LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Student Aid Commission (7980)

The Student Aid Commission provides financial aid to students through a variety of grant and loan programs. The proposed 2005-06 budget for the commission includes state and federal funds totaling $1.4 billion. Of this amount, $746 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.

Below, we first summarize the Governor's budget proposals for the Cal Grant program and the Assumption Program of Loans for Education (APLE). We have concerns with three of these proposals—the reduction to the private university Cal Grant, the "set aside" for the National Guard APLE program, and the size of EdFund's operating surplus (which partly supports the Cal Grant program). We discuss these issues later in this section.

Major Budget Proposals

Figure 1 compares the commission's revised 2004-05 budget with the proposed 2005-06 budget. As the figure shows, financial aid expenditures would increase $44.6 million, or 6 percent, from the current year. Virtually all of this increase is due to additional Cal Grant costs ($37.3 million) and APLE costs ($6.9 million). As the figure also shows, in the budget year, General Fund support would increase considerably, in part to backfill a major reduction in support from the Student Loan Operating Fund (SLOF). Whereas $146.5 million in SLOF monies were used to support the Cal Grant program in 2004-05, the Governor's budget proposes to use $35 million in SLOF monies in 2005-06.

Figure 1

Student Aid Commission
Budget Summary a

(Dollars in Millions)

 

2004‑05
Revised

2005‑06
Proposed

Change

Amount

Percent

Expenditures

 

 

 

 

Cal Grant programs

 

 

 

 

  Entitlement

$551.0

$608.9

$57.9

11%

  Competitive

116.2

124.9

8.7

7

  Pre-Entitlement

37.2

7.4

-29.8

-80

  Cal Grant C

9.7

10.3

0.6

6

    Subtotals—Cal Grant b

($714.1)

($751.4)

($37.3)

(5%)

APLE c

$34.0

$40.9

$6.9

20%

Graduate APLE

0.2

0.4

0.2

75

National Guard APLE

   —

0.2

0.2

Law enforcement scholarships

0.1

0.1

     —

1

    Totals

$748.5

$793.1

$44.6

6%

Funding Sources

 

 

 

 

General Fund

$589.4

$745.5

$156.1

26%

Student Loan Operating Fund d

146.5

35.0

-111.5

-76

Federal Trust Fund d

12.6

12.6

     —

    Totals

$748.5

$793.1

$44.6

6%

a  In addition to the programs listed, the commission administers the Byrd Scholarship and Child Development Teacher and Supervisor programs—both of which are supported entirely with federal funds. It also administers the Student Opportunity and Access program, an outreach program supported entirely with Student Loan Operating Fund monies.

b  Includes $46,000 for the Cal Grant T program in 2004‑05. The program has been phased out as of 2005‑06.

c  Assumption Program of Loans for Education.

d  These monies pay for Cal Grant costs as well as support and administrative costs.

Cal Grant Program. Figure 2 provides a more detailed breakdown of the four major budget proposals relating to the Cal Grant program. The Governor's budget assumes the commission will issue 3,345 additional Cal Grant awards. This represents a 1.3 percent increase from the current year in the total number of Cal Grant awards issued. The Governor's budget also proposes to increase the value of Cal Grants for University of California (UC) and California State University (CSU) students (to compensate for the proposed undergraduate fee increases), but it would decrease Cal Grants for financially needy students attending private institutions by $873, or 10 percent. (Please see below for a more detailed discussion of the private university Cal Grant issue.)

