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

California Community Colleges (6870)

The California Community Colleges (CCC) provide instruction to about 1.7 million students at 108 campuses operated by 72 locally governed districts throughout the state. The system offers academic, occupational, and recreational programs at the lower-division (freshman and sophomore) level. Based on agreements with local school districts, some college districts offer a variety of adult education programs. In addition, pursuant to state law, many colleges have established programs intended to promote regional economic development.

Funding Increases Proposed. The Governor's budget includes significant increases in Proposition 98 funding and student fee revenue. As shown in Figure 1, the Governor's proposal would increase total funding for CCC by 8 percent. However, this figure does not take into account an additional $200 million of costs incurred in 2003-04 that are paid for (deferred) to 2004-05. (The 2003-04 budget package included this deferral as a way to reduce Proposition 98 expenditures in the current year.) Taking this accounting issue into consideration produces a "programmatic spending level," which appears at the bottom of Figure 1. As the figure shows, CCC's programmatic spending increases by about 4.7 percent under the Governor's proposal.

CCC's Share of Proposition 98 Funding. As shown in Figure 1, the Governor's budget includes $4.7 billion in Proposition 98 funding for the community colleges in 2004-05. This is about two-thirds of total community college funding. Proposition 98 provides funding (approximately $47 billion in the budget year) in support of K-12 education, CCC, and several other state agencies (such as the Departments of Mental Health and Developmental Services). As proposed by the Governor, CCC would receive 10 percent of total Proposition 98 funding, K-12 education would receive 89.8 percent, and the other state agencies would receive the remaining 0.2 percent.

State law calls for CCC to receive approximately 10.9 percent of total Proposition 98 appropriations. However, in recent years, this provision has been suspended in the annual budget act and CCC's share of Proposition 98 has been lower than 10.9 percent. The Governor's budget proposal would again suspend this provision.

Major Budget Changes

Figure 2 shows the changes proposed for community college Proposition 98 spending in the current year and budget year. Major base increases include a restoration of the $200 million deferred from 2003-04, $121 million for 3 percent enrollment growth, and $80 million for equalization. The proposal also achieves $91 million in General Fund savings by substituting new fee revenue from a proposed student fee increase. The budget proposal includes no significant reductions to CCC programs from current year levels.

Proposition 98 Spending by Major Program

Figure 3 shows Proposition 98 expenditures for various community college programs. (We have shown spending on a programmatic basis, as discussed above, correcting for the effect of deferrals.) The Governor's proposal seeks to consolidate and reorganize funding for some CCC programs through budget bill language and trailer bill language. In order to facilitate comparisons across fiscal years, Figure 3 generally shows funding categories as they are scheduled in the budget bill. (We discuss the Governor's proposed categorical changes later in this section.)

As shown in Figure 3, apportionment funding (available to districts to spend on general purposes) accounts for $3.9 billion in 2004-05, or about 84 percent of total Proposition 98 expenditures. Total Proposition 98 funds available for general purposes would increase to about $4.3 billion, or 92 percent of Proposition 98 funding, under the Governor's categorical reform proposal.

Categorical programs (in which funding is earmarked for a specified purpose) are also shown in Figure 3. These programs support a wide range of activities—from services to disabled students to part-time faculty health insurance. The Governor's budget proposes almost no changes to the overall level of funding for these programs, although—as mentioned above—it envisions some consolidation of funding categories.

Student Fees

The Governor proposes that CCC student fees be increased from $18 per unit to $26 per unit. This represents an increase of $8 per unit, or 44 percent. For a student taking the average full-time load of 24 units per year, this would translate into an additional $192 for the academic year. Total student fees for the average full-time load under the Governor's proposal would be $624.

The Governor proposes a different fee for students who already possess a baccalaureate degree. These students would pay $50 per unit (rather than $26 per unit) under the Governor's proposal. The higher fee causes the state's subsidy for these students to be reduced, thus permitting CCC resources to be more focused on students who have not yet earned a baccalaureate degree.

