LAO 2004-05 Budget Analysis: General Government

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004

Intersegmental: Financial Aid

The Governor's budget includes several financial aid proposals relating to the statewide Cal Grant program as well as the University of California (UC) and the California State University's (CSU) institutional aid programs.

Cal Grant Proposals. As Figure 1 shows, the Governor's budget includes four Cal Grant proposals. The Governor's budget funds an increase in the total number of Cal Grant awards to be issued in 2004-05, but it reduces the Cal Grant income ceilings. This latter proposal would reduce the number of new students who would qualify for the Cal Grant Entitlement program. Additionally, the Governor's budget reduces the Cal Grant for private university students by 44 percent (dropping the award from its current-year level of $9,708 to $5,482) and maintains Cal Grants for UC and CSU students at their current-year level (equal to the 2003-04 systemwide student fee at both segments). Because the Governor's budget proposes to increase the systemwide student fee at UC and CSU by 10 percent, Cal Grants for UC and CSU students would, for the first time in many years, be "decoupled" from the full systemwide fee. Whereas the income ceiling proposal and private university grant proposal would affect only new award cohorts, the public university grant proposal would affect both new and renewal cohorts.

Institutional Aid Proposals. Regarding institutional financial aid programs, the Governor's budget assumes that UC and CSU will set aside 20 percent of additional student fee revenue for need-based institutional aid. At CSU, the Governor's budget also proposes to eliminate a relatively small and specialized institutional aid program known as the Educational Opportunity Program (EOP).

Figure 1 compares the Governor's financial aid proposals with our recommended alternative. Our general approach is to restore reductions to the Cal Grant Entitlement program by freeing up resources elsewhere. Specifically, we recommend the Legislature reject the Governor's budget proposals to (1) lower the Cal Grant Entitlement program's income ceilings, (2) reduce the private university Cal Grant, and (3) decouple the public university Cal Grant from the proposed 2004-05 systemwide fee level. To offset these expenditures, we recommend the Legislature (1) not expand UC and CSU's undergraduate institutional aid programs and (2) approve the Governor's budget proposal to eliminate CSU's EOP program and make a comparable reduction to UC's base undergraduate institutional aid budget. In total, our alternative package would save $4.2 million compared to the Governor's proposal.

Figure 1

Financial Aid Proposals

(In Millions)

 

Change From 2003‑04

Budget Proposal

Governor's Budget

LAO
Alternative

Difference

Cal Grant Program

 

 

 

Increase number of Cal Grants

$93.1

$73.3

-$19.8

Reduce income ceilings

-11.2

11.2

Reduce grant for private-college students

-32.7

1.5

34.3

Decouple grant from UC and CSU fees

18.7

18.7

  Totals

$49.2

$93.5

$44.3

University of California

 

 

 

Institutional aid augmentation for undergraduates

$19.4

  

-$19.4

Base reduction to undergraduate institutional aid

  

-$16.2

-16.2

Institutional aid augmentation for graduates

18.9

18.9

  

  Totals

$38.3

$2.7

-$35.6

California State University

 

 

 

Institutional aid augmentation for undergraduates

$12.9

  

-$12.9

Eliminate Educational Opportunity Program

-17.4

-$17.4

  

Institutional aid augmentation for graduates

13.5

13.5

  

  Totals

$9.0

-$3.9

-$12.9

    Net Effects

$96.6

$92.4

-$4.2

In this piece, we:

Concerns With Projected Cal Grant Cost Estimates

As Figure 2 shows, since 2001-02, the Cal Grant A and Cal Grant B programs have been consistently overbudgeted. The 2001-02 Budget Act, for example, provided $72 million more than was needed to fully fund the program that year. This represented a 14 percent budgeting error. This overestimation of costs was commonly attributed to the "newness" of the Cal Grant entitlement program. During its first year of operation, entitlement costs were uncertain and the state budgeted generously. The 2002-03 Budget Act, however, continued to overbudget—providing $83 million, or 15 percent, more than needed to fully fund the program. For the current year, the Governor proposes to revert $50 million in excess Cal Grant funding, though the commission has not yet reconciled all its Cal Grant payments and even more may revert by the end of the fiscal year. We are concerned with both the magnitude and regularity of the overbudgeting these last three years.

Budget-Year Estimates Appear Inflated. As shown in Figure 1, the Governor's budget includes a net Cal Grant augmentation of $49 million, which represents growth of 8 percent. Although some growth in program costs would occur in a typical year due to population growth, the Governor's budget includes several proposals that would reduce program costs. Specifically, the Governor's budget proposes lowering Cal Grant income ceilings, thereby reducing the number of new students who would qualify for the program. It also proposes to provide no enrollment growth at UC and CSU and redirects 10 percent of their first-time freshmen to the community colleges. Finally, the proposal would reduce the maximum award amount for students attending private institutions. Taken together, these proposals would noticeably reduce Cal Grants costs. Given the size of the proposed augmentation, these changes do not appear to have been taken fully into account.

