The 2021-22 Budget: Hastings College of the Law

analysis full gutter The 2021-22 Budget: Hastings College of the Law FEBRUARY 2021 Introduction In this post, we analyze the Governor’s proposal of the pandemic on Hastings’ budget. Next, we to provide a base increase to the Hastings College describe the Governor’s proposed augmentation of the Law (Hastings), a public law school affiliated and Hastings’ corresponding budget plan for with the University of California (UC). We first 2021-22. We then offer our assessment of the provide background on Hastings’ budget situation proposal and provide associated recommendations. prior to the pandemic and discuss the fiscal impact Background Prior to Pandemic, Hastings Had Core Budget reserves for a future renovation project of McAllister Deficits… As we have described in previous Tower, the school’s historic high-rise building publications, including The 2020-21 Budget: primarily used for student housing. Hastings College of the Law, Hastings’ core budget Pandemic Has Had Minor Impact on (consisting primarily of state General Fund and Hastings’ Core Budget, Larger Impact on student tuition revenue) has had a deficit since Auxiliary Budget. Though the school received a 2015-16. The deficit is connected to a decision reduction in state funding in the 2020-21 budget by the school in 2015-16 to increase its tuition ($546,000) and experienced a notable drop in its discounts for students. (Tuition discounts are a relatively small masters of law degree program form of financial aid whereby students have a (89 percent), these decreases were partially portion of their tuition charges waived over the offset by additional tuition revenue resulting from duration of their enrollment.) As the school’s core 3.3 percent enrollment growth in the school’s core funding levels could not support the higher level of juris doctor program. Taking all these factors into discounting, Hastings covered costs by drawing account, Hastings’ core funding in 2020-21 is down its core budget reserves. Though Hastings estimated to be $483,000 (0.8 percent) lower than has since returned to its more traditional level of in 2019-20. Compared to Hastings’ core budget, its tuition discounting for new student cohorts, its auxiliary budget has been impacted more adversely operating deficit has persisted as previous student by the pandemic. Hastings’ staff project auxiliary cohorts receiving the larger discounts are still revenues in 2020-21 to be at least $2.8 million enrolled. (about 33 percent) below pre-pandemic projections, …And Auxiliary Budget Surpluses. In contrast largely resulting from operating its housing program to its core budget, Hastings’ auxiliary budget at 30 percent capacity. Partially offsetting these (largely consisting of its student housing, parking, impacts, Hastings has received $859,671 in total and rental space) had annual surpluses prior to federal relief funds (from the two higher education the pandemic. These surpluses led to growth in funding rounds to date), of which $583,053 is for Hastings’ auxiliary reserves. Hastings indicates it offsetting campus revenue losses and covering plans to use a significant portion of these auxiliary 2021-22 LAO Budget Series 1 analysis full gutter extraordinary campus costs. The remaining In addition to drawing down its core reserves, $276,618 is for emergency student financial aid. Hastings reports taking some other actions to Hastings Has Largely Addressed Budget mitigate the impacts on its budget. For example, Shortfalls by Using Reserves. On its core budget, the school reports laying off some core-funded Hastings anticipates deficit spending of $2.2 million employees. In addition, several Hastings employees (3.6 percent of annual spending) in 2020-21, voluntarily agreed to one-time salary reductions leaving $10.7 million in its core unrestricted ranging from 5 percent to 50 percent. For its operating reserve (about two months of annual auxiliary programs, Hastings anticipates ending spending). This deficit would be notably smaller 2020-21 with a $849,667 deficit (18 percent than the one Hastings had in 2019-20 (which was of annual auxiliary spending) and $2.5 million $9.1 million, or 13 percent of annual spending). in reserves (more than six months of annual spending). Proposals Governor Proposes General Fund Base 2021-22 over its 2020-21 level. As Figure 1 shows, Increase. The Governor conditions the proposed this amount would more than restore core funding General Fund augmentation—$2.1 million reductions Hastings experienced in 2020-21. (The (14 percent)—on Hastings not increasing student Governor’s budget also adjusts Hastings’ General tuition charges in 2021-22. According to the Fund support downward by $356,000 to account administration, the proposed augmentation for changes in its lease revenue bond debt service.) would avoid a 7 percent increase in resident and Hastings Plans to Increase Spending nonresident tuition charges in 2021-22 initially Assuming Governor’s Proposed Funding adopted by Hastings’ governing board in Level. Though the Governor’s proposed base September 2020. Though Hastings would not increase would be unrestricted, Hasting shared increase its tuition