The budget assumes that the base fee increase and the surcharge for baccalaureate holders together will generate about $91 million in new student fee revenue. This revenue would facilitate General Fund savings of the same amount. We discuss the proposed CCC fee increases, as well as fee increases at the other higher education segments, in the "Intersegmental" section of this chapter. In general, we recommend that the Legislature approve the Governor's proposed CCC fee increases.

Enrollment Funding

The budget proposal includes an augmentation of $121 million in general apportionment funding to serve an additional 33,120 full-time equivalent (FTE) students in 2004-05. This is an increase of 3 percent above the current year budgeted level. This funding is available to serve both credit and noncredit students. (See box for a description of credit and noncredit courses.)

In addition to this general apportionment funding, the budget proposal includes an additional $4 million to serve an additional 1,900 FTE students specifically in noncredit courses. This additional noncredit funding would be available only to districts that did not receive any of the $80 million in equalization funding that the budget provides for CCC.

When the two growth funding amounts are combined, the Governor's budget provides for overall growth of 3.2 percent. Because $4 million is earmarked for noncredit instruction, noncredit enrollment is projected to grow by at least 5 percent from the current-year level.

Special Treatment of Noncredit Instruction Not Warranted

The Governor's proposal to provide a special appropriation for noncredit instruction represents a departure from longstanding practice and lacks justification. We recommend that the Legislature reject this augmentation. (Reduce Item 6870-101-0001 by $4 million.)

Under current law and regulations, community college districts receive enrollment growth funding that can be used for both credit and noncredit instruction. Districts may spend this funding on any combination of credit and noncredit FTE students that they deem appropriate. Because noncredit instruction is reimbursed at roughly half the rate of credit instruction, an average district could substitute two noncredit FTE students for a single credit FTE student when selecting the mix of enrollment they will serve with their apportionment funding. (As a practical matter, district choices about their credit/noncredit mix are of course affected by the nature of local student demand.)

Proposal Deviates From Longstanding Practice. The Governor's proposal would break with this longstanding policy by sectioning off a portion of apportionment funding exclusively for growth in noncredit instruction. It is unclear why this would be desirable. Indeed, by effectively creating a categorical program for the entire noncredit programs administered by districts, the administration appears to work against another of its proposals (discussed later in this section) to remove categorical boundaries in order to provide greater flexibility for districts in allocating their funding across programs.

Because the Governor's proposed noncredit allocation would be available only as growth funding, districts receiving this money must provide additional noncredit instruction above their current levels. Therefore, the proposal would have the practical effect of "locking in" current noncredit funding for those districts seeking an allocation.

Proposal Draws Illogical Link Between Noncredit Instruction and Equalization. More troubling is the Governor's proposal that the special noncredit funding would be available only to districts that did not benefit from equalization. Equalization funding goes to districts whose level of funding per credit FTE student is lower than a specified level. Districts eligible for the special noncredit growth allocation, therefore, are those whose funding per FTE student is above that level. We are unaware of any reason that the latter group of districts—those with higher per FTE funding—would necessarily have a greater need to provide additional noncredit instruction.

Proposal Should Be Rejected. For these reasons, we recommend that the Legislature reject the Governor's proposal to provide an additional $4 million for growth in noncredit instruction. Even without this funding, CCC districts would still have $121 million in new funding to allocate for both credit and noncredit instruction in any combination they felt was warranted by local needs.

Governor Proposes Categorical Reform

The Governor's budget proposal would restructure the funding for a number of categorical programs. The elements of this proposal are illustrated in Figure 4.

Description of the Proposal

Shifting of Categorical Funding to Base Apportionments Increases Local Flexibility. As the figure shows, the budget would move all the funding currently provided for five categorical programs, and about half the funding for a sixth categorical program, into the base apportionments provided to districts. As discussed earlier, apportionments are the general purpose funding received by districts from the state. This is a significant funding change in that it transfers money that had been earmarked for specified purposes (such as matriculation and part-time faculty compensation) into an allocation that is largely unrestricted. In other words, by shifting categorical funding to base apportionments, the Governor's proposal permits districts to decide for themselves how much money they will allocate for these targeted categorical purposes.

