The 2017-18 Budget: Analysis of the May Revision Education Proposals

The 2017-18 Budget: Analysis of the May Revision Education Proposals MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • MAY 15, 2017 Executive Summary In this report, we analyze the May Revision education proposals. This year, the May Revision departs notably from prior years in that it funds above the required Proposition 98 levels—providing $1.6 billion more than required over the 2015-16 through 2017-18 period. This augmentation, coupled with another $594 million in higher Proposition 98 General Fund support that primarily covers lower property tax estimates, results in schools and community colleges reaping nearly all of the benefit under the May Revision. We analyze this approach and present alternative approaches in the first section of our report. We then analyze other key aspects of the May Revision, including the additional funding provided to accelerate implementation of the Local Control Funding Formula and unpause implementation of the budget agreement on child care and preschool. In the report, we also discuss many other proposals, including those related to community colleges, tuition increases at the universities, Cal Grant award increases, and the recent audit of the University of California. CONTENTS Introduction ................................................................................................................................2 Proposition 98 Overview ...........................................................................................................2 K-12 Education ............................................................................................................................7 Child Care and Preschool .........................................................................................................13 Community Colleges ................................................................................................................17 California State University .......................................................................................................24 University of California ............................................................................................................26 Student Financial Aid ...............................................................................................................29 2017-18 BUDGET INTRODUCTION In this brief, we analyze the Governor’s May for K-12 education, child care and preschool, the Revision education proposals. In the first section, California Community Colleges, the California we review changes in the overall Proposition 98 State University, the University of California, and funding level. In the subsequent sections, we student financial aid. describe and assess the Governor’s major proposals PROPOSITION 98 OVERVIEW Below, we explain, assess, and offer alternatives May Revision, total Proposition 98 funding in to the May Revision Proposition 98 budget package. 2017-18 is $74.6 billion, a $3.2 billion (4.5 percent) increase over the revised 2016-17 level. The May Major Changes Revision also lowers local property tax estimates Relative to Governor’s Budget, May Revision by a total of $664 million across the period, due Increases Proposition 98 Funding by $1.5 Billion primarily to secured property tax collections Over the Period. Figure 1 compares Proposition 98 lagging expectations. Proposition 98 General Fund funding under the Governor’s January budget spending, by contrast, increases $2.2 billion across and May Revision. Compared with January, the the period. May Revision proposes $1.5 billion in additional Administration Proposes to Fund Higher funding across the 2015-16 through 2017-18 Than the Minimum Guarantee Each Year of period ($433 million in 2015-16, $22 million in Period. In most years, the state sets Proposition 98 2016-17, and $1.1 billion in 2017-18). Under the funding equal to the minimum guarantee. The top part of Figure 2 displays our estimate of Figure 1 the minimum guarantee May Revision Increases Proposition 98 Funding under the administration’s Across the Period May revenue projections. (In Millions) If the administration 2015-16 2016-17 2017-18 had funded at these Governor’s Budget levels, Proposition 98 General Fund $48,989 $50,330 $51,351 funding compared with Local property tax 19,681 21,038 22,160 Totals $68,671 $71,368 $73,511 January would have May Revision been approximately General Fund $49,424 $50,602 $52,852 $70 million lower across Local property tax 19,679 20,787 21,749 the period. (Specifically, Totals $69,103 $71,390 $74,601 funding would have been Change General Fund $435 $273 $1,500 $558 million lower in Local property tax -2 -251 -411 2016-17 and $489 million Totals $433 $22 $1,090 higher in 2017-18.) The 2 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Governor, however, Figure 2 proposes to provide May Revision Funds Above the Minimum Guarantee $1.6 billion more than Each Year of Period required across the period. (In Millions) As shown in the bottom 2015-16 2016-17 2017-18 of Figure 2, the May Estimated Minimum Guaranteea Revision funding level General Fund $48,991 $50,023 $52,251 is $433 million above Local property tax 19,679 20,787 21,749 the 2015-16 guarantee, Totals $68,671 $70,810 $74,000 May Revision Proposed Funding $580 million above the General Fund $49,424 $50,602 $52,852 2016-17 guarantee, and Local property tax 19,679 20,787 21,749 $601 million above the Totals $69,103 $71,390 $74,601 2017-18 guarantee. Difference General Fund $433 $580 $601 Funding Above Local property tax — — — Minimum Guarantee Totals $433 $580 $601 Accelerates Maintenance a Assumes the state funds at the level required to meet the minimum guarantee each year. Reflects May Revision estimates of General Fund revenue, local property tax revenue, and other Proposition 98 inputs. Factor Payment. In January, the supplemental appropriation from 2016-17 through administration estimated 2020-21. In the first two years of this period, the the state would end 2017-18 with an outstanding proposal does not have any direct effect on school maintenance factor obligation of $1.6 billion. Under funding. In 2016-17, the law would have required the May Revision, the administration estimates this a supplemental appropriation of $347 million, but amount at $822 million, a decrease of $805 million the May Revision funding level already exceeds from the January level. The main factor explaining this amount by $132 million. In 2017-18, the law this decrease is the proposed increase in ongoing requiring the supplemental appropriation would funding provided by the end of 2017-18. This not be applicable because Test 2 rather than Test 3 additional funding effectively accelerates is operative. In the latter three years of the period, maintenance factor payments. the administration estimates that the proposal Administration Proposes Not Making would reduce required Proposition 98 spending by Statutory Supplemental Appropriation Through $450 million in 2018-19, $290 million in 2019-20, 2020-21. A law enacted in 1990 requires the state and $110 million in 2020-21. to provide a supplemental appropriation when May Revision Eliminates Accounting Shift and Test 3 is operative and the minimum guarantee Payment Deferral. The Governor’s January budget otherwise would grow less quickly than the rest included several proposals to reduce Proposition 98 of the state budget. To date, the state has provided spending in 2015-16 and 2016-17. The largest of this supplemental appropriation six times, with the these proposals involved (1) scoring $324 million amount ranging from $68 million (in 1990-91) to in spending toward 2016-17 instead of 2015-16 and $1.4 billion (in 2001-02). It has notwithstood the (2) deferring an $859 million payment for the Local otherwise required appropriation once (in 1993-94). Control Funding Formula (LCFF) from 2016-17 to The May Revision proposes to not make this 2017-18. The May Revision rescinds both of these www.lao.ca.gov Legislative Analyst’s Office 3 2017-18 BUDGET proposals. For 2015-16, the result, when combined Sets Aside $1.1 Billion Until May 2019 When with several smaller adjustments, is a $433 million State Finalizes 2017-18 Guarantee. The Governor increase in spending relative to the January proposes to make $1.1 billion of the funding budget. For 2016-17, spending is $859 million included in the May Revision contingent on the higher because the state no longer defers the LCFF 2017-18 minimum guarantee meeting projections. payment but $324 million lower because costs are The specific allocations affected by this proposal no longer shifted from 2015-16—for a $535 million include $1 billion in one-time K-12 discretionary net increase. The May Revision, however, includes funding and $124 million in one-time funding a new proposal to reduce spending that counts for community college deferred maintenance. The toward the guarantee. This proposal is to cover Governor proposes to delay the release of the entire $513 million in LCFF costs with a one-time $1.1 billion until May 2019, at which time the state settle-up payment (we describe other changes will finalize its estimate of the 2017-18 guarantee. to the Governor’s settle-up proposal in the next The funding for the two specified programs would paragraph). By making this designation, the state be reduced automatically to the extent the guarantee is able to cover the spending with Proposition 2 falls below the administration’s May Revision funds. Due to these savings, Proposition 98 projections. Although trailer bill language is not spending in 2016-17 is only $22 million above the yet available, we understand that approximately level included in the January budget. 89 percent of any reduction would be applied to Revises Settle-Up Proposal. The state currently the K-12 discretionary grants and 11 percent to owes $1 billion related to meeting the 2009-10, community college deferred maintenance. 2011-12, and 2013-14 minimum guarantees. In Includes Two Major Ongoing Spending January, the administration proposed making an Priorities. The May Revision provides a associated $400 million settle-up payment. The $642 million increase for LCFF, bringing the Governor’s budget designated the funds primarily total LCFF augmentation up from $744 million for one-time discretionary grants, with smaller to $1.4 billion. As described later in this brief, the amounts for the Career Technical Education (CTE) administration estimates that this augmentation Incentive Grant program and community college would allow the state to fund 97 percent of the deferred maintenance. The May Revision increases formula’s target level. The May Revision also the proposed settle-up payment to $603 million. includes an additional $160 million in unallocated Of this amount, the administration designates base funding for the community colleges, bringing $513 million for covering LCFF costs in 2016-17, the total unallocated apportionment increase up with the remainder allocated for the CTE Incentive from $24 million to $184 million. Grant and guided pathways initiative. (Currently, Assessment the available trailer legislation reflects the allocations for LCFF and the CTE program but not Increase in Proposition 98 General Fund guided pathways.) The administration still funds Nearly Equals Increase in State Tax Revenue. As community college deferred maintenance and mentioned above, compared with the Governor’s one-time discretionary grants but intends to do so January budget, the May Revision increases using Proposition 98 funds that count toward the Proposition 98 General Fund spending by 2017-18 minimum guarantee, as discussed below. $2.2 billion across the period. By comparison, it increases its estimate of General Fund tax revenue 4 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET by $2.4 billion over the period. That is, the increase the state to adjust reserved school funding without in Proposition 98 General Fund spending is nearly making reductions to LCFF or other ongoing equal to the increase in state revenue. school programs. We think this is a particularly Funding Above Minimum Guarantee important issue for 2017-18, as our revenue Increases Future Funding Requirements. Under estimates already have the guarantee below the the May Revision, Proposition 98 funding by the May Revision estimate. One benefit of reserving a end of the period is $601 million higher than if small portion of Proposition 98 funding is that it the state had funded at the minimum guarantee sends a clear signal to schools about how the state each year. Under Proposition 98, the formulas for is likely to respond in the event that revenues do calculating the minimum guarantee generally build not match budget projections. In some prior