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

California Community Colleges (6870)

California Community Colleges (CCC) provide instruction to about 1.6 million students at 109 campuses operated by 72 locally governed districts throughout the state. The system offers academic, occupational, and recreational programs at the lower division (freshman and sophomore) level. Based on agreements with local school districts, some college districts also offer a variety of adult education programs. In addition, pursuant to state law, many colleges have established programs intended to promote regional economic development.

Funding Increases Proposed. The Governor’s budget includes significant funding increases for CCC. As shown in Figure 1, the Governor’s proposal would increase total Proposition 98 funding for CCC by $606 million, or 11.6 percent. This augmentation funds a cost-of-living adjustment (COLA) of 5.18 percent, enrollment growth of 3 percent, and various expanded programs. Counting all fund sources-including student fee revenue and federal and local funds-CCC’s budget would total $8.6 billion.

CCC’s Share of Proposition 98 Funding. As shown in Figure 1, the Governor’s budget includes $5.8 billion in Proposition 98 funding for CCC in 2006-07. This is about two-thirds of total community college funding. Overall, Proposition 98 provides funding of approximately $54 billion in support of K-12 education, CCC, and several other state agencies. As proposed by the Governor, CCC would receive about 10.8 percent of total Proposition 98 funding.

State law calls for CCC to receive approximately 10.9 percent of total Proposition 98 appropriations. However, in recent years, this provision has been suspended in the annual budget act and CCC’s share of Proposition 98 funding has been lower than 10.9 percent. The Governor’s proposed budget would again suspend this provision, although the share provided CCC would come close to what is called for in statute.

Major Budget Changes

Figure 2 shows the changes proposed for community college Proposition 98 spending in the current and budget years. Major base increases include $149 million for enrollment growth of 3 percent and $265 million for a COLA of 5.18 percent. (Following longstanding practice, the Governor proposes that CCC receive the same statutory COLA as K-12 schools. The statutory COLA is based on an estimate of inflation that will not be finalized until April.) In addition to these base adjustments, the Governor proposes program expansions of $130 million in equalization funding and $50 million in career technical education. (We discuss these issues further in this section.)

Proposition 98 Spending by Major Program

Figure 3 shows Proposition 98 expenditures for community college programs. As shown in the figure, apportionment funding (available to districts to spend on general purposes) accounts for $5.2 billion in 2006-07, an increase of $519 million, or 11.1 percent, from the current year. Apportionment funding in the budget year accounts for about 89 percent of CCC’s total Proposition 98 expenditures.

Categorical programs (whose funding is earmarked for specified purposes) also are shown in Figure 3. These programs support a wide range of activities-from services to disabled students to part-time faculty health insurance. The Governor’s budget proposes increases of approximately 7 percent for certain categorical programs to fund a COLA and enrollment growth, but for most other programs it proposes no changes. In addition, the proposed budget provides a $9.6 million augmentation for Disabled Students Programs and Services to fund additional sign language interpretative services and captioning equipment.

Student Fees

The Governor proposes no change to the existing student fee level of $26 per unit. Under the Governor’s budget, student fee revenue would account for 4.2 percent of total CCC funding. As we discuss in the “Student Fees” intersegmental piece earlier in this chapter, the Governor’s budget provides a 5.18 percent COLA to fund cost increases in apportionments. Because the proposed budget holds student fees constant, increased fee revenue is not helping to cover those higher apportionment costs. As such $19 million in state General Fund revenue is compensating for keeping fees constant. In contrast to the Governor’s proposal, we recommend raising the CCC fee by 7 percent, requiring full-time students to pay an annual fee of $835. This would maintain the same share of cost that nonneedy students pay, and maximize federal reimbursements for students paying the fee.

