A Review of State Budgetary Practices for UC and CSU

A Review of State Budgetary Practices for UC and CSU MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • FEBRUARY 11, 2014 AN LAO REPORT 2 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT EXECUTIVE SUMMARY Background State Traditionally Has Budgeted for Universities Based on Workload. Traditionally, the state has adjusted University of California (UC) and California State University (CSU) funding to account for changes in enrollment and inflation—two basic workload adjustments. For enrollment, the state typically set an enrollment target and provided UC and CSU a specified funding rate (based on an estimated marginal cost) for each additional, authorized student. For inflation, the state provided base increases so the universities could cover increased costs for their existing operations. The state also typically funded a few cost increases separately (such as pension costs) and earmarked some state funding for targeted purposes (such as student outreach programs). For capital outlay, the state reviewed and approved specific projects and used state bond funds to pay for them. The state typically did not have a policy on student tuition levels and revenues, though tuition revenues are used along with state funds to support the universities’ core programs. State Has Been Moving Away From Traditional Budgetary Approach. Beginning in 2008-09, the state started to move away from its traditional budgetary approach for the universities. The state budget no longer includes enrollment funding and base increases no longer are connected with inflation. The state budget also no longer earmarks as much funding for specific purposes. Though the state continues to fund capital outlay at CSU in the traditional manner, the Legislature no longer approves capital projects for UC as part of the regular budget process. In addition to these departures from the traditional budgetary approach, the state recently added some new elements to the budgetary process for the universities. Specifically, the state has begun requiring the universities to report on certain outcome measures, such as graduation rates. In addition, in 2013, the state adopted legislation specifying that student access, student success, state civic and workforce needs, and efficiency all should be taken into account when making higher education budget decisions. Assessment Mixed Review of Traditional Budgetary Approach. The state’s traditional budgetary approach connected funding with costs and allowed the state to ensure a certain level of student access. However, the state’s process for funding enrollment had several shortcomings in that the state set its enrollment targets based only on access to undergraduate education, without considering other related goals (such as meeting state workforce needs or providing a certain level of access to graduate education); the state set its enrollment targets after the universities had already made fall enrollment decisions; and the state did not provide incentives for the universities to become more efficient. The state’s lack of a tuition policy also resulted in volatility in student tuition, with steep tuition increases during fiscal downturns. Also Mixed Review of New Budgetary Approach. The state’s more recent budgetary approach disconnects funding and costs. It also diminishes legislative oversight and decision making regarding capital outlay. At the same time, the more recent budgetary approach includes an www.lao.ca.gov Legislative Analyst’s Office 3 AN LAO REPORT emphasis on a broader set of state priorities (including student success), though it does not specify how these priorities are to be factored into budgetary decision making. Recommendations Recommend Legislature Refine Traditional Approach. Because it connects funding and costs and ensures a certain level of student access, we recommend the Legislature return to using its traditional approach to funding the universities but make some refinements. Specifically, we recommend the Legislature authorize an updated eligibility study (such a study has not been conducted in over six years), set different targets for different groups of students (the universities are to report the cost of educating undergraduate and graduate students separately beginning October 2014), and set enrollment targets for one year out to better influence university enrollment decisions. In addition, we recommend the Legislature adopt a share of cost policy for student tuition to reduce volatility in tuition levels. Recommend Legislature Use Performance Metrics as Part of Budget Decisions. In conjunction with refining its traditional budgetary approach, we recommend the Legislature use the universities’ required reports on outcome measures to inform its budget decisions. To this end, we recommend the Legislature require UC and CSU to report on their performance measures at budget hearings each spring, so the Legislature can learn more about each university’s performance and develop expectations for performance moving forward. We recommend the Legislature work with the universities during subsequent budget hearings later in the spring to (1) identify the reasons why the universities are or are not meeting state expectations and (2) redirect state resources accordingly. 4 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT INTRODUCTION Traditionally, one of the main ways California In this report, we first describe the state’s has budgeted for UC and CSU is through traditional approach to funding UC and CSU and enrollment funding. In recent years, however, then discuss the state’s recent departures from this the state has not taken a consistent approach approach. Next, we assess the relative merits of the to funding enrollment at the universities. For state’s traditional budgetary approach versus its this reason, the Legislature adopted language in more recent approach. Based on this assessment, the Supplemental Report of the 2013-14 Budget we make several recommendations regarding how Package directing our office to review the state’s to budget for the universities moving forward. enrollment funding practices. Because the state These recommendations are intended to serve as in recent years has departed from its traditional guiding principles for the Legislature to consider. budgetary approach in numerous other ways, such (In the next few days we will publish a report as as by incorporating specific performance measures, part of our 2014-15 budget analysis series that we took a broader look at all state funding practices uses these guiding principles to make specific for the universities as part of our review. recommendations on the Governor’s 2014-15 budget proposals for UC and CSU.) BACKGROUND This section describes the way the state adjusts funding to account for policy changes that historically has funded UC and CSU. It then affect an agency’s costs. describes how the state has moved away from Main Workload Affecting Universities’ its traditional funding approach in recent years, Budgets Has Been Enrollment. For UC and particularly as part of the 2013-14 budget. CSU, the state’s main caseload adjustment has been related to changes in enrollment. If the state Traditional Approach to Funding UC and CSU decides to increase enrollment, it sets an enrollment Budgetary Approach for Universities Has target and provides UC and CSU with funding for Been Similar to Approach Used for Other State each additional