Analysis of the 2008-09 Budget Bill: Education

California 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 2008‑09 budget for the commission includes state and federal funds totaling $921 million. Of this amount, $891 million is General Fund support, primarily for direct student aid for higher education.

Below, we summarize the Governor's major budget proposals. We then offer our recommendations related to the Governor's proposals on fee levels and the proposed phase–out of a category of need–based grants. Finally, we review administrative issues related to the planned sale of CSAC’s auxiliary, EdFund.

Budget Proposals

Figure 1 compares the commission’s revised 2007–08 budget with the proposal for 2008‑09. As the figure shows, funding for state financial aid programs would increase by $49 million, or 5.7 percent, from the current year. This increase is primarily due to additional costs associated with the Cal Grant Entitlement Award Program ($109 million), offset by reductions in the Cal Grant Competitive Award Program ($60 million).

As part of the Governor's across–the–board spending cuts, the proposed budget makes 10 percent reductions to the Governor's workload estimate for state operations (–$1.6 million) and to the California Student Opportunity and Access Program, or Cal–SOAP (–$637,000). The proposed budget also includes a net augmentation of $1 million for state operations related to the planned sale of EdFund, and an augmentation of $200,000 in federal funds to maintain the Cash for College Program, previously funded through EdFund. We discuss the impact of the planned EdFund sale later in this piece.

Cal Grant Entitlement Awards. As Figure 1 shows, the Governor's budget would increase funding for the Cal Grant entitlement programs by $109 million, or 16 percent. This increase largely reflects augmentations to increase the fee coverage portion of Cal Grants to match potential fee increases at the University of California (UC) and the California State University (CSU). The Governor defers to the segments’ governing boards regarding fee levels but provides sufficient Cal Grant funds to offset increases of up to 30 percent at UC and 33 percent at CSU. The Governor's budget proposes 3,875 fewer High School Entitlement awards in 2008‑09 than in the current year, primarily to reflect a decline in the number of high school graduates based on current population estimates. The proposed number of Transfer Entitlement awards remains flat, at about 7,700 awards. The maximum Cal Grant award for needy students at private institutions would remain unchanged from the current year level of $9,708. (The box below provides more detail on the commission’s major award programs.)

Cal Grant Competitive Awards. The Governor's budget proposes to end the Cal Grant Competitive Awards Program. Although current law authorizes 22,500 new competitive awards annually, the Governor's budget includes no funding for new awards under this program in 2008‑09. The administration intends that the program be entirely phased out as existing recipients graduate or otherwise leave the program. This accounts for $57 million of the $60 million reduction to the competitive program shown in Figure 1.

APLE and Other Loan Assumption Programs. The Governor's budget maintains current funding levels for the Assumption Program of Loans for Education (APLE) and Graduate APLE, which are loan forgiveness programs for undergraduate and graduate students who fulfill teaching commitments.

The Governor's proposal does not authorize any new warrants for the National Guard APLE (NG APLE), which provides loan forgiveness for qualifying members of the National Guard, State Military Reserve, or Naval Militia who fulfill military commitments. Last year the Governor proposed to extend the July 1, 2007 sunset for NG APLE to July 1, 2010, but did not seek authorization of new warrants under the program. At the same time, the Governor proposed a new Tuition Assistance Program (TAP) in the Military Department for National Guard recruits that would provide direct grants to eligible National Guard members. In our Analysis of the 2007–08 Budget Bill (please see page E–291), we recommended that the Legislature reject the TAP proposal, and noted that if the Legislature wished to continue to provide student financial aid as a way to help recruit National Guard members, renewing the NG APLE would be a better approach. The Legislature rejected the Governor's TAP proposal and authorized no additional NG APLE warrants in the 2007–08 Budget Act. For 2008‑09, the Governor again proposes a new tuition grant program in the Military Department, as described in the “General Government” chapter of this Analysis. The proposed program is similar to TAP and would be jointly administered with CSAC. To the extent the Legislature wishes to provide fee support for National Guard members, we would again suggest that renewing the NG APLE is a better mechanism than the proposed new program.

The Governor's budget authorizes CSAC to issue 100 new warrants under each of the recently created loan assumption programs for nurses. The State Nursing APLE (SNAPLE) for faculty provides loan repayment for nursing faculty who teach at eligible California colleges or universities, and the SNAPLE for nurses in state facilities provides loan repayment for nurses who fulfill employment commitments at state facilities with high vacancy rates for registered nurses. The budget year is the first year that loan repayments will be made for warrants issued earlier under these programs.

Reduce Funding Based on Lower Recommended Fee Increases

We recommend that the Legislature adjust Cal Grant funding based on the Legislative Analyst’s Office fee recommendations. (Reduce Item 7980–101–0001 by $74.3 million.)