Enrollment

The CCC is the nation’s largest system of higher education and enrolls three out of four public postsecondary students in the state. Over the last decade, enrollment increased by about 268,000 students or an average of 2.1 percent annually. As shown in Figure 4, CCC’s headcount enrollment peaked in fall 2002, but since then has been declining. Preliminary estimates indicate that CCC enrolled about 1.6 million students in the fall 2005 term. This would reflect a decline from the previous fall term of about 2 percent and represent the third consecutive year of decline. While enrollment may begin to rebound, we note that the Department of Finance’s (DOF’s) demographic research unit projects a modest decline in CCC headcount enrollment for 2006-07.

Modest Growth in College-Age Population Brings No Tidal Wave

The decline in CCC’s enrollment comes at a time when CCC anticipated record enrollment from an increase in the traditional college-age population. The expected increase in enrollment demand is sometimes referred to as “Tidal Wave II.” California’s population of 18- to 24-year olds increased from about 3 million in 1995 to nearly 3.7 million in 2005, an average annual growth rate of 2 percent. As shown in Figure 5, the fastest period of growth of this population occurred in the late 1990s, followed by slower growth in recent years. Figure 5 also shows that the rate of growth of the college-age population is projected to increase through 2008-09, after which growth is expected to slow.

Since the late 1990s, many have speculated that this increase in the college-age population would lead to record numbers of students seeking admission to community colleges. Despite the expectation of a “tidal wave” of students, CCC enrollment growth over the last decade has been moderate. Indeed, recent system enrollment has been declining.

What Influences Enrollment at CCC? An increase in the state’s college-age population is a major factor affecting enrollment levels, but it is not the only one. Fluctuations in participation rates affect enrollment at California’s community colleges as well. Factors such as state and local education policies and personal choices of potential students determine participation rates and are much more difficult to predict. State policies affecting demand include fees and financial aid, eligibility requirements, and educational priorities, such as transfer preparation and vocational training. Additionally, factors such as the availability of certain classes, local economic conditions, and the perceived value of the education to potential students also affect participation rates.

Why Has Enrollment Lagged Population Growth?

As discussed above, CCC’s enrollment rose steadily through the second half of the 1990s, and then began declining in 2003. Although we are unable to isolate the precise causes of the recent decreases, several factors are likely to have contributed to the decline.

Recent Improvements in the State’s Economy. The availability of jobs influences the decision adults make to attend college. After a recent peak in 2003, the state’s unemployment rate has been steadily declining, resulting from an expansion of various economic sectors. In some regions, for example, new housing developments have created greater demand for housing construction workers. Some community college districts, using local surveys of recent students, report that some of these students left college to take advantage of these types of higher-wage jobs available in local economies. Thus, some portion of the statewide enrollment decline resulted from students opting for the more immediate benefits of employment in an improving economy.

Expected Reductions in Concurrent Enrollment. Beginning in 2002, the state took statutory and budgetary action to reduce concurrent enrollment levels after concerns were raised about a number of community college districts inappropriately claiming state funding for an increasing number of concurrently enrolled high school students. While state statute still permits districts to enroll some K-12 students, the Legislature and Governor adopted new restrictions on concurrent enrollment to prevent districts from abusing the provision. As a result, the number of K-12 students concurrently enrolled in CCC, predominantly high school students taking physical education courses, declined by more than 100,000.

Reduced Course Offerings. The Chancellor’s Office suggests some of the enrollment decline can be explained by districts having reduced the number of course offerings in spring 2003, in anticipation of the Governor’s proposed budget reductions. Although the Legislature rejected most of these cuts in the enacted budget, some districts reportedly prepared for budget cuts by hiring fewer part-time faculty and reducing the number of course sections available to students. Community colleges reduced about 9,800 course sections systemwide between fall 2002 and fall 2003. However, by spring 2005, CCC had restored the sections. Despite the restoration of course sections, overall enrollment has continued to decline. As a result, the average class size has fallen.

Impact of Fee Increases on Nonneedy Students. The Legislature raised fees in 2003-04 from $11 to $18 per credit unit and again in 2004-05 from $18 to $26 per credit unit. Community college student fees remain the lowest in the nation, and all financially needy students are eligible to receive a fee waiver. Nonetheless, some assert that the fee increases may have influenced demand.