authorized student at a specified Agencies. Historically, the state has used an funding rate. This setting of enrollment targets incremental budgetary approach to fund nearly all and determining the associated enrollment-growth state agencies, including UC and CSU. Under this funding allocation have long been one of the state’s approach, the state annually adjusts each agency’s main annual budget decisions for UC and CSU. existing base budget to account for changes in Enrollment Targets Set Expectations for workload—consisting mainly of changes in the Access. Enrollment targets reflect the state’s number of individuals receiving services from the expectations for access to the public universities. agency (often referred to as caseload) and changes These expectations are based on the eligibility in how much it costs to deliver services due to policies included in the state’s Master Plan for price or salary increase (inflation). Besides these Higher Education. Specifically, the Master Plan workload-related budget adjustments, the state also requires UC and CSU to admit freshmen students www.lao.ca.gov Legislative Analyst’s Office 5 AN LAO REPORT from among the top 12.5 percent and 33 percent, their Master Plan eligibility pools. (These studies respectively, of the state’s high school graduates. were conducted by the California Postsecondary The Master Plan further requires the universities Education Commission, which the state closed to accept all qualified transfer students. (The down in 2011. The last study conducted was universities themselves define which transfer published in 2007.) students are qualified, though state law requires UC Marginal Cost Formulas Used to Calculate and CSU to dedicate 60 percent of enrollment slots Enrollment Costs. To calculate the associated cost for upper-division students to allow sufficient room of enrollment growth, the state used a marginal for transfers.) The Master Plan contains no specific cost formula. Figure 1 displays the marginal cost eligibility criteria for graduate students, though calculations for UC and CSU for 2014-15 if the it encourages the universities to consider state historical formula were to be used. As shown in workforce needs, such as for physicians. the figure, the formulas approximate the staffing Enrollment Targets Based on Several resources and operating expenses necessary to Considerations. The state typically took into educate an additional student. They estimate account a number of factors when setting teaching costs based on fixed student-to-faculty enrollment targets. One main consideration was ratios and actual salaries and benefits for new changes in the college-age population. The state faculty. Other cost components, such as academic also routinely considered college participation support, are based on the average cost per rates and freshman eligibility studies. Freshman student. (For some of these other areas, certain eligibility studies were designed to determine if subcategories of costs, such as for museums and UC and CSU were drawing from less or more than executive management, are excluded.) The marginal cost formulas were used Figure 1 both to provide funding Calculation for Funding an Additional Studenta to the universities for 2014‑15 Marginal Cost Calculation increases in enrollment Cost Categoryb UC CSU targets as well as to take money back from the Faculty salaryc $5,839 $3,767 Faculty benefits 1,876 1,740 universities should they Teaching assistant (TA) salaryd 570 23 fail to meet their targets. Instructional support 3,796 628 Base Augmentations Instructional equipment 391 93 Academic support 1,226 1,285 Provided to Maintain Student services 917 1,057 Purchasing Power. Institutional support 820 1,169 The state’s other main Operation and maintenance 2,160 1,074 workload adjustment for Total Marginal Cost $17,591 $10,836 Less Student Fee Revenuee -$9,079 -$4,837 UC and CSU has been State Funding Rate $8,512 $5,999 base augmentations to a Per full-time equivalent student (FTES). cover cost increases. b Certain fixed cost subcategories (such as museums) excluded from calculation. c Based on average annual salary of all new professors and a student-faculty ratio of 18.7:1 at UC and These augmentations 18.9:1 at CSU. d are intended to cover Based on average annual salary of a full-time TA and a student-TA ratio of 62:1 at UC and 608:1 at CSU. e Based on the average systemwide fee revenue collected from each FTES, excluding institutional financial inflationary increases aid. Institutional aid averages $4,100 per student at UC and $1,800 per student at CSU. for salaries and benefits, 6 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT utilities, supplies, and other expenses. These base other factors, including how much students are augmentations allow the universities to maintain willing to pay.) their purchasing power in order to keep their State Bonds Used to Support Capital Projects. educational programs running at a consistent To access state funding for capital projects, the level. In the past, base augmentations typically universities traditionally submitted specific capital corresponded with expected inflation, as measured project proposals to the state that included each by a price index of goods purchased by state and project’s scope, cost, and schedule. These proposals local governments. typically were related to constructing new academic Other Workload Adjustments Also Provided facilities and modernizing existing facilities. To pay to Cover Cost Increases. The state also routinely for projects it had approved, the state issued bonds adjusted the universities’ budgets to account for and repaid the associated debt service. a few other changes in costs. Most notably, the Funding Provided to Systems, Not Campuses. state adjusted the universities’ budgets to account The state’s funding decisions traditionally have for changes in pension costs, retiree health been made at the systemwide level. The state budget benefits, and debt service. These areas were funded has appropriated funds to the universities’ central separately from base augmentations because their offices, which then have distributed these funds to costs did not always track with inflation. their campuses. Both universities have governing Targeted Funding Provided for Specific boards that are responsible for overseeing how the State Priorities. The state also earmarked specific central offices distribute funding to the campuses. amounts of funding in the universities’ budgets for State Approach to Funding certain state priorities, such as student outreach UC and CSU at a Crossroads programs. Typically, UC’s budget has contained a dozen or so earmarks, while CSU’s budget has State Has Taken Different Budgetary contained about half as many earmarks. Approaches Since 2008-09. From the onset of State Historically Has Not Had a Policy the most recent recession (2008-09) through the on Tuition. Though traditional state budgetary current budget (2013-14), the state has largely practices for UC and CSU were similar to those abandoned its traditional funding approach for used for other state agencies in many ways, a key UC and CSU. Throughout most of this period, difference is that the universities have the authority the state shifted away from its normal funding to raise additional revenue. That is, along with state practices because it was trying to address the state’s General Fund, tuition revenues are used to support fiscal shortfall. As