The 2022-23 Budget: Analysis of Major UC Proposals

2022-23 BUDGET The 2022-23 Budget: Analysis of Major UC Proposals Summary Brief Covers Major University of California (UC) Proposals. This brief focuses on the Governor’s proposals for UC base support, enrollment, and deferred maintenance. Base increases and enrollment growth account for nearly all new proposed ongoing spending for UC, with deferred maintenance accounting for about one-third of proposed one-time spending. Legislature Could Tie Base Augmentation More Closely to Anticipated Cost Increases. The Governor proposes providing UC a $201 million (5 percent) General Fund base increase in 2022-23. Coupled with additional tuition revenue (an estimated $45 million), UC would have $246 million available to cover core operating cost increases. We recommend the Legislature move away from providing UC arbitrary base increases and instead tie augmentations to anticipated cost increases. For illustration, at the Governor’s proposed funding level, the Legislature could cover UC’s nonsalary cost increases (including employee benefits and debt service) as well as a nearly 4 percent increase in UC’s salary pool. UC’s Enrollment Plan Creates Difficult Choices for Legislature. Intended to implement enrollment agreements established last year, the Governor proposes $99 million to grow UC resident undergraduate enrollment by 7,132 students in 2022-23. (This number includes base growth of 6,230 students, coupled with replacing 902 nonresident students with resident students.) Despite the Governor’s proposal, UC indicates it is planning to grow by only approximately 2,000 resident undergraduate students in 2022-23. UC indicates its plan to grow less in 2022-23 is due to higher-than-expected enrollment in 2020-21. We recommend the Legislature treat UC’s planned 2,000 student growth in 2022-23 as a starting point (at a cost of $43 million). The Legislature could provide funding above this amount if it wanted to fund over-target enrollment from 2020-21. Though funding past over-target enrollment runs counter to recent state practice, the Legislature could consider making an exception this year, as the pandemic might have created more uncertainty with enrollment planning. Facility Maintenance Remains Underfunded at UC. The Governor’s budget proposes $100 million one time for deferred maintenance and energy efficiency projects at UC. UC reports having an existing maintenance backlog of $7.3 billion and an annual ongoing capital renewal need of around $1.2 billion to keep the backlog from growing. For comparison, UC estimates spending $291 million in 2019-20 on maintenance. Given the substantial backlog facing UC, deferred maintenance is a reasonable use of one-time funding. One-time funding, however, does not address the ongoing problem of underfunding in this area. We encourage the Legislature to begin developing a long-term strategy for addressing UC’s ongoing facility maintenance needs. GABRIEL PETEK | LEGISLATIVE ANALYST FEBRUARY 2022 www.lao.ca.gov 1 2022-23 BUDGET INTRODUCTION Brief Focuses on the University of science students only. Campuses offer degrees California (UC). UC is one of California’s three through the doctoral level. This brief is organized public higher education segments. In contrast around the Governor’s major 2022-23 budget to campuses at the other two segments—the proposals for UC. The first section of the brief California State University (CSU) and the California provides an overview of the Governor’s UC budget Community Colleges (CCC)—UC’s ten campuses package. The remaining three sections of the brief are research universities. Nine of UC’s campuses focus on base support, enrollment, and deferred enroll undergraduate, graduate, and professional maintenance, respectively. We anticipate covering school students across a range of disciplines, other UC proposals in subsequent products. whereas a tenth campus enrolls graduate health OVERVIEW UC Budget Is $44 Billion in 2021-22. Though reflecting an increase of $308 million (7.7 percent). having the lowest level of state support, the fewest By comparison, we estimate tuition would grow campuses, and the least student enrollment, UC from $5.3 billion to $5.4 billion, reflecting an has the largest budget of the three public higher increase of $148 million (2.8 percent). In 2022-23, education segments—with total funding greater tuition revenue is expected to grow both due to than the CSU and CCC budgets combined. increases in tuition charges and enrollment growth. As Figure 1 shows, UC receives funding from Under the Governor’s budget, we estimate ongoing a diverse array of sources. In most years, the core funding per student to increase by 2.6 percent. Legislature focuses its budget decisions around UC’s “core Figure 1 funds.” Core funds at UC primarily consist of state General Fund and UC Receives Funding From Many Sources student tuition revenue, with a small $44 Billion in 2021-22 portion coming from other sources (including overhead funds from federal and state research grants). Other Core Funds UC uses its core funds to support its core mission of undergraduate Private General and graduate education, along with Fund certain state-supported research Federal and outreach programs. Tuition and Fees Ongoing Core Funding Other Increases by $392 Million (4 Percent) Under Governor’s Sales and Services Budget. As Figure 2 shows, most of the increase comes from Medical Centers Noncore the General Fund, with a smaller Funds increase from student tuition and fees. Ongoing General Fund would increase from $4 billion in 2021-22 to $4.3 billion in 2022-23, 2 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Governor Has