The 2020-21 Budget: Analyzing UC and CSU Cost Pressures

The 2020-21 Budget: Analyzing UC and CSU Cost Pressures GABRIEL PETEK LEGISLATIVE ANALYST DECEMBER 18, 2019 analysis full gutter 2020-21 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Executive Summary Report Analyzes Cost Pressures at UC and CSU. California operates two public university systems: (1) the University of California (UC), consisting of 10 campuses, and (2) the California State University (CSU), consisting of 23 campuses. Compared with many other areas of the state budget, the Legislature has considerable flexibility through the annual budget process to decide which university costs to support. Despite this greater flexibility, the Legislature faces many pressures to increase funding for UC and CSU in 2020-21. This report examines these university cost pressures, assesses the state’s capacity to fund some of them, and identifies options for expanding budget capacity to fund additional cost pressures. Cost Pressures Employee Salary Increases Likely to Remain Key Cost Pressure. Existing law grants both university systems authority to negotiate compensation levels for their employees. Since 2013-14, both systems have provided annual salary increases, generally ranging from 2 percent to 5 percent depending on the employee group. Because contracts are not in place for most university employee groups in 2020-21, salary increases will likely be a key issue facing the Legislature in the upcoming budget. We estimate the cost of a 1 percent salary increase to be around $45 million at each segment in 2020-21. Employee Benefit Costs Continue to Rise, Universities Have Notable Unfunded Liabilities. Like most government employees in California, university employees receive subsidized health care while they are employed, and they receive both pensions and subsidized health care when they retire. These benefit costs are among the fastest growing cost pressures at UC and CSU. We estimate benefit costs across both university segments will increase by around $195 million in 2020-21. In addition, both university systems have billions of dollars in unfunded pension and retiree health liabilities resulting from underfunding earned benefits in previous years. Universities Have Large Facility Maintenance Backlogs. Like most state agencies, UC and CSU dedicate a portion of their core budgets for facility maintenance, such as keeping electrical and plumbing systems in working order. As their spending on maintenance has tended to be insufficient over the years, campuses have accrued billions of dollars in unaddressed facility maintenance and seismic renovation projects. These backlogs create significant cost pressure for the Legislature in the budget year and future years. To better guide state funding decisions, the Legislature recently directed the universities to develop long-term plans to address their backlogs. The Legislature is to receive CSU’s report by January 2020 and UC’s report by January 2021. Some Pressure to Expand Enrollment but No Underlying Demographic Growth. When weighing enrollment growth decisions in the upcoming budget, the Legislature faces a number of key factors. First, the number of high school graduates is projected to decline slightly in the upcoming year. Both segments are also drawing from larger pools of high school students than expected under state policy. These factors potentially suggest further enrollment growth is not warranted in 2020-21. On the other hand, the Legislature may wish to grow enrollment to improve access at high demand campuses. Based on the state’s existing per-student funding www.lao.ca.gov 1 analysis full gutter 2020-21 BUDGET rates, we estimate growing enrollment by an additional 1 percent would cost the state around $40 million at UC and $45 million at CSU. Legislature Likely to Face Many Other University Cost Pressures. In recent years, the Legislature has considered various initiatives that change the level or scope of university services. These initiatives have included: (1) increasing the number of tenured/tenure-track faculty; (2) improving graduation rates at CSU; (3) limiting nonresident enrollment at UC; (4) expanding student food, housing, and mental health programs; and (5) establishing new academic programs and campuses. In 2020-21, the Legislature very likely will continue to face pressure for additional spending in each of these areas. Planning Issues State Budget Has Capacity to Fund Some University Cost Pressures. In The 2020-21 Budget: California’s Fiscal Outlook (fiscal outlook), we calculate the state’s budget capacity for the coming year. In making our calculations, we first assume the state maintains existing services, as adjusted for inflation. For the universities specifically, we assume the state covers salary, pension, health benefits, and debt service cost increases. After accounting for these types of cost pressures, we estimate the state would have a $7 billion surplus. Given certain risks to the General Fund, we recommend the Legislature limit new ongoing spending commitments across all areas of the state budget to around $1 billion. In the case of the universities, any remaining ongoing pressures (such as enrollment growth, expansion of services, and new programs or campuses) likely would be up for legislative consideration for a portion of this $1 billion. After making new ongoing commitments, the remainder of the state surplus would be available for one-time commitments, accelerated debt payments, or larger state reserves. If the Legislature would like to direct some of the remaining surplus to the universities, we encourage it to give high priority to addressing the universities’ unfunded liabilities and facility maintenance backlogs (including seismic renovations). Addressing these liabilities now would reduce the burden on future generations and improve the fiscal health of the state and universities. Legislature Has Some University Options for Expanding Budget Capacity. Our fiscal outlook assumes the state covers inflationary cost increases, with no increases in tuition for resident students. However, one key option available to the Legislature for covering additional cost pressures is to share ongoing university cost increases with students through a tuition increase. We estimate that every 1 percent increase in tuition raises associated net revenue by about $15 million at UC and $10 million at CSU. Another option would be to work with the universities to pursue efficiencies in their operations and facility utilization. The amount of freed-up funding that could be redirected would depend upon the specific efficiencies pursued, with some options creating budget-year savings but others not yielding savings until later years. Another option would be to factor campuses’ reserves into state budget decisions. The Legislature could be strategic in the use of these reserves—using them to protect ongoing university operations during an economic downturn or using them to address key one-time priorities, such as deferred maintenance, in the budget year. Each of the university systems potentially has hundreds of millions of dollars in reserves that are available for such spending purposes. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET INTRODUCTION The Universities Are a Key Part of State’s its 2020-21 budget, it faces many pressures Discretionary Budget. California operates two to increase General Fund support for UC and public university systems: (1) the University of CSU. These cost pressures range from covering California (UC), consisting of 10 campuses, and rising health care costs (somewhat outside the (2) the California State University (CSU), consisting universities’ control) to raising employee salaries of 23 campuses. Neither the State Constitution (largely within the universities’ control). The nor federal law requires the state to spend a pressures also range from addressing existing certain amount on UC and CSU. Furthermore, the obligations (including unfunded pension liabilities Legislature has enacted few statutes to guide its and facility maintenance backlogs) to creating new decisions on how much General Fund to allocate ones (by funding enrollment growth, expanding annually to the universities. Because of the lack services, offering new types of services, or building of constitutional or statutory requirements, the new campuses). Over the coming months, many Legislature has considerable flexibility through groups—from faculty and student groups to the annual budget process to decide which groups with regional or other specific interests— university costs to support. For few other major likely will encourage the Legislature to increase state programs (most notably, the court system) state support in one or more of these areas. To does the Legislature have a comparable amount of aid the Legislature in considering these requests flexibility. Budgeting for the universities also differs and building an overall budget plan, this report from many other areas in that UC and CSU have a describes and analyzes these cost pressures. The considerable amount of nongovernmental funding report begins with background on UC’s and CSU’s available to them—most notably through the levying budgets, then examines key cost pressures. It of student tuition charges. concludes by discussing several university-related Report Examines Key UC and CSU Cost planning issues the Legislature will face in the Pressures. As the Legislature begins to develop coming budget session. OVERVIEW OF UNIVERSITY BUDGETS In this part of the report, we provide background sources support various nonacademic purposes, on each segment’s core funding, spending, and such as on-campus housing and UC’s medical reserves. centers. Throughout the remainder of this report, we focus on core funds and associated spending. Funding State Is the Largest Source of Core Funding. Core Funds Support Each Segment’s State General Fund comprises about 60 percent Academic Mission. Core funding consists of of core funding for UC and 75 percent for state General Fund, student tuition revenue, and CSU (Figure 1, on next page). These amounts several other smaller fund sources. Core funding include direct General Fund appropriations to supports the universities’ academic functions, the universities to cover operating costs. They including undergraduate and graduate instruction, also include support for the Cal Grant program, academic support services (such as tutoring), and which covers the cost of tuition at UC and CSU related administrative costs. Core funding also for eligible students with financial need. (Students supports various research and outreach initiatives. are considered to have financial need when the In 2019-20, core funding represents around cost to attend college exceeds the amount their 70 percent of all funding at CSU and 25 percent households can contribute, as calculated by certain of funding at UC. The universities’ remaining fund federal formulas.) The remaining core funding www.lao.ca.gov 3 analysis full gutter 2020-21 BUDGET Figure 1 State Is Largest Source of Core Funding at Each Segment 2019-20 Nonresident Other Tuition Nonresident Resident Tuition Tuition Direct State UC CSU General Fund Direct State General Fund State Financial Aid Resident Tuition State Financial Aid comes from student tuition charges and, at UC, adopted tuition hikes in response to reductions in a few smaller fund sources (such as overhead state funding. allowances on federal research grants). Around Spending 40 percent of resident students—generally those without financial need—pay tuition. Nonresident Majority of Core Spending Is on Employee students, who are generally not eligible for state Compensation. As Figure 2 shows, 76 percent financial aid, also pay tuition (at a higher rate than of CSU spending and 64 percent of UC spending resident students). The share of core funding is for employee salaries and benefits. At both coming from nonresident tuition is larger at UC than segments, benefits include pension contributions, at CSU, as nonresidents comprise a larger share employee health care, and retiree health care. of overall enrollment at UC and pay higher tuition The next largest component of spending at both charges. segments is on their respective financial aid State and Segments Determine Level of Core programs. (Both UC and CSU fund financial aid Funding. Each year, the Legislature appropriates programs that help financially needy students not direct General Fund support to UC and CSU as receiving state Cal Grants or, in the case of UC, part of the annual budget act. The Legislature supplement Cal Grant aid.) Another portion of core does not directly set student tuition charges. spending is on various other operating expenses, Existing law grants this authority to the systems’ including facility maintenance, annual facility debt governing boards—the UC Board of Regents service payments, equipment, and utilities. and the CSU Board of Trustees. Despite different Universities Have Considerable Control entities controlling state General Fund and student Over Spending. For employee salaries—almost tuition decisions, in practice these decisions are half of each segment’s core spending—state law often connected. For example, in many years the grants the governing boards authority to determine governing boards have held tuition flat in response salary levels, set staffing levels, and approve to increases in state funding and other signals from collective bargaining agreements with unions. For the Legislature. In other years, the boards have benefits, UC has somewhat greater control over 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Figure 2 