Figure 2

Cal Grant A and Cal Grant B Programs
Consistently Overbudgeted

(Dollars in Millions)

 

Cal Grant A and
Cal Grant B Budget

2001‑02

 

Budget Act

$567.5

Revised budget

505.1

Actual expenditures

495.4

Reversion

72.1 (14%)

2002‑03

 

Budget Act

$612.1

Revised budget

556.7

Actual expenditures

528.9

Reversion

83.3 (15%)

2003‑04

 

Budget Act

$648.9

Revised budget

599.4

Reversiona

49.5 (8%)

 

a  Current estimate.

Inflated Award Assumptions. One of our primary concerns is the trend to overestimate the number of new entitlement awards. As Figure 3 shows, new entitlement awards have been significantly overestimated every year since the inception of the program. The Governor's budget appears to continue this trend by assuming that 66,000 new high school entitlement awards will be issued in 2004-05. This is almost 6,000 more awards than issued in the current year—despite the effect of the Governor's proposals to reduce the number of awards issued in the budget year. The Governor's budget also is likely to have overestimated the number of new transfer entitlement awards. Again, notwithstanding the Governor's offsetting budget-year proposals, it assumes 32 percent growth in the number of new transfer entitlements issued in 2004-05. Given prior-year take rates and attrition rates, we also have concerns that the Governor's assumption of 40 percent growth in the number of renewal competitive awards is likely to be too high.

Figure 3

New High School Entitlement Awards
Have Been Overestimated Every Year

 

2001‑02

2002‑03

2003‑04

Awards assumed in Budget Act

72,568

65,000

66,000

Actual awards issued

48,420

60,743

60,359

  Overestimate

24,148

4,257

5,641

Excess Funding Should Be Used for Identified Cal Grant Needs

We recommend the Legislature adopt more realistic Cal Grant assumptions, thereby generating $20 million that could be used for identified Cal Grant needs.

Given the trend over the last three years to substantially overestimate Cal Grant awards, overfund Cal Grant costs, and revert substantial savings at year's end, we recommend the Legislature initially adopt more realistic budgeting assumptions. Figure 4 lists the various adjustments we recommend. Specifically, given our concerns expressed above, we recommend the Legislature make more realistic assumptions regarding the number of new and renewal awards to be issued in the budget year. Additionally, we recommend the Legislature revert an additional $1.5 million (on top of the $50 million the Governor's budget reflects) that the commission already is reflecting as current-year savings.

The aggregate fiscal effect of all these changes is $20 million in General Fund savings. We recommend these monies be designated in the budget year for maintaining the existing Cal Grant eligibility pool and sustaining existing Cal Grant entitlement benefits, as discussed below.

Income Ceilings

The Governor's budget proposes to lower the Cal Grant income ceilings by 10 percent. The proposal would apply to both the Cal Grant A and Cal Grant B programs and to both dependent and independent students. The change, however, would affect only new award cohorts (not existing Cal Grant recipients). The Governor's budget assumes this proposal would achieve $11 million in General Fund savings—all attributable to fewer students qualifying for entitlement awards. The proposal would result in approximately 5,000, or 8 percent, fewer entitlement awards being issued in 2004-05, with a slightly greater loss in Cal Grant A awards than Cal Grant B awards. (No savings would be associated with the competitive program because the number of new competitive awards already is capped at 22,500. Thus, reducing the income ceilings merely would change slightly the income profile of competitive recipients.)

Figure 4

More Realistic Award Assumptions Would Save $20 Million

 

Assumed Number of Awards

Associated
General Fund
Savings
(In Millions)

New High School Entitlement Awards

 

 

Governor's budget

66,000

LAO recommendation

60,500

$10.1

New Transfer Entitlement Awards

 

 

Governor's budget

3,000

LAO recommendation

2,500

$1.8

Renewal Competitive Awards

 

 

Governor's budget

31,940

LAO recommendation

29,540

$6.4

Current-Year Reversiona

 

$1.5

  Total Savings

 

$19.8

 

a  This would be in addition to the $50 million already included in the Governor's budget.

Adhere to Existing Policy for Adjusting Cal Grant Income Ceilings

Rather than reducing the Cal Grant income ceilings, we recommend the Legislature adhere to its existing statutory policy for annually adjusting these ceilings. Unlike the Governor's proposal, which reduces the number of students eligible for entitlement benefits (but simultaneously enlarges the University of California and the California State University's institutional aid programs), we recommend the Legislature retain the existing entitlement eligibility pool. In the budget year, this would help many middle-income students cover likely increases in student fees and tuition and would prevent some of California's financially neediest students from being denied entitlement benefits.

In 2000, when the Legislature enacted legislation creating the Cal Grant Entitlement program, it set in statute both the income ceilings that would be operative for the 2001-02 award year and the mechanism for annually adjusting these ceilings in the future. Specifically, the commission was directed to annually adjust the ceilings based on the percent change in California's per capita income from the preceding year—consistent with the annual adjustments made to many other education programs. The commission has adjusted the ceilings each of the last three years.