charges, it anticipates a with our office its corresponding spending plan. 9.5 percent increase in enrollment, generating As Figure 2 on the next page shows, the largest $4.2 million in additional tuition revenue. When increase in spending would be for student factoring growth in other core funding, Hastings financial aid resulting from enrollment growth. anticipates total unrestricted core funding (The proportion used for tuition discounting would to increase by $6.5 million (11 percent) in remain at 30 percent, unchanged from the current Figure 1 Hastings’ Core Budget Would Increase Under Governor’s Proposal (Dollars in Millions, Except Per-Student Amounts) Change From 2020-21 Change From 2019-20 2019-20 2020-21 2021-22 Actual Estimated Proposed Amount Percent Amount Percent Core Funding General Funda $15.2 $14.7 $16.8 $2.1 14.3% $1.6 10.2% Student tuition and fees 42.7 43.1 47.3 4.2 9.7 4.6 10.8 Otherb 1.8 1.5 1.7 0.2 15.3 -0.1 -7.3 Totals $59.8 $59.3 $65.8 $6.5 11.0% $6.0 10.1% Full-Time Equivalent Students 944 963 1,054 91 9.5% 110 11.6% Funding Per Student $63,298 $61,587 $62,426 $839 1.4% -$872 -1.4% a Excludes ongoing General Fund for lease revenue bond debt service and one-time General Fund. b Consists of numerous fund sources, including state lottery, investment income, and overhead charged to auxiliary programs. 2021-22 LAO Budget Series 2 analysis full gutter year.) The next largest increase in spending Figure 2 involves faculty and staff salaries. Hastings Hastings Plans to Increase Spending and plans on increasing its employee salary pool Build Reserves of 3 percent, which would cover a mix of merit salary increases for faculty and nonrepresented Hastings’ 2021-22 Budget Plan Assuming Governor’s Proposed Funding Level (In Thousands) staff as well as general salary increases for its represented employees. Hastings also intends to Proposed Increase in Core Funding $6,514 restore one-time voluntary salary reductions taken Student tuition and fees 4,187 in 2020-21 and will see some savings resulting from State General Fund 2,101 Other funds 226 faculty separations. Finally, the plan would cover Planned Increase in Core Spending $2,887 projected cost increases to operating expenses and Student financial aid 1,818 equipment and employee benefits. Employee salaries Plan Would Eliminate Core Budget Deficit. Adjusted compensation pool (3 percent)a 895 As Hastings’ planned spending increases would Restoration of one-time salary reductions 181 be less than its projected funding increases, Faculty separations -297 Hastings’ core budget would end the year with Basic cost increases a surplus—ending its previous five-year trend of Operating expenses and equipment 201 core budget deficits. As Figure 3 shows, Hastings Pension and health care benefits 89 would end 2021-22 with a $1.4 million budget Remaining Amount to Build Core Reserves $3,627 surplus and $12.1 million in core budget reserves. a Consists of salaries and the impact of salary increases on social security, Medicare, In a preliminary multiyear budget plan submitted and pension costs prior to applying any applicable employer rate changes. to our office, Hastings projects its core budget will maintain budget surpluses over the next several Figure 3 years. The out-year plan assumes Hastings Anticipates Having a Budget Surplus in 2021-22 Hastings either increases student Ongoing Core Budget (Dollars in Millions) tuition annually or receives annual Change From 2020-21 augmentations in state General 2019-20 2020-21 2021-22 Actual Estimated Proposed Amount Percent Fund support. (Hastings also projects auxiliary budget surpluses Funding and Spending in 2021-22 and 2022-23, then Funding $59.8 $59.3 $65.8 $6.5 11.0% Spending 68.8 61.5 64.4 2.9 4.7 intends to use the built-up auxiliary reserves beginning in 2023-24 Deficit/Surplus Amount -$9.1 -$2.2 $1.4 $3.6 -$1.7 as it undertakes renovation of Percent of annual spending -13.2% -3.6% 2.2% — — McAllister Tower.) End-of-Year Reserves Amount $12.9 $10.7 $12.1 $1.4 $0.1 Percent of annual spending 18.7% 17.4% 18.9% — — Note: Excludes ongoing General Fund for lease revenue bond debt service, one-time General Fund, and carryover funds for the Diversity Pipeline Initiative (a multiyear financial aid initiative funded by one-time state General Fund provided in the 2018-19 budget). 2021-22 LAO Budget Series 3 analysis full gutter Assessment Various Factors to Consider in Assessing a complex set of factors when weighing tuition Hastings’ Spending Plan. In assessing Hastings’ increases at Hastings. On the one hand, increasing spending priorities, the Legislature likely will want Hastings’ tuition levels would treat the school more to consider not only Hastings’ specific budget and consistently with UC’s four law schools, which all program goals but also the broader context of increased student tuition charges in 2019-20 and the state’s other spending priorities as well as the 2020-21. All of these schools now have higher state’s own projected out-year operating deficits. resident tuition charges than Hastings. Increasing Some of Hastings’ planned spending increases tuition also has the benefit of expanding budget are largely unavoidable. For example, same