Analysis of the 2007-08 Budget Bill: Education

Intersegmental: UC and CSU Enrollment Growth and Funding

The Governor’s budget proposes about $120 million to fund 2.6 percent enrollment growth at the University of California (UC) and 2.5 percent enrollment growth at the California State University (CSU). This amount would provide $10,876 in General Fund support for each additional student at UC and $7,837 for each additional student at CSU. The proposed budget also provides $109 million for a 2 percent enrollment increase at the California Community Colleges (CCC). In this write-up, we analyze the Governor’s proposed enrollment growth and funding rates for UC and CSU in 2007-08 and recommend alternatives to those rates. (We discuss enrollment at CCC in the “California Community Colleges” section of this chapter.)

One of the principal factors influencing the state’s higher education costs is the number of students enrolled at the public higher education segments. Typically, the Legislature and Governor provide funding in the annual budget act to support a specific level of enrollment growth at the state’s public higher education segments. The total amount of funding provided each year to UC and CSU is based on a per-student funding rate (typically referred to as the “marginal cost” of instruction). For example, the 2006-07 Budget Act included a total of $112 million from the General Fund to support (1) 5,149 additional students at UC at a per-student funding rate of $9,901 and (2) 8,490 additional students at CSU at $7,225 per student. In approving these funding amounts, the Legislature employed a new methodology for calculating the per-student funding rates. (The previous methodology—developed in 1995—was used to calculate enrollment funding from 1996-97 through 2005-06.)

For 2007-08, the Governor proposes 2.6 percent growth for UC and 2.5 percent for CSU using a new marginal cost methodology which differs significantly from the methodology recently approved by the Legislature. In the following sections, we (1) review recent enrollment trends, (2) examine the Governor’s proposed enrollment growth and funding rates, and (3) recommend alternatives to those rates that are more aligned to our baseline enrollment projections and the marginal cost methodology approved for the current year.

Higher Education Enrollment

Essentially, there are two methods of measuring higher education enrollment levels: headcount and full-time equivalent (FTE).

Headcount Enrollment—Higher Education Participation

Headcount measures are useful for indicating how many individuals are participating in higher education at a given point in time. For example, in fall 2005 approximately 2.2 million students (headcount) were enrolled either full-time or part-time at UC, CSU, and CCC. Figure 1 summarizes actual headcount enrollment for the past 40 years. The figure shows that enrollment grew rapidly through 1975 and then fluctuated over the next two decades. Since 1995, enrollment grew steadily until a modest decline in 2003 and 2004, after which enrollment slightly increased. The recent decline in enrollment was largely made up of part-time community college students who were taking relatively few courses. Despite this drop in headcount, there was a much smaller decline in community college FTE enrollment. The remainder of this analysis focuses exclusively on enrollment growth funding for UC and CSU.

FTE Enrollment—Budgeted Enrollment Targets

In contrast to headcount, the FTE measure better reflects the cost of serving students (that is, the number of course units taken) and is the preferred measure used for state budgeting purposes. For example, the Legislature provides General Fund support in the annual budget act to support a specific number of state-supported FTE students at UC and CSU. (The enrollment targets specified in the budget act exclude students who do not receive state support, such as nonresident students and students enrolled in non-state supported summer programs.) Typically, this includes funding for enrollment growth. Because the number of eligible students enrolling at the segments cannot be predicted with complete accuracy, in any given year UC and CSU typically serve slightly more or less FTE students than budgeted. In recent years, however, actual enrollment has deviated more significantly from funded levels.