Figure 5

Cal Grant Income Ceilings

2004‑05
(Rounded to Nearest $100)

 

Cal Grant A

 

Cal Grant B

 

Proposed

Current Law

 

Proposed

Current Law

Dependent Students

 

 

 

Family Size

 

 

 

 

 

Two

$54,000

$62,100

 

$25,200

$29,000

Three

55,300

63,500

 

28,400

32,600

Four

60,000

69,000

 

31,600

36,300

Five

64,400

74,000

 

35,300

40,600

Six+

69,400

79,800

 

38,200

43,900

Independent Students

 

 

 

Marital Status

 

 

 

 

 

Single

$22,100

$25,400

 

$22,100

$25,400

Married

25,200

29,000

 

25,200

29,000

Statutorily Derived Income Ceilings About 14 Percent Higher Than Ceilings Proposed in Governor's Budget. Figure 5 compares the 2004-05 income ceilings generated by the Governor's budget proposal with the income ceilings that would be generated based on current law. Our current estimate of the change in per capita income for 2003 is 3.5 percent, so the amounts listed under "Current Law" simply reflect the current-year ceilings adjusted by this percentage. These ceilings would be about 14 percent higher than the ceilings proposed in the Governor's budget. (As one way of assessing the appropriateness of California's income ceilings, we compared them with the income ceilings other states use for their financial aid programs. Please see the nearby box for our findings.)

Few Other States With Explicit Income Ceilings

In assessing the appropriateness of California's income ceilings, few other states lend themselves as direct comparisons. This is because few other states have explicit income ceilings above which students no longer qualify for financial aid. Instead, most states use a modified form of the federal needs methodology to determine students' eligibility for state-funded financial aid. The federal needs methodology considers a student's total cost of attendance at a particular college and then subtracts from this cost the student's expected family contribution (EFC). If students' EFC is insufficient to cover their total costs (including living expenses), then they are deemed financially needy. Students' EFC is driven largely by family income, assets, family size, and the number of family members simultaneously attending college.

Of the few states that have income ceilings, California appears competitive. For example, New York funds a large need-based entitlement program for full-time college students (the Tuition Assistance Program). Its current income ceiling for dependent students is $80,000, which is slightly higher than California's Cal Grant A income ceiling. New York's income ceiling for independent students, however, is $10,000, which is substantially lower than California's ceiling for independent students. (New York's income ceilings do not vary by family size.) By comparison, Ohio's income ceilings for dependent students range from $35,000 for an only-child family to $39,000 for a five-child family. These ceilings roughly are comparable to California's Cal Grant B ceilings but substantially lower than the Cal Grant A ceilings. For independent students, Ohio's income ceiling is $16,300, or almost $6,000 less than California's comparable ceiling.

Given so few other states use explicit income ceilings, only tenuous conclusions can be drawn about the reasonableness of California's ceilings relative to other states' policies.

Proposed Lowering of Cal Grant A Income Ceilings Would Affect Many Middle-Income Students Across All Higher Education Segments. The Cal Grant program is essentially a two-tiered system that offers a tuition/fee award for middle-income students (through the Cal Grant A program) and both a tuition/fee award and a subsistence award for the financially neediest students (through the Cal Grant B program). The Cal Grant A income ceilings are higher than the Cal Grant B ceilings. The Cal Grant A program, therefore, helps many middle-income students attending all of California's higher education segments—including UC and CSU—cover their educational fees. (In 2003-04, more Cal Grant A High School Entitlement awards were issued to UC students than to students attending any other segment and, together, UC and CSU students received more than half of all these awards.) Retaining aid benefits for middle-income students is likely to become increasingly important as student fees are raised (as is proposed for 2004-05).

Lowering Cal Grant B Income Ceilings Directly Affect Some of the Financially Neediest Students. As described above, the Cal Grant B income ceilings are intended to identify those students that are so financially needy that the state will provide them with not only a tuition/fee award but also a subsistence award. To lower the Cal Grant B income ceilings, as proposed in the Governor's budget, therefore would result in some of California's financially neediest students losing all their entitlement benefits. (This is very different from lowering the Cal Grant A income ceilings, which would affect the least needy of the overall Cal Grant eligibility pool.) We think the Legislature has many other options it could consider before denying these students Cal Grant benefits. As part of our alternative aid package, we identify several of these options.

Fiscal Effect of Adhering to Longstanding Policy. Relative to the Governor's budget, it costs approximately $11 million to adhere to existing policy and adjust the current-year income ceilings by the percent change in California's per capita income. As part of our alternative aid package, we have identified resources elsewhere that are sufficient to cover this cost (and still generate net General Fund savings).

In sum, we recommend the Legislature continue to adhere to its longstanding and statutorily based practice of annually adjusting the Cal Grant income ceilings consistent with the percent change in California's per capita income. This would allow the Legislature to continue helping middle-income students at all the state's higher education segments cover their educational fees while simultaneously maintaining entitlement benefits for some of California's financially neediest students.