Responding to such concerns about the impact of fees on enrollment, the Legislature took steps to ensure that needy students would still be able to attend CCC. As part of this effort, the Legislature appropriated $38 million in the 2003-04 Budget Act ($37 million on an ongoing basis) to expand financial aid outreach, and continued to fully fund fee waivers for needy students. The Legislature also directed the Chancellor’s Office to monitor the effect of the fee increase on enrollment and report its findings to the Legislature. The Chancellor’s Office reports reveal no direct effect of fee increases on student access. Instead, the reports assert that an unknown portion of the enrollment decline is due to the fee increases.

Effect of Decline on the Student Population Profile

The CCC fee reports were able to measure whether the enrollment decline affected the segment’s student population profile. It found the following:

• Shift Toward Younder Students. The student population after the decline included a greater percentage of traditional college-age students and a reduced share of students age 30 and over.

• No Disproportionate Effect on Lower-Income Groups. The analysis showed that students residing in low-income areas were no more affected by the fee increases than students from higher-income areas. This likely reflects the fact that needy students are not required to pay fees.

• No Disproportionate Effect on Racial and Gender Groups. No racial or gender group’s share of total enrollment declined, with the exception of a 3 percent decline in the percentage of white students during this period.

• Positive Effect on Student Educational Goals and Retention. The CCC reports show a significant rise in the percentage of students seeking a degree or certificate, or intending to transfer to a four-year institution. Specifically, about 43 percent of students enrolled in fall 2004, indicated upon enrollment that their educational goal included obtaining a degree or certificate, or seeking to transfer. This reflects an increase of 6 percent since fall 2002.

• Increased Course Retention Rate. The percentage of students completing a course increased to 83 percent in fall 2004, up more than one-half of a percentage point since fall 2002. However, this increase in retention rates was not associated with an increase in success rates. The CCC calculates course success rates as the percentage of students staying until the term’s end and receiving a grade of C or better. During the same period, success rates declined more than one-half percentage point with about 67 percent of students successfully completing a course.

In summary, the CCC reports indicate that lower-income and historically under-represented groups do not disproportionately account for the recent declines in enrollment.

Recent Enrollment Funding Trends

In recent years, the state budget has included funding for enrollment growth that is high by a number of standards. For the remainder of this section, we discuss enrollment as a measure of full-time equivalent (FTE) students.

CCC Enrollment Funding Outpacing Population Growth. Funding for student enrollment at CCC has grown faster than the percent change in the traditional college-age population of 18- to 24-year olds. Figure 6 compares changes in enrollment funding with the rate of change for the population of 18- to 24-year olds over the last six years. As the figure shows, funding for CCC enrollment growth has far outpaced the annual change in the college-age population. Since 2000-01, CCC has received annual augmentations for enrollment growth at or above 3 percent. Meanwhile, growth in the college-age population has slowed during this period.

CCC Enrollment Funding Outpacing Enrollment Growth. In recent years, the state budget has provided CCC with more funding for enrollment growth than community colleges used to enroll additional students. As shown in Figure 7, funding provided for budgeted enrollment growth has exceeded the percent change in FTE students actually enrolled each year except for 2001-02. (Enrollment significantly exceeded funding in 2001-02 due in part to individuals choosing to attend college at the time of a tight job market.) In 2003-04, CCC’s actual FTE enrollment declined about 4 percent. The following year, it declined by another 2 percent. As a result, CCC received more funding for enrollment growth than was required to fund its actual enrollment growth. Some of this excess growth funding went to districts that had “unfunded” enrollment.

No Unfunded Enrollment Remains. In allocating enrollment funding each year, the Chancellor’s Office sets a limit or “cap” on the maximum number of FTE students each district will be funded to serve. A district enrolling students above this cap in a given year will not receive funding for the “overcap” students (with some exceptions). A district whose enrollment exceeds the level of enrollment allowed by the system is said to have unfunded enrollment. Figure 8 shows the level of unfunded students since 2000-01. As the figure indicates, unfunded enrollment, which peaked in 2001-02, declined rapidly thereafter as community colleges received growth funding in excess of actual enrollment. As of 2004-05, the community colleges had eliminated unfunded enrollment for all districts.