Majority of University Spending Is on Compensation-Related Costs 2017-18 Other Other Operating Operating Expenses Expenses Faculty Salaries Faculty Salaries Financial Aid UC CSU Financial Aid Staff Salaries Staff Salaries Benefits Benefits costs than CSU. UC operates its own pension, couple of main purposes. The systems maintain employee health, and retiree health programs, reserves intended to cover large, planned future with benefits in each of these areas determined costs, such as renovating a building, purchasing by the Board of Regents. CSU, by contrast, equipment, or launching a new academic program. participates in state-administrated pension and The systems also maintain reserves to help them health care programs and provides benefits that respond to unforeseen events, such an economic are established in state law. The California Public recession or natural catastrophe. Employees’ Retirement System (CalPERS) makes Universities Each Have Over $1 Billion in decisions that affect CSU spending in these areas. Core Reserves. At the end of 2017-18, CSU held $1.5 billion in core reserves whereas UC held Reserves $1.1 billion. CSU’s core reserve level was equivalent Both Systems Maintain Reserves. State to about 3 months of operating expenses, whereas law is silent on whether the universities should UC’s level was equivalent to about 1.5 months. build reserves, the purpose of those reserves, As Figure 3 (on next page) shows, the universities or the appropriate levels of those reserves. The have designated most reserve funds for planned universities, however, have developed reserve future costs. They have each kept about 30 percent policies, which generally designate reserves for a of their reserves available to respond to future risks and uncertainties. KEY COST PRESSURES In this part of the report, we analyze four key (4) various other recent priorities of the Legislature cost drivers affecting the universities’ core budgets: and universities. The first two of these pressures (1) compensation, (2) academic facilities and generally are costs the state faces to maintain the infrastructure, (3) student enrollment growth, and existing level of services at campuses and address www.lao.ca.gov 5 analysis full gutter 2020-21 BUDGET long-term liabilities. The latter two cost pressures executives) who are not represented by a union. are costs the state faces to expand the level or This is because the CSU Chancellor’s Office scope of university services. For each cost driver, typically chooses to keep salary growth for these we provide background; discuss past spending employees at pace with represented employee trend; and, where possible, estimate costs for groups. Compared to CSU, collective bargaining 2020-21. is a less salient factor for UC salaries, as only one-third of its more than 40,000 core-funded COMPENSATION employees are represented by a union. For the remaining two-thirds of employees—which includes In this section, we analyze three key all tenured and tenure-track faculty and most compensation-related costs pressures: staff—the UC President usually makes decisions (1) employee salaries, (2) pension contributions, regarding salary increases. and (3) health benefits for employees and retirees. Universities Have Provided Salary Increases the Past Several Years. After not providing Employee Salaries general salary increases for most employee groups Collective Bargaining More Notable Factor from 2008-09 through 2012-13, both systems Driving Salaries at CSU Than UC. CSU have approved salary increases every year since employs about 50,000 faculty and staff. Of these 2013-14 (Figure 4). Within each system, salary employees, 90 percent—including all faculty and increases have tended to be similar across most staff—are represented by 1 of 13 bargaining employee groups, especially when viewed across units. Represented employees receive salary the entire seven-year period (with some groups increases according to collective bargaining getting larger increases one year but then smaller agreements negotiated with the Chancellor’s Office increases the next year). The salary increases and approved by the Board of Trustees. These have tended to be somewhat larger at CSU than bargaining agreements often indirectly drive salary UC. At both segments, salary increases have increases for the remaining 10 percent of CSU tended to roughly equal or outpace inflation. (From employees (primarily consisting of managers and 2013-14 through 2019-20, consumer prices in California grew an average annual rate of 2.8 percent.) Figure 3 Likely Pressure to Increase CSU Has Larger Reserves Than UC Salaries in 2020-21. At both Core Fund Reserves at End of 2017-18 Fiscal Year (In Millions) systems, employee salary increases in 2020-21 are $1,600 uncertain. At CSU, virtually all 1,400 bargaining contracts expire at the Saved for Future $459 end of 2019-20. The Chancellor’s 1,200 Unforeseen Costs Office is currently negotiating 1,000 $323 contracts for the budget year. At UC, the UC President has not 800 yet determined salary increases 600 for faculty and most staff. For $1,053 Designated for Future 400 $826 Planned Costs the small share of UC employees who are represented, most units 200 already have negotiated 3 percent salary increases in 2020-21. UC CSU Four remaining units have open contracts. Every 1 percent increase in salaries—across all 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Figure 4 University Employees Have Had Salary Increases in Recent Years General Salary Increases by Employee Group 2013‑14 2014‑15 2015‑16 2016‑17 2017‑18 2018‑19 2019‑20 UC Faculty 2% 3% 3%a 3%a 3%a 3%a 3%a Nonrepresented staff 3 3 3a 3a 3a 3a 3a Represented employees 0‑4.5 2‑4.8 2‑4 2‑8.4 0‑3 0‑7b 0‑3b CSU Faculty 1.3% 3% 5% 2% 4.5% 3.5% 2.5% Represented support staff 1.3 3 2 5 3 3 3 Other staffc 0‑4.6 2‑3 2‑2.9 2‑5 2.2‑4 3‑4 3‑4 a Increases were distributed based on merit. b Contracts for two bargaining units are still under negotiation. c Consists of other represented and nonrepresented staff. represented and nonrepresented employees at plan remains on track, UC’s plan has fallen short. both segments—would cost about $90 million To address the shortfall, UC has borrowed money ($45 million at each segment). (mostly from internal sources), which it is paying back from its operating budget. To help accelerate Pensions the pay down of unfunded liabilities, the Legislature Both Segments Have Unfunded Pension in recent years has provided supplemental funding Liabilities. Similar to most government agencies, both for CalPERS and UC’s retirement program. UC and CalPERS (on behalf of CSU) fund pension Pension Costs Set to Increase in 2020-21. benefits by setting aside and investing contributions As Figure 5 (on next page) shows, UC and CSU made by the employer and employee during an employer pension costs have grown