The Private University Cal Grant

The Governor's budget proposes to reduce the maximum Cal Grant for students attending private colleges and universities by 44 percent—from the current-year level of $9,708 to $5,482. The administration sets the new maximum private university award equivalent to the proposed 2004-05 UC systemwide student fee. (The rationale for this particular link is unclear.) The proposal would affect only new Cal Grant recipients; thus students obtaining Cal Grants before 2004-05 would retain their higher-value award. The Governor's budget assumes that the proposal would generate $33 million in General Fund savings. Below, we discuss our concerns with this proposal. (In the box below, we also discuss the argument sometimes made that reducing the private university Cal Grant is a way to ensure private universities are sharing the budget "pain" felt by public universities.)

Private University Cal Grant Serves Financially Needy Students At Many Kinds of Higher Education Institutions

During difficult fiscal times, some policymakers argue that the private university Cal Grant should be reduced as one way to ensure that private universities share the budget "pain" felt by public universities. The purpose of the Cal Grant program, however, is not to enrich private universities but to promote access and choice for financially needy students at many kinds of colleges and universities. Although some private institutions are well endowed and might be able to offset any reduction made to their financially needy students' Cal Grant awards, many other private institutions are unlikely to be able to offset a reduction. Indeed, financially needy students who attend one of these latter types of colleges because it is close to home, small, or offers a specialized program aligned with their educational and career objectives are likely to be affected directly by a substantial reduction in their Cal Grant award. For some financially needy students, the reduction might mean not attending or postponing college or going to a less expensive college. Moreover, given the no enrollment growth and first-time freshmen redirection proposals in the Governor's budget, some of these students might have even fewer choices. In this environment, maintaining incentives to enroll in private institutions might be particularly important.

Link Private University Cal Grant to Standard Subsidy

We recommend the Legislature adopt a long-term Cal Grant policy through legislation that would link the private university Cal Grant to the weighted average General Fund subsidy the state provides for financially needy students attending the University of California and the California State University. For 2004-05, this policy actually would result in a slight increase in the private university Cal Grant (raising it to $9,906).

Rather than reducing the maximum Cal Grant for financially needy students attending private colleges and universities by $4,226, or 44 percent, we recommend providing these students a subsidy equivalent to that provided to needy students at the public universities. Specifically, we recommend setting the private university grant at the weighted average of the General Fund subsidy provided for each additional UC and CSU student plus the weighted average of the public university Cal Grant. This formula is a simple means by which the state can ensure that it provides about the same amount of support for all financially needy students (taking into account actual costs students incur at the public universities). Figure 6 shows how we calculate our recommended 2004-05 grant amount using this formula. Given the fee component of the formula, this long-term aid policy would be linked logically and consistently with a long-term fee policy (if one were to be adopted).

Figure 6

Private University Cal Grant
Using Long-Term Aid Policy

2004‑05

 

 

 

General Fund Marginal Costa

 

 

UC

$8,050

 

CSU

5,773

 

Weighted averageb

 

$6,551

Public University Cal Grantc

 

 

UC

$5,482

 

CSU

2,250

 

Weighted averageb

 

$3,355

Private University Cal Grant

 

$9,906

 

a  Reflects base subsidy provided for each additional UC or CSU student. Does not include funds the state provides for capital outlay, overhead, or institutional aid.

b  Students attending UC and CSU comprise 34 percent and 66 percent, respectively, of all four-year public university students.

c  Reflects additional state subsidy that covers systemwide fees for financially needy students attending UC or CSU.

This recommendation (1) is consistent with the state's historical private university Cal Grant policies, (2) treats financially needy students attending private and public universities equitably, and (3) preserves the value of the award over time. Later in this analysis, we also recommend that the state continue to adhere to its historical public university Cal Grant policies by maintaining the link between UC and CSU fees and the value of the public university Cal Grant. (That is, we recommend that the Cal Grant for UC and CSU students continue to cover their total systemwide fees.)

Restores Long-term Policy Basis. When determining how much to provide a financially needy student for college, the state typically tries to balance its policy goals of access and choice with fiscal fairness. Thus, the state generally has attempted to provide the same subsidy for all financially needy students, with some adjustment made for the actual costs a student incurs. Historically, the Cal Grant award for financially needy students attending private universities has been roughly equal to the state subsidy provided to financially needy students attending public universities. Indeed, for many years, the state had a long-term grant policy in statute. The policy stated, "The maximum award for students attending nonpublic institutions shall be set and maintained at the estimated average General Fund cost of educating a student at the public four-year institutions of higher education."

Reconnects Budgeting With Underlying Policy Basis and Promotes Fiscal Fairness. Throughout the mid-to-late nineties, the state's budgeting practices generally reflected this long-term statutory policy. As Figure 7 shows, from 1995-96 through 2000-01, the state annually adjusted the private university Cal Grant. Our recommendation would have the same effect of annually adjusting the private university Cal Grant. Moreover, the formula we recommend ensures that the state provides about the same level of support for all financially needy students regardless of whether they attend a private or public university. It does this by linking the private university grant directly to the General Fund subsidy the state provides to financially needy students attending UC and CSU.