In the “LAO Alternative Budget” intersegmental write–up earlier in this chapter, we recommend that UC and CSU fees be raised 10 percent from their current levels in order to modestly increase the share of total education costs paid by students without financial need. In order to maintain affordability for financially needy students, we further recommend that Cal Grant awards be increased to fully cover our recommended fee levels. This would require substantially less than the “placeholder” funding the Governor's budget includes for potential fee increases of up to 30 percent and 33 percent. As a result, our recommendation would result in General Fund savings of $74.3 million.

Recommend Retaining Competitive Program

We recommend that the Legislature reject the Governor's proposal to phase out the Cal Grant Competitive Program. (Increase Item 7980–101–001 by $58.3 million.)

Program Serves Nontraditional Students. Figure 2 compares average age, income, grade point average (GPA), and family size for recipients of the high school entitlement and competitive programs. The differences in the designs of the two programs are reflected in the data. The entitlement program is aimed at students who go to college directly from high school. This explains both the lower average age and, as these students are typically still financially dependent on their parents, the higher family income and size. The competitive program, on the other hand, is aimed at students who have been out of high school for several years. As a result, these students are more likely to be older and financially independent from their parents.

While Figure 2 reflects these programmatic differences, it also shows two key similarities. First, both programs serve very low–income, financially needy students. Second, both programs serve academically successful students—in fact, the competitive program recipients have a higher average GPA than those in entitlement programs.

The Governor's budget does not offer a programmatic rationale for its disparate treatment of the two programs—that is, full funding for the entitlement program and elimination of the competitive program. We believe the Cal Grant competitive program is an important component of the state’s financial aid system. It serves nontraditional students who are seeking education and training. (Almost three–fourths of these students attend California Community Colleges.) In our view, eliminating the state competitive program undermines a key part of the state’s affordability strategy.

In order to maintain the state’s commitment to affordability in higher education, we recommend the Legislature reject the Governor's proposed reduction of $57.4 million in the Competitive Cal Grant program. In addition, we recommend augmenting this amount by $925,000 to fully cover our recommended fee levels for new competitive award recipients.

Planned EdFund Sale and Impact on Administrative Operations

The California Student Aid Commission (CSAC) faces numerous unresolved administrative and financial concerns related to the planned sale of EdFund. We will update the Legislature on CSAC’s transition plan as more information becomes available, and will provide recommendations on related funding issues during budget hearings.

The 2007–08 Budget Act authorizes the Director of Finance to sell EdFund, which is a nonprofit public benefit corporation that acts on behalf of CSAC to administer federal loan guaranty programs. The enacted budget assumed that the state would receive $1 billion for this sale. With the sale of EdFund, it is expected that CSAC would relinquish its status as California’s federally designated guarantor for the Federal Family Education Loan Program. In anticipation of EdFund’s sale, the budget ceases the recent practice of supporting CSAC’s administrative and selected programmatic costs with funding generated by EdFund’s activities. To replace this lost revenue, the enacted current–year budget includes $21.7 million in General Fund support for state operations and Cal–SOAP.

Subsequent to the enactment of the 2007–08 Budget Act, the federal government made changes to its loan programs that are affecting the revenue retained by guaranty agencies. Partly as a result of this development, the Governor's budget proposal reduces the anticipated revenue from EdFund’s sale by half, to $500 million. The proposal anticipates completion of the sale by June 30, 2008.

In early January 2008, the Department of Finance engaged Bear Stearns as its advisor to assist in the sale of EdFund. The administration expects to solicit offers to purchase EdFund in March, when it intends to release a request for proposals.

The Governor's budget includes several adjustments for 2008‑09 related to the planned sale of EdFund. The budget proposal removes $1 million in funding for CSAC’s Federal Policy and Programs Division, as oversight responsibilities will terminate with the sale of the corporation. However, the budget bill provides contingency language allowing CSAC to maintain the division and related funding in the event the EdFund sale is not finalized until 2008‑09.

Conversely, EdFund has been providing a number of administrative services for CSAC, including telephone, Internet, and mail processing services. These benefits will terminate with the sale of EdFund, and CSAC will have to procure these services. The Governor's budget provides a $2 million augmentation for these costs.

EdFund and CSAC currently share facilities. The lease for shared facilities expires August 31, and EdFund has leased a new facility beginning July 1, 2008. The commission also intends to lease a new facility and plans to move in early 2008‑09. Finally, CSAC is transferring several civil service employees from EdFund to vacancies at the commission, but lacks enough vacant positions to accommodate all who are interested in transfers.

We will update the Legislature on the sale of EdFund and CSAC’s transition plan during budget hearings as more information becomes available, and provide recommendations on budget issues at that time.