2004-05 Growth Less Than Funded. Data from CCC suggest that the community colleges served fewer FTE students than it was funded to serve in 2004-05. The 2004-05 Budget Act included $161 million to fund enrollment growth of 3.7 percent. According to the most recent available data, the community colleges fell about 13,000 students shy of its funded level. State law requires that any unused growth funding revert to the Proposition 98 Reversion Account. We expect to have a better estimate of the amount of unused 2004-05 enrollment growth funding by the Governor’s May Revision.

2005-06 Growth Also Likely Below Funded Level. If enrollment continues to decline, CCC may not be able to use all the funding provided for enrollment growth in 2005-06. The 2005-06 Budget Act provided an augmentation of about $142 million to fund 3 percent enrollment growth, or an additional 34,000 FTE students. This amount is significantly above estimated adult population changes. Preliminary enrollment estimates indicate that CCC enrollment in 2005-06 could continue to decline or, at best, remain flat. The Chancellor’s Office has not yet received the final fall 2005 term enrollment numbers but preliminary data based on an initial census of districts’ enrollment of FTE students project a decline of as much as 1 percent compared to the fall 2004 term. These preliminary projections cast significant doubt on whether the colleges will be able to use all of their budgeted growth funding in 2005-06. In the event that CCC has unused growth funding in 2005-06, this funding would be available to fund one-time K-14 priorities. Although unused enrollment growth funding would revert, going forward this level of funding remains in the base for the budget year.

2006-07 Enrollment Growth

The Governor’s budget proposes an augmentation of $149 million to fund 3 percent enrollment growth at California Community Colleges (CCC). This level of enrollment growth exceeds our projected increase in CCC enrollment of 1.75 percent. We recommend the Legislature fund 1.75 percent enrollment growth, thus reducing the Governor’s proposed augmentation by $62 million.

The budget proposal provides an increase of $149 million for enrollment growth in 2006-07 to fund about 35,000 additional FTE students (a 3 percent increase). With this augmentation, the Governor’s budget proposes funding a total of 1.2 million FTE students in 2006-07.

State law requires the annual budget request for CCC to include funding for enrollment growth at least as large as the rate of increase in the adult population, as determined by DOF. The DOF projects that California’s adult population rate will increase by 1.74 percent in 2006-07.

Recommend 1.75 Percent Enrollment Growth Funding (Reduce Item 6870-101-0001 by $62 Million) This is a particularly difficult time to project enrollment growth for CCC. The segment has been experiencing overall declines in recent years. While it appears that this decline may continue in the current year, more conclusive information will not be available for a few months.

While recent evidence would suggest that CCC as a system will experience little or no increase in total enrollment, we recommend the Legislature fund 1.75 percent growth for 2006-07. This is the level of additional students we forecast based on our demographically driven enrollment model. We think our recommended growth level, while potentially on the high side, would support the Legislature’s goal of ensuring widespread access to the community colleges. At our recommended level, CCC’s growth augmentation could be reduced by $62 million compared to the Governor’s budget.

Additional Savings May Be Available. To the extent that CCC is not able to use all its enrollment growth funding in the current year, the segment would have unused 2005-06 growth funding in its 2006-07 base that could be applied toward its projected budget-year enrollment growth. (This is in addition to one-time savings in 2005-06 from unused growth funding which would revert.) The availability of these funds would further reduce the amount of new enrollment growth funding CCC would require in 2006-07 compared to the Governor’s budget, resulting in additional savings from what we identify above. We will update the Legislature on this matter at budget hearings as additional current-year enrollment information becomes available.

