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

Student Aid Commission (7980)

The Student Aid Commission provides financial aid to students through a variety of grant and loan programs. The proposed 2004-05 budget for the commission includes state and federal funds totaling $1.3 billion. Of this amount, $684 million is General Fund support—all of which is used for direct student aid for higher education. A special fund covers the commission's operating costs.

In this section, we (1) summarize the Governor's budget proposals for the Cal Grant program and the Assumption Program of Loans for Education (APLE), (2) explain our concerns with the administration's proposed trailer bill language for the APLE program, and (3) discuss an issue relating to EdFund's operating surplus. We recommend a portion of this operating surplus be used to fund financial aid administration at the University of California (UC) and the California State University (CSU), thereby achieving General Fund savings. At the end of this section, we also have a figure summarizing the financial aid recommendations that we make in the "Intersegmental" section of this chapter.

Major Budget Proposals

Figure 1 compares the commission's revised 2003-04 budget (including the Governor's mid-year proposals) and the proposed 2004-05 budget. As the figure shows, the Governor's budget requests a General Fund augmentation of $54 million, or 8.5 percent, over current-year expenditures. This augmentation primarily consists of two components—a net increase of $49 million for the Cal Grant A and Cal Grant B programs and an increase of $6 million for the APLE program. These augmentations represent growth of 8.1 percent and 22 percent, respectively, over current-year expenditures. 

Cal Grant A and Cal Grant B Augmentation. The net increase of $49 million for the Cal Grant A and Cal Grant B programs is associated with four separate proposals.

• Increase Number of Cal Grant Awards ($93 Million Cost). The Governor's budget includes funding for almost 25,000 additional Cal Grant awards. This substantial growth is largely attributable to the fourth-year phase-in of the High School Entitlement program.
• Reduce Cal Grant Income Ceilings ($11 Million Savings). The Governor's budget would reduce the Cal Grant A and Cal Grant B income ceilings by 10 percent. These lower income ceilings would apply only to new cohorts. Existing Cal Grant recipients would not be affected by the change.
• Reduce Private University Cal Grant ($33 Million Savings). The Governor's budget also achieves savings by reducing the maximum Cal Grant for students attending private colleges and universities by 44 percent. The 2004-05 Cal Grant award would be $5,482 (or $4,226 less than the current-year level). As with the income ceiling proposal, only new cohorts would be affected by this change.
• Decouple Cal Grant From Segments' Systemwide Fee Level. The Governor's budget maintains the Cal Grant at its current-year level for students attending UC and CSU. Given the Governor's proposed fee increases at UC and CSU, the Cal Grant would not be sufficient to fully cover systemwide fees for these students. This deviates from a longstanding policy that links UC and CSU Cal Grants to these systemwide fees.

APLE Augmentation. The $6 million APLE augmentation is associated with loan-forgiveness warrants issued in prior years for which the state owes payment in 2004-05. To reduce out-year costs, the Governor's budget proposes to issue 4,200 fewer new APLE warrants—decreasing the number of new APLE warrants from 7,700 (the budgeted 2003-04 level) to 3,500. The administration proposes that this reduction be made both for 2003-04 and 2004-05. This reduction would result in total out-year savings of approximately $57 million per new cohort. (For example, the 2004-05 new-warrant reduction would generate approximately $14 million annually in 2006-07 through 2009-10.)

Retain Existing APLE Priorities

We recommend the Legislature retain the Assumption Program of Loans for Education's existing eligibility criteria and give highest priority for new warrants to those individuals teaching in a critical subject shortage area in a very low-performing school.

Given the proposed reduction in the number of new APLE warrants, the administration proposes corresponding trailer bill language that changes the existing APLE eligibility criteria. Currently, the APLE program provides loan forgiveness for individuals agreeing to teach in a subject shortage area (as identified by the Department of Education [SDE] and determined annually) or in a disadvantaged school (defined as low-income, low-performing, or having a high percentage of uncredentialed teachers). The amount of loan forgiveness provided increases as individuals assume increasingly challenging assignments. The greatest amount of loan forgiveness ($19,000), for example, is offered to individuals teaching mathematics, science, or special education in a school ranked in the bottom two deciles of the Academic Performance Index (API).

The administration's trailer bill language proposes new eligibility criteria—eliminating the general disadvantaged-school component and replacing the subject-shortage-area component with specific allowable subject areas (mathematics, science, reading, and instruction for students with visual impairments). Of the individuals teaching in one of these four areas, those working in a school within the bottom two deciles of the API would be given first priority for new warrants.

