LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Introduction

The Governor's budget proposes a $663 million augmentation in General Fund expenditures for higher education in 2005-06. This represents a 7.5 percent increase from the revised 2004-05 amount. The Governor's proposal also assumes the enactment of student fee increases which, when coupled with changes in all other revenue sources, would increase total higher education funding by $1.3 billion, or 4 percent. The budget funds cost-of-living adjustments and enrollment growth at the three public higher education segments, as well as increased costs of the Cal Grant program.

Total Higher Education Budget Proposal

As Figure 1 shows, the 2005-06 budget proposal provides a total of $34.6 billion from all sources for higher education. This amount is $1.3 billion, or 4 percent, more than the Governor's revised current-year proposal. The total includes funding for the University of California (UC), the California State University (CSU), California Community Colleges (CCC), Hastings College of the Law, the Student Aid Commission (SAC), and the California Postsecondary Education Commission. Funded activities include instruction, research, and related functions, as well as other activities, such as providing medical care at UC hospitals and managing three major U.S. Department of Energy laboratories. The Governor's current-year estimates include a variety of technical adjustments.

Figure 1

Governor's 2005‑06 Higher Education Budget Proposal

(Dollars in Millions)

 

 

 

Change

 

2004‑05

2005‑06

Amount

Percent

UC

 

 

 

General Fund

$2,708.8

$2,806.3

$97.5

3.6%

Fee revenue

1,800.0

1,949.9

149.9

8.3

  Subtotals

($4,508.8)

($4,756.2)

($247.4)

(5.5%)

All other funds

$14,162.5

$14,637.3

$474.9

3.4%

    Totals

$18,671.3

$19,393.5

$722.2

3.9%

CSU

 

 

 

General Fund

$2,496.7

$2,607.2

$110.5

4.4%

Fee revenue

1,111.3

1,212.5

101.2

9.1

  Subtotals

($3,608.0)

($3,819.7)

($211.7)

(5.9%)

All other funds

$2,222.1

$2,197.5

-$24.5

-1.1%

    Totals

$5,830.1

$6,017.3

$187.2

3.2%

CCC

 

 

 

General Fund

$3,050.6

$3,349.7

$299.1

9.8%

Local property tax

1,750.4

1,827.0

76.7

4.4

Fee revenue

357.5

368.2

10.7

3.0

  Subtotals

($5,158.5)

($5,545.0)

($386.5)

(7.5%)

All other funds

$2,168.2

$2,165.0

-$3.3

-0.2%

    Totals

$7,326.7

$7,709.9

$383.2

5.2%

SAC

 

 

 

General Fund

$589.4

$745.5

$156.1

26.5%

All other funds

758.6

646.9

-111.7

-14.7

  Totals

$1,348.0

$1,392.4

$44.4

3.3%

Other

 

 

 

 

General Fund

$10.2

$10.4

$0.2

2.4%

Fee revenue

25.5

26.2

0.7

2.8

All other funds

20.1

16.8

-3.2

-16.2

  Totals

$55.7

$53.4

-$2.3

-4.1%

Grand Totals

$33,231.7

$34,566.5

$1,334.7

4.0%

General Fund

$8,855.7

$9,519.1

$663.4

7.5%

Fee revenue

3,294.3

3,556.8

262.5

8.0

Local property tax

1,750.4

1,827.0

76.7

4.4

All other funds

19,331.4

19,663.5

332.1

1.7

a  Excludes payments on general obligation bonds.

Major Funding Sources

The 2005-06 budget proposal provides $9.5 billion in General Fund appropriations for higher education. This amount is $663 million, or 7.5 percent, more than proposed current-year funding. The budget also projects that local property taxes will contribute $1.8 billion for CCC in 2005-06, which reflects an increase of $77 million, or 4.4 percent, from the revised current-year amount.

In addition, student fee revenue at all the public higher education segments account for $3.6 billion of proposed expenditures. This is $263 million, or 8 percent, greater than student fee revenue in the current year. This increase is primarily due to planned fee increases at UC and CSU. (The Governor does not propose any fee increase for CCC.) The budget also includes $968 million in other state funds (such as lottery and tobacco funds), reflecting a decrease of $143 million, or 12.9 percent.

