Analysis of the 2007-08 Budget Bill: Education

Student Aid Commission (7980)

The California Student Aid Commission (CSAC) provides financial aid to students through a variety of grant and loan programs. The proposed 2007-08 budget for the commission includes state and federal funds totaling $1.7 billion. Of this amount, $892 million is General Fund support—all of which is used for direct student aid for higher education. A special fund covers the commission’s operating costs.

Below we summarize the Governor’s major budget proposals. We then discuss the Assumption Program of Loans for Education (APLE), including the Governor’s proposal to set aside 600 APLE awards for certain University of California (UC) and California State University (CSU) students, as well as several other proposals. We then discuss the Cal Grant programs, including recent legislative efforts, and recommend a funding reduction that corresponds to our recommendation for lower UC and CSU fee increases discussed elsewhere. Finally, we review CSAC’s efforts to address operational issues with regard to its auxiliary, EdFund.

Major Budget Proposals

Figure 1 compares the commission’s revised 2006-07 budget with the proposal for 2007-08. As the figure shows, funding for state financial aid programs would increase by $64 million, or 7.7 percent, from the current year. This increase is primarily due to additional costs associated with the Cal Grant programs ($61 million) and APLE program ($2.9 million). In contrast to some past years, no funding from the Student Loan Operating Fund would be redirected to support Cal Grant costs.

Cal Grant Programs. As Figure 1 shows, the Governor’s budget would increase funding for the Cal Grant Entitlement programs by $59 million, or 8.9 percent, and Cal Grant competitive programs by $3.1 million, or 2.7 percent.

The Governor’s budget funds approximately 900 new High School Entitlement awards. This reflects growth of 2 percent, consistent with the projected growth in high school graduates for 2006-07. It also funds 880 new Transfer Entitlement awards, which reflects a 15 percent increase over the current year. (In part, the increase in entitlement awards is due to recent legislation that expands eligibility. We discuss this later in this write-up.) The Governor’s budget includes no funding to increase the number of new Competitive awards because the commission already issues the maximum number allowable under statute (22,500).

The budget proposal includes augmentations to increase the fee coverage portion of Cal Grant awards for UC and CSU students to match proposed fee increases at those segments. The maximum Cal Grant award for needy students at private institutions would remain unchanged from the current-year level of $9,708.

Assumption Program of Loans for Education

The APLE is designed to increase the number of qualified teachers in disadvantaged schools and in high-priority subject areas. Toward that goal, the program pays off (“forgives”) student loans, up to specified amounts, for individuals who teach in either:

• A school that has a high proportion of low-income students, low-performing students, or uncredentialed teachers; or

• A subject area which the California Department of Education has determined to have a critical shortage of teachers.

The program forgives up to $11,000 of college loan debt for a person who teaches for four consecutive years in a qualifying school or subject area. Additional loan forgiveness is provided for those who teach in the lowest-performing schools (in the first two deciles as measured by the Academic Performance Index) and for those who teach mathematics, science, or special education.

Not All Authorized Awards Being Used

Each year CSAC allocates all authorized APLE slots among qualified teacher education institutions in proportion to their production of teachers. If an institution is not able to use all the APLE awards allocated to it, CSAC redirects the unused awards to other institutions that can use them. Even with this redirection, however, a portion of the APLE awards authorized in the annual budget act has gone unclaimed in each of the past several years. As Figure 2 shows, 708 APLE awards were not used in 2004-05, and 861 were not used in 2005-06. As of January 2007, about 6,175 awards remained unissued for 2006-07, but typically many applications for these awards are received in March and April.

Legislature Rejected Earlier Proposals to Restrict Some Warrants. Despite the state’s historic inability to grant all authorized awards, in 2005-06 and 2006-07 the Governor proposed to restrict 600 of the total number of authorized APLE warrants for exclusive use by UC and CSU students that are participating in the Governor’s Math and Science Initiative. Seeing no point in further restricting a program that already had more slots than participants, the Legislature rejected the Governor’s proposal both times. In the current year, the Governor responded by vetoing 600 of the 8,000 APLE awards the Legislature authorized in the budget bill.

Governor Again Seeks to Restrict Program. For 2007-08, the Governor proposes to authorize a total of 8,000 new APLE awards, but again seeks to restrict 600 of them to UC and CSU students participating in the Governor’s Math and Science Initiative. The language would also require CSAC to “consult” with UC and CSU in setting criteria for the 600 awards. (These new awards would not create General Fund costs until future years, after the recipients completed their credential programs and their student loans became due. There is, therefore, no funding proposed for these awards, although the budget does include funding to cover loan forgiveness from previously issued awards that will require payment in 2007-08.)