the state has recovered from the universities’ core programs. The state, however, these fiscal difficulties, however, it has continued typically has not had a policy on student tuition to depart from its traditional funding approach. levels. Instead, the universities generally have been Below, we recap the various ways in which the state free to set tuition at levels that generate a certain has approached the universities’ budgets in recent amount of desired revenue for their programs. In years. practice, the universities usually set tuition levels to Enrollment Funding and Targets No Longer generate enough revenue to cover any increases in Included in Budget. As shown in Figure 2 (see next their expenditures that were not covered with state page), since 2007-08, the state budget only twice funding. (Non-resident and professional degree included both enrollment targets and enrollment supplemental tuition charges also are set based on growth funding. The state’s ad-hoc approach during www.lao.ca.gov Legislative Analyst’s Office 7 AN LAO REPORT this time is at least partly due to difficult budget absorb the relatively low inflationary cost years in which the state reduced the universities’ increases that occurred during this time using budgets and, in turn, provided the universities with internal measures.) More recently, as the state increased flexibility in how to respond, including has resumed providing base increases, it has setting their own enrollment levels. Though the not adopted augmentations based on expected state recovered its fiscal footing in 2013-14, the inflation. Further departing from the traditional current budget also omitted enrollment targets approach, CSU’s base increases have not been and funding. The Legislature, however, expressed derived based on its own budget but instead have its interest in resuming funding enrollment by been based on UC’s budget. adopting the reporting language directing our Most Funding Not Targeted for Specific office to review enrollment funding practices. To Purposes. In order to provide the universities gain further knowledge about enrollment costs, the with more flexibility, the state eliminated many Legislature also directed UC and CSU to report on of the earmarks in the universities’ budgets over the cost of education by student level and discipline the last few years. The 2013-14 budget includes categories starting in October 2014. (Appendix A very few earmarks compared to past budgets. at the end of this report contains the enrollment The most notable earmark in the current budget reporting language, while Appendix B contains the is $15 million for UC to open a new medical cost of education reporting language.) school at the Riverside campus. Base Augmentations Not Linked With Universities Still Determine Tuition Levels Costs. Throughout the recession, the state for in Response to State Funding. One budget the most part did not provide base increases area where the state continued its traditional to UC and CSU to account for inflation. (By approach is student tuition. The state continued not providing inflation adjustments, the state to budget each year without a tuition policy effectively was directing the universities to (though in recent years the state has expressed Figure 2 Enrollment Targets and Enrollment Growth Funding Not Used on a Consistent Basis in Recent Years Full-Time Equivalent Students 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14a UC Enrollment target 198,455 None None 209,977 209,977b 209,977b None Enrollment growth 5,000 — — 5,121 — — — Actual enrollment 203,906 210,558 213,589 214,692 213,763 211,212 210,986 Funding rate $10,586 — — $10,011 — — — Percent change in actual enrollment 3.3% 1.4% 0.5% -0.4% -0.5% -0.1% CSU Enrollment target 342,553 None None 339,873 331,716b 331,716b None Enrollment growth 8,355 — — 8,290 — — — Actual enrollment 353,915 357,223 340,289 328,155 341,280 343,227 350,000 Funding rate $7,710 — — $7,305 — — — Percent change in actual enrollment 0.9% -4.7% -3.6% 4.0% -0.4% 2.0% a Enrollments for 2013-14 are estimated. b State budget did not require the universities to return money if they fell short of this target. 8 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT an expectation that the universities not raise number of performance outcomes. As shown tuition). In the absence of such a policy, tuition in Figure 3 (see next page), the universities levels and revenues notably spiked and leveled now are required to report on graduation rates, off, as the universities made their tuition funding per degree, and the number of transfer decisions each year based on available state and low-income students enrolled, among other funding. From 2008-09 through 2011-12, tuition measures. These measures are intended to be levels and revenues increased significantly at used to “guide” future budget decisions, though both UC and CSU in response to cuts in state the legislation did not specify exactly how the funding. Since 2011-12, tuition levels and measures would be used. (Appendix C contains revenues have remained flat as the state has the language in trailer legislation requiring resumed providing budget augmentations. the universities to report on specified outcome New Capital Outlay Process Adopted for measures.) UC. In a major departure from past practice, Additional Factors for Higher Education the state adopted a new process for UC capital Budget Decisions. The Legislature also recently outlay as part of the 2013-14 budget. Under this added factors to consider in the budget process new process, the state no longer uses state bond for UC and CSU by passing Chapter 367, Statutes funding to support UC’s capital projects. Instead, of 2013 (SB 195, Liu). This bill establishes three UC has been given the authority to pledge its goals for higher education budget decision- state support appropriation to issue its own debt making moving forward. to pay for academic facilities. The university is • Improving student access and success, to pay for the associated debt service from its such as by increasing participation main state support appropriation. (To enable from certain demographic groups and the university to pay for the debt service, the by improving completion rates for all state shifted funding associated with existing students. debt service on UC projects into UC’s support appropriation.) In order to use the new authority, • Better aligning degrees and credentials the university is required to notify and seek with the state’s economic, workforce, and approval from the Joint Legislative Budget civic needs. Committee and the Department of Finance. • Ensuring the effective and efficient However, UC’s capital projects no longer are use of resources in order to increase heard by budget committees or listed in the state high-quality postsecondary educational budget. For CSU, the state continues to use the outcomes and maintain affordability. traditional capital outlay budget process. Universities Required to Report on New The bill states the Legislature’s intent to develop Performance Measures. After considerable metrics in the future to measure progress toward debate in recent years regarding ways to include meeting these goals. These metrics are to take performance funding in UC and CSU’s budget, into account the aforementioned outcome the 2013-14 budget package established a measures the universities are required to report new requirement for UC and CSU to report on through the budget