Figure 2

Major Cal Grant Budget Proposals

Governor's Budget Proposal

Cost
(In Millions)

Increase in number of Cal Grant awards (3,345)

$21.6

Increase University of California Cal Grant by 8 percent
(raising maximum award from $5,684 to $6,141)

15.3

Increase California State University Cal Grant by 8 percent
(raising maximum award from $2,334 to $2,520)

7.9

Decrease private university Cal Grant by 10 percent
(lowering maximum award from $8,322 to $7,449)

-7.5

    Total

$37.3

Figure 3 shows growth in the number of Cal Grant awards from 2003-04 (actual) to 2005-06 (projected). The budget assumes the commission will issue almost 260,000 Cal Grants in 2005-06. It assumes a modest increase (2.3 percent) in the number of new High School Entitlement awards, and no increase in the number of new Transfer Entitlement awards (though the commission indicates it currently is analyzing transfer patterns and might revise this estimate in the spring). Per statute, the budget assumes the commission will award 22,500 new Competitive Cal Grant awards and 7,761 new Cal Grant C awards. (The Competitive Cal Grant program is designed for older students whereas the Cal Grant C program is designed for students enrolled in short-term vocational programs.) The commission is in the midst of studying renewal patterns in the competitive program to determine if its associated budget-year projections need to be revised. The budget assumes only 1,660 pre-entitlement renewal awards—indicating that almost all pre-entitlement recipients already have completed college. In a couple of years, the program will be entirely phased out.

Figure 3

Growth in Cal Grant Participation

 

2003‑04 Actual

2004‑05 Revised

2005‑06 Projected

Change From 2004‑05

Number

Percent

High School Entitlement

 

 

 

 

 

New awards

60,359

63,000

64,449

1,449

2.3%

Renewal awards

82,486

106,960

114,371

7,411

6.9

  Subtotals

(142,845)

(169,960)

(178,820)

(8,860)

(5.2%)

Transfer Entitlement

 

 

 

 

 

New awards

2,270

4,300

4,300

         —

Renewal awards

209

1,075

2,895

1,820

169.3%

  Subtotals

(2,479)

(5,375)

(7,195)

(1,820)

(33.9%)

Competitive

 

 

 

 

 

New awards

22,391

22,902

22,500

-402

-1.8%

Renewal awards

28,717

35,193

33,670

-1,523

-4.3

  Subtotals

(51,108)

(58,095)

(56,170)

(-1,925)

(-3.3%)

Pre-Entitlement
  Renewal Awards

28,010

8,135

1,660

-6,475

-79.6%

Cal Grant C

 

 

 

 

 

New awards

7,580

7,761

7,761

         —

Renewal awards

6,500

6,884

7,964

1,080

15.7%

  Subtotals

(14,080)

(14,645)

(15,725)

(1,080)

(7.4%)

Cal Grant T Renewal Awards

255

15

-15

-100.0%

Totals

238,777

256,225

259,570

3,345

1.3%

APLE Program. The Governor's budget includes a $6.9 million General Fund augmentation to cover loan-forgiveness costs associated with APLE warrants issued in previous years. The Governor's budget proposes to issue 7,700 new APLE warrants—the same level as in the current year. The Governor's budget also includes $200,000 to fund a maximum of 100 new National Guard APLE warrants. (Please see below for a more detailed discussion of this proposal.)

Private University Cal Grant

The Governor's budget proposes to reduce the maximum Cal Grant for students attending private colleges and universities by $873, or 10 percent—lowering the award from its current-year level of $8,322 to $7,449. This would be the second consecutive reduction. Between 2003-04 and 2004-05, the award was reduced by $1,386, or 14 percent. Approximately 12,100 financially needy students attending private universities likely would be affected by the proposal, which would be imposed only on new Cal Grant recipients. Of these students, approximately 8,500 would experience the reduction in the budget year whereas approximately 3,600 others would experience the reduction in 2006-07. (This delayed impact is due to a state policy that does not provide fee assistance to most first-year Cal Grant B recipients, even though they represent the financially neediest students served by the Cal Grant program.) Continuing students would retain the higher award rates they are receiving in the current year. The Governor's budget assumes the proposal would generate $7.5 million in General Fund savings. Below, we discuss our concerns with this proposal.