notably employee’s career. In past years, these systems over the last several years—more than doubling did not fully fund pension benefits earned by since 2012-13. The higher pension costs are the employees. While this underfunding does not affect result of (1) salary growth over the period, (2) the the pensions of existing retirees, the state and plans developed by UC and CalPERS to address universities currently lack adequate funds to fully unfunded pension liabilities, and (3) changes in the pay for pension benefits that today’s employees will assumptions used to calculate liabilities. (Notably, be owed when they retire. Currently, 80 percent of both UC and CalPERS have adopted more UC pension liabilities and 70 percent of CalPERS conservative investment earnings expectations, pension liabilities (including CSU employees) are which have led to larger contributions now and funded. In dollar terms, UC’s unfunded pension improved the likelihood the funding plans remain liability is $16.6 billion (of which around 30 percent on track.) Based on planned employer contribution is associated with core funding) and the state’s rate increases in 2020-21, we estimate university unfunded CalPERS liability is $59.7 billion (with no pension costs to increase about $105 million CSU-specific breakout available). ($60 million at CSU and $45 million at UC). State and Segments Have Long-Term Plans Health Benefits to Address Unfunded Liabilities. The UC Board of Regents and the CalPERS board have both Universities Subsidize a Portion of Health developed plans to pay down their respective Costs for Employees and Retirees. At both pension system’s unfunded liabilities gradually over universities, employees receive a subsidy to cover time. The plans entail increasing contribution rates a portion of health premium costs, with remaining each year. Whereas CalPERS’ long-term funding costs paid out of pocket by the employee or retiree. www.lao.ca.gov 7 analysis full gutter 2020-21 BUDGET attributable to core-funded Figure 5 retirees. University Pension Costs Expected to Continue Growing Health Spending Expected (In Millions) to Increase in 2020-21. In $1,200 2019-20, the state is spending around $900 million on CSU 1,000 employee and retiree health care costs. UC is spending around 800 $680 million on health benefit CSU costs for core-funded employees 600 and retirees. Based on projected premium cost increases, as well 400 UC as increases in the number of CSU and UC retirees, we estimate 200 health benefit costs in 2020-21 will increase around 6 percent at each segment, resulting in a 2012-13 2014-15 2016-17 2018-19 2020-21 combined cost increase of around $90 million ($55 million at CSU and $35 million at UC). The subsidy is generally calculated by averaging the cost of the most popular plans among FACILITIES AND INFRASTRUCTURE employees. At UC, lower-income employees receive a larger subsidy than higher-income employees. For In this section, we describe two key example, UC covers 94 percent of the average cost facility-related cost pressures: (1) maintenance for employees earning $56,000 or less per year and (2) debt service on approved construction and compared to 75 percent for employees earning renovation projects. more than $167,000. For CSU, which participates Maintenance in CalPERS’ health benefit program, employees generally receive the same subsidy regardless Both Segments Have Sizable Maintenance of salary. Known as the “100/90” formula, CSU Backlogs. Like most state agencies, UC and generally pays 100 percent of the average CSU are expected to dedicate a portion of their premium cost for active and retired employees core budgets for facility maintenance, such and 90 percent of the average additional premium as keeping electrical and plumbing systems in costs for dependents. working order. Due to many years of underfunding Due to Pay-As-You-Go Funding Approach, maintenance, however, the systems have accrued Both Segments Have Large Unfunded Retiree billions of dollars in maintenance backlogs. Health Liabilities. In contrast to pension benefits, According to university leadership, the systems the state and the universities do not set aside and have underfunded maintenance to manage past invest funds during an employee’s career for retiree budget reductions and ensure operating funds health benefits. Instead, the costs of these benefits are available for other budget purposes. CSU are funded on a “pay-as-you-go” basis after the estimates its backlog for maintenance on its employee retires. Because of this pay-as-you-go academic facilities and related infrastructure totals approach, virtually all of the universities’ retiree $4.5 billion across its 23 campuses. UC currently health liabilities are unfunded. As of July 2018, estimates its backlog at $6.2 billion across all ten CSU’s unfunded retiree health liability is estimated campuses, but staff at the Office of the President to be $13.1 billion. UC’s unfunded liability is believe the estimate is incomplete. UC is currently $18.9 billion, of which around 30 percent is in the process of developing a more consistent 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET systemwide estimate, which the Office of the do not exist for UC, the magnitude of these costs President expects to release by November 2020. likely are similar to CSU. Segments Are Developing Long-Term Plans Debt Service Costs to Address Backlogs. Since 2015-16, the state has provided a total of $573 million in one-time Since 2013-14, Universities Pay Debt Service funding to help address the systems’ maintenance Out of Operating Budgets. Prior to 2013-14, the backlogs. Despite these recent appropriations, state sold bonds to pay for larger facility renovation neither the state nor the universities have long-term and construction projects on behalf of the plans to address these backlogs. To better guide universities. The state then made the associated state funding decisions, the Legislature directed annual debt payments (from the General Fund). The the universities as part of the 2019-20 budget to state changed this approach for UC in 2013-14, develop such plans. CSU is expected to submit its and took a similar action for CSU the following year. plan to the Legislature by January 2020. UC has Under the new approach, the universities issue until January 2021, shortly after it completes its their own bonds for facility projects and pay back systemwide facility condition assessment, to submit the debt from their operating budgets. In a related its plan. action, the state shifted a General Fund amount to Deferred Maintenance Is Another Significant the universities’ operating budgets to reflect the Cost Pressure. Without a long-term plan in debt service the state had previously paid directly place to address maintenance issues, the state (around $300 million at CSU and $400 