The 2019-20 Budget: Hastings College of the Law

The 2019-20 Budget: Hastings College of the Law GABRIEL PETEK LEGISLATIVE ANALYST APRIL 2019 In this brief, we provide background on the Hastings College of the Law (Hastings), then describe the Governor’s proposed budget for the law school and the school’s proposed spending plan. Next, we provide our assessment of Hastings’ budget and offer associated recommendations. Background Hastings Is a Law School Affiliated Figure 1 With the University of California (UC). The Hastings’ Funding Primarily law school’s primary mission is to instruct Comes From Student Tuition Revenue students pursuing a juris doctor degree. In $58 Million Ongoing Funds in 2018-19 2018-19, the school is enrolling 944 full-time equivalent (FTE) juris doctor students, of Othera which 823 are California residents. (Most out-of-state students are able to gain residency after one year of attendance.) The school also offers a Master of Law and a Master of Studies in Law, enrolling a total of State General Fund 22 FTE students in these programs. Hastings is affiliated with UC and participates in many of the university system’s compensation and administrative programs. Hastings, however, has its own governing board and the state Student Tuition and Fees budgets for it separately from UC. Hastings Is Receiving $58 Million in Ongoing Core Funding in 2018-19. As Figure 1 shows, Hastings relies heavily on student tuition and fee revenue to support its operations. In 2018-19, $43 million a Includes overhead from auxiliary programs, lottery funds, investment income, and library fines. (74 percent) of its ongoing funding came from student tuition and fees, $14 million (24 percent) came from state General Fund, and $1.6 million (2.7 percent) came from various other sources (including the state lottery and investment income). analysis full gutter 2019-20 BUDGET Similar to Other Law Schools, Figure 2 Hastings Enrollment Is Notably Hastings’ Enrollment Is Below Historical Levels Below Peak. In 2018-19, Hastings Full-Time Equivalent Students has about 370 fewer FTE students than in 2009-10, when the school’s 1,400 enrollment peaked (Figure 2). The drop in enrollment the past several 1,300 years is linked to a national decline in student demand to attend 1,200 law school. The school plans to decrease its enrollment slightly (to a total of around 950 students) 1,100 beginning in 2021-22. Recent Increase in Tuition 1,000 Discounting Has Resulted in Budget Deficit. Similar to other 900 law schools across the nation, Hastings discounts all or a portion 800 of tuition for many students. These 1990-91 1994-95 1998-99 2002-03 2006-07 2010-11 2014-15 2018-19 tuition discounts are allocated to students primarily based on merit rather than household income or financial need. Students generally that the school could use to cover a budget deficit receive the discount throughout their three years in the case of a fiscal emergency. of attendance. In 2015-16, Hastings began relying Hastings’ Has a Multiyear Plan for Eliminating more on tuition discounts to attract higher quality Its Budget Deficit. In 2017-18, Hastings submitted applicants. The average discount rate for the its first multiyear plan to eliminate its budget deficit. fall 2015 cohort was 42 percent, compared to At the time, Hastings anticipated eliminating its 25 percent for the previous cohort. For the next deficit by 2020-21. Its plan entailed reducing tuition two cohorts (fall 2016 and fall 2017), the average discounting beginning in 2018-19 and increasing discount rate remained above 40 percent. The tuition charges in 2019-20. In 2018-19, the school school has not had sufficient annual revenue to revised its deficit-reduction plan. While it reduced support the higher tuition discounting, resulting tuition discounting that year (to 37 percent), it in the school running annual budget deficits. In extended the period for eliminating its deficit by one 2017-18, the school ran a $3.9 million budget year (through 2021-22). deficit, equating to 6.3 percent of its total spending on operations and financial aid. Hastings has been Proposal using a portion of its reserves to cover these deficits. Provides $1.4 Million Ongoing Augmentation Hastings Has Two Core Budget Reserves. Entirely From General Fund. The proposed First, it has a general, unrestricted reserve for General Fund augmentation is unrestricted. The operations. Second, the school has a reserve to augmentation reflects a 2.3 percent increase in cover the costs of future building maintenance Hastings’ core funding (Figure 3). The Governor and upgrades. While designated for maintenance links the General Fund augmentation to an projects, Hastings indicates that it views this expectation that Hastings not increase tuition reserve as available to cover budget deficits once in 2019-20. Hastings plans to slightly decrease the operating reserve is depleted. In addition to enrollment in 2019-20, resulting in a slight decline these two core reserves, Hastings indicates its in total tuition revenue. housing and other auxiliary programs have reserves 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Figure 3 Governor Proposes Ongoing Increase at Hastings to Be Supported by General Fund Dollars in Millions Except Per-Student Amounts Change From 2018-19 2017-18 2018-19 2019-20 Actual Revised Proposed Amount Percent Tuition and fee revenue $41.9 $43.0 $42.9 —a —a General Fund 12.7 13.8 15.2 $1.4 10.3% Otherb 4.0 1.6 1.6 — — Totals $58.6 $58.4 $59.8 $1.4 2.3% FTE students 959 966 964 -2 -0.2% Funding per student $61,177 $60,523 $62,059 $1,536 2.5% a Less than $500,000 or 0.05 percent. b Includes investment income, administrative overhead from auxiliary programs, and state lottery funds. Hastings Plans To Reduce Ongoing Spending. maintenance reserve in 