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

California State University (6610)

The California State University (CSU) consists of 23 campuses. The Governor’s budget includes about $6.2 billion for CSU from all fund sources, including General Fund, student fee revenue, federal funds, and other funds. This is an increase of $196 million, or 3.3 percent, from the revised current-year amount. Most of the increase comes from CSU’s General Fund appropriations, which increase by $178 million, or 6.9 percent, from the revised current-year level. These General Fund changes are summarized in Figure 1 and detailed below. The CSU’s other funds collectively experience a net reduction of $8.4 million (0.4 percent).

Proposed General Fund Changes

Base Budget Increases. The proposed budget provides two base increases to CSU’s General Fund budget that are not restricted for specific purposes. The first totals $75.8 million and reflects a 3 percent base increase intended to compensate for increased costs to the university (mainly faculty and staff compensation increases). The second base increase totals $54.4 million and is provided to CSU in lieu of additional student fee revenue that would have been generated by a fee increase approved by the CSU Board of Trustees for 2006-07. The Governor expects that CSU will rescind the fee increase. According to CSU, this additional revenue will be used to (1) provide further salary and benefit increases beyond 3 percent, and (2) expand libraries, technology, and maintenance funding. Yet because the funding provided in lieu of the fee increase can be used by the segment for any purpose, it effectively increases CSU’s total, unrestricted base increase from 3 percent to 5.2 percent.

Enrollment Growth. In addition to base increases, the Governor’s budget also provides $57.7 million for a 2.5 percent increase in budgeted enrollment. This would increase CSU’s budgeted enrollment by 8,306 full-time equivalent (FTE) students. However, the Governor’s budget also proposes to reduce the number of units that define an FTE graduate student from 15 units per semester to 12 units per semester. This would have the effect of increasing the calculated number of graduate FTE students at CSU.

The enrollment growth augmentation provides $6,792 per additional FTE student. This reflects a proposed new formula for calculating the marginal cost of serving each additional student. In addition, the budget proposal assumes CSU will enroll an additional 163 FTE students in its entry-level master’s nursing program, as required by Chapter 592, Statutes of 2005 (SB 73, Committee on Budget and Fiscal Review).

Continuous Appropriation of Fee Revenue. The budget reduces CSU’s General Fund support by $5 million as a result of a proposed change to the treatment of student fee revenue. Up to now, CSU fee revenue has been collected by individual campuses but appropriated through the state budget in a special account. This fee revenue has earned interest, which has accrued to the state General Fund. The Governor proposes that campuses shall instead deposit fee revenue into local trust funds, which would be continuously appropriated. The state would no longer appropriate the funding through the budget act, and the General Fund would no longer receive interest from those fees. The proposed $5 million reduction in CSU’s General Fund appropriation is intended to reflect the interest that otherwise would have accrued to the General Fund, but which instead will accrue to CSU campuses through their trust funds. (Later in this write-up we recommend that if the Legislature desires to approve this proposal, it amend the proposed trailer bill language to protect budgetary accountability.)

Math and Science Initiative. The Governor’s budget provides CSU $1.1 million in new funding for the expansion of the Governor’s math and science initiative, which is intended to increase the number of math and science teachers trained at CSU.

Student Fees

As discussed earlier, the Governor’s budget assumes no increase in student fee levels. Fees for resident full-time students would remain at $2,520 for undergraduate students and $3,102 for graduate students. These amounts do not include campus-based fees. When combined with the average of campus-based fees, the total student fee for a resident full-time student in 2006-07 would be $3,164 for undergraduates and $3,746 for graduate students. Total nonresident tuition and fees would remain unchanged at $13,334 for undergraduates and $13,916 for graduate students.

Intersegmental Issues Involving CSU

In “Intersegmental” write-ups earlier in this chapter, we address several issues relating to CSU. For each of these issues, we offer an alternative to the Governor’s proposal. We summarize our main findings and recommendations below.

Fund Enrollment Growth Consistent With Demographic Projections and Our Revised Marginal Cost Methodology. The Governor’s budget provides $57.7 million to fund 2.5 percent enrollment growth at a marginal General Fund cost of $6,792 per additional FTE student, based on a proposed new marginal cost methodology. In the “UC and CSU Enrollment Growth and Funding” section in this chapter, we recommend, based on our demographic projections, that the Legislature instead provide funding for enrollment growth at a rate of 2 percent. Our proposal would allow the university to accommodate enrollment growth next year due to increases in population, as well as modest increases in college participation rates.

Moreover, we recommend the Legislature reject the Governor’s proposed marginal cost methodology. While we concur that the methodology is in need of revision, we propose an approach which more appropriately funds the increased costs associated with enrollment growth. Specifically, we propose (1) excluding unrelated costs, (2) better reflecting the actual costs of hiring entry-level faculty and teaching assistants, (3) including operation and maintenance costs, and (4) adjusting the total marginal cost by the average fee revenue collected per student. Using our revised methodology, we recommend reducing the Governor’s proposed per student funding rate for CSU from $6,792 to $6,407. (Our proposed rate is still higher than the level that would be generated under the current methodology.) Accordingly, we recommend a General Fund reduction of $14.1 million for CSU.

Maintain Nonneedy Students’ Share of Cost at Current-Year Levels. The proposed budget assumes no fee increase in the systemwide fees paid by CSU students. In the “Student Fees” write-up, we recommend the Legislature maintain nonneedy students’ share of cost at current-year levels. Because the cost of serving CSU is projected to increase, holding students’ share of cost constant would entail a modest systemwide fee increase of 3 percent. For a full-time CSU undergraduate, this amounts to an annual increase of $76. In addition, we recommend adjustments in Cal Grant award amounts sufficient to ensure that all eligible financially needy students receive grants that fully cover the fee increase.