Equalization

The Governor’s 2006-07 budget proposal includes $130 million to equalize per-student funding among community college districts. To the extent the Legislature wishes to fund priorities beyond workload increases, we recommend that the Legislature approve an augmentation sufficient to finish funding equalization to the 90th percentile, as called for in statute. However, we recommend the Legislature fund equalization contingent upon enactment of legislation providing an allocation method that preserves its equalization investment.

As a result of tax base differences that predate Proposition 13 in 1978, coupled with complex district allocation formulas, community college districts receive different amounts of funding to serve their students. Specifically, the amount of general purpose or “apportionment” funding the state provides for each FTE student varies by district. In 2003-04, when recent equalization efforts began, districts’ funding per FTE student ranged from $3,500 to $8,200. Most districts, however, had levels within a few hundred dollars of $3,800, the state median amount at the time. Funding differences may be acceptable if they are small or reflect real cost differences encountered by different districts. However, the funding differences that historically have existed among community college districts have little correlation to underlying costs.

Equalization Makes Sense

Numerous reports and hearings in recent years have recognized these funding disparities and have called for efforts to “equalize” funding among districts. As we have noted in earlier publications (see our Analysis of the 2004-05 Budget Bill, page E-220), we think equalization makes sense as a public policy goal. In particular, equalization can foster:

• Fairness to Students. Providing all districts with similar levels of funding per FTE student helps to ensure that students in different parts of the state have access to similar levels of educational support, which can translate into similar levels of educational quality and student services.

• Accountability. The state’s Master Plan for Higher Education and state law assign to community colleges a number of educational missions. The state also has called on the community colleges to meet performance expectations in a number of areas, including preparing students to transfer to a four-year institution, awarding degrees and certificates, and improving course completion rates. It is difficult to hold all districts accountable for these standards when the amount of funding provided per student varies from district to district. To the extent that equalization funding can help districts provide comparable levels of educational services, the community college system will be in a better position to evaluate district outcomes. (We discuss CCC accountability efforts in more detail later in this section.)

Different Approaches to Equalization. There is no single way to equalize community college funding. Over the years, the Legislature has considered different methods to define and implement district equalization. In general, these methods take different approaches to account for fixed costs and set funding targets. Different districts will receive more funding under some equalization approaches compared to others. However, in virtually all the methods that have been proposed, no district would lose any funding in order to equalize funding statewide.

2004-05 Budget Act Initiated Multiyear Equalization Effort

After considering these various ways to equalize, the Legislature enacted a method of equalizing district funding based on dollars per FTE student. Chapter 216, Statutes of 2004 (SB 1108, Committee on Budget and Fiscal Review), established the goal that up to 90 percent of statewide community college enrollment eventually receive the same level of funding per credit FTE student. (Noncredit enrollment and funding were excluded for purposes of equalization. Funding for noncredit students is not an equalization issue because all districts receive the same amount for each noncredit student.) Given that a few districts currently have unusually high levels of per-student funding, the Legislature concluded that it would be too costly to provide the highest rate to all districts and instead set the 90th percentile as its goal.

Chapter 216 directed the Chancellor’s Office to classify districts as small, medium, or large, based on total number of credit FTE students funded in each district’s 2003-04 base budget. The equalization targets for smaller districts would be slightly higher to account for their higher per-student fixed costs. Based on a statutory formula, the Chancellor’s Office calculated the 90th percentile funding rate for large districts to be $4,037 per credit FTE student. The target for medium-sized districts was 3 percent above this amount, or $4,158. The target for small districts was 10 percent above the large districts’ target, or $4,441.

The 2004-05 Budget Act provided $80 million toward this equalization effort. At the time, we estimated that achieving the 90th percentile target would cost about $240 million. The Chancellor’s Office prorated the $80 million to qualifying districts-57 districts received funding-as a first installment toward reaching their equalization targets.

The 2005-06 Budget Act provided a second installment of equalization funding, totaling $30 million. These funds brought the state’s total investment under this equalization effort to $110 million.