In recognition of the disconnect between the number of students funded at each segment and the number of students actually enrolled, the Legislature adopted budget bill language as part of the past three annual budget acts to ensure that UC and CSU use enrollment funding only for enrollment. For example, the language in the 2006-07 Budget Act requires that the segments report in the spring on whether they met their enrollment target for the current year. If the segment does not meet its enrollment target within 5 percent of the additional students funded (or 257 FTE students for UC and 425 FTE students for CSU), the Director of the Department of Finance (DOF) is to revert to the General Fund the total amount of enrollment funding associated with the unmet enrollment. As a result of the language in the state’s recent budgets, the amount of funds reverted to the General Fund include (1) $15.5 million in enrollment funding provided to CSU in 2004-05 and (2) $3.8 million in funding provided to UC in 2005-06. The proposed budget bill for 2007-08 includes similar provisions as those contained in the 2006-07 Budget Act.

Governor’s Budget Proposal

The budget requests a total of $120 million in General Fund support to increase enrollment at UC and CSU. The $120 million total consists of:

In reviewing the Governor’s enrollment growth proposal, the Legislature must determine the following:

Below, we examine each of these issues and make recommendations concerning the Governor’s enrollment funding proposals.

How Much Enrollment Growth to Fund?

Determining the amount of additional enrollment to fund each year can be difficult. Unlike enrollment in compulsory programs such as elementary and secondary school, which corresponds exclusively with changes in the school-age population, enrollment in higher education responds to a variety of factors. Some of these factors, such as population growth, are beyond the control of the state. Others, such as higher education funding levels and fees, stem directly from state policy choices. As a result, enrollment projections must consider the interaction of demographic changes and state policies that influence enrollment demand.

There are two main factors influencing enrollment growth in higher education:

Provide 2 Percent Enrollment Growth

Based on our demographic projections, we recommend the Legislature fund budgeted enrollment growth of 2 percent for the University of California and the California State University. Our proposal should allow the segments to easily accommodate enrollment growth next year due to increases in population, as well as modest increases in college participation.

If college participation rates remain constant for all categories of students next year, we project that enrollment at UC and CSU will grow by about 1.1 percent from 2006-07 to 2007-08. (See accompanying text box for a description of the demographics-based methodology we employ to estimate future higher education levels.) Since this projection is driven solely by projected population growth, it serves as a starting point for considering how much enrollment to fund in 2007-08. In other words, the Legislature can evaluate how various related budget and policy choices could change enrollment compared to this baseline.

DOF Projects Less Growth Than Governor’s Budget. We note that DOF’s Demographics Unit also develops enrollment projections using demographic data on the projected growth in the number of high school graduates and in the adult population. However, unlike our model, DOF also assumes changes in college participation rates. According to the department, its projections are guided by the “compact” that the Governor developed with UC and CSU in spring 2004 in which he commits to seek funding for 2.5 percent enrollment growth each year through 2010-11. Thus, DOF’s projections are largely designed to average out to 2.5 percent annually from 2007-8 through 2010-11. For the budget year (2007-08), the department projects that enrollment at UC and CSU will grow respectively by 1.9 percent and 1.2 percent, which are significantly less than the 2.6 percent and 2.5 percent budgeted enrollment growth rates proposed by the Governor.

LAO Recommendation Accounts for Increases in Participation. Over the years, the Legislature has taken deliberate policy actions (such as funding outreach programs and expanding the availability of financial aid) in an effort to increase college participation rates. Consistent with these actions, the state has provided funding for enrollment growth in some of those years that significantly exceeded changes in the college-age population. In view of the Legislature’s interest in increasing college participation, we recommend funding 2 percent enrollment growth at UC and CSU for the budget year. This is about 80 percent higher than our estimate of population-driven enrollment growth, and therefore should allow the segments to easily accommodate enrollment growth next year, due to increases in population, as well as modest increases in college participation.

Accordingly, we recommend that the Legislature reduce the Governor’s proposed enrollment growth for UC from 2.6 percent to 2 percent and for CSU from 2.5 percent to 2 percent. In a subsequent section on per-student funding rates, we discuss the General Fund savings associated with reducing the Governor’s proposed growth rates.

Plan for State’s Long-Term Higher Education Priorities

In view of the decline in the state’s college-age population that is projected to occur in a few years, we believe that the Legislature has a special opportunity to determine and fund its long-term higher education priorities.