Several Figure 2 UC General Fund Priorities. As Figure 3 shows, unrestricted base Largest Portion of UC Core Fund Increase increases and enrollment growth Comes From General Fund account for the bulk of the proposed Ongoing Core Funds (Dollars in Millions) new ongoing funding. The Governor’s budget also provides $295 million Change From 2021-22 2020-21 2021-22 2022-23 in one-time funding for specified Actual Revised Proposed Amount Percent initiatives, with the largest amounts General Fund $3,465 $4,010 $4,318 $308 7.7% for certain climate-related initiatives Tuition and fees 4,935 5,295 5,443a 148 2.8 as well as deferred maintenance and Lottery 43 51 50 —b —b energy efficiency projects. Other core fundsc 395 395 395 — — Totals $8,838 $9,750 $10,207 $456 4.7% UC Plans to Increase Tuition FTE studentsd 289,314 293,728 301,377 7,649 2.6% Charges in 2022-23. In July 2021, Funding per student $30,549 $33,196 $33,868 $672 2.0% the Board of Regents adopted a plan a Estimate from Legislative Analyst’s Office. The Department of Finance’s original estimate did not to increase resident and nonresident reflect the administration’s enrollment growth proposal. b Amount is less than $500,000 or 0.05 percent. tuition charges over the next several c Includes a portion of overhead funding on federal and state grants and a portion of patent royalty years. For undergraduates, tuition income. d Reflects total resident and nonresident enrollment in undergraduate, graduate, professional, and and fee charges will be cohort health science programs. based, with fee increases applied FTE = full-time equivalent. only to new students and held flat for continuing students. In contrast, tuition will increase annually for all Figure 3 graduate students. Generally, tuition increases will be pegged to a rolling Governor Proposes New UC Ongoing and three-year average of the California One-Time Spending consumer price index. Undergraduate General Fund Changes in 2022-23 Over Revised 2021-22 (In Millions) charges, however, will increase by more than inflation the first few years Ongoing Changes of implementation (for example, Base increase (5 percent) $201 2 percentage points over inflation in Resident undergraduate enrollment growth 68 2022-23). UC plans to initiate its new Nonresident enrollment reduction plana 31 tuition policy in 2022-23. Foster youth programs 6 UC Davis Firearm Violence Center 2 Governor Announces Multiyear Graduate medical education 1 Compact With UC. In addition to Subtotal ($308) his 2022-23 budget proposals for One Time Initiatives UC, the Governor has indicated Climate initiatives his intention to continue providing Seed and matching grants for applied research $100 UC with 5 percent base increases Regional climate technology incubators 50 annually through 2026-27. He also Regional workforce and training hubs 35 has indicated his interest in having Deferred maintenance and energy efficiency projects 100 UC San Francisco Dyslexia Center 10 UC pursue 18 expectations spanning Subtotal ($295) six priority areas—increasing Total $603 access for California students, a In 2022-23, UC would reduce its nonresident undergraduate enrollment at three campuses improving student outcomes (Berkeley, Los Angeles, and San Diego) by a total of 902 students. It would backfill these slots with the same number of additional resident undergraduate students. and equity, making UC more affordable for students, enhancing intersegmental collaboration, www.lao.ca.gov 3 2022-23 BUDGET improving workforce alignment, and expanding make progress in meeting one or more of these online education. (The administration currently expectations. We describe and assess the does not intend to codify these expectations.) Governor’s multiyear compact with UC, as well as The Department of Finance indicates that his multiyear agreements with CSU and CCC, in the administration could consider proposing our publication The 2022-23 Budget: Overview of smaller future base increases were UC not to Governor’s Higher Education Budget Proposals. BASE SUPPORT In this section, we first provide background on contribution rates. Moreover, about two-thirds of UC’s operating costs and how UC generally covers UC’s core-funded employees are not represented its operating cost increases. Next, we describe the by a union, giving the university considerable Governor’s proposed base increase for UC as well year-to-year flexibility to determine salary increases. as identify the additional tuition revenue expected That said, UC faces certain limitations each year. to result from UC’s new tuition policy. We then For example, UC generally must pay debt service assess the Governor’s proposal and make an on the bonds it issues. UC also must ensure that associated recommendation. its pension system has sufficient funds to pay for pension benefits. Background State Has Primarily Supported UC Operations UC Has Several Core Operating Costs. As with Through Unrestricted Base Increases. In recent most state agencies, UC spends the majority of its years, the state and UC have used three main ongoing core funds (about 70 percent in 2020-21) means to cover its operational cost increases: on employee compensation, including salaries, (1) state General Fund augmentations, (2) additional employee health benefits, retiree health benefits, revenue from tuition increases, and (3) increased and pensions. Beyond employee compensation, nonresident undergraduate enrollment. (Because UC spends its core funds on other annual costs, nonresident undergraduate students pay a such as paying debt service on its systemwide supplemental charge that covers more than the bonds, supporting student financial aid programs, cost of their