million at does not yet have explicit expectations as to UC). Moving forward, the universities are expected how much the systems should spend in 2020-21 to pay off all debt—for both previous state bonds and beyond. Though plans are not yet in place, and new university bonds—from their operating addressing maintenance backlogs will continue budgets. The universities must receive approval to be a significant cost pressure. For example, from the state to fund new projects under this new CSU estimates it would have to spend about process. $360 million more in 2020-21 just to keep its Debt Service Costs on Existing Projects Set backlog from growing. While comparable estimates to Increase in 2020-21. As Figure 6 shows, debt service on previously approved state and university Figure 6 UC and CSU Debt Service Costs Rising in Budget Year (In Millions) $350 $350 UC CSU 300 300 250 250 200 200 State Bonds 150 150 State Bonds 100 100 50 50 CSU Bonds UC Bonds 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 www.lao.ca.gov 9 analysis full gutter 2020-21 BUDGET bonds is expected to rise in 2020-21 by about currently available, seismic-related costs likely $100 million ($60 million at UC and $40 million are significant. For example, UC officials recently at CSU). The rising costs are the result of reported that an initial systemwide review identified decisions by the state and universities on what around 70 large, high-use classroom buildings that projects to approve, when to issue bonds, and pose life-safety risks. The total cost of renovating how to structure debt payments. The systems these 70 facilities likely would range from the high have prepared for these rising costs somewhat hundreds of millions of dollars to low billions of differently. CSU staff indicate that university dollars. According to UC, the associated increase leadership anticipated these cost increases in in annual debt service costs likely would range from previous years and set aside funding in reserves the mid-to-high tens of millions of dollars. to cover them. UC staff, by contrast, indicate that the university did not set aside funds for the cost ENROLLMENT increase. UC staff suggest the university will cover costs through one-time internal borrowing. In this section, we discuss cost pressures relating to undergraduate and graduate enrollment. Segments Proposing a Total of 29 Projects for 2020-21. UC is proposing a total of $551 million Enrollment Growth Can Increase Costs in bond authority for six new projects. Most of in Three Ways. Enrollment growth is another these projects would address seismic deficiencies significant cost pressure for the universities. UC and deferred maintenance throughout the system. and CSU typically respond to enrollment growth by Also included in UC’s package of proposals hiring more faculty, teaching assistants, academic is $100 million to construct a new building advisors, and other support staff. Historically at UC Riverside’s school of medicine. CSU is the state has funded these costs by providing proposing a total of $2.6 billion in bond authority the systems with a General Fund subsidy for for 23 new projects. Like UC, many CSU projects each additional student. Enrollment growth also would address seismic deficiencies and deferred increases costs because a sizable portion of new maintenance throughout the system. CSU’s UC and CSU students qualify for Cal Grants. package of proposals also includes several new Adding more students and faculty also can instructional buildings. Though better estimates increase pressure on the state and systems to likely will be available in the coming months, our construct new classrooms, teaching laboratories, preliminary estimate is that annual debt service faculty offices, and other academic spaces. to finance all 29 projects across the two systems These construction projects increase debt service would be about $210 million ($40 million for UC costs, and the new facilities ultimately increase projects and $170 million for CSU projects). the amount of funding needed for operations and maintenance. Seismic Renovation Projects Likely Are Significant Long-Term Cost Pressure. Seismic Certain Factors Influence Undergraduate renovation projects focus on upgrading building Enrollment Decisions. Historically, the state’s support structures and mitigating life-safety risks freshman eligibility policies have influenced the from earthquakes. When discussing cost pressures Legislature’s decisions about undergraduate with our office, staff at both university systems enrollment levels. Under these policies, the top stated that campuses have substantial backlogs one-eighth (12.5 percent) of high school graduates of seismic renovation projects. To date, though, in California are eligible to attend UC and the neither segment has completed comprehensive top one-third (33 percent) are eligible to attend assessments of its buildings’ seismic risks nor CSU. (Those not eligible as freshmen can enroll estimated the cost to correct deficiencies. As part in community colleges and then transfer to the of the 2019-20 budget, the Legislature directed universities as upper-division students.) To ensure the segments to undertake these assessments and access under these policies, the state has sought develop plans to address their seismic renovation to fund enrollment growth in years when the backlogs. Based upon the limited information number of high school graduates increased. The 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Legislature also has expected the universities to whether funds are to be used for undergraduate adjust their freshman admission requirements such or graduate enrollment. In most of these years, that they continue drawing from their designated funds were restricted for undergraduate enrollment eligibility pools. growth. State Has No Explicit Policy on Graduate UC and CSU Enrollment Trends Vary Enrollment. In contrast to undergraduate Somewhat. In 2019-20, CSU is expected to enrollment, the state does not have a longstanding enroll 394,000 resident students, and UC is policy that guarantees California students access to expecting to enroll 228,000 resident students graduate education. In past years, the state has not (Figure 7). These levels reflect all-time highs for specified how enrollment growth was to be divided the universities. Enrollment at CSU has grown between undergraduate and graduate enrollment, steadily since 2010-11, with average annual growth effectively giving the systems flexibility to make of 2.1 percent. By comparison, UC enrollment this decision. The systems typically considered was virtually flat from 2008-09 through 2015-16, the state’s workforce needs (such as for teachers, followed by notable increases the past few years. engineers, physicians, and lawyers) when planning The enrollment trends at CSU and UC generally