Legislature Should Again Reject Governor’s Proposal

We recommend the Legislature once again reject the Governor’s proposal to restrict 600 Assumption Program of Loans for Education (APLE) awards to the University of California and the California State University students participating in his Math and Science Initiative. (Amend Item 7980-101-0001, Provision 1[d].) We also recommend that the Legislature not approve a proposed staffing augmentation until the commission provides long overdue performance information on APLE.

Because authorized awards have gone unclaimed in recent years, we see no reason to further restrict this program. This is particularly the case given that the Governor proposes to authorize 600 more awards than were authorized in the current year. The administration has provided no evidence that students in the Governor’s Math and Science Initiative experience any difficulty in receiving an APLE warrant. Further, even if the number of students seeking APLE warrants began to exceed the number of authorized awards, statute already directs CSAC to give priority to students seeking mathematics or science credentials.

For these reasons, we recommend that the Legislature reject the Governor’s proposal to restrict 600 APLE awards to UC and CSU Math and Science program participants. Specifically, we recommend that Item 7980-101-0001, Provision 1 (d) be amended as follows:

(d) The purchase of loan assumption warrants under Article 5 (commencing with Section 69612) of Chapter 2 of Part 42 of the Education Code. The Student Aid Commission shall issue 8,000 new warrants. Of this amount, and notwithstanding any other provision of law, the commission shall allocate a total of 600 new warrants to the University of California and the California State University as determined in consultation with those segments, to be awarded to participants in the Science and Math Teacher Initiative. Expenditures associated with these warrants shall not count towards the maximum expenditures specified in Education Code Section 69613.8(c).

Greater Oversight Needed. The underutilization of APLE awards raises questions about how awards are allocated among institutions, about the appropriate number of awards that should be authorized annually, about how the program is promoted, and other concerns. For example, given that APLE participation already is lower than envisioned in recent budget acts, the Legislature might wish to consider ways to increase participation to the levels it envisioned when enacting the budget.

State law requires the commission to annually provide a report on various aspects of APLE that could help the Legislature consider these and other related questions. For example, the commission is required to report annually on the age, sex, and ethnicity of program participants in various categories, such as those who teach in schools serving rural areas and those from out of state. The last such report provided by the commission was for the 2002-03 fiscal year. The CSAC informs us it is currently working to provide an updated report.

Staffing Augmentations Should Depend on Responsiveness of Agency. The CSAC’s budget request includes $175,000 for two new positions to perform institutional audits. While we do not take issue with the proposed positions themselves, we do not believe the Legislature should act on the proposed augmentation until CSAC fulfills its statutory reporting responsibilities. Information on the performance of programs such as APLE is critical to legislative oversight and is necessary for considering proposals such as the Governor’s request to restrict some APLE warrants. For these reasons, we recommend that the Legislature not approve the two proposed new positions until the agency provides the APLE report called for in statute.

National Guard APLE (NG-APLE)

As established in 2003 and amended in 2004, NG-APLE offers loan forgiveness as an incentive for more individuals to enlist or re-enlist in the National Guard, State Military Reserve, and Naval Militia. Specifically, qualifying members have a portion of their education loans forgiven after each year of military service up to four years, for a maximum of $11,000. The 2006-07 Budget Act authorizes the commission to issue up to 100 National Guard warrants. The CSAC still has not adopted regulations for this program, though CSAC staff informs us they still expect to adopt regulations and issue the 100 warrants authorized in 2006-07. The Governor’s 2007-08 budget proposal includes $200,000 to pay costs associated with those warrants.

Extension of Sunset, but No New Warrants Proposed. Statutory authorization for the program will sunset on July 1, 2007. The Governor is proposing to extend the sunset date to 2012, but does not include authorization for any additional NG-APLE warrants (beyond the 100 authorized for the current year).

Similar New Program Proposed Under Military Department. As we describe in the “General Government” chapter of this Analysis, the Governor proposes that a new Tuition Assistance Program (TAP) be established in the Military Department. The TAP is aimed at prospective and current National Guard members as an incentive to join or reenlist. The annual cost of the program would be $3.3 million.

No Need to Establish New Program. In our analysis of TAP, we recommend the Legislature reject the proposal. If the Legislature wishes to continue to provide student financial aid as a way to help recruit National Guard members, we would advise renewing NG-APLE and authorizing additional awards. This program is superior to TAP in at least three ways. First, NG-APLE is easier to administer. As a loan forgiveness program, it only pays benefits once the student has completed his or her military commitment. In contrast, TAP would provide payment up front, and thus it would be necessary for the state to try to collect those funds from the student if he or she fails to complete the military commitment. Second, NG-APLE is structured similar to other programs already administered by CSAC. The TAP would create a new program to be administered by the Military Department, which has less experience in administering student financial aid programs. And third, NG-APLE is established in statute, while the Governor’s proposal for TAP would give full discretion to the Military Department regarding the allocation of awards. For these reasons, we believe the TAP proposal would be difficult to administer, inefficient, and lacking in accountability.