years, upon the level of funding provided in the previous the state has dealt with revenue declines through a year. As a result, the May Revision commits the range of mid-year actions including deferrals, fund state to a higher funding level not only in the swaps, cuts to specific programs, cuts across the budget period, but also in subsequent years. Higher board, and other actions, sometimes on relatively minimum guarantees in the out-years would short notice. The contingency proposal reduces the tend to make the state budget more difficult to likelihood that the state needs to make retroactive balance, especially during economic slowdowns adjustments. We also note that many variations of and recessions. Higher Proposition 98 guarantees the Governor’s basic proposal could be considered. also reduce funding available for the state’s For example, the state could change the amount of non-Proposition 98 priorities. funding subject to the contingency proposal as well Contingency Proposal Helps Protect Against as the date on which it releases funds. Downside Risk in 2017-18. In developing Not Automatically Providing Statutory its estimate of the 2017-18 guarantee, the Supplemental Appropriation Provides Legislature administration assumed that per capita General With More Budget Flexibility in Future Years. Fund revenue would grow 4.7 percent. Compared Not providing the supplemental appropriation with the administration, our revenue estimates could lead to somewhat slower growth in school are about $1 billion higher in 2016-17 but funding in future years. Under the Governor’s $160 million lower in 2017-18, yielding a growth multiyear estimates, Test 3 is operative from rate of 3.9 percent. Using the lower growth rate, 2018-19 through 2020-21 and supplemental the 2017-18 minimum guarantee is roughly payments are required all three years. Though $500 million lower than the administration’s supplemental payments otherwise would be estimate. Under the administration’s contingency required under the administration’s May revenue proposal, the state automatically would reduce K-12 projections, many other economic scenarios are discretionary funding by about $450 million and possible and some have different implications. For community college deferred maintenance funding example, if state revenue were to come in higher by about $50 million to align Proposition 98 than projected, Test 2 might become operative and funding with the lower minimum guarantee. the Test 3 supplemental appropriation would be Proposal Is One Reasonable Planning Option. irrelevant. On the other hand, if the state entered The administration’s contingency proposal is one a recession, the size of the supplemental payment way the state can provide a cushion in the event otherwise required could be even larger. For state of an economic slowdown or downturn, allowing budgeting purposes, not automatically providing www.lao.ca.gov Legislative Analyst’s Office 5 2017-18 BUDGET the supplemental appropriation could provide some increase identified in state revenue. In building its additional flexibility, which would be particularly budget, the Legislature may prefer to fund at a level helpful during tight fiscal times. Such an approach different from what the Governor proposes. Below, would give the Legislature more options for we first discuss the trade-offs involved in funding at balancing the budget while still preserving its or above the minimum guarantee. Next, we discuss ability to provide any amount of funding on top of an alternative that would free up funding for the minimum guarantee. other state priorities. Under the alternative, school LAO Estimates of Property Tax Revenue funding would be above the minimum guarantee Slightly Above May Revision Estimates. Compared but below the May Revision Proposition 98 level. with the administration’s estimates of property tax Lastly, we review two key budget dynamics that revenue, our estimates are $96 million (0.5 percent) will affect the Legislature’s decisions. higher in 2016-17 and $169 million (0.8 percent) Funding at Minimum Guarantee Would higher in 2017-18. Differing assumptions about Free Up General Fund but Require Accounting the revenue associated with the dissolution of Adjustments. One alternative is for the Legislature redevelopment agencies explain most of this to fund at the revised estimates of the minimum difference. Specifically, we assume that a somewhat guarantee each year, consistent with its traditional larger share of the revenue allocated to these budgetary practice. Since the minimum guarantee former agencies is available for distribution to across the entire period is similar to January schools, colleges, and other local governments, estimates, this approach would result in schools whereas the administration assumes that debts and receiving about the same funding as in the other obligations will erode more of the available Governor’s January budget. It would require the revenue. In 2017-18, an additional difference is Legislature to adopt some accounting changes, our assumption about assessed property values. potentially using more settle-up funding (which Whereas we estimate that assessed values will grow we discuss further below), shifting costs from by 5.6 percent, the administration estimates growth an accounting perspective among years, and/or of 5.3 percent. reinstating a deferral. Such retroactive adjustments are relatively common budget practice. Since Alternatives 1988, the state has revised Proposition 98 funding Weighing Proposition 98 and downward after the adoption of the budget act Non-Proposition 98 Priorities Typically Starting about half of the time and upward half of the Point in Building Overall Budget Package. Every time. The downward revisions have involved year the Legislature decides how to weigh its myriad actions, including payment deferrals, Proposition 98 and non-Proposition 98 budget accounting shifts, fund swaps, and mid-year cuts. priorities. Most years the administration and Funding at the minimum guarantees across the the Legislature use the Proposition 98 minimum period would free up $1.6 billion General Fund guarantee as their starting point in making this for non-Proposition 98 programs and/or higher decision. This May Revision is unusual because it discretionary state reserves. proposes to fund a total of $1.6 billion above the Other Alternative Could Free Up Funding for minimum guarantees across the 2015-16 through Rest of Budget While Still Funding Schools Above 2017-18 period, providing schools with most of the the Guarantee. If the Legislature wanted to fund 6 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET above the minimum guarantee but lower than the Revision Proposition 98 funding level. The state May Revision Proposition 98 level, one budget also could consider using settle-up payments to option would be to make a larger school settle-up free up any lesser amount of funding for the rest payment. Under such an approach, the state could of the budget, thereby keeping total Proposition 98 score some spending in 2015-16 and 2016-17 that funding closer to the May Revision level. exceeds the minimum guarantees as settle-up Key Budget Dynamics to Consider. As the payments. It would count the higher settle-up Legislature goes about evaluating various options payments toward its Proposition 2 debt payments, for funding Proposition 98, we encourage it to keep and replace a like amount of other Proposition 2 two specific factors in mind: debt payments included in the May Revision. From • Decisions About Funding Levels in the state’s perspective, using settle-up payments 2015-16 and 2016-17 Have Cumulative has the benefit of reducing dollar-for-dollar its Effects. Given that the minimum guarantee ongoing Proposition 98 costs. From a Proposition generally builds upon the level of funding 2 perspective, the state continues to pay down provided in the prior year, a decision to the same amount of debt, though the higher fund above the minimum guarantee in settle-up payment means that some other debt 2015-16 could be magnified three-fold must be paid down less quickly. Relative to the across the period. That is, to the extent the May Revision proposal, we estimate that the state state funds above the 2015-16 guarantee, it could use settle-up payments to free up as much as also increases the guarantees for 2016-17 $1 billion for its priorities across the period (about and 2017-18. Similarly, funding above the half of this amount would be one-time and half 2016-17 guarantee increases the 2017-18 would be ongoing). From schools’ perspective, guarantee by a roughly similar amount. only the accounting of the money would change in 2016-17, with no effect on their programs or • The 2017-18 Funding Level Affects Future their cash situation. Lowering the amount that Budgets. Looking beyond the immediate counts toward the minimum guarantee in 2016-17, budget period, the 2017-18 spending level however, would lower the 2017-18 guarantee. If the determines the state’s ongoing Proposition entire $1 billion in settle-up were used in 2016-17, 98 commitment, affecting the state’s ability we estimate the 2017-18 the minimum guarantee to balance the budget in the future. would be about $500 million lower than the May K-12 EDUCATION K-12 Proposition 98 Funding Up $1.3 Billion May Revision, total Proposition 98 funding for Across Period. Figure 3 (see next page) compares K-12 education in 2017-18 is $66 billion, reflecting total K-12 funding under the Governor’s an increase of $2.9 billion (4.4 percent) over the January budget with the May Revision. The May revised 2016-17 level. Proposition 98 funding per Revision provides an additional $1.3 billion in student is $11,080, an increase of $490 (4.4 percent) Proposition 98 funding for K-12 education across over the revised 2016-17 level. Below, we describe the 2015-16 through 2017-18 period. Under the and assess the May Revision proposals for K-12 www.lao.ca.gov Legislative Analyst’s Office 7 2017-18 BUDGET education agencies (LEAs) Figure 3 until May 15, 2019. At that Comparing K-12 Proposition 98 Funding Under time, the administration Governor’s Budget and May Revision would only allocate the (Total Funding in Millions) amount required to meet 2015-16 2016-17 2017-18 the revised estimate of January Budget the 2017-18 minimum General Fund $43,686 $44,887 $45,886 Local property tax 17,052 18,236 19,200 guarantee. As proposed Totals $60,738 $63,122 $65,087 in January, LEAs could Studentsa 5,971,343 5,958,933 5,958,288 use the funds for any Dollars per student $10,171 $10,593 $10,924 education purpose, but the May Revision administration encourages General Fund $44,040 $45,114 $47,178 Local property tax 17,048 18,035 18,858 the funds be used for Totals $61,088 $63,148 $66,036 deferred maintenance, Students 5,971,790 5,962,962 5,960,101 professional development, Dollars per student $10,229 $10,590 $11,080 and implementation of Change the Common Core State General Fund $354 $227 $1,292 Local property tax -4 -201 -343 Standards, among other Totals $350 $26 $949 priorities. If an LEA has Students 447 4,029 1,813 outstanding mandate Dollars per student $58 -$3 $156 backlog claims, the a Reflects average daily attendance. funding would be scored against those claims. education. We discuss preschool changes in the Increases LCFF Funding by $642 Million. next section. This increase brings the total LCFF augmentation Major Spending Changes to $1.4 billion. Under the May Revision, LCFF is funded at 97 percent of the full implementation Figure 4 summarizes May Revision spending cost. By comparison, the January budget funded changes for K-12 education in 2017-18. Below, we 96 percent of the full implementation cost. (The describe the most notable of these changes. full implementation cost of LCFF has increased Increases One-Time Discretionary Funding by $73 million since January—the net effect of by $725 Million. The Governor’s January budget the inflation rate increasing from 1.48 percent to included $283 million for one-time discretionary 1.56 percent, partly offset by a slight decline in per-student grants to schools. The May Revision projected attendance.) provides an additional $725 million, bringing total one-time discretionary funding up to Other Changes $1 billion. Consistent with the January proposal, Requires K-12 High Speed Network (HSN) to the administration proposes to distribute the Fund Operations From Grant Balance, Allows $1 billion based on student attendance, with the It to Spend Down Reserve on Internet Upgrades. rate increasing to $169 per student (up from $48 per The state contracts with Imperial County Office of student in January). The administration indicates Education to administer HSN, which coordinates the funding would not be allocated to local 