The administration's proposed changes to the eligibility criteria have two significant ramifications.

• Disqualifies Special Education Teachers. The proposed language disqualifies all special education teachers from receiving APLE benefits except for those who hold a specialist credential for the instruction of students with visual impairments. Given special education is the most critical subject shortage area in the state (based upon SDE's January 2004 listing of California's designated subject shortage areas), the rationale for making this change is unclear.
• Removes General Disadvantaged-School Requirement. Although the proposed language does offer first priority to individuals teaching in a school within the bottom two deciles, it removes the general requirement that individuals serve in a disadvantaged school. Thus, contrary to the current program, an individual teaching mathematics or science in a high-performing school now would become eligible for APLE warrants. (Whether these individuals actually received warrants would depend upon how many applicants agreed to work in a school within the bottom two deciles of the API.)

We do not think the APLE eligibility criteria should be changed in these ways. Instead, we recommend the Legislature adopt trailer bill language that simply would give priority to those teachers who assume the most challenging assignments (as defined by existing APLE criteria).

The EdFund Surplus

EdFund is a nonprofit public benefit corporation that is an auxiliary to the Student Aid Commission. EdFund administers the Federal Family Education Loan (FFEL) program on behalf of the state. Colleges and universities that are interested in participating in the FFEL program may choose to work with EdFund or one of several other independent guaranty agencies. Alternatively, colleges and universities may participate in the Federal Direct Student Loan program, in which case their student loans are guaranteed and administered directly by the federal government.

EdFund Has Been Experiencing Sizeable Operating Surplus. For several years, the Student Loan Operating Fund (SLOF) has been generating increasingly large annual operating surpluses. Figure 2 shows EdFund's annual operating surplus from federal fiscal year (FFY) 2000-01 through 2002-03. Over the last three years, EdFund's annual operating surplus has grown from $38 million to more than $100 million. At the end of FFY 2002-03 (September 30, 2003), the cumulative surplus was $267 million. For FFY 2003-04, EdFund expects an annual operating surplus of $31 million, which means its cumulative surplus will reach almost $300 million by year end.

Operating Monies May Be Used for Various Purposes. Federal statute governs the use of guaranty agencies' operating funds. Specifically, federal statute allows these monies to be used for (1) guaranty agency-related activities, including application processing, loan disbursement, enrollment and repayment status management, default aversion activities, default collection activities, school and lender training, and compliance monitoring; (2) financial aid awareness and related outreach activities; and (3) other student "financial aid-related activities." Currently, EdFund uses its operating fund monies both for loan-related activities and financial aid outreach activities. Additionally, the commission uses SLOF monies to support all its operating costs.

Use EdFund Operating Surplus to Relieve General Fund

We recommend the Legislature use a portion of EdFund's operating surplus to relieve the General Fund of a current obligation. Specifically, we recommend the Legislature designate $66 million in surplus monies from the Student Loan Operating Fund (SLOF) for financial aid administration at the University of California and the California State University—reducing General Fund support by a like amount. We recommend reviewing the SLOF fund condition annually to determine the viability of future swaps.

As noted above, EdFund's operating monies may be used for various purposes, including general financial aid-related activities. Financial aid-related activities generally have been thought to include administration. For example, as indicated above, the commission already uses SLOF monies to support its administration of the Cal Grant program. Recently, New York has interpreted statute more broadly to include not only state-level financial aid administration but also campus-level financial aid administration. New York reports no problems related to its decision to use its operating surplus for this purpose. (Please see box for more information about New York's recent decision to use its operating fund to cover campus-level financial aid administration.)

Replace $66 Million General Fund With $66 Million SLOF. The UC and CSU have budgeted a total of $66.3 million for their systemwide and campus-level financial aid administration in 2004-05. Of this amount, $34.7 million and $31.6 million are associated with financial aid administration at UC and CSU, respectively. For the budget year, we recommend the Legislature simply replace $66 million of existing General Fund support with $66 million of SLOF surplus monies.

Swap Will Need to Be Revisited Annually. Although EdFund's SLOF has experienced sizeable annual surpluses for the last three years, its fund condition will need to be reviewed annually to determine the viability of future swaps. Although EdFund is very likely to experience another surplus in FFY 2004-05, future surpluses are likely to be influenced by the pending reauthorization of the federal Higher Education Act. To date, it is uncertain whether reauthorization will occur during the 2004 or 2005 congressional session.

Intersegmental Financial Aid Issues

We discuss several financial aid issues in the "Intersegmental" section of this chapter. Figure 3 summarizes the various recommendations we make in that section.