As discussed above, the state college-age population (18- to 24-year olds) is expected to shrink between 2014 and 2020. This downward trend reflects an anticipated reduction in the number of California public high school graduates starting prior to that time. As shown in Figure 2, the average growth rate in the number of high school graduates was relatively high in the past decade. Beginning in 2008-09, however, the size of this cohort is expected to decline. Between 2008-09 and 2015-16, the number of students graduating from the state’s high schools is projected to fall by roughly 26,000 students.

These long-term enrollment trends have significant budgetary and policy issues implications for higher education. This is because a decline in the pool of students from which UC and CSU draw their undergraduate students—particularly at the freshman level—will consequently reduce undergraduate enrollment demands. Unlike in recent years, the state will not face demographic pressures to provide funding for undergraduate enrollment growth in order to meet the state Master Plan’s promise of undergraduate education. Thus, some of the annual undergraduate growth augmentations in the future might be redirected to other priorities.

As we discuss in the “University of California” section of this chapter, much of the projected growth assumed in UC’s recent long range development plans are based on campus desires to expand and create new graduate and professional school programs (such as in law and public policy). The Legislature might choose instead to fund growth in different programs—perhaps to meet identified research and workforce needs. Moreover, the Legislature might decide that increasing graduate enrollment is not as high a priority and that greater efforts should be made to increase the percentage of eligible high school graduates that enroll at the universities (in other words, increase participation rates). Alternatively, the Legislature may desire to focus more resources on student support services rather than enrollment growth.

In view of the above, we believe that the projected decline in the state’s college-age population provides an opportune time for the Legislature to consider and plan for the state’s long-term needs in higher education from both a policy and fiscal standpoint. (In our “University of California” and “California State University” write-ups, we recommend the Legislature direct UC and CSU to provide updated systemwide enrollment projections—including an explanation of the assumptions and data used to calculate them—at budget hearings this spring.)

How Much General Fund Support Should Be Provided for Each Additional Student?

In addition to deciding the number of additional FTE students to fund in 2007-08, the Legislature must also determine the amount of funding to provide each additional FTE student at UC and CSU. Consistent with past practice, this funding level would be based on the marginal cost imposed by each additional student for additional faculty, teaching assistants, equipment and various support services. The marginal cost is less than the average cost because it reflects what are called “economies of scale”—that is, it excludes certain fixed costs (such as central administration) which may change very little as new students are added to an existing campus. The marginal costs of a UC and CSU education are funded from the state General Fund and student fee revenue. (A similar, but distinct, approach is used for funding enrollment growth at community colleges.)

From 1996-97 through 2005-06, the state essentially used the same methodology (as initially established in 1995) to calculate the marginal cost of instruction. As part of his budget proposal for 2006-07, the Governor last year proposed a new marginal cost methodology for funding enrollment growth at UC and CSU. In adopting the 2006-07 budget, however, the Legislature rejected the Governor’s marginal cost proposal and instead used its own alternative methodology for funding enrollment growth. As we discuss below, the Governor’s budget for 2007-08 employs the same marginal cost methodology that the Legislature rejected last year. Based on his proposed methodology, which differs significantly from the one assumed in the 2006-07 budget, the Governor’s budget provides $10,876 in General Fund support for each additional student at UC and $7,837 for each additional student at CSU. In this section, we analyze the Governor’s proposed methodology and recommend funding rates based on the methodology recently approved by the Legislature.

Development of the Marginal Cost Methodology

For many years, the state has funded enrollment growth at UC and CSU based on the marginal cost of instruction. However, the formula used to calculate the marginal cost has evolved over the years. In general, the state has sought to simplify the way it funds enrollment growth and more accurately reflect costs. As we discuss below, the state has moved from utilizing a large number of complex funding formulas for each segment to a more simplified approach for calculating enrollment funding that is more consistent across the two university systems.