8 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Figure 4 2017-18 K-12 Proposition 98 Changes (In Millions) Governor’s May Budget Revision Change 2016-17 Revised Spending $63,122 $63,148 $26 Technical Adjustments Make LCFF adjustments $65 $157 $92 Make other adjustments 190 135 -55 Adjust categorical programs for changes in attendance -9 -6 2 Revise estimate of energy efficiency funds 24 -23 -47 Subtotals ($270) ($263) (-$8) Policy Adjustments Increase LCFF funding $744 $1,387 $642 Provide discretionary one-time funding — 1,012 1,012 Augment State Preschool Program 24 151 128 Provide COLA for select categorical programsa 58 61 3 Add mandated reporter training to mandates block grant 8 8 — Support SCROC — 4 4 Develop electronic LCAP templateb — — — Defer payments from June to July 2017 859 — -859 Subtotals ($1,694) ($2,624) ($931) Total Changes $1,964 $2,887 $923 2017-18 Proposed Spending $65,087 $66,036 $949 a Applies to special education, child nutrition, services for foster youth, adults in correctional facilities, and American Indian education. COLA increased from 1.48 percent under the Governor’s Budget to 1.56 percent under the May Revision. b May Revision includes $350,000 for this purpose. LCFF = Local Control Funding Formula; COLA = cost-of-living adjustment; SCROC = Southern California Regional Occupational Center; and LCAP = Local Control and Accountability Plan. Internet services to schools. The Governor proposes education toward a diploma to high school students to replace $8 million in ongoing Proposition 98 and adults. The Governor proposes to provide funding for HSN in 2017-18 with $8 million from $10 million over four years to SCROC—$4 million the Broadband Infrastructure Improvement in 2017-18, $3 million in 2018-19, $2 million Grant (BIIG) fund balance. (The 2015-16 Budget in 2019-20, and $1 million in 2020-21. The Act included $50 million for HSN to administer administration indicates that the allocation is to BIIG, a program designed to help schools upgrade aid the center as it “transitions” to a fee-supported their Internet infrastructure such that they could model under the LCFF. The administration administer online tests.) The Governor also adds indicates the proposed augmentation in 2017-18 is expenditure authority to allow HSN to spend intended to return SCROC’s budget to its 2012-13 $2.5 million of its operating reserve for Internet level. The budget bill language places no restrictions infrastructure upgrades at certain county offices of or conditions on the funds. education that could benefit from faster speeds. Adds New Mandate to K-12 Mandates Provides $10 Million Over Four Years to Block Grant With No Additional Funding. The Southern California Regional Occupational May Revision adds the California Assessment of Center (SCROC). The SCROC is an education Student Performance and Progress (CAASPP) center in Torrance that provides CTE and mandate to the K-12 mandates block grant, with no www.lao.ca.gov Legislative Analyst’s Office 9 2017-18 BUDGET associated increase in funding. The Commission Assessment and Recommendations on State Mandates determined that compliance Below, we assess the May Revision proposals with the minimum technology requirements of for K-12 education and provide associated new statewide exams constituted a reimbursable recommendations. Figure 5 summarizes these mandate. This includes the costs of purchasing new recommendations. devices, maintaining sufficient Internet speeds, Consider Balance of One-Time and Ongoing and conducting related administrative tasks. LEAs Spending. In recent years, the state has dedicated participating in the block grant would no longer most new ongoing Proposition 98 funds to be able to submit claims for reimbursement of the furthering implementation of LCFF, while still CAASPP mandate. dedicating some funds to one-time initiatives. The Creates Competitive Grant Program for May Revision takes a somewhat similar approach Educator Recruitment and Support. The May but places even more emphasis on one-time Revision repurposes $11 million in federal Title spending—dedicating more than $1 billion for II local assistance funding for a new competitive one-time discretionary grants for schools. In grant program that would assist LEAs with developing its final budget package, the Legislature attracting and supporting the development of likely will want to consider the trade-offs of educators in high-need subjects and schools. dedicating increases to one-time grants versus The program would be administered by the LCFF. Whereas increasing LCFF funding Commission on Teacher Credentialing (CTC) and particularly helps schools serving a large share of the California Center on Teaching Careers, an disadvantaged students and accelerates progress entity created by the state in 2016-17 to conduct a toward full implementation, providing one-time statewide teacher recruitment campaign. per-pupil grants benefits all schools equally. Such Increases Maximum Charter School Facility an approach can be particularly beneficial as Grant. The Governor’s January budget included all districts are experiencing increases in their $112 million for the Charter School Facility Grant pension costs. The one-time grants, if linked to program, which helps certain charter schools cover a contingency plan, also would better position the costs of renting or leasing instructional facilities. the state to accommodate a drop in the 2017-18 The May Revision makes no change to funding for the minimum guarantee. program but proposes trailer bill language increasing Use One-Time Funding to Strategically Retire the maximum grant amount. Currently, qualifying Mandate Backlog. Regardless of the exact amount charter schools can receive grants equating to either the final budget package dedicates to one-time $750 per student or 75 percent of their annual facilities funding, we continue to recommend the state costs, whichever is lower. The $750 per-student link such funding to a strategic plan to retire the amount has not been updated since the program was K-12 mandate backlog. Even though the May created in 2001. The Governor proposes to increase Revision proposes considerable one-time funding, the per-student amount to $1,236 in 2017-18, an it does not take such an approach. By distributing increase the administration considers commensurate discretionary funding purely based on attendance, with inflation since 2001. The Governor also proposes we estimate less than 30 percent ($298 million) of to apply the statutory K-12 cost-of-living adjustment the $1 billion included in the May Revision would (COLA) to the maximum per-student grant amount reduce the mandate backlog. This is because more in subsequent years. than half of LEAs have no outstanding claims 10 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET and the claims for other LEAs vary widely on a Adopt HSN May Revision Proposal but per-student basis. We estimate continuing to use Consider Legislative Role in Infrastructure a per-student approach to retire the entire backlog Upgrades Moving Forward. We recommend would cost $173 billion—nearly 200 times more the Legislature adopt the May Revision proposal than the backlog. We recommend the Legislature requiring HSN to fund operations out of the use one-time funding to more strategically retire remaining BIIG fund balance because virtually the mandate backlog. Under our recommended all schools can administer online tests and approach, all districts could receive funding but $20 million still remains in the fund. We also districts with outstanding claims would need to recommend the Legislature adopt the May agree to write off their existing claims. Revision proposal allowing HSN to spend down Figure 5 Summary of K-12 Education Recommendations Program May Revision Proposal LAO Recommendation K-12 discretionary funding/ Increases by $725 million one time (raising Modify. Link additional one-time discretionary mandates backlog total increase to $1 billion). grants to a strategic plan to pay off remainder of K-12 mandates backlog. LCFF for school districts Increases by $642 million ongoing (raising Adopt. Additional funding accelerates LCFF total increase to $1.4 billion). implementation. K-12 High Speed Network (HSN) Removes $8 million in ongoing Proposition 98 Adopt. $20 million remains in BIIG fund funding for HSN’s operations and requires balance and virtually all schools now can program to fund operations from Broadband administer online tests. Moving forward, the Infrastructure Improvement Grant (BIIG) fund Legislature may wish to consider whether balance. Allows HSN to spend $2.5 million it wants a more active role in reviewing and of operational reserves toward Internet approving infrastructure projects. infrastructure upgrade projects. Southern California Regional Provides SCROC $10 million Proposition 98 Reject. Like all other career technical Occupational Center (SCROC) General Fund over four years: $4 million in education programs, SCROC has had four 2017-18, $3 million in 2018-19, $2 million in years to transition to new funding model. 2019-20, and $1 million in 2020-21. SCROC already has committed to maintaining career technical education programming until 2020-21. CAASPP Mandate Adds mandate to K-12 mandates block grant Modify. Add mandate and $25 million to block with no additional funding. grant. Shift $12.8 million from assessments item into block grant. Educator recruitment and support Repurposes $11 million in Title II funds for a Modify. Adopt funding level but narrow the grants new competitive grant program. scope of grants and award to appropriate agency. Charter School Facility Grant Increases grant amount from $750 to $1,236 Modify. If desire is to use K-12 COLA, Program per student and applies COLA to amount in change per-student grant to $1,117 (rather subsequent years. Recipients receive lesser than $1,236). Could explore using another of this amount or 75 percent of their facilities inflationary index. cost. LCAP electronic template Provides $350,000 to develop an electronic Adopt. Electronic template would streamline LCAP template for school districts to use in process for districts to develop and publish developing and sharing their LCAPs. LCAPs. LCFF = Local Control Funding Formula; CAASPP = California Assessment of Student Performance and Progress; and LCAP = Local Control and Accountability Plan; and COLA = cost-of-living adjustment. www.lao.ca.gov Legislative Analyst’s Office 11 2017-18 BUDGET part of its operating reserve on planned Internet costs ($25 million) as well as a shift into the infrastructure upgrades. We recommend, however, mandates block grant of apportionment funding that the Legislature consider whether it would ($12.8 million) currently provided to cover other like a more active role in reviewing and approving administrative costs related to these exams. infrastructure projects in the future. Concerns With Educator Recruitment and Special Treatment for SCROC Problematic, Support Grant Proposal. Although state spending Recommend Rejecting Proposal. In 2015-16, on educator recruitment and support could have SCROC enrolled roughly 2,000 high school benefits, the May Revision proposal lacks detail students and 1,000 adults and its operating budget and fails to identify a specific policy problem or was $5 million. Of this amount, 50 percent came objective. If the Legislature wishes to repurpose from six school districts who pay fees for their high existing federal Title II monies, we recommend school students to take SCROC classes, 30 percent it identify a specific problem and clear associated came from the CTE Incentive Grant, 15 percent program objectives, operate the program through came from fees it charged adult students, and the the agency that conducts similar activities, and remaining 5 percent came from other sources. Like develop ways to measure and monitor the outcomes all other CTE programs, SCROC has had four years of the program. to negotiate with the districts it serves to transition Recommend Adjusting Charter School to a fee-supported model, and half of its budget Facility Grant Amount. We think an award equal already comes from K-12 fees. At this point, we see to 75 percent of a charter school’s facility costs no statewide benefit for providing a special state represents a sensible balance between providing appropriation to help SCROC return to its funding state support while still ensuring these schools have level from more than five years ago. Moreover, as a an incentive to keep their costs low (as they must condition of receiving CTE Incentive Grant funds, pay the remaining costs). We also think capping SCROC committed to maintaining K-12 CTE support at a specified dollar amount is sensible, programming until 2020-21 and having a plan to as it prevents the state from subsidizing even sustain its program once the grant funds expired. 