 In addition, enrollment growth and cost-of-living adjustment (COLA) calculations apply to the general apportionment base. Therefore, funding for these targeted categorical programs would increase at the growth and COLA rates provided in subsequent annual budget acts. Currently only one of the targeted categorical programs (matriculation) traditionally receives growth and COLA funding.

Grouping of Categorical Programs Would Not Increase Local Flexibility. As shown in Figure 4, the Governor's proposal would also provide funding for six existing categorical programs in three new groups: Telecommunication and Technology Services, Targeted Student Services, and Physical Plant and Institutional Support.

Although the budget includes these new groups, provisional language would continue to require the current level of funding for each existing categorical program under each group. For example, current-year funding for the Extended Opportunity Programs and Services (EOPS) and the Fund for Student Success (FSS) is $94.9 million and $6.2 million, respectively. The Governor's proposal combines these two amounts for a $101 million appropriation to fund the proposed Targeted Student Services category. However, provisional language specifies that $94.9 million of this amount is for EOPS and $6.2 million is for FSS.

Proposal Would Eliminate Two Small Programs. In addition to the reorganization of funding described above, the Governor's proposal would eliminate the Teacher and Reading Development program and the Fund for Instructional Improvement. In the current year, these two programs received a total of $4 million. Under the Governor's proposal, this funding would be redirected to a new purpose (growth in noncredit instruction, discussed earlier) in 2004-05.

Benefits of Categorical Reform

We believe that reducing categorical restrictions on funding can have several important benefits:

• Greater Fiscal and Program Flexibility. Greater flexibility would allow districts to direct funding to the highest priority local needs and to design local programs that address those needs most effectively. There are 72 locally governed community college districts in the state, each with different student populations, local resources, and job environments. District needs, therefore, can vary greatly. For example, some districts may have a relatively high need for matriculation services, while other districts may require relatively less matriculation funding and more resources for expanding technology in the classroom.
• Administrative Savings. Eliminating the individual program requirements of existing programs can help districts reduce local administrative costs associated with accounting and administrative requirements.
• Less Emphasis on Inputs. Eliminating categorical program requirements reduces the state's emphasis on what kind of activities districts fund. To the extent that this is accompanied by a renewed emphasis on outcomes, this allows districts to select for themselves the best strategies for achieving student-focused results.
• Clearer State/Local Relationship. By increasing local autonomy over the use of funds, the state would clarify the role of local district trustees in decision making over these funds. This would make it easier for students and voters to participate in local budget decisions and hold trustees accountable for how funds are used.

Proposal a Step in Right Direction, But Falls Short

We believe the Governor's categorical reform proposal is a step in the right direction, as it makes progress toward rationalizing CCC's categorical funding. However, we believe that (1) part of the categorical consolidations are more symbolic than substantive, and (2) proposed accountability provisions are not fully developed. We discuss these concerns and offer recommendations below.

Some Categorical Consolidations Are Largely Symbolic

The Governor's budget includes 11 categorical programs in the categorical reform proposal. While we believe that the particular combinations make sense, some of the program consolidations would have no practical effect. We recommend that the Legislature delete provisional language specifying funding levels for supposedly combined categorical programs.

Categorical Groupings Make Sense. Five of the categorical programs (and part of a sixth) would be consolidated into CCC's general apportionments. We believe this consolidation is logical, given that these programs achieve general-purpose objectives shared by all districts. For example, the Partnership for Excellence (PFE) which constitutes 75 percent of the categorical funding being consolidated into apportionments already is largely unrestricted. Similarly, all districts enroll a number of new students each term that must be matriculated. We therefore think it makes sense to combine these funds into a single schedule and permit districts to allocate them in a way that matches their particular needs.