State Nursing APLE and State Facilities Nursing APLE

The CSAC is authorized to issue awards for two additional APLE programs. The State Nursing APLE forgives up to $25,000 in student loans for nursing program graduates who teach for three years in a California college or university. The current-year budget authorizes the commission to issue 100 new warrants for this program.

The State Facilities Nursing APLE was created last year by Chapter 837, Statutes of 2006 (SB 1309, Scott). It provides up to $20,000 in loan forgiveness to nursing program graduates who work for four years in a state nursing facility with a vacancy rate that exceeds 10 percent. The current-year budget includes $30,000 in base funding for the commission to implement the program, and authorizes the commission to issue up to 40 awards.

At the time this analysis was prepared, the commission had issued no awards for either of these programs. The Governor’s 2007-08 budget proposal does not authorize the commission to issue any additional awards under these programs.

Cal Grant Programs

The Governor proposes augmentations in the Cal Grant programs to cover higher costs due to increased participation and increased fees at the University of California and the California State University. In this section, we discuss two recent statutory changes to the Cal Grant programs, and recommend an adjustment that corresponds with our recommendation for smaller fee increases.

Recent Statutory Changes

The state’s Cal Grant programs generally cover fees, tuition, and some living expenses. After the enactment of Chapter 403, Statutes of 2000 (SB 1644, Ortiz), all needy students are entitled to receive a Cal Grant so long as they meet certain age, income, and other criteria.

Cal Grant Entitlement Expanded. Chapter 822, Statutes of 2006 (AB 2813, De La Torre), expanded eligibility for the Transfer Cal Grant Entitlement. Prior to enactment of this bill, qualified students who were transferring from a community college to a four-year university were entitled to a Cal Grant if (among other requirements) they had not yet reached 24 years of age. Chapter 822 raised the age threshold to 28 years of age. This change is estimated to result in several hundred additional students receiving the entitlement each year, with a fiscal impact of about $2 million in the budget year.

Private Cal Grant Funding Restored, but Still No Policy. As called for in state law, students attending a public university segment have the cost of their fees covered through Cal Grants. Because of the wide variation in tuition charges among the many private and independent colleges in the state, the value of the Cal Grant for students attending such institutions varies, though a maximum amount is established by the annual budget act. As shown in Figure 3, this maximum amount was reduced in 2004-05 in order relieve pressure on the General Fund. That reduction was restored in the current year.

In recent years, we have recommended the Legislature establish in statute a policy that would link the value of the Cal Grant for needy students at nonpublic institutions to the General Fund subsidy the state provides for needy students at public institutions. (See, for example, our Analysis of the 2006-07 Budget Bill, page E-268.) We believe that, without a specific policy, Cal Grant decisions can appear arbitrary, unpredictable, and inconsistent.

Last year the Legislature passed legislation (AB 358, Liu) that would have set the private Cal Grant at 90 percent of the average General Fund subsidy provided to needy UC and CSU students. This bill was vetoed by the Governor. For 2007-08, the Governor proposes to leave the maximum private Cal Grant award unchanged at $9,708, which we estimate to be about $1,300 lower than the parity target sought by AB 358.

Cal Grant Funding for 2007-08

The Governor’s budget proposes an augmentation of $61.3 million to accommodate growth in Cal Grant participation and to cover the fee increases he proposes for the University of California and the California State University. We recommend an adjustment that corresponds with our recommended lower fee level. (Reduce Item 7980-101-0001 by $20 million.)

The Governor proposes an augmentation of $61.3 million to cover increased costs of the Cal Grant program, including a 1.6 percent increase in student participation and an 8 percent increase in the value of the average award. About $28.7 million of the proposed increase in the average Cal Grant award is due to the cost of covering UC and CSU student fees, which the Governor has proposed to increase by 7 percent and 10 percent, respectively.

In the “Student Fees” Intersegmental write-up in this chapter, we note that the state currently has no explicit fee policy to guide annual changes to fee levels. We recommend that, absent a fee policy, the Legislature simply maintain the share of education cost that fees currently represent. Under our recommended UC and CSU budgets, this would require fee increases of about 2.4 percent at UC and CSU. Covering these fee increases with Cal Grants would require about $8.6 million, or about $20 million less than proposed by the Governor. Accordingly, we recommend Item 7980-101-0001 be reduced by this amount.