75 percent of unnecessarily expensive facilities. For these reasons, we recommend the Legislature Given the state has not adjusted per-student rates reject the proposal and instead require SCROC since 2001, we think raising them is reasonable. and its member districts to manage their program The May Revision, however, miscalculates the locally and honor their commitment to maintain increase to the per-student grant if the intent is their CTE programs. to update it using the statutory K-12 COLA (as Add CAASPP Mandate and $25 Million, indicated in trailer bill language). Using that index, Along With Shifting Associated Apportionment the per-student grant would be $1,117—$119 lower Funding, Into the K-12 Mandates Block Grant. As than the May Revision level. If the Legislature we discussed in The 2017-18 Budget: Proposition 98 desired to update the index using the statutory Education Analysis, we recommend adding the K-12 COLA, we recommend it set the new rate at CAASPP mandate into the K-12 mandates block $1,117. Alternatively, the Legislature could explore grant. However, we also recommend increasing using another inflationary index that better reflects block grant funding by $37.8 million. This amount increases in leasing costs. includes our estimate of the mandate’s annual 12 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET CHILD CARE AND PRESCHOOL Child Care and Preschool Funding Up a 7 percent increase from the revised 2016-17 Notably From Governor’s January Budget. level. In this section, we describe and assess Compared to the Governor’s January budget, the the May Revision proposals for child care and May Revision includes $198 million in additional preschool programs, including the California funding for subsidized child care and preschool Work Opportunity and Responsibility to Kids programs. Of this amount, $151 million is from (CalWORKs) child care programs, non-CalWORKs Proposition 98 General Fund and $54 million is programs, the California State Preschool Program, from non-Proposition 98 General Fund. These and Transitional Kindergarten. increases are offset by an $8 million reduction in Major Changes federal funding. The May Revision augmentation brings total 2017-18 funding for child care and As Figure 6 shows, when combined with the preschool programs to $4 billion, reflecting increase included in the Governor’s January budget, Figure 6 2017-18 Child Care and Preschool Changes (In Millions) Governor’s May Budget Revision Change Reimbursement Rates Increases Standard Reimbursement Rate (SRR) 6 percent starting July 1, 2017 — $93 $93 Increases SRR to cover full-year cost of rate increase adopted in 2016-17 — 68 68 Annualizes Regional Market Rate (RMR) increase initiated January 1, 2017 $57 57 — Increases RMR to the 75th percentile of the 2016 regional market survey starting — 42 42 January 1, 2018a Annualizes 5 percent license-exempt rate increase initiated January 1, 2017 11 11 — Subtotals ($68) ($270) ($202) Preschool Slots Annualizes State Preschool slots initiated April 1, 2017 $24 $24 — Provides 2,959 full-day State Preschool slots at LEAs starting April 1, 2018 — 8 $8 Subtotals ($24) ($31) ($8) Caseload Changes Adjusts Transitional Kindergarten for changes in attendance and LCFF rates $8 $31 $23 Makes statutory adjustment to non-CalWORKs slotsb -7 -7 — Makes CalWORKs caseload and average cost of care adjustments -11 -76 -64 Subtotals (-$11) (-$52) (-$41) Other Adjustments Provides 1.56 percent COLA to certain child care and preschool programs — $29 $29 Removes one-time funding -$7 -7 — Subtotals (-$7) ($21) ($29) Totals $73 $271 $198 a Includes a temporary hold harmless provision so that no provider receives less in 2017-18 than it received in 2016-17. b Reflects 0.4 percent decrease in the birth-through-four population. LEA = local education agency; LCFF = Local Control Funding Formula; and COLA = cost-of-living-adjustment. www.lao.ca.gov Legislative Analyst’s Office 13 2017-18 BUDGET the May Revision designates $271 million for action also included a hold harmless additional child care and preschool spending. Below, provision, effective until July 1, 2018, that we describe the most notable May Revision changes. ensured no providers received rates below Adds $210 Million Above January Level to 2015-16 levels.) Implement Components of Multiyear Budget • Adds 2,959 LEA State Preschool Slots Agreement. For 2017-18, the multiyear child Starting April 1, 2018. The May Revision care and preschool budget agreement assumed includes $8 million Proposition 98 General (1) annualization of the rate and slot increases Fund for this purpose. initiated part way through 2016-17, (2) an additional 2,959 State Preschool slots, and (3) an Includes $29 Million to Provide 1.56 Percent $86 million increase in rates. The January budget COLA to Non-CalWORKs Child Care Programs. included funding to implement a portion of the Whereas the Governor’s January budget included first component of the agreement—annualizing no COLA for any child care or preschool programs, some rate increases and preschool slots. The the May Revision funds the statutory COLA for May Revision includes the following actions to most programs. Of the associated $29 million implement the remaining components of the deal: augmentation, $24 million is to further increase the SRR (which applies to State Preschool and • Increases Standard Reimbursement General Child Care programs), $4 million is for the Rate (SRR) 11 Percent Above Effective Alternative Payment program, and $346,000 is for 2016-17 Rate. The May Revision provides Resource and Referral agencies and Local Planning $68 million to increase the SRR by 5 percent. Councils. (Even though the intent of this proposal Reduces CalWORKs Child Care Spending by is to annualize the cost of a rate increase $64 Million From January Level to Reflect Revised approved in 2016-17, the augmentation Caseload and Average Cost of Care Estimates. The effectively results in a 5 percent May Revision is based on updated data regarding year-over-year rate increase due to how CalWORKs child care caseload and the types of last year’s rate increase was implemented.) care families select. (Changes in types of care used On top of this 5 percent increase, the affect the average cost of care, independent from May Revision includes $93 million for an the rate increases described above.) Of this amount, additional 6 percent SRR increase. $44.8 million is due to a net decrease of 4,866 cases • Increases Regional Market Rate (RMR) to across all three CalWORKs stages. (Stage 1 75th Percentile of 2016 Market Rate Survey and Stage 2 are down a combined 4,928 cases, Beginning January 1, 2018. The May with Stage 3 up by 62 cases.) The remaining Revision includes $42 million to increase $19.6 million reduction is due to lower average cost the RMR and hold child care providers of care estimates. harmless if the new rates are lower than Modifies Proposals to Align State Preschool current levels. The hold harmless provision and Transitional Kindergarten. The May Revision would be effective until January 1, 2019. modifies two of the Governor’s January proposals (The 2016-17 budget plan increased rates intended to help align the state’s developmental to the 75th percentile of the 2014 survey programs for four-year olds. In January, the beginning January 1, 2017. This earlier Governor proposed to exempt any State Preschool 14 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET program operating in facilities constructed recommendations. Figure 7 summarizes these according to the state’s K-12 building standards recommendations. from the state’s preschool licensing requirements. No Major Concerns With SRR and COLA The May Revision delays implementation of this Proposals. We have no concerns with the May proposal until 2018-19. In January, the Governor Revision SRR proposal, as it adheres to the also proposed allowing State Preschool classrooms multiyear budget agreement. We also have no taught by a teacher with a Multiple Subject major concerns with funding the statutory COLA Teaching Credential to operate with an adult- for most child care and preschool programs. to-child ratio of 1:12 (rather than the 1:8 ratio Hold Harmless Provision Continues to currently required). Under the revised proposal, Disconnect Rates From Child Care Market. Hold these teachers also would be required to have harmless provisions (1) allow some families to completed 24 units of early education coursework access a larger share of the child care market than or comparable experience. others and (2) reimburse some child care providers at rates higher than the 75th percentile of their Assessment and Recommendations regional markets. By adding a new hold harmless Below, we assess the May Revision child care provision (in addition to the existing hold harmless and preschool proposals and provide associated provisions), the Governor’s proposal exacerbates Figure 7 Summary of Child Care and Preschool Recommendations Issue May Revision Proposal LAO Recommendation Standard Reimbursement Rate Provides $161 million to increase SRR by total of Adopt. May Revision proposal implements (SRR) 11 percent beginning July 1, 2017. budget agreement. Regional Market Rate (RMR) Provides $42 million to increase RMR to the Modify. Reject hold harmless provision. With 75th percentile of the 2016 regional market freed up funding, consider adding new slots or survey beginning January 1, 2018. Includes hold increasing all rates to a higher percentile of the harmless provision. 2016 regional market survey. Cost-of-Living Adjustment Includes $29 million to provide COLA for non- Adopt. May Revision proposal funds statutory (COLA) CalWORKs child care and preschool programs. COLA. State Preschool Slots Provides $8 million for 2,959 full-day State Modify. Allow both LEAs and non-LEAs to Preschool slots at LEAs, beginning April 1, 2018. apply for additional full-day State Preschool slots. CalWORKs Child Care Reduces funding by $64 million due to changes Modify. Adopt LAO caseload and average in caseload and average cost of care. cost of care estimates for CalWORKs Stage 2. Results in $15 million non-Proposition 98 General Fund savings. Quality Improvement Activities Does not include sufficient funding to meet Modify. Increase quality improvement federal spending requirement on quality spending by $7 million to meet federal improvement activities. requirement. Add to recommended county- level quality improvement block grant. State Preschool and Makes modest changes to January preschool Reject. Take holistic rather than piecemeal Transitional Kindergarten alignment proposals. approach to fixing poorly designed system. Alignment LEA = local education agency. www.lao.ca.gov Legislative Analyst’s Office 15 2017-18 BUDGET the inequities in access and reimbursement rates Authorizing slots to non-LEAs, however, would across the state. We recommend the Legislature increase the state’s non-Proposition 98 General adopt a rate policy that does not include additional Fund costs, if implemented the same as in the hold harmless provisions. past few years. Based on current practice, the cost Consider Other Options for Promoting Access. of full-day programs at LEAs is entirely funded At the 75th percentile of the most recent survey, within Proposition 98, whereas 38 percent of the families in all areas of the state would have access cost of full-day programs at non-LEAs is covered by to the vast majority of child care providers in their non-Proposition 98 General Fund. (Part-day slots area. Rather than giving families in a few areas for LEAs and non-LEAs are funded entirely within even more access by adopting a new hold harmless Proposition 98.) provision, the Legislature could consider various Governor Likely Overestimates Cost of other options for expanding access more rationally CalWORKs Stage 2. The May Revision assumes throughout the state. One option that would 52,913 cases in CalWORKs Stage 2 in 2017-18, cost the same as the May Revision hold harmless about 3 percent above CDE’s most recent 2016-17 provision would be to fund about 2,000 additional estimates. We estimate Stage 2 caseload in 2017-18 Alternative Payment slots and distribute them to be 1,200 below the administration’s estimate, based upon each region’s share of the unserved roughly flat compared to CDE’s most recent 2016-17 eligible population. Alternatively, if the Legislature estimates. Our projection is based on recent data is interested in dedicating all additional funding showing the number of families entering Stage 2 is to rate increases, it could increase the RMR to a roughly the same as the number of families exiting higher percentile of the regional market survey. We the program. We