate students participating in substantially lower-cost programs.

Score $2 Million in General Fund Savings. For the budget year, we recommend the Legislature score $2 million in General Fund savings associated with these higher fees. Although the precise amount of revenue CSU would generate from these higher fees obviously would depend on the number and size of the programs to which the Board of Trustees applied the fees, we estimate that at least 4,000 students likely would be subject to higher fees. (This estimate is based on the number of students enrolled in graduate programs in business, nursing, and cinema in 2002-03.) If these students each paid 15 percent more than the 2004-05 graduate fee level (either as proposed in the Governor's budget or recommended as part of our fee alternative), CSU would generate approximately $2 million.

Score Additional $9.5 Million Associated With CSU's Summer Term

We recommend the Legislature achieve an additional $9.5 million in General Fund savings by applying the 2004-05 undergraduate and graduate fee increases either to summer 2004 or summer 2005.

Since 2001-02 (when the state began directly funding summer sessions), UC and CSU have considered summer the first term of the fiscal year. Following this practice, UC imposed the 2003-04 fee increases beginning in summer 2003. This budgeting practice meant that the fee revenue UC generated in summer 2003 could be used to backfill General Fund reductions taken in the 2003-04 fiscal year. Similarly, UC plans to impose the 2004-05 fee increases beginning in summer 2004, and it anticipates that fee revenue generated in summer 2004 would be available to backfill General Fund reductions taken in 2004-05. Thus, UC's 2004-05 fee revenue estimates account for the additional fee revenue expected in summer 2004.

In contrast, CSU did not impose the 2003-04 fee increases until fall 2003. Thus, this fee increase did not affect summer-term students until summer 2004. Apparently, this was done because of the late enactment of the budget. Despite this decision, the 2003-04 budget assumed that additional summer fee revenue would backfill a portion of CSU's 2003-04 General Fund reductions. The CSU's decision to delay the fee increase until summer 2004 generated a short-term cash flow problem for 2003-04 that will be alleviated once CSU collects summer 2004 fee revenue.

Consistent with CSU's current-year practice, the Governor's budget assumes that the 2004-05 fee increases will not be operative at CSU until fall 2004, but, unlike CSU's current-year practice, it assumes revenue generated in summer 2005 would count as 2005-06 revenues rather than toward the 2004-05 fiscal year. In short, the Governor's budget would treat 2004-05 as an anomalous year in which CSU would count no summer fee revenue as available for offsetting proposed General Fund reductions.

We recommend the Legislature score additional summer fee revenue as available to offset 2004-05 General Fund reductions. Specifically, we recommend the Legislature take one of two actions—either of which would achieve an additional $9.5 million in General Fund savings in the budget year:

• Apply the 2004-05 Fee Increases to CSU's Summer 2004 Term. Given CSU's delay of the 2003-04 fee increases until summer 2004, this action, in essence, would result in applying both the 2003-04 and 2004-05 fee increases simultaneously on the summer 2004 term. This action, however, would realign CSU with UC's existing practice, which, as noted above, would be to apply the 2004-05 fee increases beginning in summer 2004.
• Delay Fee Increase to Summer 2005 but Apply Revenue Toward 2004-05. Alternatively, the 2004-05 fee increases could be delayed until fall 2004 but the revenue generated in summer 2005 could be counted toward 2004-05. This practice would be consistent with CSU's current-year practice.

We think the first option has the distinct advantages of being consistent with both the standard practice of counting summer as the first term of the fiscal year as well as with UC's existing practice. The second option, however, would allow CSU to phase in the proposed fee increases more gradually. Regardless of which option is selected, the result would be the same level of General Fund savings.

Professional School Fees

The Governor's budget proposes to reduce total General Fund support for professional schools by 25 percent. This reduction would apply to all UC professional schools except nursing, as well as to Hastings College of the Law. The Governor's budget assumes $42.6 million in General Fund savings associated with UC's professional schools and $3 million in savings associated with Hastings. The Governor's budget assumes that UC and Hastings would increase student fees to offset these General Fund reductions.