UC and CSU Used Different Methodologies Before 1992

From 1960 through 1992, CSU’s enrollment growth funding was determined by using a separate marginal cost rate for each type of enrollment category (for example, lower-division lecture courses). In other words, the different marginal cost formulas took into account education levels—lower division, upper division, and graduate school—and “instructional modes” (including lecture seminar, laboratories, and independent study). Each year, CSU determined the number of additional academic-related positions needed in the budget year (based on specific student-faculty ratios) to meet its enrollment target. These data were used to derive the separate marginal cost rates.

Similar to CSU, annual enrollment growth funding provided to UC before 1992 was based on a particular mix of new students, with different groups of students funded at different rates. However, UC’s marginal cost methodology was simpler and did not require the calculation of different rates based on modes of instruction. The university calculated separate funding rates for undergraduate students, graduate students, and for each health science program based on an associated student-faculty ratio. Each cost formula also estimated the increased costs for library support due to enrolling additional students.

New Methodology Adopted in 1990s

Beginning in 1992-93, the Legislature and Governor suspended the above marginal cost funding practices for UC and CSU. While the state did provide base budget increases to the universities, it did not provide funding specifically for enrollment growth during that time. In the Supplemental Report of the 1994 Budget Act, the Legislature stated its intent that, beginning in the 1996-97 budget, the state would return to the use of the marginal cost as the basis for funding enrollment growth. Specifically, the language required representatives from our office, UC, CSU, and DOF to review the 1991-92 marginal cost formulas and propose improvements that could be used in developing the 1996-97 budget.

Compromise Methodology Adopted for 1996-97. After a series of negotiations, the four agencies developed a new methodology for estimating the amount of funding needed to support each additional FTE student at each segment. This methodology reflected a compromise that all parties agreed should be the basis for funding future enrollment growth. The methodology was first implemented in 1996-97 and was generally used to calculate enrollment funding through 2005-06. Some of the key features of this methodology included:

Marginal Cost Review Requested for 2006-07

In adopting the 2005-06 budget, the Legislature called for a review of the marginal cost methodology that was developed in 1995. Specifically, the Supplemental Report of the 2005 Budget Act directed our office and DOF to jointly convene a new working group, including representatives from UC and CSU, to examine possible modifications to the 1995 methodology for the 2006-07 budget. Although our office and DOF worked collaboratively during the summer and fall of 2005, we were not able to reach consensus on a new methodology, and the Governor’s budget proposal for 2006-07 included enrollment funding based on an entirely new methodology developed by the administration. (In our Analysis of the 2006-07 Budget Bill, we recommended an alternative methodology.)

Legislature Rejected Governor’s Proposal and Adopted a New Methodology. In adopting the 2006-07 budget, the Legislature rejected the Governor’s marginal cost proposal and instead used its own alternative methodology to fund UC and CSU enrollment growth. Based on this methodology, the 2006-07 Budget Act provides enrollment growth funding at rates much higher than would have been provided under the 1995 methodology—$9,901 for each additional UC student and $7,225 for each additional CSU student. (These represent increases of about 30 percent for UC and 15 percent for CSU compared to the marginal costs rates provided in 2005-06.) In signing the budget, the Governor vetoed provisional language specifying that future budgets be based on the methodology adopted by the Legislature.

The legislative methodology maintains the same underlying basis of the 1995 methodology—that is, determining a total marginal cost based on current-year expenditures and “backing out” a student fee component to determine the state’s share. However, it more accurately accounts for increased costs associated with enrollment growth. In developing the methodology, the Legislature incorporated many of the suggestions made by the segments during the marginal cost working group discussions and during budget deliberations last spring (such as including costs for operation and maintenance and adjustments to the faculty salary amounts). The major features of the legislative methodology include:

Governor Proposes Same Methodology That Legislature Rejected

For 2007-08, the Governor uses the same marginal cost methodology that he used last year in his January budget for 2006-07, which the Legislature rejected. As mentioned above, the Legislature approved enrollment growth funding for 2006-07 based on the revised marginal cost methodology. The major ways that the Governor’s methodology deviates from the legislative methodology are:

Based on the Governor’s marginal cost methodology, the proposed budget provides $10,876 in General Fund support for each additional student at UC and $7,837 for each additional student at CSU. In comparison, we estimate that the legislative marginal cost methodology would call for a UC General Fund cost of $10,586 and a CSU General Fund cost of $7,710. Figure 3 provides a detailed description of the marginal cost calculations for 2007-08 based on the legislative methodology. In the following section, we raise concerns about the Governor’s proposed marginal cost methodology.

