The 2023-24 Budget: Higher Education Overview

2023-24 BUDGET The 2023-24 Budget: Higher Education Overview GABRIEL PETEK | LEGISLATIVE ANALYST | JANUARY 2023 SUMMARY Governor’s Budget Plan Focuses on Core Operations. This brief provides an overview and initial analysis of the Governor’s proposed higher education budget plan. This plan contains $1.5 billion in new higher education spending ($1.3 billion ongoing, $200 million one time). For the California Community Colleges (CCC), California State University (CSU), and University of California (UC), the Governor proceeds with the second year of his multiyear budget plans. The main element of the CCC roadmap and university compacts is annual unrestricted General Fund base increases for core operations. In 2023-24, the Governor proposes $653 million for an 8.13 percent cost-of-living adjustment to CCC apportionments and $227 million and $216 million, respectively, for 5 percent base increases at CSU and UC. For the California Student Aid Commission, the Governor’s budget includes a slight decrease due to Cal Grant caseload adjustments, as well as $226 million in one-time spending for the Middle Class Scholarship program agreed to last year. In response to the state’s projected deficit, the Governor also proposes a $2.3 billion package of funding delays and cost shifts, mostly affecting certain university facility projects. Plan Has Some Positive Aspects, Some Risks and Shortcomings. We believe a positive aspect of the Governor’s plan is that it has a strong focus on access and preserving the segments’ core operations. The Governor’s budget also does not support any new ongoing higher education costs with one-time funding. One risk with the plan, however, is that the base increases for the universities are contributing factors to the state deficits that arise under the multiyear outlook. Another, related risk is that the proposed budget solutions provide General Fund savings in 2023-24, but they do so by pushing out costs such that budget challenges are exacerbated over the subsequent few years. A third risk is that the administration might be underbudgeting CCC apportionment costs. A shortcoming of the plan is that it has no compelling cost basis for the notably different base funding increases proposed for the segments. The plan also does not link university funding increases to specific budget priorities. Moreover, the plan does not update enrollment expectations across the segments despite updated data indicating sustained enrollment challenges. Furthermore, the proposed budget solutions create odd timing issues for certain UC capital projects and difficult trade-offs among certain CSU capital projects. Legislature Could Consider Various Improvements to Plan. We believe one improvement would be to link university funding increases to budget priorities. Another improvement would be to develop a plan to keep existing campus facilities in good condition—an issue on which the Governor is silent. The Legislature also could consider whether to move forward with certain CSU and UC capital projects given the state’s revised fiscal outlook. Additionally, it could consider recognizing savings from lower-than-expected enrollment across the segments in 2022-23. Moreover, to help with budget preparation in the case state revenues fall, the Legislature could identify additional budget solutions. Furthermore, the Legislature could consider supporting a new tuition policy at CSU in 2023-24 or 2024-25 that would help expand budget capacity. www.lao.ca.gov 1 2023-24 BUDGET INTRODUCTION Funding by Source Brief Focuses on the Governor’s Proposed Total Ongoing General Fund Support for Higher Education Budget Plan. Along with the rest Higher Education Increases. As Figure 1 shows, of his budget plan, the Governor recently released the Governor’s budget for 2023-24 includes a total his budget proposals for higher education. This of $21.9 billion in ongoing General Fund support brief highlights his major budget proposals for the for the three segments and CSAC. The proposed California Community Colleges (CCC), the California 2023-24 funding level is $584 million (2.7 percent) State University (CSU), the University of California higher than the 2022-23 level. All three segments (UC), and the California Student Aid Commission see year-over-year funding increases, whereas (CSAC). The brief has three main sections. The first CSAC sees a small decline. Of the annual increase, section provides an overview of the Governor’s higher $539 million is non-Proposition 98 General Fund education budget plan. The second section provides and $45 million is Proposition 98 General Fund. an initial high-level assessment of that plan, and the Whereas CSU, UC, and CSAC generally receive last section identifies various ways the Legislature state support entirely from non-Proposition 98 could consider improving the Governor’s plan. General Fund, the state supports CCC primarily Over the coming weeks, our office plans to release from Proposition 98 General Fund. (Proposition 98 additional budget briefs that delve more deeply into is a measure that established a constitutional the Governor’s higher education proposals. Our funding formula for K-14 education that is