The remaining five programs (and the rest of the sixth) would be grouped under three new program areas. The proposal respects functional similarities among programs. For example, we believe that grouping the California Virtual University program with the Telecommunications and Technology Infrastructure Program is logical, in that it groups programs that facilitate the development and use of technology. We support this general approach of grouping funding for similar programs. For example, in 2002-03 we proposed that 11 categorical programs be consolidated into two block grants: one for the provision of student services and one for the support of faculty. (Please see our Analysis of the 2002-03 Budget Bill, pages E-253 through E-255.)

Three "Broadened" Categorical Programs Largely Symbolic. As observed earlier, the Governor's proposal to rearrange six existing categorical programs under three larger headings is logical, respecting programmatic similarities among programs. However, this regrouping is largely symbolic and would do nothing to increase local flexibility in expending funds, which should be a central goal of categorical reform. Instead, the regrouping of these programs has no practical effect because provisional language retains the current allocation of funding among the component programs.

To the extent that the Legislature wishes to create local flexibility in these program areas, we recommend the deletion of provisional language specifying funding levels for the component programs within each of the three new categories. This would permit local districts to allocate funding with each broadened category in a way that best suits its needs. At the same time, the Legislature may wish to add some provisional language that better defines the parameters of each broadened category. If the Legislature wished to pursue a more comprehensive reform of categorical funding, we would recommend a block grant approach such as the one we described in our 2002-03 Analysis.

Proposal Lacks Adequate Accountability Measures

We recommend that the Legislature (1) clarify its expectations as to outcomes it expects districts to achieve with their apportionment funding, and (2) establish clear consequences for failure to meet those expectations.

The state created CCC's categorical programs to ensure that districts address specific priorities. In principle, categorical programs are designed to address situations where local incentives lead districts to underinvest in a particular input that the state views as critical to the educational process. As noted above, a drawback to this approach can be a lack of local flexibility. There can be situations where districts identify ways to provide more or better services for their students, but categorical restrictions prevent districts from implementing them.

Priority Courses Specified and Progress Toward PFE Goals Required. The Governor's budget takes a step toward local flexibility by moving some categorical funding into district apportionments. At the same time, it imposes certain accountability provisions on districts. Specifically, language in the budget proposal would require that districts receiving these consolidated funds agree to two conditions: (1) that they will "assure that courses related to student needs for transfer, basic skills, and vocational and workforce training are provided to the maximum extent possible within budgeted funds" and (2) that they will "make annual increases in the number of transfer ready and transfer students, the number of degrees and certificates awarded, rates of successful course completion, and workforce development and basic skills improvement." (The five areas identified for annual increases are currently the focus of the soon-to-sunset PFE.) The CCC Board of Governors (BOG) is to report annually on each district's progress toward these goals.

In addition, proposed trailer bill language would prohibit districts that accept the consolidated funds from using them to fund the concurrent enrollment of K-12 students in physical education, dance, recreation, study skills, and personal development courses.

Accountability Provisions Need Work. While we support the Governor's effort to clarify priorities and expected outcomes for the districts, we have various concerns about the accountability provisions. Specifically:

• Expectations Are Vague. The proposal does not specify what standard will be applied to determine whether a district in fact gave highest priority to the specified types of courses. Similarly, it is unclear whether annual increases in the PFE areas must be achieved for all five areas each year, or only for a majority of those areas. In interpreting the existing PFE statute, for example, the CCC has considered meeting goals in three of the five areas to be adequate progress.
• Consequences for Failing to Meet Requirements Are Unclear. The proposed budget language states that a district must agree to the two requirements as a condition of receiving funds. However, if a district agrees to meet requirements but does not in fact meet the requirements, it is unclear whether funding would be withheld. It is also unclear whether all of a district's new apportionment funding would be in jeopardy, or only a portion (or none) of it.
• Limitations on Concurrent Enrollment Have Loophole. The proposed language prohibits districts from using the apportionment funding redirected from six categorical programs on certain low-priority concurrent enrollment courses. This funding makes up only a fraction a district's total apportionment funding. It is unclear how one could determine whether this targeted funding or base apportionment funding was used to fund particular courses.