Equalization to Cost More Than Governor’s Proposed $130 Million

The 2006-07 Governor’s Budget proposes $130 million as the final installment to complete equalization under Chapter 216. Combined with the $110 million the Legislature previously provided, the Governor’s proposed funding would bring the total investment in equalization under Chapter 216 to $240 million.

While the Governor intends for the proposed funding to equalize credit instruction rates per FTE student to the 90th percentile, it may not be sufficient to achieve that goal. Two developments have driven up the cost of equalizing to the 90th percentile: (1) since 2003 there has been an increase in the number of students to be equalized, and (2) the CCC’s funding allocation method works at cross purposes with the Legislature’s equalization efforts.

More Students to Equalize. While overall enrollment has declined in the past several years, funded enrollment in some districts has increased. To the extent enrollment has increased in equalization districts, it now costs more than it did two years ago to equalize the enrollment in those districts.

Program-Based Funding Works Against Equalization Goal. While the Legislature provided funds to equalize districts, it left in place a complex method of allocating apportionment funding to districts for enrollment growth and COLAs based on a program-based funding formula. This formula attempts to account for the different costs that different districts experience. Under program-based funding, districts do not receive equal funding rates on a per-FTE student basis. Instead, district allocations are influenced by headcount enrollment, total square footage of district facilities, and other factors. As such, program-based funding works at cross purposes from the goal of funding statutory equalization targets. Having both allocation methods operating at the same time is contrary to the Legislature’s most recent intent to equalize per-student funding.

Link Equalization Funding to New Apportionment Allocation Method

Use Latest CCC Data to Measure Equalization. The Legislature chose the 90th percentile as a reasonable point where disparities in revenues limits would be reduced to acceptable levels. We believe updated CCC data should be used to measure the 90th percentile target. Reaching the 90th percentile based on the latest CCC data would cost approximately $150 million this year-according to preliminary estimates-rather than the $130 million proposed by the Governor. Providing this higher amount would allow the Legislature to reach its goal of equalizing district funding disparities. If the Legislature decides to fund Proposition 98 expenditures at the level proposed in the 2006-07 budget, we believe equalization represents a good use of discretionary funds.

Link Equalization Funding to Allocation Formula. If the Legislature provides funding for equalization, we recommend it do so contingent on the enactment of legislation replacing program-based funding with an allocation method more consistent with its equalization goal. As discussed above, program-based funding allocates new apportionment funding to districts in a way that is inconsistent with the Legislature’s equalization goal. To maintain equalization levels, we recommend that the Legislature amend statute to allocate new apportionment funding at the same amount per credit FTE student for all districts in similar size groupings. This way, as student enrollment increases, districts’ level of funding per student would keep pace with other districts of similar size. This method would ensure future allocations of growth funding are applied consistently with the Legislature’s equalization goals.

Career Technical Education

The 2006-07 budget proposes $50 million for the Governor’s Career Technical Education initiative to expand and improve the sequencing of vocational courses offered at high schools and California Community Colleges (CCC). This proposal augments the $20 million in one-time funds the Legislature provided in the current year towards this effort. We recommend the Legislature not expand the program until CCC has evaluated the progress of the initial efforts and prepared a proposal for the new funds. (Reduce Item 6870-101-0001 by $50 million)

The 2005-06 Governor’s Budget proposal included funding to encourage high schools and community colleges to work together to expand and improve vocational courses. The proposal was intended to build upon the existing “2+2” programs, in which students take two years of high school vocational courses that lead into a two-year CCC vocational credential or degree program.

The Governor’s initial proposal was modified somewhat in budget hearings, and the Governor vetoed the funding included in the 2005-06 Budget Bill. Ultimately, however, the Legislature enacted Chapter 352, Statutes of 2005 (SB 70, Scott), which provided $20 million in one-time funds to CCC to award local assistance grants to a consortia of community colleges, and elementary and secondary schools. The legislation requires CCC to assist economic and workforce regional development centers and consortia-including middle schools, junior highs, or high schools, and regional occupational centers and programs-to improve connections between vocational programs. In response to legislative concerns, CCC has developed a spending plan for the 2005-06 funds. However, CCC has not yet awarded the grants. The Chancellor’s Office tells us it expects to begin making awards later this spring.