Create Parity for Financially Needy Students Attending Public and Private Universities

We recommend the Legislature establish in statute a policy and an associated award formula that would link the Cal Grant for financially needy students attending private universities to the General Fund subsidy the state provides for financially needy students attending public universities. Under our recommended formula, the private university Cal Grant would be $10,568 in 2005-06. Providing this higher award amount to new 2005-06 recipients would cost $26.6 million relative to the Governor's budget. We recommend the Legislature use additional Student Loan Operating Fund surplus monies to cover this cost (please see final write-up of this section).

Since 2001-02, the state has had neither an explicit nor an implicit policy for determining the private university Cal Grant. Without a policy, Cal Grant decisions can appear arbitrary, the program can become disconnected from its primary objective, and the program can be more difficult to oversee and evaluate. For these reasons, we recommend the Legislature establish a statutory private university Cal Grant policy that is linked with an associated award formula that can be used for budgeting purposes. We recommend a policy and related formula that would provide a simple means by which the state could ensure that it contributes about the same amount of support for all financially needy students.

Since 2000, State Has Not Had Private University Cal Grant Policy. When Chapter 403, Statutes of 2000 (SB 1644, Ortiz), created the new Cal Grant Entitlement program, the state's existing private university award policy was replaced with a new provision that linked the private university Cal Grant to whatever amount was specified in the annual budget act. For the next three consecutive years, the private university award was maintained at its 2000 level before being reduced in the current year.

Without a Policy, Funding Decisions Can Appear Arbitrary. Without an award policy, private university Cal Grant decisions can appear arbitrary. For example, in the current year, college costs (including fees and tuition) increased for public and private students alike. However, the Cal Grant award increased for public university students while the private university Cal Grant declined.

Without a Policy, Program Can Become Disconnected From Its Purpose. Without a policy to guide annual private university award decisions, the Cal Grant program can quickly become disconnected from its primary purpose. Although maintaining access and choice for all financially needy students is the primary goal of the Cal Grant program, the state's current-year action appeared to promote access to public institutions while dampening the potential for some financially needy students to attend private institutions. This is of particular concern because some private institutions are very specialized and essentially have no public university equivalent, yet they may best meet a financially needy student's educational objective. Access also is of particular concern because a significant proportion of financially needy, baccalaureate-seeking students attend local four-year private universities—living at home to substantially reduce overall college costs. For example, more than one-third of the financially neediest students (with family incomes less than $30,000) attending private four-year colleges live at home. Moreover, of the 25 private schools that enroll the greatest number of Cal Grant recipients (please see nearby box), all but a handful are relatively small regional universities with relatively small endowments. These institutions would not be as likely to backfill the proposed reduction in the state's award.

Without a Policy, Program Is Difficult to Evaluate. One of the primary benefits of any statutory policy is that it can clarify the objective of a program, thereby allowing the Legislature to monitor and track its performance. Without a policy, the Legislature cannot determine whether the private university award is fulfilling its objective. A statutory policy could establish criteria upon which to evaluate the private university award's success in promoting access, choice, and persistence among financially needy students as well as its success in expanding general higher education enrollment capacity.

State's Former Statutory Policy Sought Parity. Prior to 2000, the state had a longstanding statutory policy that guided private university Cal Grant decisions. Statute then specified, "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." Toward this end, statute included a formula that set the private university Cal Grant at 75 percent of the average General Fund cost per student at CSU plus the average of UC and CSU's student fees (both systemwide and campus-based).

Our Modified Formula Promotes Greater Parity. Our recommendation is consistent with the intent of the state's former statutory policy to provide comparable General Fund support for financially needy students attending public and private schools. We recommend modifying the previous formula to better meet this intent. The earlier formula was somewhat arbitrary in linking the award to "75 percent of the average General Fund cost per student at CSU." Our modified formula is based on the enrollment-weighted General Fund subsidy provided for students attending UC and CSU. We think this is a more accurate reflection of how much the state provides for an additional public university student. Second, our modified formula is based on the marginal cost rather than the average cost, as this too is a better reflection of the amount the state pays for each additional (rather than existing) student. Third, the earlier formula accounted for both systemwide and campus-based fees to reflect former Cal Grant policies. Our modified formula reflects current Cal Grant policies, which link awards only to systemwide fees. All three modifications establish a simple, ongoing means for equalizing what the state provides for financially needy students at public and private universities.