Facilitate Expansion of Summer Programs. In recent years, the Legislature has taken steps to encourage CSU to serve more students during summer sessions (such as providing supplemental funding to enhance summer operations), thus reducing the need for adding new facilities to accommodate additional demand. The CSU’s progress in this area is mixed. Between 2001 and 2004, summer enrollment at some CSU campuses grew while enrollment at campuses targeted for expansion declined by about 40 percent. Systemwide, summer sessions have enrollment levels that are less than 10 percent of fall sessions. In the “Year-Round Operations at UC and CSU” write-up in this chapter, we (1) provide an update on CSU’s (and the University of California’s) efforts to expand summer operations, (2) examine whether any additional funding would be needed to fully convert all CSU campuses to year-round operations, and (3) identify several ways that the Legislature could further facilitate the achievement of truly year-round operations at the state’s universities.

General Fund Base Increase

We recommend the Legislature provide a 3.3 percent General Fund base increase to the California State University. This is consistent with our projection for inflation in the budget year. The Governor in effect proposes funding for a 5.2 percent base increase. We therefore recommend reducing the proposed increase of $130 million by $46.8 million. (Reduce Item 6610-001-0001 by $46.8 million.)

In order to compensate for the effects of inflation, which erode the purchasing power of a fixed appropriation over time, many state programs receive periodic base increases. The CSU uses these increases to fund salary and wage increases for faculty and staff, as well as increased prices of goods and services. In other words, these cost-of-living adjustments are not intended to fund increased workload, but rather are meant to help the university’s campuses pay for existing workload whose cost has increased due to inflation.

For 2006-07, the Governor proposes two base increases: (1) $75.8 million for a 3 percent base increase and (2) $54.4 million for a 2.2 percent base increase provided in lieu of increased funding from student fees. We project inflation in 2006-07 to be 3.3 percent (based on our estimate of the change in the U.S. state and local deflator from 2005-06 to 2006-07), which would increase CSU’s base costs by $83.4 million. Thus, we recommend the Legislature reduce the Governor’s proposed base increase from $130.2 million to $83.4 million. Under our proposal, the university would receive sufficient funding to compensate for increased costs. At the same time, the Legislature could use our identified General Fund savings of $46.8 million to address other priorities, including addressing the state’s budget problem.

K-14 Outreach Programs

We withhold recommendation on the proposed $7 million General Fund reduction to CSU’s outreach programs, pending our review of an evaluation of the programs to be submitted in April.

The CSU currently administers a number of outreach programs (also known as academic preparation programs) that focus on preparing and encouraging students from disadvantaged backgrounds to attend college. These programs include the Early Academic Assessment Program, the Educational Opportunity Program, and campus-based outreach programs. The 2005-06 Budget Act included a total of $52 million for such programs. This amount consists of $7 million from the General Fund and $45 million in other funds. For 2006-07, the Governor’s budget proposes to eliminate the $7 million in General Fund support from CSU’s outreach funding. Under the Governor’s proposal, CSU would maintain $45 million in other funds to allocate to its outreach programs. In adopting the 2005-06 budget, the Legislature rejected a similar proposal made by the Governor last year.

As part of the 2005-06 Budget Act, the Legislature adopted provisional language to ensure oversight of the use of CSU’s outreach funds. Specifically, it required that CSU report to the Legislature by March 15, 2006, on the outcomes and effectiveness of the Early Academic Assessment Program. We withhold recommendation on the proposed reduction to CSU’s outreach programs until we have had an opportunity to review this report.

Continuous Appropriation of Fee Revenue Could Reduce Accountability

If the Legislature wishes to continuously appropriate CSU’s fee revenue, we would recommend the Legislature amend trailer bill language to facilitate continued accountability for these funds.

Currently, student fee revenue collected by CSU campuses is placed in a special account and appropriated to CSU through the annual budget act. In the current year, $1.2 billion in fee revenue is appropriated in this way. Accompanying budget bill language specifies that any fee revenue collected in excess of this amount is automatically appropriated as an augmentation to the specified appropriation. Because the fee revenue is held in a state account, the state earns interest on it. This interest is estimated to total $4.5 million in the current year. For 2006-07, it is estimated to total $5 million.

The Governor proposes (through trailer bill language) that CSU fee revenue no longer be deposited in state funds and appropriated to CSU through the annual budget act. Instead, he proposes that fee revenue be deposited in local trust accounts maintained by CSU campuses and continuously appropriated for CSU’s general purposes. Existing state law would require that any interest received on these deposits be credited to the state General Fund. The CSU asserts that the proposed changes to the treatment of fee revenue would be more efficient because it would reduce the number of times this revenue would have to be recorded and reconciled. It also asserts that the proposal would be revenue-neutral for the state.

Stronger Trailer Bill Language Needed to Preserve Accountability. While this proposal would not appear to have any net fiscal impact on the state and may improve efficiency, it potentially could reduce accountability. If the Legislature wishes to continuously appropriate CSU’s fee revenue for the purpose of increasing efficiency, we recommend the proposed trailer bill language be revised to ensure that fee revenue is accounted for in annual budgeting and routinely reported and clearly displayed in budget documents. At a minimum, we would recommend that language be added that (1) requires the Governor’s annual budget proposal to include an estimate of the total fees to be collected in the current year and budget year, as well as the actual amount collected in the prior year, and (2) expresses the Legislature’s intent that the General Fund appropriation for CSU take into account estimated fee revenue.