Finally, the budget includes $18.7 billion in nonstate revenue—including federal funding, private contributions to the universities, and other revenue. This amount is $475 million, or 2.6 percent, more than the revised current-year level. The amounts in Figure 1 do not include capital outlay expenditures or the General Fund costs associated with paying off general obligation bonds. These costs are discussed in the "Capital Outlay" chapter of this Analysis.

Funding by Segment

For UC, the budget proposal provides General Fund appropriations of $2.8 billion, which is a net $97.5 million, or 3.6 percent, more than the proposed current-year estimate. The Governor's budget also anticipates that, largely as a result of planned fee increases, student fee revenue will increase by $150 million. When General Fund and fee revenue are combined, UC's budget would increase by 5.5 percent.

For CSU, the budget proposes $2.6 billion in General Fund support, which is a net increase of $111 million, or 4.4 percent, from the revised current-year level. With proposed fee increases, student fee revenue would increase by $101 million. Total General Fund and fee revenue combined would increase by 5.9 percent.

For CCC, the Governor's budget proposes $3.4 billion in General Fund support, which is $299 million, or 9.8 percent, above the current-year amount. Local property tax revenue (the second largest source of CCC funding) would increase by 4.4 percent, to $1.8 billion. The Governor's budget does not propose an increase in student fee levels at CCC. Combined, these three sources of district apportionments (General Fund support, property taxes, and fee revenue) would amount to $5.5 billion, which reflects an in-crease of $387 million, or 7.5 percent.

Major Cost Drivers for Higher Education

Year-to-year changes in higher education costs are influenced by three main factors: (1) enrollment, (2) inflation, and (3) student fee levels.

Enrollment Growth. For UC and CSU, the state uses a "marginal cost" formula that estimates the added cost imposed by enrolling one additional full-time equivalent student. This estimate includes instructional costs (such as faculty salaries and teaching assistants), related educational costs (such as instructional materials and libraries), administrative costs, and student services. Because faculty (particularly at UC) spend part of their time performing noninstructional activities such as research, the marginal cost formula "buys" part of these other activities with each additional student enrolled. A similar approach is used for funding enrollment growth at CCC, although there are technical differences in how funding is calculated. (We discuss marginal cost funding in some detail in an intersegmental issue later in this chapter.)

Inflation. Higher education costs rise with general price increases. For example, inflation increases the costs of supplies, utilities, and services that are purchased by campuses. In addition, price inflation creates pressure to provide cost-of-living adjustments to maintain the buying power of faculty and staff salaries.

Student Fees. Student fees and General Fund support are the two primary funding sources for the segments' instructional programs. The Legislature generally considers fee increases either to (1) maintain the share of costs supported by fees as the segments' budgets increase yearly, or (2) increase the share of total costs supported by fees.

Major Budget Changes

The Governor's higher education budget proposal results primarily from base increases (essentially to compensate for inflation), enrollment increases, and increased financial aid costs. Figure 2 shows the major General Fund budget changes proposed by the Governor for the three segments.

Figure 2

Higher Education
Proposed Major General Fund Changes

 

 

 

 

University of California

Requested:

$2.8 billion

 

 

 

Increase:

$97.5 million

(+3.6%)

 

 

 

 

 

Base Augmentation: Provides $76.1 million for a 3 percent base funding increase.

 

 

Enrollment Growth: Provides $37.9 million for 2.5 percent enrollment growth, which is sufficient to fund 5,000 additional full-time equivalent (FTE) students.

 

 

Budget Reductions: Eliminates $3.8 million for Labor Institutes, and makes a $17.3 million reduction to enrollment and/or outreach. (The university would decide how to allocate this reduction between these two activities.)

 

 

 

 

 

California State University

Requested:

$2.6 billion

 

 

 

Increase:

$111 million

(+4.4%)

 

 

 

 

 

Base Augmentations: Provides $71.1 million for a 3 percent base funding increase, and $44.4 million for increased retirement costs.

 

 

Enrollment Growth: Provides $50.8 million for 2.5 percent enrollment growth, which is sufficient to fund 8,100 additional FTE students.

 

 

Budget Reduction: Includes a $7 million reduction to enrollment and/or outreach. (The university would decide how to allocate this reduction between these two activities.)

 

 

 

 

 

California Community Colleges

Requested:

$3.3 billion

 

 

 

Increase:

$299 million

(+9.8%)

 

 

 

 

 

Cost-of-Living Adjustments (COLAs): Provides $196 million for a COLA of 3.93 percent for apportionments and selected categorical programs.