process. (Appendix D annually, beginning March 1, 2014, on a contains the complete language of Chapter 367.) www.lao.ca.gov Legislative Analyst’s Office 9 AN LAO REPORT Figure 3 Performance Metrics for UC and CSU Metric Definition CCC transfers (1) Number of CCC transfers enrolled. (2) CCC transfers as a percent of undergraduate population. Low-income students (1) Number of Pell Grant recipients enrolled. (2) Pell Grant recipients as a percent of total student population. Graduation ratesa (1) Four- and six-year graduation rates for freshmen entrants. (2) Two- and three-year graduation rates for CCC transfers. Both of these measures also calculated separately for low-income students. Degree completions Number of degrees awarded annually in total and for: (1) Freshman entrants. (2) Transfers. (3) Graduate students. (4) Low-income students. First-year students on track to degree Percentage of first-year undergraduates earning enough credits to graduate within four years. Funding per degree (1) Total core funding divided by total degrees. (2) Core funding for undergraduate education divided by total undergraduate degrees. Units per degree Average course units earned at graduation for: (1) Freshman entrants. (2) Transfers. Degree completions in STEM fields Number of STEM degrees awarded annually to: (1) Undergraduate students. (2) Graduate students. (3) Low-income students. a Six- and three-year graduation rates apply only for CSU. STEM = science, technology, engineering, and mathematics. ASSESSMENT This section assesses the state’s traditional universities. This is because the universities must funding approach as well as its more recent serve the number of students specified in the budgetary approach for UC and CSU. budget or risk losing some of their state funding. . . . But a Few Shortcomings With Process Traditional Funding Approach Has Used to Set Enrollment Targets. Regarding the Both Pluses and Minuses state’s method for setting enrollment targets, a few Enrollment Funding Helpful for Establishing notable shortcomings existed. State’s Expectations for Access . . . As noted • Focused Only on Access for earlier, enrollment budgeting directly relates to Undergraduates. Traditionally, the state the level of access to the public universities, which only considered access for undergraduates historically has been a strong state priority. By in setting enrollment targets. The state linking funding with students, the traditional did not consider graduate student access enrollment funding model easily allows the state or other state goals related to enrollment, to influence the level of access provided by the such as state workforce needs. Moreover, 10 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT by setting a single target, the state allowed Targeted Funding Not Always Connected the universities to determine the mix of With Highest State Priorities. Targeting student enrollment. (Also, because the funding for specific purposes in theory helps state had a single enrollment target for all the state ensure that its priorities are being met. students, the marginal cost calculation did In practice, however, the state had a tendency to not distinguish costs for different student earmark relatively small amounts of funding for levels or disciplines.) narrow purposes. For example, several recent budgets included a $3.2 million earmark for a • Enrollment Decisions Made by supercomputer center at the San Diego campus. Universities Before State Set Targets. Moreover, some specific earmarks became Under the traditional process, enrollment outdated. For example, the state many years targets were finalized when the state budget ago earmarked $52 million of UC’s budget for passed in June—after the universities had financial aid at a time when the university itself made their admissions decisions for the provided relatively little financial aid. This earmark fall semester. This meant the state ended continued each year until 2012-13, even though by up having little influence over UC’s admis- then UC was providing students with a little over sions decisions, as most UC students enter $1 billion annually in financial aid. in the fall. For CSU, if the state did not Tuition Decisions Led to Volatility for fund enrollment based on the university’s Students. Because the state traditionally has not plan, then CSU had to make potentially had an explicit tuition policy, student tuition large adjustments in its spring admissions. levels generally have fluctuated in response to Enrollment and Inflation Funding Helped state budget conditions. During times when the Connect Funding With Costs . . . By funding state budget has been balanced, tuition levels have workload such as enrollment and inflation, the remained flat. In contrast, during times when the state aimed to connect funding with costs. This state budget has suffered a shortfall, tuition levels allowed the universities to maintain their programs have increased sharply. This can create difficulty for from year to year, while it allowed the state to some middle- and upper-income students enrolled have knowledge over how its funds were being during times of sharp increases, as these students spent. Moreover, the state’s approach to estimating do not qualify for state financial aid (which enrollment and inflation costs balanced accuracy increases to match tuition increases). Similar with simplicity. students enrolled during times of state fiscal . . . But Lacked Incentives for Universities stability, however, benefit from flat tuition. The to Be Efficient. Despite connecting funding and impact on any particular middle- or upper-income costs, the traditional approach had one negative student traditionally has been related solely to the aspect. Neither the marginal cost calculation nor timing of when they enroll. Figure 4 (see next page) the base augmentations for inflation provided an illustrates the volatility in tuition levels over the last incentive for the universities to reduce their costs. three decades. Rather, these budget adjustments were designed Traditional Approach to Capital Outlay simply to cover cost increases. Allowed for Transparent State Review and Oversight. In the area of capital outlay, the state’s traditional budgetary approach included www.lao.ca.gov Legislative Analyst’s Office 11 AN LAO REPORT hearings open to the public to comment on same base augmentations, despite differences in proposed projects. This provided a transparent missions and costs at the two universities. and deliberative forum for overseeing state Including Performance Measures in Funding expenditures. Under the traditional approach, Process Helps State Focus on Broader Set of funding, however, could be sporadic in that voters Priorities . . . In the past, the main decisions might not approve a state bond measure or the state regarding how to budget for UC and CSU might suspend bond sales due to a fiscal downturn. have addressed mostly access and inflationary adjustments. Yet, the state recently has adopted Mixed Review of Current Budgetary Approach several other goals for higher education, including Unallocated Funding Approach Problematic. student success and the relevance of educational The state’s current practice of providing programs for meeting state workforce needs. unallocated base increases lacks transparency The state’s newly adopted performance measures since the state has not identified why the specific incorporate these other state priorities into