LAO 2006-07 Budget Analysis: Education

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

Intersegmental: Protecting Legislative Priorities in Higher Education

The Governor’s budget for the University of California (UC) and the California State University (CSU) generally follows a six-year agreement he developed with the segments in spring 2004. This “compact” (which is not in statute and which has not been acted on by the Legislature) lays out specific annual increases in enrollment, student fees, and base funding, among others.

The Legislature has expressed its general higher education priorities in the Master Plan for Higher Education, as well as various statutory provisions. However, there is no clear link between the funding priorities specified in the compact and higher education needs under the Master Plan. The Legislature has the opportunity to reflect its priorities though appropriations in the annual budget act. In this writeup we (1) outline the basic choices the Legislature faces each year with regard to the higher education budget and (2) offer our specific recommendations on these key issues.

Higher Education Budget-Key Choices

Although the state’s higher education budget involves billions of dollars of expenditures and a variety of interrelated issues, the Legislature’s budgetary choices can be considered in a methodical and straightforward manner. Below, we outline the three basic steps in the Legislature’s decision making process.

Adjust Base Budgets. In any given year, funding contained in a segment’s base budget may need to be adjusted to account for one-time costs or anomalies. For example, if the base budget contained funds for expected enrollment growth that never materialized, it could be appropriate to reduce that segment’s enrollment funding to match actual experience. Similarly, the inclusion of funds for a one-time purpose (such as start-up costs for a new campus) would normally be backed out of a segment’s base budget for the following year.

Determine New Higher Education Costs the Budget Should Accommodate. Given the state’s current fiscal circumstances, we believe that first priority for budget increases should be given to those new costs that are necessary to maintain existing services. The largest costs in this area typically include enrollment growth and inflationary adjustments. After addressing these base issues, the Legislature then typically considers proposals for program expansions or new programs. The sum of these various changes results in new costs to each higher education segment or agency.

Determine How Costs Should Be Covered. After making decisions about the total budget for each segment, the Legislature then has to decide how these costs are to be covered by various funding sources. In general, education-related programs at the three higher education segments are funded with a combination of state General Fund support and student fee revenue. These funds are essentially interchangeable. The key decision for the Legislature in this area is: What share of total costs should students (and their families) bear?

Specific LAO Recommendations

Based on the approach described above, we recommend the Legislature address specific components of the Governor’s budget proposal as follows:

Fund Expected Levels of Enrollment Growth. The Governor’s compact calls for UC and CSU’s funded enrollment to grow by 2.5 percent each year through 2011. This ignores changes in population growth, participation rates, and other factors that affect enrollment. Indeed, the Governor’s Department of Finance projects that enrollment will grow by a much smaller percentage in 2006-07. In the “UC and CSU Enrollment Growth and Funding” section later in this chapter, we recommend the Legislature fund 2 percent enrollment growth for each segment in 2006-07.

Fund Cost Increases Caused by Inflation. The Governor’s compact calls for UC and CSU’s base budgets to increase by predetermined percentages each year without regard for actual inflationary effects. As we estimate that inflation will cause costs to increase about 3.3 percent in 2006-07, we recommend that level of increase for the two segments in the budget year.

Reject Concept of Fee “Buyout.” The Governor’s compact calls for fee increases at UC and CSU of 8 percent for undergraduate students and 10 percent for graduate students. The UC Regents and CSU Trustees have already approved those increases for 2006-07. Now, however, the Governor’s budget proposal calls for those increases to be reversed, and proposes a General Fund augmentation of $130 million to make up for (or “buy out”) the additional fee revenue that would have been collected.

The notion of a fee buyout makes no sense under the budget approach we have recommended above. In effect, the Governor proposes an unallocated General Fund increase that is not tied to any identified need. The only reason the fee buyout is set at $130 million is because that is the amount of money that would have been raised by the particular fee increases originally envisioned by the Governor’s compact. If the Governor’s compact had envisioned larger fee increases, the buyout would cost more; if the Governor’s compact had envisioned smaller fee increases, the buyout would cost less.

As suggested above, we think decisions about the level of higher education funding and the shares of costs borne by the state and students should be addressed as two separate questions. Whatever the amount of new higher education costs, the Legislature will need to decide what share of these costs should be borne by the state and by students. As we discuss later in this chapter, we recommend that the share of costs borne by students remain at its current level. This would require modest fee increases at UC and CSU (although they would be less than half of the fee levels called for in the compact). But even if the Legislature desired not to increase student fees (and thus to allow students’ share of cost to decline), this would not require a fee buyout. Instead, it would simply leave a larger share of identified cost increases to be covered by state General Fund support, or the Legislature could take steps to reduce or eliminate other cost increases.

Redirect General Fund Savings. We estimate that the Legislature could free up about $145 million in General Fund support (relative to the Governor’s budget) by funding the needs we have identified for UC and CSU rather than the somewhat arbitrary amounts generated by the Governor’s compact. These savings would be available for the Legislature to address other important priorities not addressed in the Governor’s budget. For example, the Legislature could apply these savings toward the state’s structural budget deficit (which we estimate to be about $6 billion under the Governor’s budget proposal). The Legislature could also use this funding to address unfunded priorities in other areas of the budget. If the Legislature wished to redirect these General Fund savings within the higher education budget, it could consider various options, such as:

What About the Budget for Community Colleges?

Although it constitutes a vital part of the state’s system of higher education, the California Community Colleges (CCC) are excluded from the Governor’s higher education compact. Many of the budgeting decisions the Legislature faces for UC and CSU, however, are affected by and will affect CCC. For example, funding for enrollment growth at one segment can affect enrollment demand at another segment due to student transfers between CCC and the universities.

In general, we recommend the Legislature take a similar approach to CCC’s budget as it takes to UC and CSU’s budgets. For example, the interaction of fees and General Fund support for all three segments is functionally similar, despite technical differences. At the same time, most funding for CCC is subject to Proposition 98, and thus augmentations and reductions to CCC’s budget will affect total Proposition 98 spending by the state. For this reason, we discuss priorities for CCC funding within the “Crosscutting” section, “Proposition 98 Priorities.”

Return to Education Table of Contents, 2006-07 Budget Analysis