The 2006-07 budget proposes increasing funding for this effort by $50 million on an ongoing basis. We supported the initial grants as a starting point for addressing a significant problem in career technical education, but we note that the Governor’s new proposal does not include a broad vision for revitalizing career technical education across the state. Furthermore, the CCC does not have a proposal for how it would spend this additional money. Finally, given that the initial grants have not yet been awarded, we believe that this proposed augmentation is premature. Consequently, we recommend the Legislature not fund an augmentation to the career technical education program at this time, for a savings of $50 million.

Retiree Health Benefit Liabilities

We recommend the Legislature direct the California Community Colleges Chancellor’s Office to provide an assessment at budget hearings regarding the extent of the retiree health benefit liabilities of the community colleges.

In 2004, the national Governmental Accounting Standards Board (GASB) issued a new policy requiring local governments, including local educational agencies, to account for retiree health benefits in a manner similar to other pension costs. This new GASB policy requires community college districts to identify the total unfunded liability for retiree benefits that the districts have promised to current employees and retirees. (We discuss this overall issue in more detail in the K-12 “School District Financial Condition” section of this analysis and in “Retiree Health Care: A Growing Cost for Government,” in “Part V” of The 2006-07 Budget: Perspectives and Issues.)

This policy presents a major new fiscal challenge for many community college districts. According to the Community College League of California, about 65 of the 72 community college districts pay some level of post-employment retiree health benefits. These districts have an estimated total liability of $2.5 billion to $3 billion and have reserved about 15 percent of this liability.

Seventeen of these districts formed a joint powers agency (JPA) to address the fiscal challenges of complying with this new accounting standard. This new JPA is providing participating districts with assistance such as actuarial services and a pooled investment program.

Districts have some incentives to address their retiree health benefit liabilities. For example, the existence of unfunded liabilities can reduce a district’s bond rating, thereby increasing the cost of borrowing. Additionally, the Accrediting Commission for Community and Junior Colleges has cited these unfunded liabilities as a factor in evaluating an institution’s financial stability and has required institutions make plans to identify and provide for these obligations.

The state, however, also has an incentive to encourage districts to focus on this problem because, at some point, districts may seek financial assistance for these costs from the state. The CCC currently has no comprehensive data on the extent of the problem. As such, we recommend the Legislature direct the Chancellor’s Office to survey districts on their retiree health care liabilities and provide the Legislature with an assessment at the time of budget hearings.

CCC Accountability update

In recent years, the Legislature has become increasingly concerned with accountability in higher education. In legislation as well as the annual budget, the Legislature has sought assurances that state resources are being used effectively to advance the various missions assigned to the segments by the Master Plan for Higher Education. This issue became particularly important in relation to CCC last year, when accountability provisions related to the Partnership for Excellence (PFE) expired on January 1, 2005. (We discussed the approaching sunset of those PFE provisions in our Analysis of the 2004-05 Budget Bill, page E-256.)

New CCC Accountability System

Anticipating the sunset of the PFE, the Legislature and Governor enacted Chapter 581, Statutes of 2004 (AB 1417, Pacheco), which required the CCC Board of Governors (BOG) to develop “a workable structure for the annual evaluation of district-level performance in meeting statewide educational outcome priorities,” including transfer, basic skills, and vocational education. Pursuant to statutory direction, the BOG consulted with our office, DOF, and various other higher education experts and interested parties as it developed its proposal. The proposal was presented to the Legislature and Governor last spring, and was adopted as part of the 2005-06 budget package in Chapter 73, Statutes of 2005 (SB 63, Committee on Budget and Fiscal Review). Chapter 73 requires community college districts to report specified data to the CCC Chancellor’s Office, which in turn is to submit an annual report to the Legislature and Governor. The first preliminary report is due January 31, 2007. (Please see nearby box for a summary of the accountability measures.)