 

Figure 3

Marginal Cost Calculations
Based on Legislative Methodology

2007-08

 

Marginal Cost Per FTEa Student

 

UC

CSU

Faculty salary

$4,611

$3,415

Faculty benefits

821

1,290

Teaching assistants

504

17

Instructional equipment replacement

598

119

Instructional support

3,938

836

Academic support

1,363

1,345

Student services

1,083

1,039

Institutional support

872

973

Operations and maintenance

1,679

933

  Totals

$15,469

$9,967

Less student fee revenue

-$4,883

-$2,257

State Funding Rate

$10,586

$7,710

Governor's Proposed Methodology

$10,876

$7,837

 

a  Full-time equivalent.

 

Concerns With Governor’s Proposal

As we advised the Legislature last year, we believe that the Governor’s proposed marginal cost methodology has significant shortcomings (such as assuming average faculty costs), which in large part is why the Legislature rejected it last year. The Governor’s methodology represents a significant departure from the underlying rationale behind the methodology approved by the Legislature in the 2006-07 budget and the methodology previously used for the past ten years. We also find that the Governor’s proposal does not accurately capture the increased costs associated with enrollment growth, and is unnecessarily complex and lacks transparency. Figure 4 summarizes our concerns, which we discuss in further detail below.

 

Figure 4

Legislature Should Again Reject
Governor’s Marginal Cost Proposal

 

»  Ignores Contribution of Student Fees. The proposed methodology does not account for new student fee revenue resulting from fee increases that is available to support a greater share of the marginal cost of instruction. In addition, the methodology does not recognize that General Fund and fee revenue are “fungible” resources that support the total marginal cost.

»  Overbudgets Faculty Costs. The Governor’s proposal assumes faculty costs at the University of California and the California State University will increase on the average (rather than on the margin) with each additional full-time equivalent student.

»  Limits Legislative Budgetary Discretion. The methodology assumes that the Legislature will approve the annual base budget increase contained in the Governor’s compact each year. Moreover, it “shields” the marginal cost from policy decisions, such as changes to the share of education cost paid by students.

 

Ignores Contribution of Student Fees

In adopting its marginal cost methodology, the Legislature recognized that both General Fund and student fee revenue together fund the marginal cost of serving an additional FTE student. After a total marginal cost is calculated, the fee revenue UC and CSU anticipate collecting from each additional student gets subtracted from this cost, in order to determine the state’s share. Thus, this methodology acknowledges that because General Fund and fee revenue are fungible resources used for general purposes, it is difficult—and unnecessary—to determine (based on complex calculations and arbitrary assumptions) how much of specific program costs are borne by the General Fund as opposed to student fee revenue.

Unlike this approach, the Governor’s proposal does not account for new student fee revenue resulting from the increases. Since the methodology calculates only General Fund contributions, it ignores the availability of fee revenue to account for a greater share of the marginal cost of instruction. Rather, we believe that the Legislature should continue to consider new fee revenue as available to meet legislatively determined needs of the segments.

Overbudgets Faculty Costs

The Governor’s proposed methodology assumes that faculty costs at UC and CSU will increase on average (rather than on the margin) with additional FTE students. To put it in another way, the proposal assumes that a cohort of faculty hired at each segment because of enrollment growth will reflect the make-up of existing faculty at that segment, in terms of level or classification. However, the most recent data available from UC and CSU on the salaries and make-up of recently hired faculty compared to all existing faculty indicates that this is not the case. In fact, the opposite is true.