also estimate the average annual estimate increasing the RMR to the 77th percentile Stage 2 cost of care will be $9,431—$71 less per case of the 2016 survey without a hold harmless than the Governor assumes in the May Revision. provision would cost roughly the same as the May As a result of our caseload and cost of care Revision proposal. Both alternatives would remove estimates, we project CalWORKs Stage 2 child care existing inequities and ensure families across the costs to total $488 million—$15 million lower than state have access to the same share of their local the May Revision estimates. Recognizing these child care providers. savings would free up non-Proposition 98 General New Preschool Slots at LEAs Likely to Go Fund spending that could be used to fund full-day Unused. The Legislature has authorized an State Preschool slots at non-LEAs, other legislative additional 8,789 full-day State Preschool slots for priorities, or an increase in the state’s discretionary LEAs over the last two years—5,830 in 2015-16 reserves. and 2,959 in 2016-17. Based on the most recent May Revision Does Not Include Sufficient information provided by the California Department Funding to Meet Federal Spending Requirement of Education (CDE), only 2,714 of these slots have for Quality Improvement Activities. As a condition been awarded for full-day programs at LEAs. The of receiving federal funds for child care and remaining funding has been awarded to LEAs preschool, California is required to spend a certain and non-LEAs for part-day slots or remains percentage of federal funds and a state match on unallocated. We recommend the Legislature make activities to improve quality. Based on the most funds available to all State Preschool providers, not recent information from the federal government, only LEAs, to ensure slots are used as intended. we estimate California will be required to spend 16 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET $85 million on quality improvement activities in block grant under our recommendation up to 2017-18. The May Revision includes $78 million $28 million). for these activities—$7 million less than the Continue to Have Overarching Concerns federal requirement. To remain compliant with With Preschool Alignment Proposals. As we the federal rules, we recommend the Legislature discussed in our March report, we have concerns increase spending on quality improvement that the Governor’s alignment proposals add activities by $7 million. As we discussed in our greater complexity to the existing system without March report, The 2017-18 Budget: Analysis of Child providing substantial alignment between State Care and Preschool Proposals, we recommend the Preschool and Transitional Kindergarten. The Legislature combine seven of the state’s existing May Revision makes minor improvements to these quality improvement programs into a county- proposals but does not address our core concerns. level block grant that could be used for a variety We continue to recommend the Legislature not of improvement activities. We recommend the take time to tweak a poorly designed system but $7 million augmentation be added to the county- instead take a more holistic approach to aligning level block grant (bringing the size of the total State Preschool and Transitional Kindergarten. COMMUNITY COLLEGES Community College Figure 8 Funding Up $219 Million Comparing CCC Proposition 98 Funding Across Period. Figure 8 Under Governor’s Budget and May Revision compares total funding for (Total Funding in Millions) the California Community 2015-16 2016-17 2017-18 Colleges (CCC) under the Governor’s Budget Governor’s January budget General Fund $5,304 $5,443 $5,465 with the May Revision. Local property tax 2,630 2,803 2,959 The May Revision provides Totals $7,933 $8,246 $8,424 an additional $219 million FTE students 1,145,637 1,156,810 1,168,379 Dollars per FTE student $6,925 $7,128 $7,210 in Proposition 98 funding May Revision for community colleges General Fund $5,384 $5,489 $5,674 across the 2015-16 through Local property tax 2,631 2,753 2,891 2017-18 period. Under Totals $8,016 $8,242 $8,565 the May Revision, total FTE students 1,137,619 1,152,708 1,154,917 Dollars per FTE student $7,046 $7,150 $7,416 Proposition 98 funding Change for community colleges General Fund $81 $46 $209 in 2017-18 is $8.6 billion, Local property tax 2 -50 -68 reflecting an increase of Totals $83 -$4 $141 $324 million (4 percent) FTE students -8,018 -4,102 -13,462 Dollars per FTE student $121 $22 $206 over the revised 2016-17 FTE = full-time equivalent. level. Proposition 98 funding per full-time www.lao.ca.gov Legislative Analyst’s Office 17 2017-18 BUDGET equivalent (FTE) student is $7,416, an increase of operating expenses for retirement benefits, facility $267 (4 percent) over the revised 2016-17 level. maintenance, professional development, full-time Below, we describe and assess the May Revision faculty, and other general expenses. Colleges could proposals for community colleges. use these funds for any purpose. Provides Additional $92 Million for Deferred Major Spending Changes Maintenance. Of this amount, $49.5 million comes Figure 9 summarizes 2017-18 spending changes from Proposition 98 funds and $42.6 million from for the community colleges. The three major settle-up funds. (The Governor’s budget already May Revision changes are: (1) providing a larger had included $43.7 million in settle-up funds for unallocated base increase, (2) increasing deferred deferred maintenance, bringing total associated maintenance funding, and (3) reducing enrollment settle-up funds to $86.3 million. Since release of the growth funding. May Revision, the administration has indicated its Provides Additional $160 Million intent to use the $86.3 million in settle-up funds for Unallocated Base Increase. Together with a portion of the guided pathways initiative and to the $24 million proposed in January, the fund deferred maintenance entirely from within the unallocated apportionment funding increase 2017-18 Proposition 98 minimum guarantee. The would total $184 million. The Governor proposes administration indicates this shift is necessary to the augmentation in recognition of increased implement its Proposition 98 contingency proposal. Figure 9 2017-18 CCC Proposition 98 Changes (In Millions) Governor’s May Budget Revision Change 2016-17 Revised Spending $8,246 $8,242 -$4 Technical Adjustments Remove one-time spending -$177 -$177 — Other technical adjustments -35 -84 -$49 Subtotals (-$212) (-$260) (-$49) Policy Adjustments Provide unallocated base increase $24 $184 $160 Fund guided pathways initiative (one time) 150 150 — Increase COLA from 1.48 percent to 1.56 percenta 98 102 4 Reduce enrollment growth from 1.34 percent to 1 percent 79 58 -22 Fund deferred maintenance (one time) — 50 50 Fund Innovation Awards (one time) 20 20 — Augment Online Education Initiative 10 10 — Fund integrated library system (one time) 6 6 — Increase Full-Time Student Success Grant 3 5 2 Subtotals ($390) ($584) ($194) Total Changes $179 $324 $145 2017-18 Spending $8,424 $8,565 $141 a Applied to appportionments, Extended Opportunity Programs and Services, Disabled Students Programs and Services, CalWORKs student services, and support for certain campus child care centers. COLA = cost-of-living adjustment. 18 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Under that proposal, the bulk of these funds would because some grant recipients end up qualifying for be set aside as a reserve to be allocated in May 2019 the award in only one term. Were the maximum after determining the revised 2017-18 Proposition 98 award not to be increased, the administration minimum guarantee.) The funding provided for estimates that the program would yield notable deferred maintenance could be used for facility savings from its current budgeted funding level. maintenance and repairs, water conservation The May Revision also makes a small upward projects, and replacement of instructional equipment adjustment to expected participation in 2017-18. and library materials. The Chancellor would Adjusts 2015-16 Apportionment Funding. allocate these funds to colleges on the basis of FTE The May Revision makes two notable changes to enrollment. 2015-16 apportionment funding: Reduces Enrollment Growth Estimate for • Adjusts Unused Prior-Year Enrollment 2017-18 by $22 Million. The May Revision reduces Growth. In January, the administration enrollment growth in 2017-18 from 1.34 percent to estimated $56 million in unused 2015-16 1 percent, for savings of $22 million relative to the growth and reduced funding accordingly. Governor’s budget. The proposed reduction stems Final attendance reports indicate only from recent attendance reports showing systemwide $30 million went unused. The May enrollment has slowed in 2016-17. Despite this Revision adds back $26 million. slowing, the May Revision does not reduce 2016-17 enrollment growth funding. The May Revision • Increases General Fund Support to includes new provisional language to permit the Reach Target Proposition 98 Spending Chancellor’s Office to allocate unused 2017-18 Level. For 2015-16, the May Revision growth funding to backfill any unanticipated has an overall Proposition 98 spending shortfalls in apportionments (such as a shortfall due level that is notably above the Governor’s to lower-than-expected local revenues). January budget. To help reach the higher spending level, the May Revision provides Other Spending Changes an additional $32 million in General Provides $3.7 Million to Cover Higher Fund support previously associated with COLA. The May Revision increases the COLA for a property tax backfill. It also provides apportionments and select categorical programs an additional $23 million in General from 1.48 percent to 1.56 percent based on updated Fund support formerly associated with data. adjustments of $16 million to property Provides $1.9 Million Net Increase to tax revenue and $7 million to student fee Full-Time Student Success Grant Program. The revenue. The combined General Fund May Revision increases funding for supplemental increase of $55 million is to be distributed awards for full-time community college students to colleges on a FTE student basis for any who are Cal Grant B or C recipients. The proposal locally determined, one-time purpose. raises the maximum annual award amount from Provides Additional State Operations $600 to $700. The administration expects that Funding. The May Revision rescinds the Governor’s the increase in the maximum award would raise January proposal to provide an additional the average award from $515 to $600. The average $378,000 non-Proposition 98 General Fund and annual award is less than the maximum award authority for two new vice chancellor positions. www.lao.ca.gov Legislative Analyst’s Office 19 2017-18 BUDGET It replaces this proposal with an increase of Authorizes Chancellor’s Office to Require $618,000 non-Proposition 98 General Fund, Additional Information From Colleges. The $454,000 in reimbursements, and authority for six proposed trailer bill language authorizes the new positions. The General Fund portion would Chancellor’s Office to develop an application support two additional information technology for the program or require a college to submit specialists and an administrator to oversee guided information to assess the college’s commitment to pathways implementation. In addition, it would guided pathways. It also authorizes the Chancellor’s provide funding to fill an existing vacant executive Office to set criteria for releasing funding in stages position to serve as a second deputy chancellor. based on a participating college’s progress toward The reimbursement authority would support two implementing guided pathways. research specialists and an attorney. All three of Clarifies Reporting Requirements. The these staff would provide fee-based services to proposed trailer bill language requires the colleges, districts, and external researchers. Chancellor’s Office to develop indicators for Provides $1.8 Million for Equal Employment measuring early outcomes of guided pathways. It Opportunity. The May Revision provides also requires that a summary of each participating $1.8 million from a special fund to promote college’s progress based on these indicators be equal opportunity in hiring and promotion at included in the final annual report (due 2022). community college districts. Other Policy Changes Changes to Guided Pathways Proposal Gives Colleges More Time to Use Innovative In January, the Governor proposed a one-time Apprenticeship Grants. The May Revision $150 million program to help community would extend by two years the encumbrance and colleges develop a “guided pathways” approach to expenditure period for grants awarded in 2015-16 improving student outcomes. The May Revision and 2016-17 under the California Apprenticeship maintains the same level of funding but proposes Initiative. Typically, state agencies have a total of several changes to specific components of the three years to encumber and spend appropriations. original proposal. Under the May Revision, the period would be Authorizes Expenditure Over Five Years. extended to five years for this program. The The May Revision includes provisional language Department of Finance has indicated that it likely authorizing the expenditure of funds until would continue this practice for apprenticeship June 30, 2022. grants in the future through provisional language Clarifies Definition of Guided Pathways in the budget. The purpose of this change is to and Suggested Use of Funds. The administration allow more time to implement and pilot new modifies its proposed trailer bill language to apprenticeship programs, which may require include a more specific definition of a guided complex agreements among employers and pathways program based on the definition in use by education providers. the California Guided Pathways Project, a privately Creates Exemption From Competitive Bidding funded initiative administered by the CCC Rules. Sometimes the Chancellor’s Office contracts Foundation. The modified language also suggests with a community college district to perform how colleges could use state funds provided for the certain services on behalf of the CCC system. The program. 