Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

Introduction

Higher Education

The Governor’s budget proposes a $997 million General Fund augmentation for higher education in 2006-07. This represents a 10.3 percent increase from the revised 2005-06 amount. The Governor’s proposal assumes no student fee increases at any of the three segments. It does, however, provide additional General Fund support to the University of California and the California State University in lieu of specified fee increases. 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 2006-07 budget proposal provides a total of $34.4 billion from all sources for higher education. This amount is $1.5 billion, or 4.5 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), the California Community Colleges (CCC), Hastings College of the Law, the California Student Aid Commission, 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 mainly technical adjustments.

Major Funding Sources

The 2006-07 budget proposal provides $10.7 billion from the General Fund for higher education. This amount is $997 million, or 10.3 percent, more than proposed current-year funding. The budget also projects that local property taxes will contribute $1.9 billion for CCC in 2006-07, which reflects an increase of $70 million, or 3.8 percent, from the revised current-year amount. (The figure masks an underlying growth in property tax revenues of 11 percent. The 3.8 percent growth reflects the end, in 2005-06, of the two-year property tax shift from local governments to schools.)

Student fee revenue at all the public higher education segments accounts for $3.6 billion of proposed expenditures. This is $78.9 million, or 2.2 percent, greater than student fee revenue in the current year. This increase is primarily due to assumed enrollment growth at all three segments. (The Governor assumes no increase in student fee levels at any of the segments.) The budget also includes $18.2 billion in other funds, which is an increase of $322 million, or 1.8 percent. About $16 billion of this amount constitutes nonstate revenue-including federal funding and private contributions to the universities. The remainder is made up of various state revenues, including lottery and tobacco funds. In addition to the amounts reflected in Figure 1, local community colleges are projected to receive an additional $2 billion from locally budgeted resources. (These funds are identified in the “California Community Colleges” section of this chapter.)

Funding by Segment

For UC, the budget proposes General Fund appropriations of $3 billion, which is $207 million, or 7.3 percent, more than the proposed current-year estimate. The other major source of funding for UC’s educational programs is student fee revenue. This is projected to total $2 billion in 2006-07, which is 2.2 percent above the current-year estimate. When General Fund and fee revenue are combined, UC’s budget would increase by 5.2 percent.

For CSU, the budget proposes $2.8 billion in General Fund support, which is an increase of $178 million, or 6.9 percent, from the revised current-year level. Fee revenue would increase by $26 million, or 2.2 percent, to $1.2 billion. Total General Fund and fee revenue combined would increase by 5.4 percent.

For CCC, the Governor’s budget proposes $4 billion in General Fund support, which is $501 million, or 14.5 percent, above the current-year amount. Local property tax revenue (the second largest source of CCC funding) would increase by 3.8 percent, to $1.9 billion. Fee revenue would provide an additional $358 million, reflecting an increase of $10.4 million, or 3 percent. Combined, these three sources of district apportionments (General Fund support, property taxes, and fee revenue) would amount to $6.2 billion, which reflects an increase of $581 million, or 10.3 percent.

Major Cost Drivers for Higher Education

Annual base adjustments for higher education funding generally arise from three major factors: (1) enrollment growth, (2) inflation, and (3) student fee levels. Specifically, these factors influence costs in the following ways:

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 community college, although there are technical differences in how funding is calculated. (For 2006-07, the Governor proposes changes to marginal cost funding, as we discuss in the “UC and CSU Enrollment Growth and Funding” section of 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, inflation creates pressure to provide cost-of-living adjustments to maintain the buying power of faculty and staff salaries.

Student Fees. Student fees comprise a portion of total revenue available to the segments. When fees are increased, this creates new revenue that either can substitute for General Fund revenue (thus creating General Fund savings) or increase total funding for the higher education segments. Either way, fee increases reduce the level of General Fund support required to provide a given level of services.

Major Budget Changes

The Governor’s higher education budget proposal results primarily from base increases (somewhat higher than 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.

Enrollment Growth. The Governor proposes enrollment increases from budgeted levels 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.

Student Fees. For all three segments, the Governor proposes no increases in student fees. (See Figure 4 for the current fee levels at the segments.) As noted earlier, the Governor proposes to provide UC and CSU with General Fund augmentations in lieu of fee increases the segments had adopted for 2006-07. While no such fee “buyout” is formally proposed for CCC, implicitly a fee increase equal to CCC’s inflation adjustment is “bought out.” We discuss student fees in more detail later in this chapter.

Student Financial Aid. The Governor proposes $51 million in additional funding for Cal Grants. About $39 million of this amount would fund increased participation in the Cal Grant program, and $12 million would restore an earlier reduction in Cal Grant awards for needy students attending private institutions. The Governor’s budget provides another $51 million to backfill a reduction in grant support from the Student Loan Operating Fund (SLOF). For 2006-07, the Governor is proposing no transfer of monies from SLOF to the Cal Grant program. We discuss these augmentations in the “California Student Aid Commission” write-up of this chapter.