Restructure State Administration of Grant and Loan Programs

For the past couple of years, the California Student Aid Commission (CSAC) and its auxiliary organization, EdFund, have been the focus of attention concerning issues of inadequate oversight and interagency tension. Given the apparent inability of CSAC to resolve these issues through a revised operating agreement, we continue to recommend that the Legislature replace the current two-agency structure for administering higher education grant and loan programs with a single-agency structure.

Background

In 2005-06, members of the education and budget committees expressed concern with the organizational relationship between CSAC and EdFund. Responding to a legislative directive, our office issued a report in January 2006 that examined this relationship and identified options for restructuring it (California’s Options for Administering the Federal Family Education Loan Program). Since that time, the California State Auditor has also released a report that identified tensions between CSAC and EdFund, and documented inadequate oversight that may have hampered monetary collections and programmatic expansion. The auditor made a number of recommendations, generally calling for CSAC to better monitor EdFund operations and consider certain changes to how various roles and responsibilities are divided between CSAC and EdFund.

CSAC Has Not Been Able to Revise Operating Agreement

State law requires that the operations of EdFund (including its roles and responsibilities) be specified in an “operating agreement” that is approved by CSAC and periodically updated. The last substantive update of the agreement was in 2002-03. Any meaningful attempt to address the operational issues raised by the Legislature, our office, and the State Auditor would likely require a substantial revision to the operating agreement, if not more fundamental changes.

Earlier Extension of Operating Agreement Did Not Achieve Promised Results. The CSAC committed to the Auditor and the Legislature that it would modify its operating agreement with EdFund in response to expressed concerns. When it became clear that CSAC would not be able to approve a new operating agreement before the existing agreement was set to expire on September 30, 2006, CSAC sought an extension until January 31, 2007. In notifying the Legislature of this extension, CSAC and EdFund assured the Legislature that the extension would allow sufficient time to develop a new agreement with appropriate revisions. In late 2006, however, CSAC once again informed the Legislature that it could not meet the sunset deadline, and sought another extension until June 30, 2007—again assuring the Legislature that it will have a new agreement in place before the extension expires. The Joint Legislative Budget Committee agreed to the extension, but emphasized that the Legislature may need to take measures to resolve the underlying issues of the CSAC-EdFund relationship itself if CSAC were unable to resolve them through the operating agreement by June 30, 2007.

Structural Reform Needed

We recommend the Legislature enact legislation that would restructure how the state administers grant and loan programs. Specifically, we recommend the Legislature authorize a single agency, with a single board and Executive Director, to administer both state grant and federal loan programs.

As we described in our January 2006 report, we believe the existing organizational arrangement between CSAC and EdFund suffers from three main shortcomings: (1) the existence of two separate governing bodies (the CSAC commission and the EdFund board) creates tension among the leadership; (2) state law does not adequately delineate which agency is responsible for which operational functions; and (3) CSAC and EdFund have conflicting incentive structures. While some of these shortcomings could be ameliorated through revisions to the CSAC-EdFund operating agreement, the continuing inability of CSAC to identify and approve such revisions suggests that underlying statutory and structural factors need to be addressed by the Legislature.

Accordingly, we continue to recommend the Legislature replace the current two-agency structure for administering grant and loan programs with a single agency that has a unified leadership. The single agency could be a state agency or a nonprofit agency. While both models have been used successfully in other states, we think a nonprofit public benefit corporation would have greater flexibility to adapt to changes in loan programs and loan competitors. At the same time, a nonprofit organization would need to be subject to adequate accountability requirements to ensure that it is meeting legislative intent and providing students with excellent service.

Single-Agency Structure Most Likely to Overcome Existing Problems. Compared to a two-agency, shared-control structure, a single-agency structure has certain inherent advantages. Tension is less likely to develop among organizational leadership in a single agency with a single board and executive director, and confusion about roles and responsibilities is likely to be more easily and quickly resolved.

Greater Autonomy Should Be Coupled With Greater Accountability. Increasing the agency’s autonomy over its daily administrative activities should be coupled with increased attention to accountability. Toward this end, the Legislature could establish accountability requirements such as annual audits and outcomes reporting to ensure the agency is meeting legislative intent.

New Structure Could Accommodate Broader Reform. We think another distinct advantage of our recommendation is that it creates a structure within which other reforms could easily be accommodated. As a single agency, it would be better situated to integrate grant and loan information and services. As such, the Legislature could consider a variety of other reforms related to financial aid administration. For example, the new agency could assume responsibility for the state’s savings and scholarship programs (currently administered by the Scholarshare Investment Board). This would unify all state-level financial aid administration in one umbrella agency and create a single point for state-level financial aid information.

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