the Graphic Sign Off amounts of funding are being provided. For budget process. example, the state has not articulated whether . . . But UncleaSr tehcer Retoaler yThese Measures these base increases are intended to expand Will Have in Budget Process. So far, the state has Analyst enrollment, cover cost increases, or enhance only required that the segments report information MPA programs. Instead, the current state budget about how they are furthering certain state Deputy provides UC and CSU with base increases of priorities. While this is an initial step in the right a seemingly arbitrary amount. Moreover, the direction, the state has not yet determined how it current budget provides UC and CSU with the will actually hold the universities accountable for making progress toward meeting these priorities. Figure 4 Notably, the state has Signficant Volatility in Tuition chosen not to create a Under Traditional Budgetary Approach specific link between Annual Percent Change in Tuition funding and performance measures. While this might 40% be viewed as a weakness UC CSU in terms of holding the 30 universities accountable for performance, not having 20 a funding formula allows for more flexibility and 10 professional judgment on the part of the state 0 in making its budget decisions. -10 New Capital Outlay 85-86 90-91 95-96 00-01 05-06 10-11 Process for UC Raises Concerns. By removing the ARTWORK #130765 12 Legislative Analyst’s Office www.lao.ca.gov Template_LAOReport_mid.ait AN LAO REPORT review and approval of UC capital outlay projects the change in debt issuance practices (whereby UC from the regular state budget process, the new issues bonds) will actually result in more stability capital outlay process for UC has been made less in the long term. Furthermore, the administration, transparent and deliberative. For example, UC’s Legislature, and segments appear to have somewhat 2013-14 capital program includes $87 million in different understandings regarding the state’s capital expenditures that were approved without versus the segments’ facility responsibilities moving a budget hearing. Moreover, it is unclear whether forward. RECOMMENDATIONS Because the state’s traditional and current building in incentives for the universities to approaches to funding UC and CSU both have meet expectations on access. For these reasons, strengths and weaknesses, we recommend the we recommend the Legislature retain this basic Legislature move forward by building upon budgetary approach but make the following the positive elements from each. Specifically, refinements. we recommend the Legislature retain the basic Authorize an Updated Eligibility Study. We elements of the traditional funding approach— recommend the Legislature authorize an updated including funding enrollment and inflation—but freshman eligibility study, as the last eligibility add some refinements to address some of its study was undertaken six years ago. Information shortcomings. In addition, we recommend the from such a study is necessary to determine Legislature build upon its recent efforts to Figure 5 consider the universities’ Summary of Recommendations performance as part of the Refine Traditional Budgetary Approach budget process. Figure 5 9 Authorize updated freshman eligibility study. summarizes these 9 recommendations, which Establish different enrollment targets and funding rates for different types are discussed in more of students. detail below. 9 Set enrollment targets for year after budget year. 9 Refine Traditional Fund inflation instead of unallocated base increases. Funding Approach 9 Limit earmarks to highest state priorities and review periodically. Despite some 9 weaknesses in the state’s Adopt a share of cost tuition policy. traditional approach to 9 Maintain traditional review and approval process for funding capital funding UC and CSU, projects. the state’s treatment of Use Performance Measures to Guide Budgetary Decisions the universities overall 9 had positive features, Require universities to report on measures at budget hearings. particularly by connecting 9 Identify causes for universities meeting or not meeting state expectations funding and costs and and adjust funding accordingly. www.lao.ca.gov Legislative Analyst’s Office 13 AN LAO REPORT whether UC and CSU currently are drawing from spending commitment. A risk exists, however, that less or more than their Master Plan eligibility a state fiscal shortfall could necessitate revisions to pools. If the study concludes the universities the approved enrollment target. Nonetheless, over are drawing from beyond their eligibility pools, the long term, such a budgetary practice would this information suggests that enrollment levels give the Legislature more influence in setting currently are too high. If the study concludes the enrollment levels and the systems more certainty universities are drawing from too small a pool of over planning for enrollment. students, this information suggests that enrollment Fund Inflation Instead of Unallocated Base levels currently are too low. (Such a study must be Increases. Rather than providing unallocated conducted by reviewing transcripts of high school base increases of a seemingly arbitrary amount, we students and linking with university admissions. recommend the Legislature link base increases with Given the amount of coordination required across an inflation index. Specifically, we recommend the high schools, UC, and CSU, the state traditionally Legislature use the state and local deflator index has relied on independent consultants to undertake that approximates cost increases for state and local parts of the study.) governments. We recommend the Legislature Make More Targeted Decisions on exclude any costs that it decides to fund separately Enrollment. We recommend the Legislature (such as pension costs or debt service) from the establish different enrollment targets for different inflation adjustment calculation. types of students. This would allow the Legislature Limit Targeted Funding to Highest Priorities. to set expectations for access for different student We recommend the Legislature in the future groups. For instance, the Legislature could set one only designate funding for specific purposes in target for undergraduate enrollment and another the budget when it is of the highest state priority target for graduate enrollment. The Legislature also and only when the Legislature has reason to could consider targets for different disciplines by believe the university would not advance these taking into consideration state workforce needs. priorities without being required to do so. (Once UC and CSU submit their required reports One example could be an earmark for student on the cost of education by student level and outreach programs. Moreover, we recommend the discipline starting in October 2014, information Legislature annually review any earmarks included will be available to create different marginal cost in the budget to determine whether they are formulas to distinguish these targets. Currently, justified on an ongoing basis. information is not available to make these Adopt a Share of Cost Policy. Instead of calculations.) having tuition levels be set on an ad-hoc basis, Better Align State and University Enrollment we recommend the Legislature adopt a policy Decisions. We also recommend the Legislature that bases tuition at each public university on a set enrollment targets for the year after the budget share of