commonly EdBudget website contains a first batch of higher called the “minimum guarantee.” The state education budget tables reflecting the Governor’s typically provides a set share of Proposition 98 proposals, with additional tables forthcoming. funding—11 percent—to community colleges.) Total Core Funding Provides a More OVERVIEW Comprehensive Fiscal Picture. Whereas CSAC In this section, we first identify funding designated receives most of its funding from the state, the three for higher education, then discuss major higher segments receive substantial core funding from education spending proposals, and conclude sources other than the state. For CCC, the largest by summarizing the Governor’s proposed higher nonstate fund source is local property tax revenue education budget solutions (including those related to (most of which counts toward the Proposition 98 student housing) that are designed to help the state minimum guarantee). For CSU and UC, the largest solve a projected budget deficit in 2023-24. nonstate core fund source is student tuition revenue. Figure 1 Governor’s Budget Increases General Fund Support for Higher Education Ongoing General Fund (Dollars in Millions) Change From 2022-23 2021-22 2022-23 2023-24 Actual Revised Proposed Amount Percent CCCa $9,442 $9,315 $9,357 $43 0.5% CSUb 4,606 5,050 5,344 294 5.8 UCb 4,011 4,374 4,630 256 5.9 CSAC 1,974 2,538 2,529 -9 -0.3 Totals $20,033 $21,276 $21,860 $584 2.7% Non-Proposition 98 $11,243 $12,563 $13,102 $539 4.3% Proposition 98c 8,790 8,713 8,758 45 0.5 a Consists of Proposition 98 funds for CCC programs as well as non-Proposition 98 funds for CCC state operations, certain pension costs, and debt service. b Consists of non-Proposition 98 funds for all ongoing purposes, including pensions, retiree health benefits, and debt service. c Reflects General Fund that counts toward the minimum guarantee. The state sometimes designates some of this General Fund support for one-time purposes. CSAC = California Student Aid Commission. 2 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET As Figure 2 shows, total core funding grows time (30 units) totaling $1,380. (Enrollment fees at 1.6 percent for CCC, 3.8 percent for CSU, and CCC were last raised in summer 2012, at which 4.4 percent for UC. Whereas local property time the state increased the fee from $36 to tax growth at CCC is outpacing growth in $46 per unit.) The Governor’s budget also assumes Proposition 98 General Fund, growth in tuition no tuition increase at CSU—retaining annual revenue at CSU and UC is lower than growth in systemwide tuition for a full-time undergraduate non-Proposition 98 General Fund. student of $5,742. (Tuition charges at CSU were Governor Assumes No Tuition Increases last raised in 2017-18, with a 4.9 percent increase in at CCC and CSU. The Governor takes the same undergraduate tuition assessed that year.) approach to tuition increases as he did last year. Governor Assumes Tuition Increases Specifically, the Governor proposes no increase Only at UC. In contrast to CCC and CSU, the in community college enrollment fees—retaining Governor’s budget continues to assume UC the existing per unit enrollment fee of $46, with increases tuition annually for certain students, annual enrollment fees for a student enrolled full consistent with the Board of Regents’ tuition policy. Figure 2 Total Core Funding Also Increases Ongoing Core Funds (Dollars in Millions) Change From 2022-23 2021-22 2022-23 2023-24 Actual Revised Proposed Amount Percent CCC General Funda $8,790 $8,713 $8,758 $45 0.5% Local property taxa 3,512 3,648 3,811 164 4.5 Additional General Fundb 653 602 599 -3 -0.4 Additional local property taxb 418 443 465 22 5.0 Student fees 409 409 411 1 0.3 Lottery 302 264 264 —c -0.1 Subtotals ($14,084) ($14,079) ($14,308) ($229) (1.6%) CSU General Fundd $4,606 $5,050 $5,344 $294 5.8% Student tuition and fees 3,240 3,061 3,077e $16 0.5% Lottery 74 65 65 —c —c Subtotals ($7,920) ($8,176) ($8,485) ($310) (3.8%) UC General Fund $4,011 $4,374 $4,630 $256 5.9% Student tuition and fees 5,295 5,335 5,530f 195 3.6 Lottery 53 46 46 —c -0.1 Otherg 395 395 395f — — Subtotals ($9,754) ($10,149) ($10,600) ($451) (4.4%) Totals $31,758 $32,404 $33,394 $990 3.1% a Proposition 98 funds. b “Additional General Fund” refers to non-Proposition 98 funds for CCC state operations, certain pension costs, and debt service. “Additional local property tax” refers to “excess” revenue for basic aid districts that does not count toward the Proposition 98 minimum guarantee. c Less than $500,000 or 0.05 percent. d Includes funding for pensions and retiree health benefits. e Reflects Governor’s assumed level adjusted to reflect CSU’s estimate of additional revenue from proposed enrollment growth. f Standard budget displays are not yet available for UC. Amounts shown reflect LAO estimates based upon the information that is currently available g Includes a portion of overhead funding on federal and state grants and a portion of patent royalty income. www.lao.ca.gov 3 2023-24 BUDGET This policy pegs annual tuition increases to inflation initiatives for CSU and UC this year. For CSAC, (with certain caps). Incoming undergraduate the Governor’s budget includes a slight decrease students