20 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET May Revision exempts the Chancellor’s Office from in unused enrollment growth funding for the competitively bidding new district contracts of current year. The Legislature could redirect this $20 million or less, as well as all district renewal funding to deferred maintenance or other one-time contracts. Nearly all existing district contracts fall Proposition 98 priorities. (We have no concerns under the $20 million threshold and thus would be with the administration’s enrollment funding affected by the proposal. Under the May Revision adjustment for 2015-16, as it aligns with final proposal, the Board of Governors would continue attendance reports.) to review and approve all CCC contracts. Recommend Approving Increase in Full-Time Student Success Grant. As noted in our recent Assessment and Recommendations report, Creating a Debt Free College Program, many Below, we assess the May Revision proposals community college students have considerable for community colleges and provide associated unmet financial need. Receiving more financial recommendations. Figure 10 (see next page) aid could allow some students to reduce the summarizes these recommendations. number of hours they work per week, thereby Recommend Designating Portion of making full-time enrollment more manageable. Additional Funding for Apportionments. Given Full-time enrollment is associated with better cost pressures on community college districts student outcomes, including higher completion and the availability of additional Proposition 98 rates and less time to degree. For these reasons, we funding at the May Revision, we think providing recommend approving the proposed augmentation. additional funding for apportionments is Given the proposed increase in the maximum reasonable. Providing more general purpose annual award is small ($100), the impact on student funding would increase budget flexibility for behavior, however, also is likely to be small. districts as they work to meet state and local Revenue-Related Adjustments to 2015-16 priorities. Should Conform to Overall Proposition 98 Recommend Funding Deferred Maintenance. Package. The May Revision proposals to restore Given CCC has a substantial backlog of deferred the local revenue backfill and rescind January maintenance, we recommend providing additional adjustments for higher revenue from property funding to reduce the backlog. taxes and student fees are unrelated to changes Recommend Lowering Enrollment Growth in revenue estimates. Instead, they are related to Estimate for 2017-18. Based on updated attendance the Governor’s Proposition 98 funding target for reports, we believe a systemwide enrollment 2015-16. Whether to approve these adjustments will growth target of 1 percent is more reasonable depend on the Legislature’s overall decision about than the higher January proposal of 1.34 percent. its target Proposition 98 funding level in 2015-16. Attendance data show roughly two-thirds of Recommend Modifying Guided Pathways districts have been experiencing enrollment Language. We believe the May Revision declines in recent years, with roughly one-third of modifications to the guided pathways initiative are districts still continuing to grow. modest improvements from the Governor’s January Recommend Reducing 2016-17 Enrollment proposal. In particular, we believe the addition of a Funding. Based on recent attendance reports, we more specific definition of guided pathways, early estimate the state will have at least $50 million outcome indicators, and authorization to use the www.lao.ca.gov Legislative Analyst’s Office 21 2017-18 BUDGET funds over five years are constructive changes. The the desired improvements. As discussed below, we proposal does not, however, go far enough toward have several remaining concerns and recommend increasing the likelihood that funding results in certain associated changes. Figure 10 Summary of CCC Recommendations Program May Revision Proposal LAO Recommendation General purpose apportionment Increases by $160 million ongoing. Adopt. Colleges can use flexible funds to meet funding highest priorities. Deferred maintenance and Provides additional $92 million one time, Adopt. Addressing CCC’s deferred instructional equipment bringing total to $136 million one time. maintenance backlog is a high state priority for one-time funding. Enrollment growth Lowers 2017-18 growth rate from 1.34 percent Adopt. Based on recent attendance reports, to 1 percent and reduces by $22 million. 1 percent is a more reasonable estimate. Authorizes allocation of unused amount to backfill apportionment shortfalls. Makes no change to 2016-17. Modify. Reduce funding by $50 million to reflect updated attendance reports and redirect funds to deferred maintenance or other high one-time priorities. Revises 2015-16 upward by Adopt. Reflects updated attendance reports. $26 million to reflect smaller enrollment decline than expected. Full-Time Student Success Increases by $1.9 million to raise award by Adopt. Community college students have Grants $100 per year (for new maximum award of significant unmet financial need. $700) and increases caseload estimate. 2015-16 apportionment increases Increases 2015-16 funding by a total of Conform to Proposition 98 Package. $55 million to reach higher Proposition 98 Spending level in 2015-16 will need to conform spending level. to overall budget package. No major underlying programmatic issues. Guided pathways Makes various policy changes. Modify. Adopt proposed changes but increase amount designated for state-directed technical assistance to participating colleges and strengthen accountability requirements. State operations Provides additional state operations funding Adopt. CCC and DOF staffing review indicates and positions. additional data, technology, research, institutional effectiveness, and legal services support warranted. Equal Employment Provides $1.8 million from EEO Fund (one Adopt. Uses special fund balance for Opportunity (EEO) time). authorized purposes. Apprenticeships Provides colleges two additional years Adopt. We have no concerns about this to use 2015-16 and 2016-17 California proposal. Apprenticeship Initiative grants. Contracts Exempts certain contracts from competitive Modify. Exempt contract renewals, but not new bidding. Applies only to contracts between contracts. Chancellor’s Office and colleges. 22 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET • Decentralized Approach. As we noted purposes. The aim of guided pathways is in The 2017-18 Budget: Higher Education to make strategic changes ensuring those Analysis, existing large-scale guided ongoing efforts are as effective as possible. pathways initiatives in other states have • Applicant Screening and Award retained all funding centrally to provide Payments. The May Revision authorizes expertise, professional development, and but does not require that the Chancellor technical assistance to colleges. They conduct more thorough screening of have not funded colleges directly. The applicants and set progress criteria for Governor’s January and May proposals, releasing funds. We recommend these in contrast, give at least 90 percent of the components be made requirements. funding to colleges and set aside only up to 10 percent for centralized support. Recommend Approving New State Operations Such a decentralized approach risks Proposal. The May Revision proposal stems from shortchanging colleges on the professional a comprehensive organizational review of the development and technical assistance Chancellor’s Office conducted over several months component. We think setting aside at least by its staff and the Department of Finance. The 35 percent of the funding for centrally review indicates additional staffing is warranted in coordinated technical assistance teams the Technology, Research, and Information Systems would very likely improve implementation Division and the Office of the General Counsel. In efforts. The central funds also could be addition, if the Legislature approves the Governor’s used for collecting and monitoring of data guided pathways proposal, the additional position on early outcome indicators, as well as in the Institutional Effectiveness Division also providing feedback and support to colleges. will be warranted. Given identified workload and existing staffing, we believe the proposed allocation • Scope of Implementation for Participating of General Fund support for three new positions Colleges. The proposal continues to lack and an existing vacant position, supplemented clarity as to whether a participating college by reimbursement authority for three additional must work toward creating pathways for all positions, is reasonable. entering students, or could instead create Other Recommendations. We have no a more limited program for a subset of concerns about the Governor’s Equal Employment students. Opportunity funding proposal. It uses special funds for authorized purposes. We also have no • Use of Funds. Although the proposed list of concerns about the Governor’s proposal to give potential uses for program funds is a good apprenticeship grant recipients additional time to start, we recommend adding that these use funding. Finally, we recommend modifying one-time funds may not be used to provide the May Revision proposal on district contracts to direct services to students or fund other exempt only contract renewals from competitive ongoing operational costs. The state already bidding requirements. provides significant funding for these other www.lao.ca.gov Legislative Analyst’s Office 23 2017-18 BUDGET CALIFORNIA STATE UNIVERSITY California State University (CSU) Funding Up this reduction results from two adjustments. From January Levels by $121 Million, Primarily Under the May Revision, CSU receives an Due to Recognizing Tuition Increase. The top unrestricted base increase of $153 million rather part of Figure 11 compares state General Fund than $157 million. (This $4 million drop could be and tuition revenue for CSU under the Governor’s framed in many ways, including being conveyed January budget and May Revision. Under the May as an adjustment to reflect higher Cal Grant costs Revision, combined CSU funding from the two due to CSU’s tuition increase. The administration, sources is $121 million (2 percent) higher than in however, links the drop to its proposal to keep the Governor’s January budget. This consists of private Cal Grant awards at their current level $135 million in higher tuition revenue offset by a rather than cutting them as previously scheduled.) $15 million decline in state General Fund support. The May Revision also adjusts CSU’s General Fund As compared with the revised 2016-17 level, CSU support downward by $11 million to reflect recently funding in 2017-18 is $247 million (4 percent) revised state contribution rates for CSU pensions. higher. Under the May Revision, CSU’s combined Provides $2 Million From Transportation General Fund and tuition revenue reaches Special Fund. Pursuant to Chapter 5 of 2017 (SB 1, $6.8 billion in 2017-18. Below, we describe and Beall), the May Revision appropriates $2 million assess the May Revision proposals for CSU. from the State Transportation Fund to CSU for transportation research and