education, the net revenue generated and covering other operating expenses and from these students is available to support cost equipment (OE&E). Each year, campuses typically increases.) Figure 4 tracks the use of these budget face pressure to increase employee salaries at tools over the past several years. In all but one of least at the pace of inflation, with certain other the years shown, the state provided UC with base operating costs (such as health care, pension, General Fund increases. Notably, in only one of and utility costs) also tending to rise over time. these years (2019-20) was the base increase linked Though operational spending grows in most to specific UC operating cost increases. In the other years, UC has pursued certain actions to contain years of the period, the base increases appeared this growth. For example, UC has pursued new to be set arbitrarily, without a direct link to UC’s procurement practices and energy efficiency operating costs. In addition to the base General projects with the aim of slowing associated Fund augmentations, UC campuses regularly cost increases. increased revenue generated from nonresident UC Has Considerable Flexibility to Manage students by increasing both their supplemental Its Operating Costs. In contrast to most state tuition charge and enrollment levels. In most agencies, UC directly manages its employee recent years, UC did not increase the base tuition compensation programs. That is, it sets salaries charge (which is applied to both resident and for its employees, manages its own employee and nonresident students). retiree benefit programs, and sets its own pension 4 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Proposal Assessment Governor Proposes Unrestricted General Base Increases Are Poor Approach to Fund Base Increase. The Governor proposes a Budgeting for Operating Costs. As we have said $201 million (5 percent) unrestricted General Fund in many previous publications, base increases are increase for UC in 2022-23. (As part of his multiyear a poor approach for two reasons. First, they lack compact, the Governor proposes to provide transparency. The Governor does not identify how 5 percent base increases annually through 2026-27, UC is to use its base increase. Moreover, UC itself with future increases contingent on UC meeting does not adopt a corresponding spending plan until certain expectations.) after final budget enactment in June. Second, given UC Also Anticipates Receiving More Tuition the purpose of the funding is unspecified, the Revenue. UC estimates it will receive roughly amount of proposed augmentations are arbitrary, $45 million in new student tuition revenue available lacking clear justification based on documented to cover operating costs. Of this amount, $41 million cost increases. will come from tuition increases on resident and Legislature Could Begin by Considering nonresident students. The remainder will be Nonsalary Cost Increases. Among UC’s operating generated from growing nonresident undergraduate costs, we think the Legislature may wish to first enrollment. (The nonresident enrollment growth will consider how much to provide for employee benefits, be concentrated at UC’s less selective campuses. debt service, and OE&E. Costs in these areas are As we note in the “Enrollment” section of this brief, driven by UC policy and contractual arrangements UC plans to reduce nonresident undergraduate that, absent a change in policy, are set to increase. enrollment at the Berkeley, Los Angeles, and In 2022-23, UC estimates that total core costs in San Diego campuses in 2022-23.) The exact amount these areas will increase by $78 million. of tuition revenue UC raises will depend on the Legislature Then Could Consider Salary number of students it enrolls in 2022-23. (Of the Increases. After covering nonsalary cost increases, revenue generated from fee increases, UC intends the Legislature could consider how much funding to set aside a portion for student financial aid. The to provide for salary increases. Generally speaking, amounts in this paragraph are net of this set aside.) the goal of providing salary increases is to ensure the university is able to attract and retain faculty and staff. Though recent evidence of the competitiveness Figure 4 UC Has Used Several Means to Cover Operating Cost Increases Annual Change 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 Base General Fund support 5%a 5%a 4% 4% 4%b 3% 3%c -8%d 5% Tuition charges Base tuition — — — — 3 -1e — — — Nonresident — — 8 8 5 3 3 — — supplemental tuition Student Services Fee — — 5 5 5 — — — — Nonresident undergraduate 29 22 17 12 6 6 2 -5 7 enrollment a Small portion of increases were designated for specified purposes, such as online course development and UC labor center operations. b Portion of augmentation was covered with Proposition 56 funds. c Increase connected to specific UC operating cost estimates. d State restored this reduction in 2021-22, on top of the base increase it provided UC that year. e Decrease due to end of special $60 surcharge adopted in 2007-08. www.lao.ca.gov 5 2022-23 BUDGET of UC salaries is limited, there is little evidence that Recommendation the university experiences difficulty with attracting Build Base Increase Around Identified most of its faculty and staff. For example, UC faculty Operating Cost Increases. We recommend salaries on average are higher than most public the Legislature decide the level of base increase universities engaging in a similar level of research. to provide UC by considering the operating Moreover, faculty separations have remained cost increases it wants to support in 2022-23. about the same over the last ten