educational costs. Such a policy would year. This would allow the universities more time provide a rational basis for tuition levels and a to plan their admissions decisions accordingly, simple mechanism for annually adjusting them. though it would entail making a commitment for (This share of cost would be factored into both enrollment funding prior to the development of the the marginal cost formula and inflationary state’s budget for that year. Ideally, in times of fiscal adjustments.) Though such a policy would depend stability, the Legislature would be able to honor this on the state providing its share of funding, we 14 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT believe it would be more likely to result moderate, opportunity to learn more about each university’s gradual, and predictable tuition increases over performance and develop expectations for time. It also would provide students with a greater performance moving forward. incentive to hold the universities accountable Adjust Funding Accordingly. We further for ensuring that proposed cost increases are recommend the Legislature use the information worthwhile. reported at budget hearings to make funding Maintain Control Over Capital Outlay. We decisions based on whether the universities are recommend the Legislature not relinquish further meeting state expectations. In order to do so, oversight and control over capital expenditures the Legislature would need to work with the for the universities. Traditionally, the Legislature universities to identify the reasons why they are or has considered managing state infrastructure, are not meeting state expectations. For example, the including university facilities, one of its key state has expressed an interest in the universities responsibilities. Making decisions about the improving their four- and six-year graduation universities’ capital projects also traditionally has rates. However, there could be multiple factors that been seen as closely connected with the state’s explain why some students do not graduate within responsibility for ensuring access to undergraduate four or six years. Some examples include: (1) course and graduate academic programs. sections not being available for students to take when they need them, (2) students not being able Use Performance Metrics to to take enough units each semester to graduate Inform Funding Decisions within four or six years because of part-time work One positive aspect of the state’s newer or other reasons, (3) poor academic preparation for approach to funding UC and CSU is its inclusion of students that causes them to not graduate at all, or certain state funding priorities, including a greater (4) students not focusing on a course of study early focus on student success. Below, we offer guidance enough that results in them taking excess units. on how the Legislature could build upon its recent Depending on which of these factors are most efforts to incorporate performance into its budget relevant, the Legislature’s responses would vary. decisions. For example, the Legislature might require that Require Universities to Present Performance the universities redirect their resources in order Results at Budget Hearings Each Spring. We to better align their course offerings with student recommend the Legislature require UC and CSU demand if it identifies course availability as the to discuss their performance in specific areas main hindrance to timely graduation. The state also (including student access and success) at budget could set expectations for funding per degree to hearings each spring. The Legislature could use this encourage the universities to become more efficient. CONCLUSION The state’s longstanding funding practices objectives. In particular, enrollment funding for UC and CSU have connected funding with has allowed the state to establish its expectations costs, thereby matching public dollars with the for access to the universities. Apart from some amount of work needed to fulfill expected public shortcomings with the specific approach used to www.lao.ca.gov Legislative Analyst’s Office 15 AN LAO REPORT fund enrollment, this basic budgetary approach programs. The state’s newly adopted performance has provided a transparent and rational method measures provide an opportunity for the state to for the state to allocate funding. At the same time, monitor progress in these areas. For these reasons, however, this approach fails to encourage the we recommend the Legislature budget for the universities to address other state priorities, such universities by refining its traditional process as student success and the relevance of degree and by using performance measures to inform its spending decisions. 16 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT APPENDIX A Enrollment Funding Reporting Requirement Supplemental Report of the 2013-14 Budget Package Item 6440-001-0001—University of California 1. Enrollment Funding. The Legislative Analyst, in consultation with the University of California, California State University, and the Department of Finance, shall review the state’s current approach to enrollment funding, including a review of current funding per student and the marginal cost funding formula, and submit a report to the Legislature by January 1, 2014 with recommendations on how to fund enrollment going forward to promote access, quality, and other state higher education goals. Item 6610-001-0001—California State University 1. Enrollment Funding. The Legislative Analyst, in consultation with the University of California, California State University, and the Department of Finance, shall review the state’s current approach to enrollment funding, including a review of current funding per student and the marginal cost funding formula, and submit a report to the Legislature by January 1, 2014 with recommendations on how to fund enrollment going forward to promote access, quality, and other state higher education goals. www.lao.ca.gov Legislative Analyst’s Office 17 AN LAO REPORT APPENDIX B Cost of Education Reporting Requirement Chapter 50, Statutes of 2013 (AB 94, Committee on Budget) SEC. 3. Article 10 (commencing with Section 89290) is added to Chapter 2 of Part 55 of Division 8 of Title 3 of the Education Code, to read: Article 10. Expenditures for Undergraduate and Graduate Instruction and Research Activities 89290. (a) The California State University shall report biennially to the Legislature and the Department of Finance, on or before October 1, 2014, and on or before October 1 of each even-numbered year thereafter, on the total costs of education at the California State University. (b) The report prepared under this section shall identify the costs of undergraduate education, graduate academic education, graduate professional education, and research activities. All four categories listed in this subdivision shall be reported in total and disaggregated separately by health sciences disciplines, disciplines included in paragraph (10) of subdivision (b) of Section 89295, and all other disciplines. The university shall also separately report on the cost of education for postbaccalaureate teacher education programs. For purposes of this report, research for which a student earns credit toward his or her degree program shall be identified as undergraduate education or graduate education, as appropriate. (c) The costs shall also be reported by fund source, including all of the following: (1) State General