transportation-related Spending Changes workforce training and education. Revises Base General Fund Increase Downward by $15 Million. As Figure 12 shows, Figure 11 Changes in General Fund and Tuition Revenue for the Universities (In Millions) 2017-18 Year-to-Year 2015-16 2016-17 Governor’s May Change at Revised Revised Budget Revision Change May Revision California State University General Fund Ongoing $3,271 $3,479 $3,714 $3,699 -$15 $220 One time 5 110 1 1 — -109 Subtotals ($3,276) ($3,589) ($3,715) ($3,700) (-$15) ($112) Tuition and fees $3,022 $2,963 $2,963 $3,098 $135 $135 Totals $6,298 $6,552 $6,678 $6,799 $121 $247 University of California General Fund Ongoing $3,135 $3,279 $3,362 $3,358 -$4 $79 One time 124 262 169 169 — -93 Subtotals ($3,259) ($3,541) ($3,531) ($3,527) (-$4) (-$14) Tuition and fees $4,087 $4,393 $4,548 $4,623 $74 $229 Totals $7,346 $7,934 $8,079 $8,150 $70 $216 24 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Figure 12 2017-18 California State University General Fund Changes (In Millions) Governor’s May Budget Revision Change Unrestricted base increases (ongoing) Funding per Governor’s original long-term plan $131 $127 -$4 Redirected savings from Middle Class Scholarship modifications 26 26 — Subtotals ($157) ($153) (-$4) Pension adjustment (ongoing) $50 $39 -$11 Retiree health benefits adjustment (ongoing) 23 23 — Lease-revenue bond debt service adjustment (ongoing) 5 5 — Remove one-time funding provided in prior year -87 -87 — Other adjustments -22 -22 — Total Changes $126 $112 -$15 Assessment and Recommendations as higher health care premiums for employees), and (3) $75 million for the system’s Graduation The top part of Figure 13 (see next page) Initiative (primarily to make available more courses summarizes our recommendations for CSU, which to current students). CSU has indicated that we discuss below. without additional funding from the state (beyond Under May Revision, CSU Has Sizeable the amount proposed in the May Revision), it does Unrestricted Base Increase. In March 2017, the not intend to fund enrollment growth in 2017-18. CSU Board of Trustees approved a tuition increase Recommend Approving May Revision for resident and nonresident students. This Funding Level but Setting Expectation for increase, which is scheduled to take effect in fall Enrollment Growth. In The 2017-18 Budget: 2017, will generate net revenue of about $95 million Higher Education Analysis, we note that CSU has in 2017-18 ($135 million in gross revenue less about reported denying admission in recent years to some $40 million that CSU intends to use for tuition eligible transfer students. Given this development, discounts and waivers for certain students). When together with statute that requires CSU to prioritize combined with the $153 million unallocated transfer applicants, we continue to recommend ongoing General Fund augmentation included in the Legislature signal to CSU that increasing the May Revision, CSU would have $248 million transfer enrollment is a priority. The Legislature (4 percent) in additional unrestricted base resources could send this signal by adopting provisional in 2017-18 compared with the current year. language that sets an enrollment target for new Administration Does Not Earmark Any transfer students. An expectation of 2 percent of Increase for Enrollment Growth. CSU has enrollment growth in the budget year would result indicated that it intends to use the additional in about 7,200 more FTE transfer students being unrestricted monies to address a number of its served, which we estimate would allow CSU to priorities, including using (1) $139 million to accommodate all or virtually all transfer applicants fund collective bargaining agreements that were in 2017-18. Under our recommendation, costs for approved by the Board of Trustees last spring, CSU to serve these students, which we estimate (2) $26 million to cover basic cost increases (such www.lao.ca.gov Legislative Analyst’s Office 25 2017-18 BUDGET Figure 13 Summary of University Recommendations Issue May Revision Proposal LAO Recommendation California State University Unrestricted base Reduces General Fund base increase from Modify. Approve May Revision increase $157 million to $153 million. Recognizes base increase. Coupled with 5 percent tuition increase. Places no tuition increase, funding sufficient conditions on funding. to cover core costs. Add budget bill language specifying enrollment target for new transfer students. Transportation research Provides $2 million from transportation Adopt. Implements recently special fund for transportation research. chaptered legislation. University of California Unrestricted base Reduces General Fund base increase from Modify. Approve May Revision increase $81 million to $77 million. Recognizes base increase. Coupled with 2.5 percent tuition increase. tuition increase, funding sufficient to cover core costs. Add budget bill language specifying 2018-19 enrollment target. Conditions placed on Makes $50 million of UC’s base Modify. Adopt specified conditions portion of base increase increase contingent on implementing but conduct additional legislative recommendations made by the State oversight of UC’s budget. Auditor, increasing transfer enrollment, and piloting activity-based costing at three campuses. Transportation research Provides $5 million from transportation Adopt. Implements recently special fund for transportation research. chaptered legislation. Breast cancer research Increases January proposal by $2.1 million Adopt. Reflects updated revenue from breast cancer research special fund. estimates. Tobacco disease-related Increases proposed Proposition 56 funding Adopt. Reflects updated revenue research by $1.2 million and Proposition 99 funding estimates. by $3,000. at about $60 million (after factoring in about its assessment practices and make available more $20 million in net tuition revenue generated by course slots by reducing excess units, we believe the additional students), likely would come at the CSU can make significant progress on improving expense of CSU’s Graduation Initiative. Given the student outcomes without funding set aside for the opportunities we have identified for CSU to reform Graduation Initiative in the budget year. UNIVERSITY OF CALIFORNIA Funding for the University of California (UC) Governor’s January budget and May Revision. Under Higher Than January Level by $70 Million. The the May Revision, combined UC funding from the bottom part of Figure 11 (page 24) compares state two sources is $70 million (1 percent) higher than General Fund and tuition revenue for UC under the reflected in the Governor’s budget. This amount 26 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET consists of $74 million in higher gross tuition revenue, Conditions a Portion of State Funding on UC offset by a $4 million decline in state General Fund Meeting Three Expectations. The May Revision support. As compared with the revised 2016-17 level, conditions $50 million of the base General Fund UC funding in 2017-18 is $216 million (3 percent) increase on UC meeting three expectations, as higher. Under the May Revision, UC’s combined described below. If the Department of Finance General Fund and tuition revenue reaches $8.2 billion deems UC to have met the conditions, it would in 2017-18. Below, we describe and assess the May release the $50 million in May 2018. Revision proposals for UC. • State Auditor Recommendations. In an April 2017 report, the State Auditor identified Spending Changes a number of problems with the UC Office Revises Base General Fund Increase of the President (UCOP), including the Downward by $4 Million. As Figure 14 shows, office’s staffing size and costs, spending on the May Revision includes an unrestricted systemwide programs, and overall budget. base increase for UC of $77 million rather than The Auditor’s report included dozens of $81 million proposed in January. (As we note recommendations designed to enhance in the “California State University” section, the transparency, operational performance, administration links this drop to its private Cal and state oversight. The Auditor called for Grant award proposal, though the decrease could these recommendations to be implemented be framed in many other ways.) In addition to the over a three-year period (between April $77 million base increase, the Governor continues 2018 and April 2020). The May Revision his January expectation regarding Proposition 56 would link budget-year funding with funding. Under his proposal, he would use UC’s implementation of the April 2018 $50 million in Proposition 56 monies designated recommendations. for graduate medical education to free up a like amount of General Fund that UC currently • Transfer Enrollment. The May Revision spends for those purposes. Taken together, these also expects all but two campuses (Merced actions would effectively provide the university and San Francisco) to enroll at least system with a total base General Fund increase of one new transfer student for every two $127 million. new freshman students for the 2018-19 academic year. That is, at least one-third of Figure 14 2017-18 University of California General Fund Changes (In Millions) Governor’s May Budget Revision Change Pay down unfunded pension liability (one time) $169 $169 $0 Unrestricted base increase (ongoing) 81 77 -4 Resume funding for medical education program (ongoing) 2 2 — Remove one-time funding provided in prior year -262 -262 — Total Changes -$10 -$14 -$4 www.lao.ca.gov Legislative Analyst’s Office 27 2017-18 BUDGET each campus’s new resident undergraduate for total combined funding of $92 million. The enrollment would need to be transfer proposals reflect updated revenue estimates in each students. This target is intended to align fund. Additionally, pursuant to Chapter 5 of 2017 with policies called for in the 1960 Master (SB 1, Beall), the Governor proposes appropriating Plan for Higher Education. In 2015-16, $5 million from the State Transportation Fund to 31 percent of UC’s incoming resident UC for transportation research. undergraduates were transfer students. Assessment and Recommendations • Activity-Based Costing. The May The bottom part of Figure 13 (page 26) Revision’s final condition is for UC to pilot summarizes our recommendations for UC, which activity-based costing at three campuses. we discuss below. The purpose of activity-based costing is to May Revision Funding Sufficient to Cover identify program- and course-level costs of UC’s Core Costs. As we noted in The 2017-18 providing instruction and other services to Budget: Higher Education Analysis, the Governor’s students. Currently, one pilot is underway January proposal, coupled with UC’s adopted at the Riverside campus, and two campuses tuition increases and other sources of new (Merced and Davis) have completed revenue, sufficiently covers UC’s core costs in the scoping studies for pilot programs. budget year. Because overall proposed funding While the first expectation reflects the State for the university system is virtually unchanged Auditor’s recent findings, the other two from January, we do not have concerns with expectations (transfer enrollment and activity- the May Revision funding level. We continue to based costing) reflect goals UC previously recommend, however, that the Legislature adopt committed to achieve in a May 2015 agreement resident enrollment targets in the budget act for with the Governor. the 2018-19 academic year. (The state already has Recognizes Tuition Increase. In late January, funded enrollment growth for the 2017-18 academic the UC Regents adopted a tuition level of $11,502, year, and we recommend it wait to fund 2018-19 a $282 (2.5 percent) increase over the 2016-17 level. enrollment until 2018-19.) UC estimates this increase will generate $74 million Shared Interest in Implementing Auditor’s in additional revenue, of which $26 million will Recommendations. The State Auditor’s April 2017 be redirected for financial aid. The May Revision report includes a number of recommendations recognizes this increase. (UC also adopted designed to improve transparency and 5 percent increases in the Student Services Fee accountability at UCOP, including (1) developing and nonresident supplemental tuition, which the a budget display that shows all actual and planned Governor’s January budget recognized.) spending, (2) adopting a formal reserve policy, and Includes Several Special Fund Revisions. The (3) developing a comprehensive list of systemwide May Revision includes the following special fund initiatives. We share the administration’s goals revenue adjustments: (1) a $2.1 million adjustment of ensuring UC meaningfully implements these for breast cancer research, for total funding of recommendations. $7.2 million, and (2) a $1.2 million combined Recommend Legislature Adopt May Revision increase in Proposition 56 and Proposition 99 Conditions of Funding and Conduct Oversight funding for tobacco-related disease research, Hearings. Given the general concerns regarding 28 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET the recent audit and UC’s previous commitments Legislature conduct oversight hearings throughout to attain specified transfer ratios and implement next year on key issues of interest. For example, activity-based costing, we think the Governor’s it might hold an oversight hearing to learn more proposed conditions are reasonable. We note, about UCOP’s staffing size and costs. To the extent however, that the language gives the Governor UC does not meet legislative expectations, the authority to determine whether UC has satisfied Legislature will have the opportunity to respond each expectation. To ensure UC also is responsive through the budget process next year. to legislative priorities, we recommend the STUDENT FINANCIAL AID Student Financial Aid Funding Up Under May May Revision, total funding for CSAC in 2017-18 is Revision. Figure 15 compares total funding for $2.2 billion, reflecting an increase of $109 million the California Student Aid Commission (CSAC) (5 percent) over the revised 2016-17 level. Below, we under the Governor’s January budget and May describe and assess the May Revision proposals for Revision. Funding in 2017-18 is up $114 million CSAC. compared with the Governor’s budget. Under the Figure 15 California Student Aid Commission Budget (In Millions) 2017-18 Year-to-Year 2015-16 2016-17 Governor’s May Change at Revised Revised Budget Revision Change May Revision Expenditures Local Assistance Cal Grants $1,861 $1,986 $1,986 $2,109 $123 $124 Middle Class Scholarships 44 74 74 64 -10 -10 Assumption Program of Loans for Education 14 10 7 7 1 -3 Chafee Foster Youth Program 11 14 14 14 — — Student Opportunity and Access Program 8 8 8 8 — — National Guard Education Assistance 2 2 2 2 — — Awards Other Programsa 1 1 1 1 — — Subtotals ($1,941) ($2,095) ($2,093) ($2,206) ($113) ($111) State Operations $14 $17 $14 $15 $1 -$2 Totals $1,955 $2,112 $2,107 $2,221 $114 $109 Funding General Fund $1,419 $1,163 $1,153 $1,078 -$75 -$85 Federal TANF 521 926 926 1,120 194 194 Otherb 16 23 29 23 -6 — a Includes Cash for College, Child Development Teacher and Supervisor Grants, Graduate Assumption Program of Loans for Education, John R. Justice Program, Law Enforcement Personnel Dependents Scholarships, and State Nursing Assumption Program of Loans for Education for Nursing Faculty. b Includes College Access Tax Credit Fund, Student Loan Authority Fund, and other federal funds. TANF = Temporary Assistance to Needy Families. www.lao.ca.gov Legislative Analyst’s Office 29 2017-18 BUDGET Spending Changes The reduction conforms to updated estimates of the resources available in the special fund. Adjusts Cal Grant Funding Based on Updated Provides CSAC With Authority to Offer More Participation Estimates. The May Revision Initial Competitive Cal Grant Awards. The May decreases Cal Grant funding by $56 million in Revision proposes to allow CSAC to make 35,000 2015-16 and increases it by $33 million in 2016-17 initial competitive Cal Grant award offers in and $72 million in 2017-18 to reflect updated Cal 2017-18. It makes no changes, however, to funding Grant participation estimates. or to the maximum authorized number of new Increases Cal Grant Award Amounts for paid awards (25,750). The proposal maintains the Students Attending CSU and UC. The May current-law requirement that CSAC make half Revision includes $49 million for higher Cal Grant of its award offers in March and the other half in costs for students attending CSU ($28 million) and September. CSAC reports that the competitive UC ($21 million). These changes conform to CSU’s Cal Grant has a utilization rate of 96 percent and UC’s scheduled tuition increases (5 percent annually. The administration indicates that to use and 2.5 percent, respectively). Cal Grant awards 100 percent of funding and allow more students to cover full tuition costs at CSU and UC (with the receive awards earlier in the year, CSAC would like exception of some first-year students). a statutory change explicitly allowing it to make a Maintains Cal Grant Award Amount for larger number of additional initial Cal Grant offers. Private, Nonprofit Schools but Establishes Decreases Middle Class Scholarship Funding Conditions. The Governor’s January budget scored Based on Updated Participation Estimates. savings due to a statutorily scheduled decrease The May Revision reduces funding for Middle in the Cal Grant award for low-income students Class Scholarships in 2017-18 by $10 million attending private, nonprofit schools. Specifically, (bringing total funding down from $74 million to the award is set to decrease from $9,084 to $8,056, $64 million). The reduction reflects a decline in beginning in 2017-18. The May Revision provides participation estimates. In addition, the Governor $8 million relative to the Governor’s budget reduces the scholarship by $4.5 million in 2015-16 to maintain the award at its existing level. The to conform with updated participation estimates administration proposes to eliminate any future (bringing the total down from $48 million to scheduled reduction in the award. As a condition $44 million in that year). The May Revision makes of receiving the $1,028 differential, however, the no change to the Governor’s January proposal to Governor proposes that institutions benefitting phase out the Middle Class Scholarship over the from the award enroll more low-income students, next four years. enroll more transfer students, and offer more Small Adjustments to Other Financial online courses. Aid Programs. The May Revision makes small Reduces Cal Grant B Supplement. The May adjustments in participation and award amounts Revision adjusts funding for the Cal Grant B to several other financial aid programs, including supplement downward by $5.6 million. The the Assumption Program of Loans for Education supplement provides additional funding to all (APLE), the State Nursing Assumption Program Cal Grant B recipients based on the amount of of Loans for Education (SNAPLE), the Child funds annually deposited in the College Access Tax Development Teacher and Supervisor Grant Credit Fund. The reduction lowers the per-award Program, the John R. Justice Loan Assumption supplement from $49 to $24—a decrease of $25. 30 Legislative Analyst’s Office www.lao.ca.gov 2017-18 BUDGET Program, and the Law Enforcement Personnel adopt the same policy as back then, we calculate Dependent Grant Program. the private, nonprofit Cal Grant award amount Provides Funding for IT Project Planning. (or aspirational goal) would be $16,510. By not The May Revision includes $546,000 in one-time lowering the award amount, as proposed in the funding for CSAC to continue working on May Revision, the award amount would be closer replacing its online grant delivery system. CSAC to this aspirational goal. Though we think setting uses its grant delivery system to process financial the award amount no lower than its existing rate aid applications, make aid offers, and process is reasonable, we have concerns with placing payments. The project currently is moving through conditions on the awards. To date, the state has the California Department of Technology’s “Project not placed unique conditions on private, nonprofit Approval Lifecycle” process. Most state IT projects Cal Grant awards (apart from institutional are required to go through this four-stage planning eligibility criteria relating to graduation rates and process. The CSAC project currently is in stage two student loan default rates, which also apply to of the process. Of the proposed $546,000, $296,000 UC and CSU campuses). Adding such conditions is to allow CSAC to continue contracting with an therefore would reflect a substantial policy external project management team and $250,000 change. If the Legislature wishes to place special is for required contracting with the Department of stipulations on private, nonprofit Cal Grant awards, Technology. we believe this is better done as part of a broader Increases Temporary Assistance for Needy policy making process, whereby clear objectives, Families (TANF) Support, Decreases General performance measures, and enforcement Fund Support Accordingly. The May Revision mechanisms could be established. increases federal TANF support by $194 million Reject Proposal to Provide CSAC With and decreases state General Fund by that amount. Authority to Offer More Initial Competitive This fund swap has no programmatic effect. Cal Grant Awards. Current law places no cap on the number of awards CSAC may offer annually. Assessment and Recommendations Thus, CSAC does not need legal authority to offer As Figure 16 shows (see next page), we more awards. If the Legislature is concerned that a recommend adopting most of the financial aid 96 percent utilization rate is too low or that some proposals in the May Revision. Below, we assess students are receiving awards too late in the year, and provide recommendations for two proposals it could explore policy responses to those specific for which we have concerns. problems. For example, to increase the utilization Recommend Maintaining Private, Nonprofit rate, the Legislature could establish a process for Cal Grant Award at Existing Level but Rejecting allowing CSAC to run a deficiency request if it paid Proposed Conditions as Part of Budget Closeout. out slightly more than the maximum allowable We continue to recommend that the Legislature number of new awards. Under this approach, establish a statutory policy for private Cal Grant the Legislature might set a cushion of 2 percent, awards similar to the one in effect prior to 2000. thereby allowing CSAC to run over the cap by This policy linked the private award to costs and about 500 awards and still be funded for those tuition at UC and CSU. If the Legislature were to awards. www.lao.ca.gov Legislative Analyst’s Office 31 2017-18 BUDGET Figure 16 Summary of Financial Aid Recommendations Program May Revision Proposal LAO Recommendation Cal Grants Participation Decreases by $56 million in 2015-16, Adopt. Conforms with updated participation increases by $33 million in 2016-17, and estimates. increases by $72 million in 2017-18. Awards for students at UC and CSU Increases by $49 million ($21 million UC Adopt. Conforms with UC and CSU tuition and $28 million CSU). increases. Awards for students at private, Provides $8 million to maintain award at Modify. Adopt funding level but reject nonprofit schoolsa $9,084 (rather than reducing to $8,056 as conditions without prejudice. Could consider previously scheduled). Links the $1,028 any new conditions as part of developing a difference in award amount to three statutory policy on private, nonprofit awards. conditions (enrolling more low-income students, enrolling more transfer students, and offering more online courses). Cal Grant B supplement from Decreases by $5.6 million (reducing the Adopt. Conforms with updated estimates of College Access Tax Credit Fund award supplement from $49 to $24). available resources. Initial offers for competitive awards Provides CSAC authority to make 35,000 Reject. Does not address root issue. initial award offers in 2017-18 but continues to fund 25,750 new awards. Other Middle Class Scholarships Decreases by $4.5 million in 2015-16. Adopt. Conforms with updated participation Decreases by $10 million in 2017-18. estimates. Grant Delivery System Provides $546,000. Adopt. Allows CSAC to continue IT project Modernization Project planning. Temporary Assistance for Needy Increases federal TANF support by Adopt. Reflects fund swap and has no Families (TANF) $194 million, with a corresponding programmatic effect. decrease in General Fund support of that amount. Other financial aid programsb Adjusts for changes in participation and Adopt. Conforms with updated estimates. award amounts. a Also applies to for-profit institutions that are accredited by the Western Association of Schools and Colleges. b Applies to Assumption Program of Loans for Education (APLE), State Nursing Assumption Program of Loans for Education (SNAPLE), Child Development Teacher and Supervisor Grant Program, John R. Justice Loan Assumption Program, and Law Enforcement Personnel Dependent Grant Program. CSAC = California Student Aid Commission and IT = information technology. LAO Publications This brief was prepared by the Education Unit of the Legislative Analyst’s Office (LAO). The LAO is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This brief 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. 32 Legislative Analyst’s Office www.lao.ca.gov