years. That said, The Legislature could start with UC’s nonsalary campuses have reported to our office that they have cost increases ($78 million). From this point, difficulty recruiting and retaining certain types of the Legislature could consider providing funds staff, such as mental health counselors. Additionally, for salary increases (around $45 million for inflation is anticipated to be higher in 2022-23 than each 1 percent increase). For illustration, at the in past decades, likely generating pressure for Governor’s proposed funding augmentation larger-than-typical salary increases. The Legislature ($246 million, consisting of $201 million in new likely will want to weigh these competing factors General Fund and $45 million in new tuition when deciding how much funding to provide and fee revenue), the Legislature could cover for salary increases in 2022-23. To help with the UC’s nonsalary cost increases as well as a nearly Legislature’s planning, we estimate each 1 percent 4 percent increase in UC’s salary pool. increase in UC’s total salary pool in 2022-23 would be approximately $45 million. ENROLLMENT In this section, we first provide background on State’s Approach Has Changed in Three Key the state’s approach to funding UC enrollment Ways in Recent Years. Since the 2015-16 Budget as well as review recent UC enrollment trends. Act, the state has made three key changes to its Next, we describe the Governor’s proposed enrollment approach for UC, described below. funding increases for enrollment in 2022-23 and • Setting an Outyear Target. Whereas the state his proposed multiyear enrollment plan. We then historically set targets for the upcoming year, assess the Governor’s proposals and make most recent budgets have set a target for the associated recommendations. following year (for example, setting a target in the 2021-22 budget for 2022-23). Setting Background an outyear target allows the state to better State Typically Sets Enrollment Targets and influence admission decisions, as campuses Provides Associated Funding. Over the past two typically have already made their decisions for decades, the state’s typical enrollment approach for the upcoming year before the enactment of the UC has been to set systemwide resident enrollment state budget in June. targets. If the target reflects growth (sometimes • Setting Growth Target Only. In the past, the the state leaves the target flat), the state typically state commonly specified both the overall level provides associated General Fund augmentations. of enrollment it expected and the associated Augmentations have been determined using an growth over the previous year. (For example, agreed-upon per-student funding rate derived from the state might set the total enrollment level the “marginal cost” formula. This formula estimates at 200,000 students, with associated growth the cost to enroll each additional student and shares from the prior year set at 1,000 students.) the cost between anticipated tuition revenue and Since the 2015-16 Budget Act, the state has state General Fund. stopped setting the overall enrollment level and specified only the expected amount of growth over a baseline year. 6 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET • Setting Targets for Undergraduate initiated a plan to reduce the nonresident share Students Only. The state commonly has set of undergraduate students at the Berkeley, Los targets for overall resident enrollment, giving UC Angeles, and San Diego campuses from over flexibility to determine the mix of undergraduate 21 percent in 2021-22 to 18 percent by 2026-27. and graduate students. Most recent budgets, (One additional campus—Irvine—has approximately however, have set a target for UC resident 18 percent nonresident undergraduates and the undergraduate growth only. (As an exception, remaining five undergraduate-serving campuses the 2017-18 Budget Act funded growth of have smaller shares.) UC is to achieve the reduction 500 graduate students.) targets by gradually enrolling fewer incoming students. The plan is to start in 2022-23, with the State Set Resident Undergraduate Enrollment state providing funding for the lost tuition revenue Target for 2022-23. In the midst of the pandemic, associated with the reduction in nonresident the Legislature opted not to set enrollment growth students. At the time of adopting this plan, it was targets in the 2020-21 Budget Act for 2021-22. Such estimated UC would have to reduce nonresident an approach gave UC flexibility to manage funding enrollment by 902 students annually. reductions and uncertain enrollment demand that year. When state revenues recovered the following Recent Enrollment Trends year, the state resumed setting targets. Specifically, UC Exceeded Targets From 2016-17 Through the state set an expectation in the 2021-22 Budget 2020-21. As Figure 5 shows, each year the state Act that UC grow resident undergraduate enrollment established an enrollment growth target, UC in 2022-23 by 6,230 students. The budget act exceeded its growth expectation. To date, the state passed in June had made this a two-year expectation has not provided UC additional General Fund support by setting 2020-21 as the baseline year, but clean-up specifically designated for this over-target enrollment. legislation enacted in the fall amended the baseline Instead, the state has built this over-target enrollment year to 2021-22. Language in the 2021-22 Budget into the new baseline it sets for UC. For example, Act also stated legislative intent to provide ongoing in 2017-18, UC resident undergraduate enrollment state funding for this growth beginning in 2022-23. grew by around 4,700 students over the level in