 

 

Enrollment Growth: Provides $142 million for 3 percent enrollment growth (to fund about 34,000 additional FTE students).

 

 

Other Augmentations: Includes $20 million one-time funding to create new vocational curricula that link K-12 and community college classroom work. Also, sets aside an additional $31.4 million that would be added to general apportionments, contingent on the Board of Governors’ adequately responding to legislation requiring the development of a district-level accountability proposal.

 

 

Technical Reductions: Reduction of $90.1 million which adjusts for increased fee and property tax estimates.

 

Enrollment Growth. The Governor proposes enrollment increases of 2.5 percent at UC and CSU, and 3 percent at CCC. Figure 3 shows enrollment changes at the three segments. We discuss proposed enrollment levels in more detail later in this chapter.

Figure 3

Higher Education Enrollment

Full-Time Equivalent Students

 

Actual
2003‑04

Budgeted
2004‑05

Proposed
2005‑06

Change

Amount

Percent

University of California

 

 

 

 

 

Undergraduate

155,754

155,647

159,730

4,083

2.6%

Graduate

32,874

32,963

33,860

897

2.7

Health sciences

13,268

12,366

12,386

20

0.2

  UC Totals

201,896

200,976

205,976

5,000

2.5%

California State University

 

 

 

 

 

Undergraduate

278,774

272,419

279,207

6,788

2.5%

Graduate/postbacalaurate

52,931

51,701

53,016

1,315

2.5

  CSU Totals

331,705

324,120

332,223

8,103

2.5%

California Community Colleges

1,108,348

1,142,987

1,177,276

34,289

3.0%

Hastings College of the Law

1,261

1,250

1,250

    Grand Totals

1,643,210

1,669,333

1,716,725

47,392

2.8%

Student Fees. For UC and CSU, the Governor proposes fee increases of 8 percent for undergraduate students and teacher credential students, and 10 percent for graduate students. The Governor's budget does not account for the continued phase-in of higher fees for students taking "excess" course units. That fee phase-in was proposed by the Governor in the 2004-05 budget, and accepted by the Legislature. For 2005-06, the excess course unit policy is to generate $25.5 million in General Fund savings. Once fully implemented over five years, the excess course unit policy would raise student fees to the full marginal cost of education for students taking more than 110 percent of the credit units required for graduation.

For CCC, the Governor proposes no increase in student fees. Resident students at CCC would continue to pay $26 per unit—the lowest fee in the country. Proposed student fees are shown in Figure 4, and are discussed in more detail later in this chapter.

Figure 4

Annual Education Fees for Full-Time Resident Students a

 

Actual
2003‑04

Actual
2004‑05

Proposed
2005‑06

Change From 2004‑05

Amount

Percent

University of California

 

 

 

 

 

Undergraduate

$4,984

$5,684

$6,141

$457

8%

Graduate

5,219

6,269

6,897

628

10

Select professional programs b

 

 

 

 

  Nursing

8,389

8,389

9,105

716

9

  Pharmacy

10,339

14,139

15,027

888

6

  Medicine

14,013

18,513

19,532

1,019

6

  Business

14,824

19,324

20,368

1,044

5

Hastings College of the Law

$13,735

$18,750

$19,725

$975

5%

California State University

 

 

 

 

 

Undergraduate

$2,046

$2,334

$2,520

$186

8%

Teacher education

2,256

2,706

2,922

216

8

Graduate

2,256

2,820

3,102

282

10

California Community Colleges

$540

$780

$780

a  Fees shown do not include campus-based fees.

b  The University of California currently charges special fee rates for nine professional programs—including the four shown. The Governor's budget proposes to charge a special rate ($10,897) for three additional programs—Public Health, Public Policy, and International Relations and Pacific Studies.

Student Financial Aid. The Governor's budget provides $746 million in General Fund support for SAC, primarily for the Cal Grant programs. This reflects an increase of $156 million from the revised current-year level. About two-thirds of this increase would be used to backfill a reduction in funding from the Student Loan Operating Fund (SLOF). About $147 million in surplus funding in the SLOF was used on a one-time basis in the current year to achieve General Fund savings. For 2005-06, the Governor proposes a smaller one-time shift of $35 million from the SLOF. The remaining increase in General Fund support for SAC is largely due to higher fees at UC and CSU (which are covered by Cal Grants) and a projected increase in the number of Cal Grant awards.


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