for graduate enrollment. In addition, the systems reflect the Legislature’s enrollment growth have tended to grow graduate enrollment along decisions. with undergraduate enrollment. This is because Legislature Faces Certain Enrollment campuses rely on graduate students to serve as Decisions in Upcoming Budget Cycle. The teaching assistants in undergraduate courses Legislature faces a decision about how many and research assistants to new faculty. In recent CSU students to fund in 2020-21. For UC, the years, the state has reversed course by specifying Legislature faces a decision about how many Figure 7 Enrollment Has Increased in Recent Years Resident Full-Time Equivalent Students 400,000 380,000 CSU 360,000 340,000 320,000 300,000 280,000 260,000 240,000 UC 220,000 200,000 2007-08 2009-10 2011-12 2013-14 2015-16 2017-18 2019-20 www.lao.ca.gov 11 analysis full gutter 2020-21 BUDGET students to fund in 2021-22. The state tends to and CSU, they are not guaranteed admission to set UC’s enrollment targets one year in advance, a specific campus. Both systems refer eligible as this allows the Legislature to better influence students who are not admitted to their campus of UC fall admission decisions, which usually occur in choice to a lower-demand campus with remaining the spring before the state budget is enacted. (UC space. Historically, relatively few applicants choose will have made its 2021-22 admissions decisions to enroll at a campus to which they have been by spring 2021, before the 2021-22 budget has redirected. Supporting more enrollment growth been adopted.) We estimate growing enrollment could enable both systems to accommodate by an additional 1 percent would cost the state more applicants at their campus of choice. The around $40 million at UC and $45 million at CSU. Legislature could weigh this benefit against the (These estimates include the cost to hire additional other cost pressures described in this report. faculty and staff and cover the cost of tuition for More Undergraduate Enrollment Could students eligible to receive Cal Grants.) To assist Increase Pressure for More Graduate the Legislature in making its enrollment growth Enrollment. Were the Legislature interested decisions, we discuss four key enrollment drivers in funding more undergraduate students, the below. universities would likely experience pressure to High School Graduates Are Projected to fund more graduate student assistants to support Dip, Then Rise Slightly. Consistent with historical the additional undergraduate courses and faculty. practice, the Legislature may wish to consider Currently, UC enrolls around six undergraduate adjusting UC and CSU enrollment to keep pace students for every graduate student. At CSU, the with changes in California’s high school graduates. ratio is around ten undergraduate students to every The Department of Finance projects that the graduate student. number of public high school graduates in 2019-20 (affecting the incoming fall 2020 freshman class) will OTHER COST PRESSURES decrease by 0.4 percent, followed by a 1 percent increase in 2020-21 (affecting the incoming fall In this section, we analyze other major pressures 2021 freshman class). to expand the level and scope of university services. Both Systems Are Drawing From Beyond Their Freshman Eligibility Pools. According Recently, Pressure Has Mounted to Hire to a study of the high school class of 2015, UC More Faculty. As Figure 8 shows, UC’s and CSU’s was found to be drawing from 14 percent of high overall student-to-faculty ratio has increased school graduates, somewhat higher than the state’s slightly since 2003-04—both rising from 21 to historical eligibility expectation of 12.5 percent. 22. At CSU, the mix of faculty has also changed The same report found that CSU was drawing over the years, with the system relying less on from 41 percent of high school graduates— tenured/tenure-track faculty and more on lecturers notably higher than the state’s historical eligibility to deliver instruction. In 2003-04, CSU had 31 expectation of 33 percent. Updated information students for every tenured/tenure-track faculty. since the release of this study suggests that the By 2017-18, the number of students per tenured/ universities likely are drawing from even larger tenure-track faculty had risen to 40. The increase pools today. Neither UC nor CSU, however, has in the ratio of tenured/tenure-track faculty at correspondingly adjusted its freshman admission UC has been much more gradual than at CSU. criteria. To the extent that the Legislature wishes In response to the trend at CSU, the 2018-19 the universities to draw from their historical pools of and 2019-20 budget packages directed CSU to high school graduates, additional enrollment growth prioritize hiring more tenure-track faculty with its funding is not warranted. state funding augmentations. Though the UC Office of the President has regularly requested funds to Many Eligible Undergraduate Students Are hire more faculty and reduce its student-to-faculty Referred to Less Selective Campuses. While eligible students are guaranteed admission to UC 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET ratio, the state has not directed UC to prioritize limit nonresident enrollment at UC. Specifically, state funding augmentations for this purpose. in 2017-18, the Legislature directed the Board of State Continues to Focus on CSU’s Regents to develop a policy limiting nonresident Graduation Initiative. In an effort to boost enrollment at each campus, and, in 2018-19, the historically low graduation rates at CSU campuses, Legislature directed UC to estimate the cost to the state over the past several years has provided reduce nonresident enrollment. UC submitted its ongoing and one-time augmentations for the plan in April 2019, which would start in 2020-21 system’s Graduation Initiative. This initiative aims and eventually reduce nonresident enrollment to to increase four- and six-year graduation rates 10 percent of entering freshmen by 2029-30 at for freshmen to 40 percent and 70 percent, each campus. UC estimates the annual cost to respectively, by 2025. (For comparison, CSU’s attain this reduction—resulting from replacing the four-year rate historically has been below foregone nonresident supplement tuition revenue 15 percent and its six-year rate below 50 percent.) and enrolling more resident students—would While campuses have flexibility on how to spend increase from an initial $8 million in 2020-21 to their funds, most use their funds to hire additional $455 million by 2029-30. The state did not formally faculty, offer more course sections in high-demand commit to funding this plan in the 2019-20 budget. areas, and provide more student support services. State Recently Has Signaled Interest in Currently, CSU is spending $243 million annually Supporting