State Also Adopted Multiyear Plan to Reduce 2016-17, exceeding the 2,500 student growth Nonresident Undergraduate Enrollment at UC. Until recently, the state typically has been silent on the Figure 5 number of nonresident students UC Exceeded Recent Enrollment Targets that UC campuses could enroll. Nonresident students Full-Time Equivalent Resident Undergraduate Students are self-supported by revenue generated from tuition and 200,000 Over-Target Growth supplemental tuition charges and Target Growth historically have comprised a small 190,000 share of undergraduate enrollment. Beginning around the time of the 180,000 Great Recession, however, several UC campuses notably increased 170,000 nonresident undergraduate enrollment. Concerned about the potential impact of this growth 160,000 2016-17 2017-18 2018-19 2019-20a 2020-21 on access for resident students, the state began adopting policies a The 2018-19 budget did not set an outyear enrollment growth target for 2019-20, though UC grew enrollment in that year. The 2019-20 budget set a growth target of 4,860 students in 2020-21 over the level in 2018-19. to limit nonresident enrollment. Most recently, the 2021-22 budget www.lao.ca.gov 7 2022-23 BUDGET budgeted by the state. When the state set the Proposals growth target for 2018-19, it set the new baseline at Proposes $99 Million Ongoing General Fund the higher 2017-18 level, thus effectively absorbing for Resident Undergraduate Enrollment Growth the over-target enrollment. Since 2016-17, UC has in 2022-23. Of this amount, $67.8 million is to enrolled around 10,700 students more than the state support enrollment growth of 6,230 undergraduate growth targets, with more than half of the over-target resident students in 2022-23. Proposed budget bill growth occurring in 2020-21 alone. language specifies 2020-21, rather than 2021-22, as Resident Undergraduate Enrollment in the baseline year. This amount assumes a marginal 2021-22 Expected to Decline Slightly. Though the cost of $10,866 per student, the rate for 2021-22. 2021-22 academic year has not yet finished, UC The remaining $31 million is for reducing nonresident has made initial estimates based on enrollment enrollment by 902 students and replacing those levels in the summer and fall of 2021. UC estimates students with resident students. The $31 million is 2021-22 resident undergraduate enrollment to intended to replace lost nonresident supplemental be 199,358 students—717 students (0.4 percent) tuition revenue, as well as lost base tuition revenue below the level in 2020-21. As Figure 6 shows, paid by nonresident students that supports financial UC experienced a drop in summer 2021 enrollment. aid for resident students. Including both proposals Summer enrollment spiked in 2020 in the midst of together, the administration expects UC to enroll the pandemic, likely because students had more 207,207 resident undergraduate students in 2022-23, opportunities to study online and fewer summer 7,132 more students than the level in 2020-21. employment opportunities. The subsequent Proposes Multiyear Enrollment Plan. drop in summer 2021 could reflect fewer online The Governor’s compact includes a multiyear plan course offerings or improved summer employment to expand undergraduate and graduate student opportunities for students. Though UC saw a drop enrollment. Specifically, the administration proposes in summer 2021 enrollment, fall 2021 enrollment that UC grow resident undergraduate enrollment by increased, which likely will translate into a around 1 percent each year from 2023-24 through corresponding increase in the spring 2022 term. 2026-27. (Though proposed as part of the compact, UC Is Planning for Lower Growth in 2022-23 the Governor does not specify the 1 percent growth Than Directed in Budget. In its 2022-23 budget expectation for 2023-24 in the budget bill.) According request to the state, the UC Board of Regents to the administration, this annual growth would adopted a plan to grow resident undergraduate represent more than 8,000 additional students enrollment by 2,000 students over the level in across the four-year period. The administration 2021-22, thus enrolling around 202,000 students also proposes that UC grow graduate student in 2022-23. Of the growth of 2,000 students in enrollment by roughly 2,500 students over the 2022-23, 900 would be allocated to the Berkeley, same time period. Under the Governor’s compact, Los Angeles, and San Diego campuses (combined) to replace reductions in nonresident students. Figure 6 The remaining 1,100 students would UC Enrollment Drop in 2021-22 Attributable to be concentrated at the remaining six Decline in Summer Enrollment undergraduate-serving campuses. Resident Undergraduate Full-Time Equivalent Students According to UC, it does not intend to grow by 6,230 students Change From 2020-21 2019-20 2020-21 2021-22 in 2022-23 (the target set in the Actual Actual Estimated Amount Percent 2021-22 Budget Act) because of Fall through spring 176,984 177,643 180,113 2,470 1.4% having enrollment over its target Summera 16,808 22,432 19,245 -3,187 -14.2 in previous years. Specifically, UC Totals 193,792 200,075 199,358 -717 -0.4% would like to count over-target a Summer term is treated as the first term of a fiscal year. For example, summer 2019 is counted growth in 2020-21 toward the state’s toward 2019-20. growth expectation. 