Specific Fee Increases Not Yet Determined. At the time of this analysis, neither UC nor Hastings had finalized its 2004-05 fee levels. The UC therefore had not yet determined the specific fee increases that would apply to each of its nine professional programs. It has suggested that student fees likely would be raised by between $4,000 and $7,000 for each professional program (except nursing, for which student fees would remain at the 2003-04 level). Figure 3 illustrates what 2004-05 student fee levels would be if the same dollar increase were applied to each of UC's existing professional fee levels. The average fee increase would be $4,900. By comparison, Hastings proposes to increase student fees by approximately $4,200 for resident students and $6,300 for nonresident students.

Professional Fee Increases Comparable to or Less Than Other Graduate Fee Increases. We estimate that UC could accommodate the proposed General Fund reduction by raising total resident and nonresident charges each by 25 percent. (This would result in resident and nonresident students paying, on average, $3,500 and $8,200 more, respectively, in 2004-05 than in 2003-04.) Similarly, Hastings-proposed 2004-05 fees are 27 percent and 24 percent higher than the current-year levels for resident and nonresident students, respectively. These percentage increases are actually less than the 40 percent increases the Governor's budget proposes for other graduate students at UC and CSU. They are comparable to the 30 percent increases we recommend for graduate students at UC and CSU. Thus, we think the proposed General Fund reductions are reasonable and proportional to reductions proposed for other areas of higher education.

Critical Budgeting Assumption Reduces Potential General Fund Savings by $56 Million

When calculating the amount associated with the Governor's 25 percent reduction proposal, the Governor's budget adopts a critical budgeting assumption that reduces potential General Fund savings by $56 million. To assess both the viability of the proposed savings and the potential to achieve additional savings, we recommend the Legislature request the University of California (UC) to provide additional detail on current-year expenditures for its professional schools. Specifically, during budget hearings, UC should provide: (1) an accurate accounting of its professional school enrollment and (2) the current-year budget for each of its professional schools.

In spring 2003, UC provided our office with an accounting of professional school expenditures for 2001-02—the most recent year for which actual expenditure data were available. According to these data, UC's professional programs spent a total of $2.6 billion. Of this amount, $444 million was from the state General Fund. Assuming UC's professional programs experienced General Fund reductions in 2002-03 and 2003-04 consistent with UC's overall General Fund reductions, we estimate the state currently is providing about $395 million for these programs.

Budgeting Assumption Reduces Potential General Fund Savings by $56 Million. As described above, the Governor's budget proposes to reduce total General Fund support for UC professional schools by 25 percent. For purposes of calculating this reduction, the budget assumes that less than half of the $395 million currently provided for UC's professional programs is associated directly with professional school students. This assumption reduces potential General Fund savings by $56 million. (Rather than saving $99 million [25 percent of $395 million], UC estimates savings of only $43 million.) The UC made this assumption because it estimates that only about half of the students enrolled in classes in professional programs are graduate professional-degree seekers. The rest are assumed to be undergraduates, graduate students seeking doctoral degrees rather than professional degrees, or medical residents who already have obtained their professional degree. The UC has not been able to provide any documentation substantiating this claim.

Insufficient Documentation to Determine if General Fund Savings Calculated Appropriately. These figures are troubling because they suggest either (1) about half of UC's documented professional school expenditures are not really related to professional school activities or (2) the Governor's budget proposal substantially underestimates potential savings. To determine just how much savings actually is associated with specific reduction proposals, we recommend the Legislature request UC to provide the following information during budget hearings.

• An accurate accounting of undergraduate, graduate, and professional school enrollment in each of UC's professional programs.
• The current-year budget for each of UC's professional programs, broken down by funding source and major expenditure categories.

We recommend the Legislature use this information to determine if additional General Fund savings should be achieved.

New Fee Surcharges

The Governor's budget proposes to establish two new fee surcharges. Below, we discuss these proposals. We recommend the Legislature approve both of the new surcharges.

Excess Unit Surcharge

The Governor's budget proposes to establish a per-unit surcharge for undergraduate students at UC and CSU who enroll in considerably more classes than required to obtain a baccalaureate degree. Specifically, for each unit taken beyond 110 percent of the units required to obtain a baccalaureate degree, students would be charged the full cost of instruction. For most programs, the cap would be set at 198 quarter units and 132 semester units. The Governor's budget includes associated General Fund reductions of $9.3 million and $24.4 million for UC and CSU, respectively. The Governor's budget is ambiguous in that it scores the General Fund savings but assumes that the new surcharge actually would generate no additional fee revenue in 2004-05. Thus, it remains unclear whether the proposal is intended as a fund shift (from General Fund to fees) or an unallocated General Fund reduction.