In 2005-06, UC hired a total of 354 new faculty members. Of this amount, 68 percent were hired at the assistant professor level. In comparison, only about 18 percent of UC’s current faculty members are assistant professors. About 63 percent of the current faculty is at the higher-paid level of full professor. In terms of actual salary, the average salary of all faculty members at UC is $100,548, which is significantly higher than the $83,714 average salary of recent hires. The CSU reports similar differences in the make-up and salaries of new faculty hires compared to those faculty members already at the university. In view of the above, we find that the Governor’s marginal cost proposal overbudgets the marginal cost of hiring additional faculty.

Limits Legislative Budgetary Discretion

The proposed methodology assumes that the Legislature will approve the annual General Fund base budget adjustments contained in the Governor’s compact with UC and CSU. This is because the methodology calculates a General Fund marginal cost for each segment using current-year expenditures, and then adjusts that cost by the General Fund base budget increase specified in the compact for the budget year. We believe that there is no reason to assume that the base increase called for in the compact is the appropriate amount each year. The right amount could be more or could be less. Moreover, although the Governor’s marginal cost rate for the 2007-08 is based on an adjustment for his proposed 4 percent base increase, it ignores his other proposal to increase student fees by 7 percent at UC and 10 percent at CSU. (We analyze the Governor’s student fee proposals in a subsequent section of this chapter.) In other words, the proposed methodology “shields” the marginal cost from policy decisions, such as increasing or decreasing the share of education cost paid by students.

Fund Enrollment Growth Based on Legislative Methodology

We recommend the Legislature fund enrollment growth at the University of California (UC) and the California State University (CSU) based on the marginal cost methodology it developed and approved as part of the 2006-07 budget. Using this methodology and our proposed 2 percent enrollment growth, we recommend deleting $27.3 million from the $120 million requested in the budget for enrollment growth at UC and CSU. Our proposal would leave sufficient funding to provide $10,856 for each additional UC student and $7,710 for each additional CSU student. We further recommend the Legislature (1) amend the proposed budget bill language to reflect these marginal cost and enrollment growth rates and (2) adopt supplemental report language specifying that enrollment growth funding provided in future budgets be based on the legislative methodology. (Reduce Item 6440-001-0001 by $13.4 million and Item 6610-001-0001 by $13.9 million.)

Given our concerns above, we recommend the Legislature once again reject the Governor’s proposed marginal cost methodology. Rather, we support the underlying basis of the legislatively determined marginal cost methodology—that is, determining a total marginal cost based on current-year expenditures and backing out a student fee component to determine the state’s share. We find that it more appropriately funds the increased costs associated with enrollment growth and preserves legislative prerogatives. Accordingly, we propose funding enrollment growth at UC and CSU based on the marginal cost methodology that the Legislature developed and approved as part of the 2006-07 budget. Specifically, we recommend the Legislature provide $10,856 in General Fund support for each additional FTE student at UC and $7,710 for each additional student at CSU—which are slightly lower than the Governor’s proposed funding rates.

After incorporating our earlier proposal to fund enrollment growth at a rate of 2 percent at both UC and CSU, we therefore recommend reducing the Governor’s proposed General Fund augmentation for enrollment growth by a total of $27.3 million, including $13.4 million from UC and $13.9 million from CSU. Under our proposal, the segments would still receive sufficient funding to cover the estimated enrollment growth due to increases in population and college participation. At the same time, the Legislature could use our identified General Fund savings for other priorities, including the state’s budget problem.

We further recommend the Legislature amend the proposed budget bill language to reflect our recommended marginal cost and enrollment growth rates for state-supported students. Moreover, we recommend the Legislature adopt supplemental report language specifying its intent that enrollment growth funding provided to UC and CSU in subsequent budgets be based on the legislative methodology for determining the marginal cost of instruction.

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