8 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET UC would not receive additional funds for enrollment Three Undergraduate Enrollment Trends growth over the period, but instead it would need to Consider. The recent pandemic has made it to accommodate the higher costs from within its increasingly complicated for the state and UC to base increases. project enrollment demand. Nonetheless, three key trends, described below, could shape the Assessment Legislature’s considerations for UC resident Disconnect Between Governor’s Proposal undergraduate enrollment in 2023-24. and UC Plan Raises Issues for Legislature • High School Graduates. The Department to Consider. The administration describes its of Finance projects the number of high 2022-23 enrollment growth proposal as intended school graduates in California to increase by to implement the state budget agreement adopted 0.3 percent in 2021-22 (affecting fall 2022 last year. UC has indicated, however, that it is demand) and by 0.6 percent in 2022-23 not planning to meet the administration’s target (affecting fall 2023 demand). All else equal, enrollment level of 207,207 students. The Legislature a rise in high school graduates increases could respond to this disconnect by reducing UC’s UC freshman enrollment demand. associated enrollment growth funding—providing • Community College Students. funding only for the additional students UC plans Transfer student enrollment rose at UC from to enroll in 2022-23 over the set baseline year. This fall 2016 through fall 2020, corresponding approach keeps the tightest connection between with growth in CCC enrollment over the new state funding and new students enrolled. same time period. CCC enrollment declined Alternatively, the Legislature could consider providing in 2020-21, however, and a further drop is UC the full amount proposed by the Governor— expected in 2021-22. Whether this drop results effectively funding some over-target enrollment from in a corresponding decline in UC transfer 2020-21 and raising UC’s per-student funding level. enrollment is uncertain. UC has enrollment In recent years, the state has not funded over-target management tools, such as reducing transfer enrollment. Such a practice could create incentives referrals to less selective campuses, that could for UC to disregard state enrollment growth targets allow it to increase its transfer yield rates and with resulting fiscal impacts that could run counter maintain its transfer enrollment levels. to legislative intent. UC, however, is in a somewhat • Referral Pools. UC refers students who are not unusual situation due to the pandemic. Given the admitted to their campuses of choice to less unusual times, the Legislature may want to consider selective campuses. UC Merced is UC’s sole making an exception for UC this year. referral campus for freshman applicants, and Setting Funded Enrollment Level Could Clarify UC Merced and UC Riverside are UC’s referral Intent Moving Forward. The purpose of setting campuses for transfer students. Providing enrollment targets is to make clear expectations funding for more enrollment can potentially regarding the number students the universities are to reduce the number of students referred to enroll. The state’s recent practice of setting growth less selective campuses. In fall 2020 (the most targets has worked well when the Legislature, recent year of data publicly available), UC administration, and segments shared a common referred 9,110 freshman applicants (10 percent). understanding of the baseline level of students. UC does not regularly report the number of Recent experience, however, suggests that there transfer students referred. may be different interpretations as to the existing baseline level of funded enrollment at UC. Without a Eligibility and Admission Policies Remain a shared understanding, the Legislature runs the risk Consideration. Historically, the state has expected of UC and the administration implementing future UC to draw its freshman admits from the top enrollment expectations in ways that do not align 12.5 percent of the state’s high school graduates. with its intent. As we have noted in previous analyses, UC has been found to be drawing from beyond these pools in recent years and likely will continue to do so. www.lao.ca.gov 9 2022-23 BUDGET In past periods, the state has expected UC to tighten starting point for funding (costing $12 million, freshman admission policies when it was found to using the 2022-23 marginal cost of instruction of be drawing from beyond these pools. When the UC $11,200 per student). Though the Legislature could tightens its admission policies, it effectively redirects consider providing more than the $12 million, such a portion of its enrollment to CSU and CCC. action would differ from recent state practice. Outyear Resident Enrollment Target Likely The Legislature likely would want to consider Will Affect Future Nonresident Plans. As the providing more funding only if it were concerned Legislature increases systemwide resident about UC having over-target enrollment in 2020-21 undergraduate enrollment (and thus, overall and its resulting per-student funding being too low. undergraduate enrollment), it reduces the number of Adopt Nonresident Reduction Funds. nonresident students UC must reduce to attain the Consistent with last year’s budget agreement, we 18 percent goal at the Berkeley, Los Angeles, and recommend adopting funds for planned reductions San Diego campuses. If the Legislature desires to in nonresident enrollment (and associated growth grow resident enrollment in future years, it will want in resident students) in 2022-23. We think the to receive updated nonresident enrollment and cost Governor’s proposed level of funding ($31 million information from UC. UC currently is required to for the 900 student replacement) likely is justified. submit an annual report with this information to the That said, we recommend the Legislature review Legislature by January 31, with the first