Student Hunger, Homelessness, in ongoing funding on the initiative. As boosting and Mental Health Initiatives. In recent years, the CSU student outcomes likely remains a statewide universities and the state have sought to address priority, the Legislature may face pressure to a number of nonacademic issues facing students. identify funding to further expand the initiative in According to survey data, more than 40 percent 2020-21. of undergraduate students at CSU and UC have Legislature Likely to Remain Interested in experienced food insecurity (defined as having Reducing Nonresident Enrollment at UC. In low food intake and/or lack of variability in diet). response to concerns that nonresident students are A smaller share of students—about 10 percent displacing resident student at selective campuses, at CSU and 5 percent at UC—have experienced the Legislature the past few years has sought to homelessness. Campuses have also experienced Figure 8 Overall Student‑to‑Faculty Ratios Have Increased Slightly Ratio of Full-Time Equivalent Students to Full-Time Equivalent Faculty UC CSU 45 45 Tenured/Tenure-Track Faculty Only 40 40 35 35 Tenured/Tenure-Track Faculty Only 30 30 25 25 20 20 All Faculty All Faculty 15 15 10 10 5 5 2003-04 2010-11 2017-18 2003-04 2010-11 2017-18 Notes: Due to availability of data, UC’s ratios reflect faculty and students over the fall through spring terms, whereas CSU’s ratios reflect instruction in the fall term only. UC’s ratios exclude students and faculty in the health sciences. www.lao.ca.gov 13 analysis full gutter 2020-21 BUDGET a notable rise in demand for on-campus student state. Provisional language requires CSU to submit mental health services. For example, UC reports the results of the study to the Legislature by July a 78 percent increase in students visiting a 2020. At UC, the 2019-20 budget authorized campus counseling center between 2007-08 a new medical school project at or near the and 2017-18. During the same period, overall Merced campus, presumably with the intention enrollment increased by 27 percent. In 2019-20, of opening a medical school at that campus. The the Legislature provided a total of $30 million in budget did not set a deadline for UC to submit ongoing funding and $18 million in one-time funding a specific project proposal to the Legislature. for hunger, homelessness, and mental health Because new campuses or medical schools will initiatives at UC and CSU. Given the reported scale require future authorization and implementation, of these issues among students, the Legislature the Legislature does not face immediate costs in could face pressure to provide additional funding to 2020-21. Nonetheless, the Legislature may wish to expand services in 2020-21. keep these projects in mind as it sets its ongoing State Exploring Possible New Campuses and budget priorities in 2020-21. Were new campuses Medical Schools. At CSU, the 2019-20 budget or medical schools to be approved over the next provided $4 million one-time General Fund for the few years, the resulting cost increases would Chancellor’s Office to study whether to develop be substantial, with significant long-term fiscal new campuses in several specified areas of the implications. KEY PLANNING ISSUES In this section, we examine the extent to which across all areas of the budget. (As discussed the state General Fund budget has capacity to in the nearby box, we made certain inflationary cover UC and CSU cost pressures in the budget assumptions in projecting university costs. A year. We end the section by identifying three different set of assumptions would affect the size options within the universities’ budgets to expand of the state’s estimated operating surplus.) this capacity. . . . But Limited Capacity for New Ongoing Spending Commitments. While $7 billion reflects Implications of State Fiscal Outlook a sizable projected surplus, we have identified for Universities numerous risks to the state’s budget condition. For example, our growth scenario assumes the In 2020-21, State Might Have a Sizable federal government approves a state policy Budget Surplus . . . In our recent report, The intended to draw more federal funding for state 2020-21 Budget: California’s Fiscal Outlook, we health programs. Were the state not to receive assess the state’s General Fund condition for the federal approval, General Fund costs would upcoming 2020-21 fiscal year. If economic growth rise notably. Furthermore, state revenues would were to continue at our assumed levels, we fall were the state to experience an economic estimate the state in 2020-21 would have enough recession. Given these risks, we strongly funds to cover cost increases for its current level encourage caution when making decisions about of services. For the universities specifically, we new ongoing spending. As a rule of thumb, we assume the state covers inflationary increases in recommend the Legislature limit new ongoing salaries, pensions, health care, facility debt service spending commitments across all areas of the costs, and other operating expenses (Figure 9). state budget to around $1 billion. The Legislature After covering these increases and increases likely would want to consider UC and CSU to other state programs, we estimate the state enrollment growth, expansion of services, and would have a $7 billion surplus. The surplus would new programs within the context of all the other be available for addressing legislative priorities possible calls on this $1 billion. A particularly 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Figure 9 Assumptions Underlying Our Fiscal Outlook for the Universities LAO Assumptions for 2020-21 What Our Outlook Assumes: Salary increases (around 3 percent). Pension cost increases (assuming CalPERS and UC-adopted rate increases). Employee and retiree health increases (premium increases of around 5 percent). Debt service adjustments at UC.a Other operating and equipment cost increases (around 3 percent). What Our Outlook Does Not Assume: Enrollment growth.b Additional funds to address liabilities. Programmatic enhancements and other policy changes. Resident tuition increases.c a CSU intends to cover these costs using existing funds. b Assumes no enrollment growth beyond what was already authorized in the 2019-20 budget. c For UC only, assumes 5 percent increases in the Student Services Fee and the nonresident supplemental tuition charge. University Forecast Depends Upon Certain Assumptions In developing our fiscal outlook each year, our office must decide how to project future cost increases in existing operations. This year for the University of California and the California State University, we projected growth in salaries and “other operating expenses” (such as supplies, utilities, and contracts) using a composite inflationary index reflecting changes in consumer prices and