and all academic graduate students are ($10 million) in ongoing Cal Grant spending due to subject to the tuition increases. Tuition charges are caseload adjustments. It also includes an additional held flat for continuing undergraduate students. $226 million in one-time spending for the Middle Under the policy, 2023-24 tuition and systemwide Class Scholarship program that the Governor fee rates are set at $13,752 for new undergraduate and Legislature agreed to last year. Beyond students and $13,104 for continuing undergraduate these spending proposals and adjustments, the students, reflecting a $648 (4.9 percent) increase administration indicates an intent to introduce for new students. In 2023-24, UC estimates another community college proposal this spring. generating an additional $147 million in revenue The administration indicates the proposal would from tuition increases. It plans to use $58 million provide colleges more flexibility in implementing of this additional revenue for institutional student certain categorical programs relating to academic financial aid. (In addition, the CSAC budget reflects and student support services. The overarching higher associated Cal Grant costs at UC. This Cal objective of the proposal would be to help Grant cost increase is entirely offset by Cal Grant colleges serve students more holistically, efficiently, reductions associated with overall caseload.) and effectively. Freed-Up One-Time Funds Increase Amount Governor Proposes Second Year of CCC Available for Community Colleges. Under Roadmap and University Compacts. Last year, the Governor’s budget, Proposition 98 funding the Governor proposed multiyear budget plans for for the community colleges grows $209 million each of the segments. Though the Legislature did (1.7 percent). The annual Proposition 98 growth not codify these multiyear plans, the Governor’s rate, however, understates the amount of new 2023-24 higher education budget proposals are funding available for the colleges’ ongoing consistent with them. The largest component of programs. The state sometimes designates a these plans is annual unrestricted base increases. portion of Proposition 98 funds for one-time These base increases are loosely linked with purposes. Last year, the state took this approach— performance expectations in certain areas, providing nearly $700 million that counted toward including student access, success, and equity; the minimum guarantee for various one-time intersegmental coordination; and workforce community college initiatives. Those expiring alignment. Per the multiyear agreements, the one-time funds are available in 2023-24 for any segments are to report their performance in these Proposition 98 priority, including, at the state’s discretion, ongoing CCC programs. Under the Figure 3 Governor’s budget, these funds effectively are Governor Proposes to Increase repurposed in this way. Spending in a Few Areas Major Spending Proposals Major General Fund Changes, 2023-24 (In Millions) Majority of New Spending Is for Community Ongoing Spending Colleges. Figure 3 shows the Governor’s major CCC apportionments (8.13 percent) $653 higher education spending proposals. Of the CSU core operations (5 percent) 267a $1.5 billion in new higher education spending UC core operations (5 percent) 216 proposed over the period, $1.3 billion is for CCC categorical programs (8.13 percent) 92 ongoing purposes and $200 million is for one-time UC nonresident enrollment reduction (902 students) 30 CCC enrollment growth (0.5 percent) 29 purposes. Of the ongoing spending increases, Subtotal ($1,286) approximately 60 percent is for community One-Time Initiatives colleges, with approximately 20 percent each for CCC student enrollment and retention strategies $200 CSU and UC. All of the newly proposed one-time Total $1,486 spending is for CCC, with no proposed one-time a Includes funding for pensions and retiree health benefits. 4 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET areas each year through 2026. CSU and UC Governor Takes Different Enrollment released their first progress reports in fall 2022, with Funding Approach for Colleges and CCC expected to release its first progress report in Universities. Whereas the Governor proposes summer 2023. a separate enrollment growth appropriation Proposed Base Increase for Colleges Is for CCC, he expects the universities to cover Higher Than for Universities. As Figure 3 the cost of enrollment growth from within their shows, for CCC apportionments (unrestricted 5 percent base increases. Though consistent base funding), the Governor proposes a with the approach specified in the Governor’s $653 million increase to cover an 8.13 percent compacts, this approach differs from the one cost-of-living adjustment (COLA). This proposed the state historically has used to fund CSU rate increase is linked to a measure of inflation and UC enrollment growth. Typically, the that will be updated in late April. (The Governor state has provided CSU and UC with separate also proposes to grant an 8.13 percent COLA appropriations specifically for this purpose on to certain CCC categorical programs as well top of the universities’ base increases for as certain K-12 programs.) For CSU and