report due at UC’s forthcoming report, due January 31, to ensure the end of this month. UC intends to reduce nonresident enrollment at the Different Set of Considerations for Graduate affected campuses by a combined 900 students. Enrollment. In contrast to undergraduate enrollment, Set Resident Undergraduate Enrollment access has not been a primary focus of the state Target in 2023-24. After making decisions for when deciding whether to support graduate student 2022-23, we recommend the Legislature set a enrollment growth. Rather, the primary focus in resident undergraduate enrollment target for past years has been on state workforce needs for budget-year-plus-one. Depending on the factors graduate students. Existing workforce demand likely discussed earlier, the Legislature could consider varies for academic doctoral, academic master’s, any number of options. For example, the Legislature and professional graduate students. For example, could set the target in 2023-24 at 207,207 students, there is little evidence that the state is facing overall thus giving UC more time to meet the administration’s shortages of doctoral students to fill higher education proposed enrollment level. Alternatively, the faculty positions. On the other hand, there is some Legislature could adjust its expectations based on evidence of regional shortages for certain professions more recent trends, funding more or less growth as (such as for primary care physicians). Beyond it deems warranted. Regardless of the Legislature’s workforce considerations, UC campuses also often desired level of enrollment, we recommend setting seek to grow graduate enrollment proportionate to the target enrollment level, rather than just a growth undergraduate enrollment. This practice ensures target, for 2023-24 in the 2022-23 Budget Act. Such campuses have an adequate number of teaching and an approach would better clarify legislative intent and research assistants to accommodate the higher level enhance accountability. Moreover, we recommend of undergraduate courses and faculty workload. scheduling any funds for growth in 2023-24 to be appropriated in the 2023-24 budget. This approach Recommendations allows the state more easily to align funding with Use UC’s Planned Growth as a Starting updated enrollment estimates for that year. Point for Resident Undergraduate Enrollment Consider Expectations for Graduate in 2022-23. As UC indicates it will enroll only Enrollment. If the Legislature has specific workforce 1,100 rather than 6,230 additional resident priorities that entail graduate student growth, it could undergraduate students in 2022-23 (excluding set a target for 2023-24. That said, the Legislature the approximately 900 new students from the could continue its current approach of not setting nonresident reduction plan), we recommend the a graduate enrollment target if it has no specific Legislature consider that planned growth as a graduate student-related priorities. 10 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET FACILITY MAINTENANCE In this section, we provide background on UC’s UC Recently Released Updated Estimates. maintenance backlog, describe the Governor’s In December 2021, UC released its long-term proposal to fund deferred maintenance and energy maintenance and renewal report to the Legislature. efficiency projects at UC, assess the proposal, and In the report, UC estimates having a total ten-year offer associated recommendations. Throughout capital renewal need of $12.3 billion, on top of this section, we use “facility maintenance” broadly an existing $7.3 billion maintenance backlog. to encompass activities needed to keep academic (According to UC, its capital renewal need likely facilities and infrastructure in good condition. is higher than $12.3 billion, as the university has This includes capital renewal projects to replace not yet completed its systemwide infrastructure aging building components, such as roofs and assessments.) As Figure 7 shows, UC estimates heating and ventilation systems. it would need to spend an average of $1.2 billion annually over the next ten years to address its Background capital renewal needs, as well as an additional Campuses Have Maintenance Backlogs. $728 million annually to eliminate its existing Like most state agencies, UC campuses are backlog. The combined amount is $1.7 billion responsible for funding the maintenance and more than the best available estimate of UC’s operations of their buildings from their support current annual spending on these types of projects budgets. When campuses do not set aside enough ($291 million in 2019-20). funding from their support budgets to maintain State Has Provided Funds to Address their facilities, they begin accumulating backlogs. Backlogs. In the years since the Great Recession, These backlogs can build up over time, especially the state has provided one-time funding to UC to during recessions when campuses sometimes help address its maintenance backlog. Figure 8 defer maintenance projects as a way to help them on the next page shows the amount appropriated cope with state funding reductions. by the state for deferred maintenance and related UC Has Been Developing a Better Estimate purposes each year from 2015-16 through 2021-22. of Its Maintenance Backlog. For the past several years, UC has indicated that its maintenance Figure 7 backlog totals billions of dollars. Until very UC Has Considerable Maintenance recently, it lacked a more precise estimate. This is because campuses historically maintained their and Capital Renewal Needs own lists of deferred maintenance projects. (In Millions) According to staff at the UC Office of the President, these lists