Fund. (2) Systemwide tuition and fees. (3) Nonresident tuition and fees and other student fees. (d) For any report submitted under this section before January 1, 2017, the costs shall, at a minimum, be reported on a systemwide basis. For any report submitted under this section on or after January 1, 2017, the costs shall be reported on both a systemwide and campus-by-campus basis. (e) A report to be submitted pursuant to this section shall be submitted in compliance with Section 9795 of the Government Code. 18 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT (f) Pursuant to Section 10231.5 of the Government Code, the requirement for submitting a report under this section shall be inoperative on January 1, 2021, pursuant to Section 10231.5 of the Government Code. SEC. 11. Article 7.5 (commencing with Section 92670) is added to Chapter 6 of Part 57 of Division 9 of Title 3 of the Education Code, to read: Article 7.5. Expenditures for Undergraduate and Graduate Instruction and Research Activities 92670. (a) The University of California shall report biennially to the Legislature and the Department of Finance, on or before October 1, 2014, and on or before October 1 of each even-numbered year thereafter, on the total costs of education at the University of California. (b) The report shall identify the costs of undergraduate education, graduate academic education, graduate professional education, and research activities. All four categories listed in this subdivision shall be reported in total and disaggregated separately by health sciences disciplines, disciplines included in paragraph (10) of subdivision (b) of Section 92675, and all other disciplines. For purposes of this report, research for which a student earns credit toward his or her degree program shall be identified as undergraduate education or graduate education. (c) The costs shall also be reported by fund source, including all of the following: (1) State General Fund. (2) Systemwide tuition and fees. (3) Nonresident tuition and fees and other student fees. (4) University of California General Funds, including interest on General Fund balances and the portion of indirect cost recovery and patent royalty income used for core educational purposes. (d) For any report submitted under this section before January 1, 2017, the costs shall, at a minimum, be reported on a systemwide basis. For any report submitted under this section on or after January 1, 2017, the costs shall be reported on both a systemwide and campus-by-campus basis. (e) A report to be submitted pursuant to this section shall be submitted in compliance with Section 9795 of the Government Code. (f) Pursuant to Section 10231.5 of the Government Code, the requirement for submitting a report under this section shall be inoperative on January 1, 2021, pursuant to Section 10231.5 of the Government Code. www.lao.ca.gov Legislative Analyst’s Office 19 AN LAO REPORT APPENDIX C Performance Measures Reporting Requirement Chapter 50, Statutes of 2013 (AB 94, Committee on Budget) SEC. 4. Article 10.5 (commencing with Section 89295) is added to Chapter 2 of Part 55 of Division 8 of Title 3 of the Education Code, to read: Article 10.5. Reporting of Performance Measures 89295. (a) For purposes of this section, the following terms are defined as follows: (1) The “four-year graduation rate” means the percentage of a cohort that entered the university as freshmen that successfully graduated within four years. (2) The “six-year graduation rate” means the percentage of a cohort that entered the university as freshmen that successfully graduated within six years. (3) The “two-year transfer graduation rate” means the percentage of a cohort that entered the university as junior-level transfer students from the California Community Colleges that successfully graduated within two years. (4) The “three-year transfer graduation rate” means the percentage of a cohort that entered the university as junior-level transfer students from the California Community Colleges that successfully graduated within three years. (5) “Low-income students” means students who receive a Pell Grant at any time during their matriculation at the institution. (b) Commencing with the 2013–14 academic year, the California State University shall report, by March 1 of each year, on the following performance measures for the preceding academic year, to inform budget and policy decisions and promote the effective and efficient use of available resources: (1) The number of transfer students enrolled annually from the California Community Colleges, and the percentage of transfer students as a proportion of the total undergraduate student population. (2) The number of low-income students enrolled annually and the percentage of low-income students as a proportion of the total student population. (3) The systemwide four-year and six-year graduation rates for each cohort of students and, separately, for low-income students. (4) The systemwide two-year and three-year transfer graduation rates for each cohort of students and, separately, for each cohort of low-income students. (5) The number of degree completions annually, in total and for the following categories: (A) Freshman entrants. (B) Transfer students. (C) Graduate students. 20 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT (D) Low-income students. (6) The percentage of first-year undergraduates who have earned sufficient course credits by the end of their first year of enrollment to indicate they will complete a degree in four years. (7) For all students, the total amount of funds received from all sources identified in subdivision (c) of Section 89290 for the year, divided by the number of degrees awarded that same year. (8) For undergraduate students, the total amount of funds received from all sources identified in subdivision (c) of Section 89290 for the year expended for undergraduate education, divided by the number of undergraduate degrees awarded that same year. (9) The average number of course credits accumulated by students at the time they complete their degrees, disaggregated by freshman entrants and transfers. (10) (A) The number of degree completions in science, technology, engineering, and mathematics (STEM) fields, disaggregated by undergraduate students, graduate students, and low-income students. (B) For purposes of subparagraph (A), “STEM fields” include, but are not necessarily limited to, all of the following: computer and information sciences, engineering and engineering technologies, biological and biomedical sciences, mathematics and statistics, physical sciences, and science technologies. SEC. 12. Article 7.7 (commencing with Section 92675) is added to Chapter 6 of Part 57 of Division 9 of Title 3 of the Education Code, to read: Article 7.7. Reporting of Performance Measures 92675. (a) For purposes of this section, the following terms are defined as follows: (1) The “four-year graduation rate” means the percentage of a cohort that entered the university as freshmen that successfully graduated within four years. (2) The “two-year transfer graduation rate” means the percentage of a cohort that entered the university as junior-level transfer students from the California Community Colleges that successfully graduated within two years. (3) “Low-income students” means students who receive a Pell Grant at any time during their matriculation at the institution. (b) Commencing with the 2013–14 academic year, the University of California shall report, by