as capacity and allowing for more spending priorities other agencies, Hastings will need to cover benefit to be funded, either for the law school itself or cost increases, as its employer contribution rates for the state more broadly. On the other hand, for both pensions and health care are projected tuition increases would raise costs for Hastings’ to increase in 2021-22. Other planned spending students and very likely result in additional student increases—for example, for salary increases—are borrowing. When factoring in both student debt more discretionary, particularly those increases for levels and salary levels after graduation, Hastings’ nonrepresented faculty and staff. Though Hastings’ graduates face higher debt burdens than their plan to increase its salary pool by 3 percent would UC peers. According to the website “Law School roughly align with projections of inflation, the Transparency,” the average Hastings’ graduate Legislature may wish to consider these increases in spends 24 percent of his or her first-year income to light of the compensation decisions affecting other repay student debt, whereas the burden for UC law state and university employee groups. Additionally, school graduates ranges between 13 percent and as a further way to contain costs, some agencies, 21 percent. including UC, are not budgeting for increases in General Fund Augmentation Comes With operating expenses and equipment in 2021-22, No Expectations. As we noted in our recent whereas Hastings is projecting 1.5 percent cost publication The 2021-22 Budget: Analysis of increases in this area. the Major University Proposals, the Governor’s Overall Budget Outlook Is Improved, but budget would condition funding increases to Target Reserve Level Could Be Reconsidered. the California State University (CSU) and UC on Hastings’ budget is in better shape this year certain performance and program expectations. than in any of the past five years, with the school The Governor does not extend any of these projecting a surplus rather than deficits for the expectations to Hastings, nor does it create first time over this period. The improvement in its expectations specially tailored for Hastings. One of fiscal situation is due to several factors, including the university expectations—relating to maintaining several consecutive years of increases in its state higher levels of online education moving forward— General Fund support, increases in its enrollment, has applications for Hastings too. Much like at and moving back to its more traditional tuition CSU and UC, Hastings’ move to large-scale online discounting policy. While we think the improvement instruction could provide the Legislature useful in Hastings’ fiscal outlook is commendable, we data as to which courses were particularly well think growing Hastings’ core reserve levels, as suited to online formats, what barriers faculty and the school plans to do, might be a lower priority students faced, and the costs Hastings incurred to in 2021-22. The rationale of growing Hastings’ transition courses from in-person to online formats. reserves might be especially questionable in light of (The Governor also conditions CSU and UC the state budget’s projected deficits in future years. funding increases on closing student equity gaps, Competing Factors to Weigh With Potential particularly at the undergraduate level. Hastings’ Tuition Increases. As we noted in last year’s staff reports that the law school’s graduation rates post on the law school’s budget, the state faces do not vary notably by student race/ethnicity.) 2021-22 LAO Budget Series 4 analysis full gutter Recommendations Treat Proposed Augmentation as Maximum Direct Hastings to Report on Online Increase. We recommend the Legislature treat the Education. In line with our recommendations Governor’s proposed General Fund augmentation for the other higher education segments, we for Hastings as a maximum potential increase, even recommend the Legislature adopt an expectation were the state’s budget situation to improve in May. that Hastings report on its experience with online We think the January proposal could be considered education. Such a report should include: (1) data a maximum given Hastings’ strong budget situation on pre-pandemic enrollment in its online courses, relative to previous years and the state’s overall (2) analysis as to which courses are most suitable fiscal condition. Were the Legislature to consider for online instruction, (3) an estimate of the fiscal any part of Hastings’ spending plan to be a low impact of expanding online education, (4) a plan priority or were the state’s budget situation to for improving student access and outcomes using worsen in May, the Legislature could modify the technology, and (5) an assessment of the need proposed augmentation downward. for additional faculty professional development. To ensure this information is available to assist next year’s budget deliberations, we recommend requiring Hastings to submit this information by November 2021. LAO Publications This report was prepared by Jason Constantouros, and reviewed by Jennifer 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. 2021-22 LAO Budget Series 5