Figure 4 compares the support the state provides for different groups of financially needy students. As reflected in the figure, the Governor's proposed private university Cal Grant award would be 15 percent less than the level of General Fund support provided for financially needy students at CSU and 46 percent less than the level of General Fund support provided for financially needy students at UC. Also reflected in the figure, the budget-year private university rate generated by our recommended formula would be just slightly less than what the award would have been using the state's former statutory formula.

Figure 4

Comparing State Support for
Financially Needy Students

 

2005‑06

University of California

 

General subsidy

$7,588

Cal Grant

6,141

  Total subsidy

$13,729

California State University

 

General subsidy

$6,270

Cal Grant

2,520

  Total subsidy

$8,790

Private University Cal Grant

 

Proposed rate

$7,449

LAO-formula rate

10,568

Former statutory rate

10,694

Fiscal Implication of New Parity Policy. Increasing the private university Cal Grant to $10,568 for new 2005-06 recipients would cost $26.6 million relative to the Governor's budget. (By comparison, the Governor's budget proposal includes a $23 million augmentation for UC and CSU Cal Grants in the budget year.) We recommend the Legislature use surplus SLOF monies to cover this budget-year cost. In 2006-07, the cost of the higher private university grant would increase by approximately $8.3 million as second-year Cal Grant B recipients began receiving a fee award (rather than only a subsistence award). The Legislature also may want to consider increasing the award for new Cal Grant recipients in the current year, who were subject to the 14 percent award reduction. We estimate providing the higher award of $10,568 for these students would cost an additional $25.5 million in 2005-06.

In sum, we recommend the Legislature adopt a policy that would seek parity between state support provided for financially needy students attending public and private universities. This policy could help guide annual private university Cal Grant decisions, thereby making them seem less arbitrary. It also would support the primary objective of the Cal Grant program—to promote access and choice for all financially needy students. Finally, having an explicit policy could enhance the Legislature's ability, on an ongoing basis, to assess the public benefit of the private university Cal Grant.

Private University Cal Grant Helps Financially Needy Students Attending Diverse Set of Institutions

To help answer some private university Cal Grant questions that often arise, we list below the 25 private schools that enrolled the greatest number of Cal Grant recipients in 2004-05. Of the 25 schools, 23 are four-year institutions whereas 2 are two-year institutions. Seventeen are nonprofit institutions whereas eight are for-profit institutions. Two schools (Stanford and the University of Southern California) have endowments that exceed $1 billion, six schools have endowments that exceed $100 million, and the remaining nonprofit schools have relatively small endowments. These 25 schools enroll just about one-half of all private university Cal Grant recipients. In total, new Cal Grant recipients in 2004-05 are enrolled at 191 private institutions.

Private Institutions Enrolling the
Greatest Number of Cal Grant Recipients

(2004‑05)

Private Institution

Cal Grant Recipients

Private Institution

Cal Grant Recipients

University of Southern California

838

University of San Diego

231

University of Phoenixa

572

Saint Mary's College of California

215

Devry University, Pomonaa

488

Westwood College of Technologya

199

Loyola Marymount University

392

University of Redlands

194

University of the Pacific

348

California Baptist University

194

Fashion Institute of Designa,b

334

The Art Institute of California, Los Angelesa

192

University of Laverne

306

Universal Technical Institutea,b

178

Azusa Pacific University

299

American Intercontinental Universitya

175

University of San Francisco

278

Santa Clara University

172

Mount St. Mary's College

264

La Sierra University

158

Stanford University

253

The Art Institute of California, San Franciscoa

153

Chapman University

236

Fresno Pacific University

151

Biola University

232

 

 

a  For-profit institutions.

b  Two-year institution.