UC, core operations. the Governor proposes $227 million and Governor Proposes “Grace Period” for $216 million, respectively, to cover 5 percent Segments to Reach Enrollment Targets. base General Fund increases. In addition, the All three segments are expected to have soft Governor’s budget provides CSU with $39 million enrollment levels in 2022-23. Though preliminary ongoing General Fund to cover certain benefit systemwide CCC data are not yet available, data cost increases ($36.7 million for retiree health from a sample of community colleges suggests benefits and $2.6 million for certain pension systemwide enrollment could be either about flat costs). The three segments can use base funding or up somewhat in 2022-23 from a depressed increases for any of their core operations, 2021-22 level. At CSU, resident undergraduate including employee salaries and benefits, utilities, enrollment is expected to fall by about 5 percent, supplies, and equipment. whereas it is expected to remain about flat at Governor Proposes Enrollment Growth at UC (down 0.1 percent). The 2022-23 Budget Act All Three Segments. For CCC, the Governor’s included language requiring the administration to budget includes $29 million to cover 0.5 percent reduce enrollment growth funding proportionally systemwide enrollment growth in 2023-24, to any enrollment shortfalls at the universities. equating to 5.496 additional full-time equivalent Specifically, these budget provisions directed the (FTE) students. The Governor also expects CSU administration to reduce funding for enrollment and UC to increase resident undergraduate shortfalls at CSU in 2022-23 and at UC in enrollment. For CSU, the Governor assumes 2023-24. The Governor, however, is not proposing growth of 3,434 additional FTE students to reduce any 2022-23 enrollment growth funding (1.1 percent) from 2022-23 to 2023-24. For UC, at any of the segments. Instead, the administration the Governor assumes growth of 4,203 additional effectively is letting each of the segments retain FTE students (2.1 percent). Although the Governor their associated enrollment growth funding in proposes budget bill language referring to the 2022-23 ($81 million at CSU, $52 million at UC, CCC enrollment funds and growth target, he and $27 million at CCC) and use all or a portion proposes no such budget provisions for the of those funds for other purposes. Though the universities. (The budget provisions for CSU and Governor proposes no fiscal repercussions for any UC include much broader language specifying of the segments missing their enrollment targets that the base funding increases are “to support in 2022-23, he has certain expectations moving operational costs.”) forward. For CCC, he signals community colleges that continue missing their targets should plan for associated funding reductions beginning in 2024-25. For UC and CSU, he expects cumulative enrollment growth targets to be reached by the final year of the compacts (2026-27). www.lao.ca.gov 5 2023-24 BUDGET Governor Has Only a Few Other Higher facility maintenance projects, but he effectively Education Spending Proposals. Beyond base repurposes that funding for another one-time increases and enrollment growth, the Governor community college initiative relating to student has only a few other higher education spending enrollment and retention strategies.) Though the proposals this year—a stark contrast to the number Governor’s package of budget solutions in 2023-24 of higher education spending proposals he has contains no Proposition 98 components, the introduced in previous years. Of these remaining Proposition 98 side of the budget also is expected proposals, the two most notable ones are related to face challenges in future years, as discussed in to enrollment. One of these proposals has UC the nearby box. continuing to replace some nonresident students Governor Proposes Various Higher Education with resident students at its three most selective Budget Solutions. Within the non-Proposition 98 campuses (Berkeley, Los Angeles, and San Diego). side of the budget, the administration proposes The second of these proposals has the community three major types of budget solutions: (1) funding colleges continuing efforts to regain enrollment. reductions (some of which are linked to certain trigger conditions), (2) funding delays, and (3) fund Proposed Funding Delays and Shifts or cost shifts. Of the higher education budget Governor Proposes Actions in Response solutions, none are funding reductions—the to Projected State Budget Deficit. The Governor classifies all of them as either funding proposed actions, taken together, would enable delays or shifts. Figure 4 shows the proposed the state to meets its constitutional requirement higher education budget solutions. The proposed to adopt a balanced budget in 2023-24. As we solutions involve several specific CSU and UC discuss in The 2023-24 Budget: Overview of capital outlay projects, two housing-related the Governor’s Budget, the proposed actions, programs that affect all three segments, and however, are insufficient to keep the state budget one CSAC program. These proposed budget balanced in future years, with projected out-year actions yield a total of $2.3 billion in