Figure 7

Private University Grant
Change Over Time

Maximum Award Amounts

 

Actual
Award

Value in
2004‑05 
Dollars

Year-to-Year Change in Real Value

1994‑95

$5,250

$6,675

1995‑96

5,250

6,516

-2%

1996‑97

7,164

8,681

33

1997‑98

8,184

9,704

12

1998‑99

9,036

10,506

8

1999‑00

9,420

10,543

2000‑01

9,708

10,448

-1

2001‑02

9,708

10,326

-1

2002‑03

9,708

10,097

-2

2003‑04

9,708

9,931

-2

2004‑05a

5,482

5,482

-45

 

a  Governor's budget proposal.

Stops Devaluation of Award. As Figure 7 shows, the last time the state increased the maximum private university Cal Grant award was in 2000-01—when the award was raised from $9,420 to $9,708. Given inflation, the real value of the award therefore has declined 6 percent over the last four years. The Governor's budget proposal would reduce the award in real terms by an additional 45 percent—dropping the award to its lowest value in more than a decade. By comparison, our recommendation both retains the real value of the award and links it to an underlying policy basis that treats financially needy students fairly and consistently.

Fiscal Effect of Adopting Long-Term Private University Cal Grant Policy. Our recommendation would increase Cal Grant costs by $1.5 million over the current-year level. However, the Governor's grant-reduction proposal would achieve $32.7 million in savings. Thus, relative to the Governor's budget, our recommendation would result in a $34.3 million General Fund cost. As Figure 1 indicates, our alternative aid package identifies sufficient resources to cover this cost and still achieve net General Fund savings.

The Public university Cal Grant

The Governor's budget proposes to decouple the Cal Grant for UC and CSU students from the systemwide student fee level at each of the segments. Thus, rather than increasing the public university Cal Grant to cover the proposed 10 percent fee increases, the maximum Cal Grant for students attending UC and CSU would remain at the current-year levels of $4,984 and $2,046, respectively. In other words, although the Governor's budget proposes fee increases, it does not propose a corollary increase to the value of the UC and CSU Cal Grant. We estimate this results in $18.7 million of cost avoidance in 2004-05.

Retain Existing Policy Basis Used to Set Value of Public University Cal Grant

Rather than decoupling the public university Cal Grant from the University of California and the California State University's systemwide fee level, we recommend the Legislature adhere to existing law and existing budgeting practice and increase the grant to cover the entire systemwide fee. This would send the clear and consistent message that financially needy students at all three public higher education segments will continue to receive full student fee coverage.

Rather than decoupling the public university Cal Grant from UC and CSU's systemwide fee level, we recommend the Legislature increase the grant to the proposed 2004-05 systemwide fee levels at UC and CSU. This would increase the Cal Grant for UC students from its current-year level of $4,982 to $5,482, and it would increase the Cal Grant for CSU students from its current-year level of $2,046 to $2,250. This recommendation (1) retains the existing long-term policy basis for the public university Cal Grant and (2) reconnects budgeting practices with this policy. In addition, it would not generate any additional net cost for the state because we further recommend redirecting new institutional aid monies to the Cal Grant program.

Retains Existing Long-Term Policy Basis. Even prior to the creation of the Cal Grant Entitlement program, the state's long-term statutory policy had been to link the public university Cal Grant with systemwide student fees at UC and CSU. Historically, students' educational fees have been viewed as the major fiscal hurdle to attending college. Although living costs are a substantial component of overall college costs, these costs are borne by all individuals whether or not they attend college. Thus, the state's primary goal has been to cover all systemwide student fees. Our recommendation to maintain the integrity of the public university Cal Grant by linking it to the 2004-05 systemwide fee level therefore is consistent with the state's overall Cal Grant policy.

Reconnects Budgeting With Long-Term Policy Basis. Over the last 15 years, the public university Cal Grant has covered total systemwide student fees at UC and CSU every year except one. (In 1992-93, the public university Cal Grant covered 75 percent and 70 percent of UC and CSU systemwide fees, respectively.) In every other year, the public university Cal Grant equaled or exceeded the systemwide fee level. Thus, decoupling the public university Cal Grant from the systemwide fee level would be a noticeable departure from typical budgeting practice. Moreover, since the inception of the entitlement program, the Cal Grant has always covered the full systemwide fee at UC and CSU. Our recommendation therefore would reconnect the state's budgeting practice with its long-term underlying policy objectives.

Does Not Create Any Additional Net Cost—Uses New Institutional Aid Monies More Transparently. We estimate the additional Cal Grant funding required by the proposal would total $19 million, and we have identified funding that would be sufficient to cover this cost. Specifically, the Governor's budget assumes augmentations for both UC and CSU's undergraduate institutional aid programs (totaling $32 million in redirected student fee revenue). We discuss these institutional aid programs in more detail in the following section.

