Analysis of the 2007-08 Budget Bill: Education

Intersegmental: Student Fees

The Governor’s budget assumes that the University of California and the California State University will enact fee increases of 7 percent and 10 percent for resident students at their respective campuses. We recommend lower fee increases of 2.4 percent for both systems. The 2.4 percent fee increase would match the increase in overall costs experienced by the segments due to inflation, and would ensure that students continued to pay the same share of their educational cost as they are paying in the current year. We also recommend that the Legislature not “buy out” any portion of the Governor’s proposed fee increase because such an approach confuses the role of fees and undermines the Legislature’s role in budgeting. We do not recommend any change to the Governor’s proposed fee level for the community colleges, which would maintain the $20 per unit fee that went into effect in January 2007.

Setting Student Fee Levels

Student fees are an important component of higher education budgets, both as a source of revenue and as factor in affordability. Formally, the Legislature sets student fee levels for the California Community Colleges (CCC) in statute, while the University of California (UC) Board of Regents the California State University (CSU) Board of Trustees set student fees for their respective systems. As a practical matter, however, the Legislature assumes a certain level of revenue to be generated by student fees when it approves funding for all three of the segments in the annual budget act. That is, the Legislature takes projected student fee revenue and other sources of funding into consideration when it decides what level of General Fund support to appropriate for the higher education segments. (See nearby box for a discussion of how the Legislature can affect fee levels at UC and CSU.)

How Can the Legislature Influence Fee Levels? As noted in the text, the Legislature sets fees for the California Community Colleges while fees at the University of California (UC) and the California State University (CSU) are set by their respective governing bodies. However, in adopting the annual state budget, the Legislature can wield considerable influence over UC and CSU fee levels. Assuming a Fee Level. In its deliberations over the annual budget, the Legislature assumes a particular level of fee revenue that will be generated by student fees. That revenue estimate could assume that fees increase, decrease, or remain at their current levels. The Legislature takes this assumed amount of fee revenue into account as it decides what level of General Fund revenue to appropriate for each segment. What if the Segments Want a Lower Fee? Even if UC or CSU desired to enact a lower fee level than assumed by the Legislature, there is a strong fiscal incentive for the university to enact the Legislature’s assumed fee. This is because a lower fee level would cause the segment to receive less total revenue than assumed in the budget act. What if the Segments Want a Higher Fee? The situation is different if a segment desires to enact a fee that is higher than the level envisioned by the Legislature. A higher fee level would result in the segment receiving more revenue than assumed in the budget act. And because fee revenue is continuously appropriated to UC and CSU, it is available for their use without an appropriation in the budget act. However, there are still ways that the Legislature can encourage the segments to adopt fee levels more in line with its assumptions. For example, the Legislature could adopt budget bill language stating its intent with regard to fee levels, and providing for a reduction in the segment’s General Fund appropriation by the same amount as any “excess” fee revenue. This would eliminate any financial benefit the segment would receive from raising fees above the prescribed level. Alternatively, the Legislature could take the excess fee revenue into account when it decided on a General Fund appropriation for the segment in the following fiscal year. Legislature Has a Role in Making Annual Fee Decisions. Because of these and other options available to the Legislature, the university segments have an incentive to work with the Legislature when setting annual fee levels.

State Has No Explicit Fee Policy. The state currently does not have an explicit policy for setting fee levels at any of the higher education segments. The state’s 1960 Master Plan for Higher Education recommends against charging student “tuition” to support instructional costs for resident students. It does, however, call for students to pay “fees” that support operating costs “not directly related to instruction.” Given that the state provides over $10 billion per year for the support of the three segments and given the broad variety of costs that the segments regularly incur, it is difficult to identify which specific costs are borne by students and which are borne by the state. As a result, the distinction between fees and tuition has been largely a semantic one. A 2002 report by a joint legislative committee to review and expand the Master Plan acknowledged the practical and semantic difficulties with the “no tuition” approach, and recommended that this be replaced by a more explicit policy—one in which student fees were increased in a “gradual, moderate, and predictable fashion….” Over the years, the Legislature has made various efforts to establish such a policy. At this time, however, the state continues to lack a formal, explicit policy that would unambiguously guide annual fee levels.

Instead, the state generally operates under an implicit policy whereby students and the state are expected to share educational costs, but with the relative proportions dependent on the state’s fiscal situation. As shown in Figure 1, over the past fifteen years student fees have increased quite steeply during tight budget years and have gradually declined when the state budget situation improved. This approach works against the interests of students in two important ways. First, the unpredictability and volatility of the fee levels make it difficult for students and their families to plan for educational costs. Second, fee changes tend to move in the opposite direction of the average students’ ability to pay—increasing when per capita income tends to slow, and decreasing when per capita income tends to increase.