General Fund deficits in the $4 billion to $9 billion range. Within savings over the 2021-22 through 2023-24 period. higher education, the Governor proposes only Though the proposed funding delays and cost non-Proposition 98 budget solutions, with no shifts generate immediate savings, they do so by proposed Proposition 98 budget solutions. pushing costs out to future years, with $2 billion in (The Governor proposes to reduce one-time associated General Fund costs emerging over the Proposition 98 funding for community college 2024-25 through 2026-27 period. Proposition 98 Outlook Growth in Guarantee Might Be Lower Than Inflationary-Driven Costs. Under the Governor’s budget, the Proposition 98 minimum guarantee grows at an average annual rate of 3.9 percent from 2023-24 through 2026-27. After accounting for baseline adjustments, the effective increase available for new spending commitments averages 3.2 percent per year. This rate of growth could be insufficient to fully cover the cost-of-living adjustments (COLAs) that the state typically applies to major K-14 education programs. When the Proposition 98 minimum guarantee grows more slowly than the full statutory COLA rate, the Department of Finance has the authority to reduce the COLA rate such that it can be supported within the guarantee. Based upon current projections, a shortfall appears more likely than not in 2024-25, with the state potentially providing only a partial COLA to community colleges (and school districts) that year. Shortfalls also are possible in 2025-26 and 2026-27. We discuss these issues in more detail in our forthcoming Proposition 98 budget brief. 6 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Figure 4 Governor Proposes Several Higher Education Budget Solutions General Fund Impacta (In Millions) 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 Financing Changesb CSU Bakersfield Energy Innovation Center — $83 — — — — CSU San Diego Brawley Center — 80 — — — — CSU San Bernardino Palm Desert Center — 79 — — — — CSU University Farms — 75 — — — — CSU Fullerton Engineering and Computer Science — 68 — — — — Innovation Hub CSU San Luis Obispo Swanton Pacific Ranch — 20 — — — — CSU new associated debt service — — -$27 -$27 -$27 -$27 Subtotals (—) ($405) (-$27) (-$27) (-$27) (-$27) Funding Delays California Student Housing Revolving Loan Fundc — — $900 $250 -$1,150 — Higher Education Student Housing Grant Programc — — 250 -250 — — CSAC Golden State Education and Training Grants $400 — — -200 -100 -$100 UC Los Angeles Institute of Immunology and — $100 100 -200 — — Immunotherapy UC Berkeley Clean Energy Project — — 83 -83 — — UC Riverside and UC Merced campus expansion projects — — 83 -83 — — Subtotals ($400) ($100) ($1,416) (-$566) (-$1,250) (-$100) Totals $400 $505 $1,389 -$593 -$1,277 -$127 a Positive amounts indicate General Fund savings. Negative amounts indicate General Fund costs. b The administration proposes reducing CSU funding by $405 million, having CSU sell systemwide revenue bonds of a like amount, and providing $27 million ongoing to cover the associated debt service. c CCC, CSU, and UC campuses may apply to these programs for help financing their housing projects. CSAC = California Student Aid Commission. Budget Solutions Are Not Expected to At this time, SAL requirements are not expected Create Issues With State Appropriations to present significant challenges for the state in Limit (SAL). The California Constitution imposes crafting its 2023-24 budget. a limit on the amount of revenue the state can Different Budget Solution Approaches appropriate each year. The state can exclude Taken for CSU and UC. Though all the proposed certain capital outlay appropriations from the SAL budget solutions for CSU and UC involve capital calculation, effectively making it more manageable outlay projects, the specific approach taken by to meet the overall SAL requirement. Last year, the administration varies. For CSU, the Governor the state approved many capital outlay projects proposes to change how the projects are financed. in an effort to meet its SAL requirement. Under Rather than providing General Fund upfront for the Governor’s budget, some of these projects the projects, the Governor proposes to have CSU would be financed differently or delayed. Though sell systemwide revenue bonds and have the state these proposed actions would reduce the provide a General Fund augmentation to cover the amount excluded from the SAL calculation in the associated debt service. In contrast, the Governor near term, many other factors are affecting the proposes to delay funding for the UC projects. state’s overall SAL requirement. While we are still The administration indicates that it did not propose reviewing the administration’s SAL estimates, we debt-financing for the UC projects because understand the Governor’s budget continues to those projects were at earlier phases with more meet near-term SAL requirements even with the unknown factors. proposed capital outlay-related budget solutions. www.lao.ca.gov 7 2023-24 BUDGET ASSESSMENT Because the Governor’s higher education spending plan does not have any new core operating shortfall In this section, we identify positive aspects of akin to the LCFF