March 1 of each year, on the following performance measures for the preceding academic year, to inform budget and policy decisions and promote the effective and efficient use of available resources: (1) The number of transfer students enrolled annually from the California Community Colleges, and the percentage of transfer students as a proportion of the total undergraduate student population. (2) The number of low-income students enrolled annually and the percentage of low-income students as a proportion of the total student population. www.lao.ca.gov Legislative Analyst’s Office 21 AN LAO REPORT (3) The systemwide four-year graduation rates for each cohort of students and, separately, for each cohort of low-income students. (4) The systemwide two-year transfer graduation rates for each cohort of students and, separately, for each cohort of low-income students. (5) The number of degree completions annually, in total and for the following categories: (A) Freshman entrants. (B) Transfer students. (C) Graduate students. (D) Low-income students. (6) The percentage of first-year undergraduates who have earned sufficient course credits by the end of their first year of enrollment to indicate they will complete a degree in four years. (7) For all students, the total amount of funds received from all sources identified in subdivision (c) of Section 92670 for the year, divided by the number of degrees awarded that same year. (8) For undergraduate students, the total amount of funds received from the sources identified in subdivision (c) of Section 92670 for the year expended for undergraduate education, divided by the number of undergraduate degrees awarded that same year. (9) The average number of course credits accumulated by students at the time they complete their degrees, disaggregated by freshman entrants and transfers. (10) (A) The number of degree completions in science, technology, engineering, and mathematics (STEM) fields, disaggregated by undergraduate students, graduate students, and low-income students. (B) For purposes of subparagraph (A), “STEM fields” include, but are not necessarily limited to, all of the following: computer and information sciences, engineering and engineering technologies, biological and biomedical sciences, mathematics and statistics, physical sciences, and science technologies. 22 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT APPENDIX D State Goals for Higher Education Chapter 367, Statutes of 2013 (SB 195, Liu) SECTION 1. Article 2.5 (commencing with Section 66010.9) is added to Chapter 2 of Part 40 of Division 5 of Title 3 of the Education Code, to read: Article 2.5. State Goals For California’s Postsecondary Education System 66010.9. The Legislature finds and declares all of the following: (a) Since the enactment of the Master Plan for Higher Education in 1960, California’s system of postsecondary education has provided access and high-quality educational opportunities that have fueled California’s economic growth and promoted social mobility. (b) In today’s global information economy, California’s national and international success as an educational and economic leader will require strategic investments in, and improved management of, state educational resources. (c) Several factors, including changing demographics, rising costs, increased competition for scarce state funding, and employer concerns about graduates’ skills, present new challenges to higher education and state policymakers in effectively meeting the postsecondary education needs of Californians. (d) Although the public segments of postsecondary education have each undertaken efforts to improve reporting and transparency, these efforts do not combine to indicate whether the postsecondary system as a whole is on track to meet the state’s needs. (e) The absence of a common vision and common goals for California’s postsecondary education system hinders the state’s ability to effectively make critical fiscal and policy decisions. (f) Policy and educational leaders should collectively hold themselves accountable for meeting the state’s civic and workforce needs, for ensuring the efficient and responsible management of public resources, and for ensuring that California residents have the opportunity to successfully pursue and achieve their postsecondary educational goals. 66010.91. In order to promote the state’s competitive economic position and quality of civic life, it is necessary to increase the level of educational attainment of California’s adult population to meet the state’s civic and workforce needs. To achieve that objective, it is the intent of the Legislature that budget and policy decisions regarding postsecondary education generally adhere to all of the following goals: (a) Improve student access and success, which shall include, but not necessarily be limited to, all of the following goals: greater participation by demographic groups, including low-income students, www.lao.ca.gov Legislative Analyst’s Office 23 AN LAO REPORT that have historically participated at lower rates, greater completion rates by all students, and improved outcomes for graduates. (b) Better align degrees and credentials with the state’s economic, workforce, and civic needs. (c) Ensure the effective and efficient use of resources in order to increase high-quality postsecondary educational outcomes and maintain affordability. 66010.93. (a) It is the intent of the Legislature that appropriate metrics be identified, defined, and formally adopted for the purpose of monitoring progress toward the achievement of the goals specified in Section 66010.91. It is further the intent of the Legislature that all of the following occur: (1) The metrics take into account the distinct missions of the different segments of postsecondary education. (2) At least six, and no more than 12, metrics be developed that can be derived from publicly available data sources for purposes of periodically assessing the state’s progress toward meeting each of the goals specified in Section 66010.91. (3) The metrics be disaggregated and reported by gender, race or ethnicity, income, age group, and full-time or part-time enrollment status, where appropriate and applicable. (4) The metrics be used for purposes of the requirements of subdivision (a) of Section 69433.2. (5) The metrics take into account the performance measures required to be reported pursuant to Sections 89295 and 92675. (b) It is the intent of the Legislature to promote progress on the statewide educational and economic policy goals specified in Section 66010.91 through budget and policy decisions regarding postsecondary education. It is the intent of the Legislature that the metrics be used to ensure the effective and efficient use of state resources available to postsecondary education. It is further the intent of the Legislature that progress on the adopted metrics be reported and considered as part of the annual State Budget process. 66010.95. For the purposes of this chapter, “segments of postsecondary education” means the California Community Colleges, the California State University, the University of California, independent institutions of higher education, as defined in Section 66010, and private postsecondary educational institutions, as defined in Section 94858. LAO Publications This report was prepared by Paul Golaszewski, and reviewed by Jennifer Kuhn. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 24 Legislative Analyst’s Office www.lao.ca.gov