Explicit Student Fee Policy Needed

For these reasons, we recommend that the Legislature adopt an explicit fee policy that maintains rational and predictable fee levels at all three segments. In previous reports (see for example our Analysis of the 2005-06 Budget Bill, pages E-184 through E-187), we have recommended a policy that bases student fees at each segment on a fixed share of their total educational costs. Such a policy would both provide an underlying rationale for fee levels and a simple mechanism for annually adjusting them. This would promote clarity by establishing an expected contribution from all nonnneedy students, regardless of when they enter college. (Financial access for needy students is addressed through financial aid programs, rather than fee policies.) It would promote consistency by routinely adjusting fee levels such that nonneedy students pay the same share of cost over time. It also would recognize that college is a partnership between students and the general public—expecting both to contribute to its costs and intending for both to benefit from its activities. Lastly, a share-of-cost policy would ensure that students and the university share the cost of any new program or program enhancement, thereby providing a strong incentive for students to hold their campuses accountable for making quality investments at reasonable cost.

For all these reasons, an explicit share-of-cost fee policy can be an important component of the state’s higher education policy and one that is consistent with the state’s goals concerning access and accountability.

Absent Policy Direction, Maintain Current Share of Cost for 2007-08

Without an explicit fee policy in place to guide legislative action on the higher education budgets, we recommend that the Legislature at least maintain the share of cost that student fees cover in the current year. This would result in fee increases of 2.4 percent, or about and one-third and one-quarter of what the Governor proposes for the University of California and the California State University, respectively.

Current Fee Levels Modest by National Standards

By almost any state comparison measure, student fees at California’s public higher education segments are relatively low. The average fee charged by California’s public universities is only about four-fifths of the national average; only 15 states have lower average fees. Looking at the interaction of fees, financial aid, and other factors in a 2006 report, the National Center for Public Policy and Higher Education found California’s higher education system to be the most affordable (tied with Utah) in the nation. In part this is due to California’s Cal Grant entitlement program, which guarantees fee coverage for all eligible students. In addition, California’s community college fees are by far the lowest in the nation (and about one-quarter of the national average).

Given California’s relatively low fees and its extensive financial aid programs, we think the state could make a policy choice to increase the share of costs borne by students in the form of fees. However, until such a time as the Legislature has made such a policy decision about fee levels, we recommend the Legislature simply maintain the current shares of cost. In other words, fees would increase at the same rate as each segment’s overall cost of education. This would also reduce pressure to subject students to larger year-to-year fee increases in subsequent years.

Governor Proposes Fee Increases for 2007-08. After experiencing no fee increase in 2006-07, UC and CSU students would face fee increases of 7 percent and 10 percent, respectively, in 2007-08 under the Governor’s proposal. (In addition to the proposed 7 percent increase, UC fees for 2007-08 would also include a new, temporary surcharge of $60 per student. The UC is levying this surcharge on all students to compensate for some student fee revenue it had to forgo in response to a lawsuit brought by some graduate students.) The Governor proposes no fee increase for the community colleges. The CCC fee was reduced by 23 percent (to $20 per unit) halfway through the current fiscal year, and under the Governor’s proposal would remain at $20 per unit in the budget year.

Figure 2 shows the Governor’s proposed fee levels and the associated changes to fee revenue. The UC and CSU fee increases would generate $105 million and $98 million, respectively, in additional revenue. For CCC, the fees paid by a full-time student would decline by $90 between the current year and the budget year due to the full-year effect of the fee increase in 2007-08. This would reduce year-to-year total fee revenue by an estimated $33.2 million. The Governor’s budget includes this amount in General Fund revenue to backfill the forgone fee revenue.

The Governor provides no rationale for the proposed fee levels. The UC and CSU increases are tied to neither an inflationary index nor a specified share of cost.

Recommend Lower Fee Increases at UC and CSU

Absent an explicit fee policy, we recommend that the current share of educational costs borne by students through fees be maintained in the next year. In the “University of California” and “California State University” sections of this chapter, we recommend funding new costs (primarily those resulting from inflation) that would increase the cost of education by about 2.4 percent. We recommend, therefore, that UC and CSU fees be increased by the same percentage. (The $60 temporary surcharge would raise the UC fee increase to about 3.4 percent.) Increasing CCC fees by the same percentage as educational costs would only increase fees by less than 50 cents per unit. Given that community college fees have historically been set in increments of one dollar, and given the recent implementation of the new fee level, we do not recommend a change to CCC fees in 2007-08. Figure 3 shows our recommended fee levels.