The Institutional Aid Set Aside

The UC's primary need-based institutional aid program is the University Student Aid Program (USAP), and CSU's primary need-based aid program is the State University Grant (SUG) program. As in prior years, the Governor's budget proposes to allow UC and CSU to set aside a portion of additional student fee revenue for these institutional aid programs. Specifically, the Governor's budget proposes that UC and CSU set aside 20 percent of all additional student fee revenue for institutional aid. This would be a modest deviation from the typical budgeting practice over the last decade, which has been to set aside one-third of all additional fee revenue. For 2004-05, we estimate the 20 percent set aside would increase UC and CSU's institutional aid budgets by $38 million and $26 million, respectively. As Figure 8 shows, within each segment, the new funds are distributed almost evenly between undergraduate and graduate students.

No Analytical Basis for Set Aside. Neither the concept of a set aside nor the mechanism for calculating the set aside ever has had a solid analytical basis. For example, neither UC nor CSU has had a consistent policy regarding what "new" fee revenue counts toward the set aside. Some years, for example, CSU has counted fee revenue generated from enrollment growth toward the set aside whereas other years it has counted only fee revenue generated from fee increases. Similarly, in the budget year, both segments suggest they will set aside fee revenue associated with the proposed systemwide fee increase but not the proposed excess unit surcharge. Moreover, the precise percentage of additional fee revenue set aside for aid has varied over time. For example, from 1990-91 through 1993-94, UC set aside a different percentage each year (gradually increasing from 20 percent to 32 percent). In short, the general notion as well as specific calculation for the set aside has changed frequently and unpredictably.

Figure 8

Governor's Budget Expands
UC and CSU's Aid Programs

(In Millions)

 

2004‑05
Augmentation

University of California

 

Undergraduate students

$19.4

Graduate students

18.9

  Subtotal

$38.3

California State University

 

Undergraduate students

$12.9

Graduate students

13.5

  Subtotal

$26.4

    Total

$64.7

Undergraduate students

$32.2

Graduate students

32.5

Large Growth in Institutional Aid in Current Year. The set aside also has resulted in exceptionally large increases to UC and CSU's institutional aid budgets. Figure 9 shows the growth in UC and CSU's institutional aid budgets between 2002-03 and 2003-04. As the figure shows, during this brief period, despite the state's difficult fiscal situation, these aid budgets grew dramatically. The UC's institutional aid budget grew by $118 million, or 50 percent, whereas CSU's SUG budget grew by $76 million, or 66 percent.

Figure 9

UC and CSU's Institutional Aid Programs
Grew Dramatically in Current Year

(Dollars in Millions)

 

 

 

Change From 2002‑03

 

2002‑03

2003‑04

Amount

Percent

University of California

 

 

 

 

Undergraduate students

$149.4

$230.5

$81.1

54%

Graduate students

85.5

122.2

36.7

43

  Subtotals

$234.9

$352.8

$117.8

50%

California State University

 

 

 

 

Undergraduate students

$95.9

$161.9

$66.0

69%

Graduate students

19.1

29.1

9.9

52

  Subtotals

$115.1

$191.1

$76.0

66%

    Totals

$350.0

$543.8

$193.8

55%

 Undergraduate students

$245.3

$392.4

$147.2

60%

 Graduate students

104.7

151.3

46.6

45

Exceptional Augmentations Disconnected From Actual Need. The current year was anomalous in that UC and CSU's institutional aid budgets increased to reflect both slightly higher than normal enrollment growth and large fee increases. These factors led to a substantial increase in student fee revenue, and one-third of this increase was redirected to institutional aid programs. Although the additional students and higher fees undoubtedly increased the total financial need of students at UC and CSU, the actual size of the augmentations was entirely disconnected from any measure of actual need. Moreover, the augmentations were much greater than needed to hold UC and CSU's aid budgets harmless. Indeed, the sizeable augmentations resulted in both substantially more students receiving awards—in excess of enrollment growth—and substantially larger awards—in excess of that needed to cover the fee increases. For example, at CSU, the number of SUG recipients grew by 16 percent between 2002-03 and 2003-04—considerably more than the 4 percent enrollment growth CSU achieved. Similarly, the average SUG award grew by 43 percent—noticeably more than CSU's 35 percent fee increases.

Below, we focus specifically on the Governor's budget proposal to further expand UC and CSU's undergraduate institutional aid programs. Because the state currently does not have a comparable Cal Grant-like program for graduate students, we do not have the same concerns with the Governor's budget proposal for graduate institutional aid. The lack of a state-structured program for graduate students, coupled with the sizeable fee increases the Governor's budget proposes for graduate students, actually suggests that some augmentation to graduate institutional aid programs is warranted. Thus, over the short term, we recommend the Legislature approve the Governor's budget proposal to augment UC and CSU's graduate institutional aid programs by $32.5 million (though we also recommend the Legislature begin to consider other options for promoting graduate education). In contrast, as we discuss in more detail below, we have several concerns with the Governor's budget proposal to augment undergraduate institutional aid.