National Guard APLE Program

As established in 2003 and amended in 2004, the National Guard APLE program offers loan forgiveness as an incentive for more individuals to enlist or re-enlist in the National Guard, State Military Reserve, and Naval Militia. Specifically, qualifying members have a portion of their education loans forgiven after each year of military service—$2,000 after their first year of service and $3,000 after their second, third, and fourth years of service—for total loan forgiveness of $11,000. The annual budget act has not yet authorized the commission to issue any National Guard warrants.

New Warrants Have No Budget-Year Cost

Because no National Guard warrants have been issued to date, and individuals must complete one year of military service prior to receiving loan forgiveness, the commission will incur no associated program costs in 2005-06. Thus, the Governor's budget prematurely funds the program. We therefore recommend the Legislature capture the associated $200,000 as General Fund savings.

The Governor's budget proposes to authorize up to 100 new National Guard APLE warrants. It also includes $200,000 for the program, with accompanying budget bill language that "these funds shall remain available through 2006-07." Because warrant-holders must complete one year of military service before receiving loan forgiveness, the state would not begin incurring a cost for a new National Guard APLE warrant (as is the case with all APLE warrants) until at least one year after it is originally issued. Thus, no funding would be needed in the budget year. Moreover, the Governor's proposal to set aside 2005-06 monies that will not be needed until 2006-07 is inconsistent with existing APLE funding practices. Specifically, the state has a long history of funding APLE warrants only as payment on them becomes due. This helps ensure funds are provided when needed. We recommend the Legislature continue to adhere to its existing budget practice and pay for any new warrants when payment becomes due. Thus, we recommend the Legislature capture the unneeded $200,000 as General Fund savings.

EdFund Operating Surplus

Chapter 961, Statutes of 1996 (AB 3133, Firestone), gave the commission the authority to establish an auxiliary organization for purposes of administrating the Federal Family Education Loan (FFEL) program. Toward this end, the commission created EdFund, which, consistent with statute, functions as a nonprofit public benefit corporation. 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.

After Six Years of Increasingly Large Annual Surpluses, EdFund Had $267 Million Cumulative Surplus. From federal fiscal year (FFY) 1997-98 through FFY 2002-03, EdFund experienced increasingly large annual operating surpluses. In 2002-03, EdFund's annual surplus reached $108 million. EdFund's annual operating expenses that year were $118 million, so it was generating about twice as much revenue as it needed to cover its operating costs. By the close of 2002-03, EdFund was carrying a cumulative surplus of $267 million. EdFund attributes these surpluses to three primary factors—an increase in its loan volume as well as its success in default prevention and loan collections.

Current-Year "Swap" Works as Intended. In 2004-05, the state decided to use $146.5 million in SLOF monies to cover a portion of Cal Grant costs. The swap worked as intended—helping to maintain existing Cal Grant benefits for most students, reducing EdFund's surplus without threatening the viability of the agency, and relieving the General Fund. Even after accounting for this swap, EdFund has a cumulative surplus of $160 million (as of September 2004).

Use Larger Budget-Year Swap to Restore Cal Grant Benefits

We recommend the Legislature use an additional $26.6 million in Student Loan Operating Fund surplus monies to restore Cal Grant benefits for financially needy students attending private universities (thereby reducing the cumulative surplus to a more moderate level).

The Governor's budget proposes to use $35 million in SLOF surplus monies to support the Cal Grant program. In essence, it swaps $35 mil lion in SLOF surplus monies for General Fund monies. We recommend the Legislature increase the swap by $26.6 million—for a total of $61.6 million—to restore the current-year and proposed reductions to the private university Cal Grant. If EdFund generated no additional operating surplus in FFY 2004-05, our recommendation would reduce EdFund's cumulative surplus from $160 million to $98 million. This equates to roughly a nine-month reserve. We think, for a nonprofit public agency, this is still a substantial reserve level—one that would not reduce EdFund's viability as a guaranty agency.


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