Our proposed fee increases would generate $36 million and $23.5 million in additional revenue for UC and CSU, respectively. (This is less than the new fee revenue that would be generated by the Governor’s proposed fee levels.) In the “University of California” and “California State University” sections later in this chapter, we account for these new fee revenues and address related affordability issues. In the “Student Aid Commission” section, we also show how our recommended fee levels would generate General Fund savings in the Cal Grant program.

Implementing Our Recommended Fee Levels. As noted earlier in this write-up, there are various ways for the Legislature to act on whatever decision it makes about fees. Although the Legislature does not formally set fees for UC and CSU, it can explicitly incorporate its expectations into the budget act and, if deemed necessary, adopt provisions that create incentives for the segments’ governing boards to enact the fee levels assumed in the budget. In any case, however, there is no need for the Legislature to “buy out” any portion of the Governor’s proposed fee increases, as we discuss below.

“Buying Out” Proposed Fee Increases Does Not Make Sense

Last January in his 2006-07 budget proposal, the Governor characterized as a “fee buyout” part of his proposed General Fund augmentations for UC and CSU. Specifically, the Governor proposed to provide the segments with General Fund support in lieu of revenue they would have received from planned fee increases of 8 percent to 10 percent. The Governor in effect argued that his proposed augmentation was the “cost” of forgoing the fee increases. We believe that the notion of buying out a fee increase confuses the role of fees and undermines the Legislature’s role in budgeting.

Confuses Needs and Resources. Student fees are a form of revenue that supports the general operations of the universities. Fee revenue is completely interchangeable with General Fund revenue in supporting university programs. The notion of a fee buyout, however, improperly treats a fee increase not as a resource to cover costs, but as a need in itself. Therefore, we believe a decision by the Governor or a segment to raise fees is not evidence of new need that must somehow be covered, but rather it is a policy choice about the share of total need that should be covered by students.

Undermines Legislature’s Budgeting Role. Under the mistaken logic of a fee buyout, if the Legislature does not want for a segment to enact a proposed fee increase, then it must provide the same amount of General Fund support that would have been generated by the fee increase. This improperly limits the Legislature’s budget choices in two ways:

• It permits the segment to set whatever price it wants as the cost of avoiding a fee increase. It could propose a fee increase of 10 percent or 25 percent, or whatever it wished, and this would in turn define the amount of state support that the Legislature would have to provide to avoid a fee increase.

• It shields the fee buyout amount from scrutiny as to what it would purchase. For example, in 2006-07 the Governor proposed fee buyouts for UC and CSU that totaled $130 million, but offered no explanation as to what specifically these augmentations would fund.

The joint legislative committee that reviewed the Master Plan in 2002 recognized the dangers of giving in to the temptation to avoid annual fee increases, and thus recommended that the state not “buy out these fees with taxpayer dollars.”

Legislature Should Decide Funding Needs First and Fee Levels Second. It is easy for the Legislature to avoid the trap presented by the notion of a fee buyout. Instead of starting by considering the fee increase amount to be a “need,” the Legislature should start by considering what total funding needs the segment will face. New costs might include enrollment growth, inflationary effects, and perhaps new programs or services. The total of these new costs could then be divided in some way between the students’ share and the state’s share. The level of fee increase to be imposed on students would result from a choice about how these new costs should be split between students and the state.

What About the Backfill of CCC’s Fee Reduction?

As noted earlier, the Governor’s budget includes $33.2 million to backfill the remaining annualized cost of the CCC fee reduction that went into effect in January 2007. We do not take issue with this backfill. In fact, we believe the CCC backfill is a good example of the budgeting approach we recommend the Legislature take with regard to the relationship between fees and General Fund support.

The Legislature made its decision to reduce CCC fees near the end of its 2006-07 budget deliberations, after it had made most of its decisions about what levels of program funding it wanted to provide. The decision to reduce fees was based not on a desire to increase or reduce total program funding, but rather sought to reduce the amount of total costs that would be paid by students. Thus, the backfill of the fee reduction reflects an effort to maintain support for a particular, agreed-upon level of programs and service. In contrast, starting with a decision simply to buy out the fee increases proposed by the Governor for UC and CSU would be based on achieving a particular level of funding augmentations which have not yet been approved by the Legislature.

---

Return to Education Table of Contents, 2007-08 Budget Analysis