Maintain Integrity of Cal Grant Program Before Further Expanding Undergraduate Institutional Aid

Rather than augmenting the University of California (UC) and the California State University's (CSU) undergraduate institutional aid programs, we recommend the Legislature achieve $32.2 million in General Fund savings and use the freed up resources to sustain existing Cal Grant entitlement benefits. We think maintaining existing Cal Grant benefits is of higher priority than further expanding institutional aid programs because the Cal Grant program (1) is more transparent and easier for students to understand, (2) already accounts for segment-specific differences, and (3) allows the state more simply and directly to address critical policy trade-offs.

We think maintaining existing Cal Grant benefits is of higher priority than further expanding UC and CSU's institutional aid programs. Compared to UC and CSU's institutional aid programs, the Cal Grant program: (1) is more transparent, (2) already accounts for specific cost differences at each of the segments, and (3) allows the state to address critical policy trade-offs more comprehensively and coherently. Moreover, even if UC and CSU's undergraduate institutional aid programs were not expanded in the budget year, they would retain a total of $392 million in their base budgets (as shown in Figure 9).

Cal Grant Program Intended to Simplify and Streamline Complicated Aid System. As most students and policymakers alike can attest, the realm of financial aid is complicated. Multiple entities (including the federal government, state government, universities, corporations, and philanthropists) offer financial aid, and the aid they offer comes in multiple forms (including grants, scholarships, loans, work-study, tax credits, and savings plans). The CSU Sacramento's Financial Aid Office, for example, has accounting codes for almost 300 different financial aid programs. Dating from 1976, Education Code Section 69530 even has a provision declaring, "The entire student aid system, due to a proliferation of programs, has resulted in substantial confusion and inefficiencies." The subsequent provision finds that "One statewide student assistance program supplementary to the Pell Grant Program would increase simplicity and effectiveness. The most appropriate program for this purpose is the Cal Grant program."

Cal Grant Program More Transparent, Sends Clearer Message. Not only is the Cal Grant program intended to simplify and streamline the system, but it also is one of the few financial aid programs whose eligibility criteria and aid benefits are specified explicitly in statute. Additionally, since the enactment of the entitlement program, neither the eligibility criteria nor the aid benefits have changed, and the California Student Aid Commission has devoted substantial time and resources to advertising these benefits. Under our recommendation, these benefits would remain intact. For example, financially needy students attending UC and CSU would know that their Cal Grant award would continue to cover all systemwide student fees—just as it had for prior Cal Grant recipients.

Institutional Aid Programs Not in Statute, Evolve Annually, Lack Clear Message. In contrast, neither UC's USAP program nor CSU's SUG program is in statute. Moreover, UC and CSU's institutional aid policies and practices often change, and neither policymakers nor students are notified in advance of the changes. For example, following the enactment of the Cal Grant Entitlement program, CSU decided to substantially revise its aid policies—increasing its maximum award and decreasing its need requirement. It did not share these changes formally with the Legislature until two years after the fact, and only then due to a newly established reporting requirement. Similarly, in the current year, UC created an entirely new institutional aid program for students with family incomes between $60,000 and $90,000—students who in prior years would not have met UC's own definition of financially needy. It created the program only months before the beginning of the fall term. (Thus, it very likely had little, if any, impact on students' enrollment decisions.) Similarly, for the budget year, neither UC nor CSU can clearly specify how they would use their institutional aid monies. Thus, under the Governor's proposal to augment institutional aid, financially needy students at best could only speculate as to what kinds of existing or new aid UC or CSU might provide them. In contrast, under our recommendation, students would know if they qualified for a Cal Grant and they would know the actual value of the award they would receive.

Cal Grant Program Already Segment-Specific. Although one might argue that institutional aid programs need to expand as a way to help each segment address the unique needs of its students, the Cal Grant program already accounts for the most important cost differences among the segments. Indeed, the complexity of the Cal Grant program is due entirely to its efforts to tailor its benefits to segment-specific needs. For example, because the UC systemwide student fee is higher than the CSU fee, the state already offers a larger Cal Grant to financially needy students attending UC. Additionally, because financially needy students at community colleges already receive a Board of Governor's fee waiver, their Cal Grant covers only subsistence costs (for example, living, food, and transportation costs). In the budget year, under our recommendation, these segment-specific differences would continue to be addressed through the Cal Grant program.

Cal Grant Makes Segment-Specific Trade-Offs Explicit—Prevents New Disparities From Emerging. In their institutional aid programs, the segments can develop increasingly idiosyncratic definitions of need. For example, a student deemed financially needy at UC and deserving of a UC institutional aid grant, might be considered less needy at CSU and ineligible for a CSU institutional aid grant. This actually is already the case. For example, in 2001-02, the median income of a need-based aid recipient at CSU was only half the median income of a need-based aid recipient at UC ($12,200 and $25,700, respectively). Under our recommendation, the Legislature can better coordinate and align aid opportunities by making all critical trade-offs through the Cal Grant program. For example, the Legislature could decide to increase the Cal Grant A income ceilings to help all upper middle-income students attending UC. By making these decisions through the Cal Grant program, the Legislature would be able to assess more easily the relative costs and benefits of these options.