state economic output. Using this composite index, we assumed salary and other operating expenses grow by 2.8 percent in 2020-21. For employee benefit cost increases, we projected growth based upon recent state actuarial assumptions regarding pension contribution rates and health premium increases. Using different assumptions than we made would result in a different estimate of the state’s operating surplus. For example, the state and universities could fund salary increases higher or lower than 2.8 percent in 2020-21. The universities’ actual employee benefit costs in 2020-21 also could be higher or lower than we assume. Furthermore, the Legislature could decide not to adjust other operating expenses for inflation. Historically, the state has not provided direct adjustments for these operating costs, though it sometimes has provided indirect increases by applying a percent increase to the universities’ total budgets. challenging part of the upcoming budget season ongoing spending decisions, the remaining surplus could be deciding how to prioritize these would be available for larger state reserves, additional university cost pressures among all the accelerated debt payments, and other one-time state’s other ongoing spending priorities. commitments. After making its decisions about Recommend Legislature Focus on reserves, if the Legislature wishes to direct some Addressing Unfunded Liabilities. After making of the state’s remaining surplus to the universities, www.lao.ca.gov 15 analysis full gutter 2020-21 BUDGET we recommend it give high priority to addressing a 5 percent increase in the Student Services Fee existing unfunded liabilities, including the and the nonresident supplemental tuition charge, universities’ unfunded pension and retiree health also consistent with past actions.) While the state care liabilities, facility maintenance backlogs, and budget appears to have the capacity to support seismic renovation backlogs. The Legislature could some university cost increases without a tuition designate one-time funds for these purposes, increase, raising tuition would allow for other though ultimately the Legislature likely would need university cost pressures to be addressed. We to provide funding over many years, and in some estimate that every 1 percent increase in tuition cases increase ongoing support, to eliminate generates associated revenue of about $15 million the liabilities and backlogs. Addressing existing at UC and $10 million at CSU. (These estimates liabilities is essential to ensuring the state’s and reflect the amount of funding available after universities’ long-term fiscal health. As with providing Cal Grants and university-administered virtually all unfunded liabilities, addressing them financial aid to financially needy students.) is costly and difficult in the short run, especially Additional Efficiencies Would Help Address as the state faces many other competing Cost Pressures. In recent years, the state cost pressures. In the long run, however, not has sought to find efficiencies in the university addressing liabilities results in even higher costs— systems that would help offset cost increases. pushing even more difficult situations onto future For example, the universities have been pursuing generations. changes in their procurement practices that have reduced some of their ongoing operating costs, Other Options for Addressing Cost freeing up funding for other ongoing purposes. Pressures The state also could avoid certain long-term capital costs by directing the universities to use Three Other Options for Addressing Cost their existing facilities more intensively, offer more Pressures. The Legislature has options within the online instruction, and expand the use of summer universities’ budgets that would allow it to expand term. The magnitude and timing of savings budget capacity and address additional cost resulting from these efficiencies would depend pressures or reduce the amount of state funding upon which of these options were pursued. required to address identified priorities. Below, we discuss three such options—raising tuition levels, Use of Campus Reserves Could Be Part pursuing efficiencies in university operations, and of Strategic Plan for Covering Costs. Another using university reserves to meet strategic goals. approach to expanding budget capacity is to factor UC and CSU campus reserves into Raising Tuition Levels Would Help Address budget decisions. While campuses already have Additional Cost Pressures. Recognizing the committed a sizable portion of their reserves private benefit from earning a college degree, the for certain future costs, potentially hundreds of state implicitly shares college costs with students millions of dollars remain available. In preparation through their tuition charge. The state does not for a future economic recession, the Legislature have a formal policy, though, for what share of could allow campuses to maintain and expand cost nonfinancially needy students should be these reserves in 2020-21. Such an approach expected to bear. Since emerging from the last would add to the state’s total level of reserves recession, the state generally has kept tuition flat and strengthen the state’s and campuses’ ability and elected to cover virtually all approved ongoing to withstand a future downturn. Alternatively, the cost increases from the state General Fund. For Legislature could direct campuses to use some the purposes of our fiscal outlook, we assume of their reserves in the budget year to address the state continues this practice. That is, we specified cost pressures (such as deferred assume UC and CSU do not adopt increases to maintenance) on a one-time basis. resident tuition levels. (We did assume UC adopts 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET CONCLUSION This report has sought to identify university cost pursuing operational efficiencies. Over the coming pressures facing the Legislature in the budget months, the Legislature will be weighing in on all year. The report also has suggested a framework these matters. Upon release of the Governor’s for addressing some of these cost pressures budget in early January, we will turn to analyzing in light of the state’s overall fiscal outlook and the Governor’s specific budget proposals for UC discussed risks to the General Fund. Moreover, the and CSU. Until that time, the Legislature can be report has identified a few options for expanding proactive in considering its highest budget priorities budget capacity, including by raising tuition and for UC and CSU. www.lao.ca.gov 17 analysis full gutter 2020-21 BUDGET LAO PUBLICATIONS This report was prepared by Jason Constantouros and Paul Steenhausen and reviewed by Jennifer Kuhn Pacella and Anthony Simbol. 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. 18 LEGISLATIVE ANALYST’S OFFICE