Specific Performance Measures Being Developed. While Chapter 73 establishes several major types of outcomes to be measured (such as student transfers), it does not specify what specific data will be used to measure outcomes. For example, there are various ways to define transfer rates that use different definitions of the pool of potential transfer students. To resolve these kinds of measurement questions, the Chancellor’s Office established a “Technical Advisory Workgroup.” In addition to staff from the Chancellor’s Office, the workgroup includes about a dozen research and analysis experts from community college districts and other agencies. The workgroup has been meeting regularly, and is expected to develop a final recommendation for approval by the Board of Governors this spring.

Reports Should Facilitate Various Forms of Accountability. The CCC accountability reports should be helpful for a number of different purposes. For example, they can assist the Legislature in its oversight function, indicating overall system performance and effectiveness in carrying out CCC’s educational mission. The reports should also help inform legislative budgeting and policy decisions, helping to identify issues that require attention. The reports should also help the Chancellor’s Office in its role of monitoring the performance of individual districts and colleges, enabling it to respond to concerns as warranted. In addition, the reports should be helpful to local residents in holding their local community college governing boards accountable for district performance in relation to similar districts.

For all these reasons, we believe the emerging accountability system can be a useful tool for advancing CCC’s mission. Once the working group completes its recommended accountability methodologies, we will advise the Legislature on further steps, if any, that we would recommend the Legislature take. We note that Chapter 73 expresses the Legislature’s intent to specify performance measures and reporting requirements in the annual budget if warranted by changes in state needs, legislative priorities, or the availability of data.

Cal-PASS Funding a Good Investment

In February 2003, the California Partnership for Achieving Student Success (Cal-PASS) was launched by the Grossmont-Cuyamaca Community College District using a grant from the Chancellor’s Office. The Cal-PASS is a data-sharing system aimed at improving the transition of students from high schools to community colleges to universities.

Student transitions are critical to the success of the educational system. For community colleges they are especially crucial. The success of students at community colleges depends in part on how well the K-12 curriculum is aligned with community college courses. In addition, the success of community college students wishing to eventually earn a four-year degree depends to a large extent on how well CCC’s curriculum is aligned with that of the universities and colleges to which students transfer. The Cal-PASS collects information on students throughout the state regarding their performance and movement through these various segments. These data are used by faculty consortia, institutions, and researchers to identify potential obstacles to the successful and efficient movement of students between segments. For example, high remediation rates of students who take English at a particular high school and enroll at a particular college could point to a need to better align the English curriculum or standards between these two institutions. Similarly, data concerning course standards and content can help reduce the incidence of students taking unnecessary or inappropriate courses for transfer.

Participation in Cal-PASS by individual institutions is voluntary. Since its inception, the Cal-PASS network has grown from several colleges, universities, and high schools in the San Diego area to more than 1,000 institutions statewide.

Cal-PASS Helps Address State’s Accountability Concerns. We believe Cal-PASS promotes district-level and system accountability in two ways:

• Identifies Problems. The Cal-PASS helps districts identify problems in areas of particular concern to the state, including transfer and remediation. Identifying these problems is a first step toward improving performance.

• Monitors Progress. The Cal-PASS can measure changes in performance over time, thereby providing policymakers with information on how well districts and the system as a whole are responding to state concerns.

Proposed Augmentation Would Expand Cal-PASS. The Governor’s budget proposes to increase state support for Cal-PASS by $500,000, for total funding of $1.5 million in 2006-07. This augmentation would support the expansion of Cal-PASS by: (1) including more institutions, (2) creating additional faculty councils that use Cal-PASS data to align curricula, and (3) performing additional research on student transitions and outcomes. To the extent the Legislature wished to appropriate Proposition 98 funding for CCC above the amount required for workload-related increases, we would recommend approval of this augmentation as a good investment for monitoring and improving student transitions throughout the state’s educational system.