In short, we recommend the Legislature capture $32.2 million in General Fund savings by rejecting the Governor's budget proposal to augment UC and CSU's institutional aid programs. Alternatively, we recommend the Legislature use these freed up resources to sustain existing Cal Grant entitlement benefits. This would provide greater transparency for financially needy students (promising that student fee increases will be covered) and much greater transparency for the Legislature (allowing it to compare critical trade-offs in a comprehensive, coherent, and consistent fashion).

Eliminate Small, Specialized Institutional Aid Programs

In addition to not expanding the University of California (UC) and the California State University's (CSU) major institutional aid programs, we recommend eliminating their small, specialized institutional aid programs. Specifically, we recommend the Legislature approve the Governor's budget proposal to eliminate CSU's Educational Opportunity Program as well as capture additional savings by eliminating UC's University Fee Grant program. These programs result in disparities both among and within the segments and are not well coordinated with the state's larger financial aid objectives.

In addition to the SUG program, CSU offers the EOP program—a small, specialized institutional aid program. This program provides low-income undergraduate students with a supplemental grant of up to $2,000 that may be used for student fees (if the recipient does not also have a Cal Grant or SUG) and/or living expenses. Grants may be renewed until the student has received a baccalaureate degree or has completed five academic years (whichever comes first). Although the 1995 statute reauthorizing the program required that academic records of EOP grant recipients be kept so the program could be evaluated, the Chancellor's Office does not collect this information regularly, and the program has not been evaluated in the eight years since its reauthorization. For the last three years, funding for the program has remained constant at $17 million annually. The Governor's budget proposes to eliminate the program, thereby achieving $17 million in General Fund savings.

In addition to the USAP program, UC began a new institutional aid program in the current year—the University Fee Grant program. Begun in an effort to alleviate the sticker shock of the 2003-04 fee increases, this program provided students who formerly would have been ineligible for UC aid with a grant of $778 to cover half of the current-year fee increase. These students did not demonstrate financial need by UC's own criteria. As mentioned above, UC does not yet know if it will retain this program in the budget year, and the Governor's budget is silent as to its future.

These Types of Programs Create Disparities Across Systems. Although well-intentioned, programs such as the EOP program and the new University Fee Grant program can produce undesirable disparities. For example, although the Governor's budget proposes reducing the income ceilings for both the Cal Grant A and Cal Grant B program, the EOP income ceilings actually are scheduled to rise in 2004-05. Moreover, the EOP income ceilings already are higher than the Cal Grant B income ceilings. Additionally, under the Governor's proposal, a small select group of middle-income students might continue to receive a UC fee grant while some financially needier students attending other segments would be losing basic Cal Grant entitlement benefits.

These Types of Programs Create Disparities Within Systems. An illustration of the disparities that can result within systems is the effect the University Fee Grant program had on UC's work/loan expectation for undergraduate students. The work/loan expectation is how UC attempts to ensure equity across students. Typically, UC applies the same work/loan expectation—about 12 hours to 15 hours of work a week and a low-interest loan of approximately $4,000 annually—for all its students. (Historically, by assuming a consistent, manageable work/loan expectation, UC has been able to package sufficient financial aid to help all financially needy students meet all their college costs.) The UC deviated from this aid model in 2003-04—the result of which was to disregard its own equity goals and allow nonneedy students to have a lower work-loan expectation. This, in turn, meant that the work-loan expectation was higher than it otherwise would have been for poorer students.

Not Well Coordinated With State's Overall Financial Aid Objectives. These small institutional aid programs are not well aligned with the state's overall financial aid objectives. Given the state's fiscal challenges, we do not think it should be sustaining programs that retain or enlarge benefits for less needy or nonneedy students. Additionally, rather than providing specialized benefits (such as an EOP grant) to only a select group of students when many other students are equally needy and deserving, we think the Legislature should make budget-year adjustments through the Cal Grant program. Given the Cal Grant program is a statewide program benefiting students across all higher education segments, it is a better vehicle than institutional aid programs for ensuring that financially needy students are being treated fairly and appropriately.

In sum, we recommend the Legislature approve the Governor's budget proposal to eliminate the EOP program (for $17 million in General Fund savings) as well as eliminate $16.2 million from UC's base undergraduate institutional aid budget. Although UC still has not yet decided whether it will continue the University Fee Grant program in 2004-05, we think the use of the $16.2 million in the current year for students who are not needy by UC's own definition demonstrates that higher statewide financial aid priorities exist. Furthermore, these small specialized programs generate disturbing disparities among and within the segments and are not well coordinated with the state's extensive Cal Grant program.


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