2019-20. Hastings also Although overall ongoing funding is increasing, has revised its deficit-reduction plan, extending Hastings is continuing its plan to reduce overall the timeframe for eliminating its deficit by another spending to address its budget deficit. Hastings year (until 2022-23). The revised deficit-reduction plans to reduce the tuition discount rate for the plan assumes Hastings begins increasing tuition by fall 2019 cohort to 30 percent. This action would 5 percent annually beginning in 2020-21. Under the reduce the cost of tuition discounts by a total of plan, the school’s maintenance reserve would have $2 million. Hastings plans to use some of these $3.9 million in 2022-23 (about one-third less than savings to increase certain other operational the amount in that reserve today). costs—most notably, employee salaries (3 percent), Deficit Raises Questions About Proposed operating expenses and equipment (1.5 percent), Compensation Increases. State agencies and employee benefits (0.5 percent). After commonly provide compensation increases. Most accounting for all of these adjustments, ongoing agencies, however, have not been dealing with a spending in 2019-20 would decline by $1.2 million notable budget imbalance. Given the continued (1.8 percent). deficit of the school, the extended timeline for Provides $1 Million One-Time General Fund eliminating it, the expected complete drawing for Deferred Maintenance. The Governor also down of its operating reserve in 2019-20, and proposes to fund some deferred maintenance the likelihood the school will begin using its projects in 2019-20. As Figure 4 shows, Hastings maintenance reserve for operating costs, the has identified a maintenance backlog totaling $1.5 million at Kane Hall, one of Hastings’ two Figure 4 academic facilities. Staff at the school indicate they Hastings’ Reported Maintenance Backlog at are in the midst of identifying which projects on this Kane Hall list to support with the proposed $1 million. (In Thousands) Assessment Project Cost Hastings Continues to Reduce Its Deficit but Carpet replacement for entire building $756 Has Extended the Timeframe for Eliminating It. Replace security system controls 200 Replace elevator control systems 200 Hastings estimates its deficit would decline from Interior painting 150 $6.4 million in 2018-19 to $5.3 million in 2019-20. Replace heating and cooling control system 150 Though the planned operating deficit is smaller, Replace lighting control system 90 the schools anticipates fully spending down its Total $1,546 operating reserve and beginning to draw down its www.lao.ca.gov 3 analysis full gutter 2019-20 BUDGET state may wish not to support Hastings’ proposed using it to cover operational costs. Moving forward, compensation and equipment increases this year. we also are concerned that Hastings’ budget plan Hastings’ Identified Maintenance Projects may result in it not setting aside sufficient funds to Seem Less Critical Than Other Higher Education support maintenance of its new facility, eventually Projects. Whereas each of the state’s three main leading to disrepair. higher education segments—UC, the California Recommendations State University, and the California Community Colleges—have maintenance backlogs totaling Signal to Hastings Budget Expectations. We billions of dollars, Hastings has significantly fewer encourage the Legislature to signal its expectations outstanding maintenance projects. Hastings to Hastings regarding 2019-20 compensation consists of only two academic facilities—Snodgrass increases, equipment purchases, tuition Hall and Kane Hall. The state has substantially discounting, and tuition charges. In considering addressed maintenance issues at these two these issues, we encourage the Legislature to keep facilities over the past several years. Specifically, Hastings’ operating deficit in mind and ensure that Hastings is currently undergoing a state-funded a plan is in place to eliminate this deficit soon. A project to replace Snodgrass Hall with a new future economic downturn would make addressing building, with construction of the new building Hastings’ operating deficit even more difficult, scheduled to be completed by 2020. The state with potentially more adverse implications for its has addressed much of Kane Hall’s maintenance students (likely steeper tuition increases) and staff issues with previous one-time General Fund (likely layoffs or salary rollbacks). Given Hastings appropriations. As a result of these projects, the plans to end 2019-20 with no operating reserve, school indicates that its identified $1.5 million such adverse effects become stronger possibilities. in projects represents Hastings’ final facility Reject Proposed Deferred Maintenance maintenance needs. Funding. We recommend the Legislature direct Hastings’ Use of Maintenance Reserve to Hastings to cover the cost of remaining Kane Cover Operating Deficit Raises Concerns. Hall maintenance projects using its maintenance One prudent use of maintenance reserve funds reserve. In addition, we recommend the Legislature is to address deferred maintenance projects. We direct Hastings to develop a plan by December 1, believe using these funds to address Hastings’ 2020 to fund maintenance of its new facility and maintenance issues in 2019-20 is more appropriate ongoing maintenance at Kane Hall moving forward. than the state providing additional funding. To ensure responsible budgeting, Hastings also Moreover, we believe using a maintenance reserve should build the associated maintenance costs into for maintenance issues is more appropriate than its future budgets. LAO PUBLICATIONS This report was prepared by Jason Constantouros and reviewed by Jennifer Kuhn Pacella. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 4 LEGISLATIVE ANALYST’S OFFICE