Expectations Should Be Clarified. The current statutory mission for the community colleges is broad, vague, and even contradictory. As can be seen in Figure 5, statute assigns to CCC two primary missions, several essential and important functions, as well as additional authorized functions and permitted activities. Moreover, the statutory description of most of these functions is quite broad—for example, providing "community service courses and programs." We believe that the breadth of CCC's mission makes it difficult for the state to ensure that funding provided to CCC is used to advance state priorities. This was illustrated, for example, by controversies in recent years about some districts' enrollment of large numbers of high school students in physical education classes. Some districts argued that such enrollment was consistent with the state's expectations, while some legislators asserted that this was not the case. In the end, the Legislature amended statute as a way to try to resolve the problem.

Given the breadth of CCC's mission, it is difficult to know whether the course priorities proposed by the Governor (transfer, basic skills, and vocational/workforce training) are consistent with the Legislature's in tent. We recommend, therefore, that the Legislature clearly express its priorities for CCC in statutory language accompanying any categorical reform.

We also think it is important to clarify expectations about outcomes. The Governor's proposed language calls for annual increases in five outcome measures. These outcome measures are currently specified in the PFE, which is to sunset at the end of 2004. We recommend that the Legislature (1) revisit these measures and evaluate them for consistency with state priorities (as discussed above), (2) consider whether to adopt the expectation of annual increases in these measures, as proposed by the Governor, and (3) consider target levels beyond which further improvement is not required.

Consequences Should Be Clarified. We recommend that the Legislature amend the proposed budget language to clarify the consequences of failing to meet the Legislature's expectations in providing apportionment funding. This could involve reducing district funding (as implied by the Governor's proposal, and as allowed under the PFE). Alternatively, the Legislature could indicate simply that it intends to monitor annual progress toward the specific goals, and make future decisions about CCC's system budget and statutory provisions in response to the adequacy of that progress. We note that this second approach is similar to that envisioned by the Senate's Higher Education Accountability Advisory Group, which has developed an outcomes-based data collection proposal to facilitate greater accountability within the state's higher education system. A third alternative would be to ensure that information on district performance is made available to local voters, students, and other stakeholders to permit local accountability of district decisions. In all three cases, we believe it is important for the Legislature to more clearly link CCC's success in achieving student outcomes with meaningful state and/or local oversight. As we have observed in prior Analyses, we believe the lack of clear consequences has hindered the PFE's ability to promote meaningful improvements in outcomes.

Governor Proposes $80 Million for Equalization

The budget includes $80 million to help equalize the funding each community college district receives to serve a full-time equivalent student. While we support this objective, we believe that the state's fiscal situation requires that funding be directed to existing obligations before new programs are funded. We therefore recommend the Legislature delete the $80 million in General Fund support provided for equalization in the budget year. (Reduce Item 6870-101-0001 by $80 million.)

The Governor's 2004-05 budget proposal includes $80 million to help equalize the amount of apportionment funding each community college district receives to serve an FTE student. Currently, this amount varies from about $3,550 to $8,150 per FTE student, with a statewide average of about $3,800.

Various efforts have been made over the years to equalize CCC funding (see nearby box). We support the goal of equalizing per-student funding for three reasons:

• Fairness. Students in different parts of the state should have access to comparable educational services. Although similar per-student funding does not guarantee similar quality, it does make this goal easier to achieve.
• Efficiency. Eliminating historical anomalies in district funding can promote a more efficient allocation of state resources. When per-student funding is equalized, apportionment funding goes to districts based on their anticipated "workload" (number of students to be served), rather than these historical anomalies.
• Simplicity. Community college funding should be relatively easy to understand and administer.