were not reliable because Total Costs campuses used different approaches to estimate Projected ten-year renewal needa $12,313 Existing maintenance backlog 7,277 their backlogs and generally had not undertaken Total $19,590 comprehensive condition assessments of their Average Annual Costb buildings. To obtain a better estimate, UC began Capital renewal costs $1,231 undertaking a multiyear project known as the Maintenance backlog 728 Integrated Capital Asset Management Program Total $1,959 (ICAMP). Under ICAMP, UC is conducting facility Existing Annual Spending $291 condition assessments of all its academic facilities Gap in Annual Spending $1,669 and infrastructure. In conjunction with this effort, a Reflects renewal need for academic facilities only, as UC is still the Legislature in the Supplemental Report of assessing the condition of its infrastructure. the 2019-20 Budget Act directed UC to submit b Reflects estimates of amounts UC would need to spend each year for ten years to prevent its backlog from growing while also eliminating the a report quantifying its long-term maintenance existing backlog. and renewal needs. www.lao.ca.gov 11 2022-23 BUDGET Funding over the period totals $704 million, with expensive facilities projects, including emergency nearly half of that amount provided in 2021-22 repairs, in the long run. Funding energy efficiency alone. Notably, the state allowed UC to use its projects also could be beneficial, as these 2021-22 allocation to pay for either deferred projects are intended to reduce campuses’ utility maintenance or energy efficiency projects. UC costs over time. reports that it is spending about two-thirds of the One-Time Funding Does Not Address allocation on energy efficiency projects (most of Underlying Cause of Backlog. Deferred which also address deferred maintenance), and the maintenance backlogs tend to emerge when remaining one-third on projects strictly intended to campuses do not consistently maintain their address deferred maintenance. facilities and infrastructure on an ongoing basis. Based on its estimates, UC would need to increase Proposal its ongoing spending on maintenance and capital Governor Proposes Funding for Deferred renewal by around $1 billion just to keep the Maintenance and Energy Efficiency Projects. backlog from growing. (This reflects the gap The Governor proposes to provide $100 million between UC’s average annual capital renewal costs one-time General Fund to UC for these purposes. of $1.2 billion and its existing annual spending Though UC has not submitted a list of specific of $291 million.) Although one-time funding can projects that would receive funding, UC indicates help reduce the backlog in the short term, it does that it likely would draw from a list of projects not address the underlying ongoing problem of totaling $788 million deemed by ICAMP to be underfunding in this area. “highest risk.” (Upon request, UC submitted this list of projects to our office in January 2022.) Recommendations According to UC, projects in the highest risk Consider Governor’s Proposal as a Starting category should be addressed within the next few Point. To address UC’s maintenance backlog, years to avoid disruptions to campus operations. we recommend the Legislature provide at least Budget bill language would direct the administration the $100 million proposed by the Governor. As it to report to the Legislature on the specific projects deliberates on the Governor’s other one-time selected within 30 days after the funds are proposals and receives updated revenue released to UC. information in May, the Legislature could consider providing UC with more one-time funding for this Assessment purpose. (Though we focus on UC in this budget Proposal Reflects a Prudent Use of One-Time brief, other state agencies also have documented Funding. Providing funds for deferred maintenance deferred maintenance backlogs. The Legislature projects would address an existing need that is could consider providing one-time funding to growing. Addressing this need can help avoid more address these backlogs too.) Figure 8 State Has Provided Funding to Address Deferred Maintenance at UC One-Time Funds (In Millions) 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 General Fund $25 $35 — $35 $144a — $325b UC bondsc — — $35d 35 35 $35 — Totals $25 $35 $35 $70 $179 $35 $325 a The 2020-21 budget package allowed UC to repurpose unspent 2019-20 deferred maintenance funds for other operational purposes. b Amount was provided for deferred maintenance or energy efficiency projects. c Reflects state-authorized UC bond funds. UC repays the debt on these bonds using its General Fund support. d In 2017-18, the state authorized an additional $15 million in UC bond funds for systemwide facility and infrastructure assessments. 12 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Consider Developing Strategy to timing, fund sources, ongoing versus one-time Address Ongoing Maintenance and Capital funds, and reporting. Given the magnitude of Renewal Needs. In addition to providing one-time the ongoing maintenance and capital renewal funding for deferred maintenance, we encourage needs at UC, developing such a strategy would the Legislature to begin developing a long-term likely require significant planning beyond the strategy around UC maintenance and capital 2022-23 budget cycle. renewal needs. Potential issues to consider include www.lao.ca.gov 13 2022-23 BUDGET 14 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET www.lao.ca.gov 15 2022-23 BUDGET 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. 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, California 95814. 16 LEGISLATIVE ANALYST’S OFFICE