The UC and CSU have raised four issues regarding the implementation of the surcharge in the budget year. We discuss these issues below.

Still Determining Who Would Be Subject to the New Surcharge. The UC in particular has several concerns about applying the surcharge policy to students pursuing double majors and "high-unit" majors. Despite these concerns, the administration's proposal offers UC considerable flexibility in implementing the surcharge and presumably UC could choose to exempt certain students, such as double majors, from the unit cap. Exempting students from the surcharge, however, obviously reduces the additional fee revenue that could be generated.

Different Interpretations of Phase In. No common understanding appears to exist regarding the proposal's phase-in requirements. The CSU, for example, interprets phasing in to mean that the policy should apply only to entering freshmen. Under this scenario, CSU would not begin to generate additional fee revenue until 2008-09 (at the earliest). In contrast, the Governor's budget documents suggest that phasing in would mean the policy would be applied selectively in the budget year—affecting only some of the students taking excess units.

Revenue Estimates Still Being Disputed. Both UC and CSU have expressed some reservations about their ability to generate additional fee revenue sufficient to offset the associated General Fund reductions proposed in the Governor's budget. Compared to the $9.3 million estimate included in the Governor's budget, UC estimates that it would generate between $2.7 million and $10.5 million when the surcharge policy was fully implemented. Because CSU believes it would phase in the surcharge beginning with freshmen in 2004-05, it questions whether it can achieve any associated fee revenue in the budget year.

If Effective Over Long Term, Little Additional Fee Revenue Would Be Expected. If this surcharge policy is effective, then most undergraduates would focus their studies and avoid taking excess units. As a result, UC and CSU actually would generate little additional fee revenue. They would, however, free up state-supported enrollment slots, which would either permit the enrollment of additional students with the same level of funding or reduce overall costs.

Aggressively Pursue Option, Link With Reporting Requirement

We recommend the Legislature institute the general policy of charging full cost for excess units, and, unless the segments can reasonably defend alternative revenue estimates, score the $33.7 million in General Fund savings included in the Governor's budget. Additionally, we recommend the Legislature request the University of California and the California State University to report on the actual implementation of the surcharge during next year's budget hearings.

Despite the segments' concerns noted above, we believe the administration's estimates of General Fund savings are relatively conservative. Rather than assuming that the new surcharge would apply to every excess unit likely to be taken in 2004-05, the Department of Finance (DOF) assumes the surcharge would apply only to one in every five excess units taken. This assumption affords UC and CSU considerable discretion to determine how best to apply the policy in the budget year. Because we believe the policy itself is reasonable, in the absence of more refined revenue estimates from the segments, we recommend the Legislature score the $33.7 million in General Fund savings as proposed in the Governor's budget.

At the same time, we recognize there are legitimate concerns regarding how this policy will be implemented. We therefore recommend the Legislature adopt supplemental report language requesting UC and CSU to provide an implementation update by April 1, 2005. Specifically, UC and CSU should provide the following information regarding their implementation of the surcharge: (1) the policy they used to determine who would be subject to the surcharge, (2) the specific surcharge they applied, (3) an estimate of the number of students subject to the surcharge, and (4) the average number of excess units taken by these students. The Legislature then could review this material, reassess the associated budget estimates, and make appropriate budget adjustments.

Baccalaureate Surcharge

The Governor's budget proposes to establish a surcharge for CCC students who already have obtained a baccalaureate degree. Rather than paying $26 per unit, as the Governor's budget proposes for other CCC students, baccalaureate holders would pay $50 per unit. A typical full-time CCC student with a baccalaureate degree would pay $1,200 per year—still almost 40 percent less than the national average and only about 30 percent of their total education costs. The DOF estimates that approximately 48,000 full-time equivalent students would be subject to the surcharge, and CCC would generate an additional $18 million in associated student fee revenue.

We recommend the Legislature approve this baccalaureate surcharge. Akin to the Governor's proposal to institute an excess-unit surcharge for UC and CSU students, we think charging higher fees to CCC students who already have obtained a four-year college education would appropriately target state higher education subsidies where they are needed most.