Budget-Year Funding Should Be Directed To Existing Obligations

While we support the goal of equalization, we believe that the state's current fiscal situation requires that funding for new programs such as the Governor's equalization plan instead be directed to existing fiscal obligations. As we discuss earlier in this chapter, the state has deferred payment on a number of education expenditures in order to reduce Proposition 98 appropriations. These deferred payments include $200 million in community college apportionments, which the Governor proposes to defer again to 2005-06. The Governor also proposes to defer payments for various local mandates. Rather than continue to defer these obligations, the Legislature could apply the proposed equalization funding toward them. This would reduce the "balance" the state is carrying on its education "credit card," thereby helping to restore structural balance to the state budget. At the same time, it would not affect the overall level of Proposition 98 appropriations for the community colleges, since it would simply reallocate a portion of CCC's Proposition 98 funding from a new program (equalization) to existing programs (such as reducing the deferral of apportionment costs).

Overdue Reports Hinder Accountability

In adopting the 2003-04 budget, the Legislature included a number of reporting requirements to allow the Legislature to monitor how the California Community Colleges (CCC) implement important features of the budget and to evaluate the effect of budget actions on student access. At the time this analysis was prepared in early February, CCC had failed to provide two of the required reports. We recommend CCC report at budget hearings on these required reports.

The 2002-03 Budget Act includes a number of reporting requirements for CCC. We focus on two overdue reports below:

Report on Allocation of $25 Million Concurrent Enrollment Reduction

The 2003-04 budget reflects a $25 million reduction in apportionment funding for concurrent enrollment of high school students in certain courses. This reduction was prompted by the Legislature's concern that some CCC districts were violating the intent of the concurrent enrollment statute, which provided for the enrollment of high school students in CCC courses under limited circumstances. With the funding reduction, the Legislature intended that CCC districts would reduce the number of concurrently enrolled high school students by approximately 6,500 FTE students. The Legislature directed the Chancellor to allocate the funding reduction among districts proportionate to their reported levels of concurrent enrollment in physical education, recreation, study skills, and personal development courses. The Chancellor was permitted to limit a district's reduction if he believed that district's financial integrity otherwise would be jeopardized.

During budget hearings, various districts expressed concern over how the reductions might be allocated. For example, some districts were concerned that the selection of a particular base year for measuring districts' reported levels of concurrent enrollment could skew the allocation of reductions. Others were concerned that the definition of jeopardized financial integrity might be too liberally applied, thus shifting a greater share of the $25 million reduction to other districts. Still others believed that the allocation might unfairly fail to distinguish between reported enrollment which is legal (albeit of a low priority) and enrollment which was illegal (such as claiming enrollment for courses which did not exist).

In order to monitor how the $25 million reduction is ultimately allocated, the Legislature directed the Chancellor to report on the allocation by January 1, 2004. No report had been provided as of early February. Given the importance of ensuring that the Chancellor's office has appropriately implemented the Legislature's intent in allocating these reductions, we recommend that the Legislature direct CCC to report at budget hearings on how the $25 million reduction was allocated. Not only would this facilitate greater accountability on the part of CCC, but it would also be helpful as the Legislature deliberates on further changes to the state's policy concerning concurrent enrollment.

Report on Allocation of Apportionment Funding

The 2003-04 Budget Act includes General Fund appropriations of $1.4 billion for base apportionments and $57.9 million for enrollment growth. Given ongoing concerns about the extent to which district course offerings reflect state priorities, the budget act includes language directing the CCC BOG to adopt criteria for allocating these funds in a way that gives highest priority to three types of courses: (1) those related to student needs for transfer, (2) basic skills courses, and (3) vocational and workforce training courses. The report was due on February 1, 2004. As of early February, no report had been provided.

As discussed earlier, there is a need to ensure that funding provided to community colleges is used in a way that is consistent with the Legislature's intent in providing that funding. During 2003-04 budget hearings, the Legislature expressed considerable concern on this topic, especially given CCC's own statements that total course offerings were being reduced in response to real and anticipated budget reductions. We therefore recommend the Legislature direct the CCC to report at budget hearings on (1) how it ensured that highest priority was given to the types of courses specified in the budget language, and (2) the degree of success that was achieved in focusing on these types of courses.