shortfall, the higher education the Governor’s proposed higher education plan, segments would be in a stronger fiscal position than then identify shortcomings of that plan, including school districts entering 2024-25. (The Governor’s highlighting certain drawbacks of the Governor’s budget, however, might have underbudgeted CCC proposed higher education budget solutions. apportionments, as discussed in the next section.) Positive Aspects of Plan More Flexibility Could Enable Community Governor Focuses on Core Operations. Colleges to Serve Students Better. Over the We believe a positive aspect of the Governor’s past several years, the state has created many higher education spending plan is that it has additional CCC categorical programs. The relatively few proposals and those proposals proliferation of these programs has increased have a strong focus on access and preserving the colleges’ administrative burden and exacerbated segments’ core operations. We believe focusing on program silos, which, in turn, likely have generated core operations and not scattering funds across greater inefficiencies. Were the Governor this spring many programs and new initiatives is a better to introduce a flexibility proposal for the colleges, budget approach, especially given the current we believe it could be worth pursuing. We think a state fiscal context. By focusing new spending promising proposal would strike a balance between on core operations, the Governor makes handling focusing on outcomes and accountability while key budget challenges more manageable for the providing more flexibility for districts in how they segments. In particular, focusing on core operations achieve those outcomes. Additional flexibility in helps the segments address inflationary pressures; operating programs and reporting on the outcomes respond to employee recruitment, retention, and of those programs might allow the colleges to compensation issues; and sustain program quality. better serve students, including by allowing them to dedicate more time to student support rather Higher Education Spending Plan Has than administration. No New Structural Shortfalls in 2023-24. The Governor’s budget does not support any new Shortcomings of Plan ongoing higher education costs with one-time Ongoing Proposals Present a Risk to State funding. (The Governor’s budget funds some Budget Moving Forward. Though we believe the ongoing Middle Class Scholarship costs with Governor’s higher education spending plan has one-time funding, but the Legislature previously certain positive aspects, it also has some risks and agreed to this action.) Though no new structural shortcomings. One risk is linked to the proposed shortfalls emerge within higher education, the CSU and UC base increases, as these ongoing Governor proposes funding $1.4 billion in ongoing General Fund augmentations are contributing K-12 Local Control Funding Formula (LCFF) costs factors to the state budget deficits that arise under with one-time funds (an issue we discuss in more the multiyear outlook. Were the state revenue detail in our forthcoming Proposition 98 budget situation to deteriorate further, any ongoing General brief). This structural shortfall in the K-12 budget Fund augmentations made in 2023-24 will become would heighten budget challenges for school harder for the state to sustain over the near term. districts in 2024-25. Importantly, the main reason Under some revenue scenarios, the state would the Governor is able to avoid a structural shortfall face difficulty affording future base increases for for community colleges (despite the colleges also CSU and UC over the next few years. being funded within the Proposition 98 minimum guarantee) is because the state took a less risky Proposed Budget Solutions Provide budget approach for them last year. Last year, the Temporary Fix. A second, related risk emanates community college budget had a proportionally from the Governor’s proposed higher education larger budget cushion than school districts. budget solutions. The proposed funding delays and 8 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET cost shifts (for example, with certain CSU and UC increases in their health care premiums, increases capital projects) provide General Fund savings in in their pension contribution rates, and inflationary 2023-24, but they do so merely by shifting costs out pressures in other key areas, including utilities, one or more years. Importantly, nearly all the higher supplies, and equipment. education budget solutions in 2023-24 immediately University Augmentations Are Not Clearly turn into budget challenges in 2024-25. Tied to Budget Priorities. Whereas the community Community College Apportionment Costs college apportionment formula is designed so that Might Be Underbudgeted. A third risk in the districts effectively are required to earn their base Governor’s budget relates to how it implements funding increases, the state has no such funding a “funding stability” provision that applies to requirements for the universities. Specifically, for community colleges. This provision protects community colleges, the Student Centered Funding community college districts from sudden drops Formula allocates funds based upon enrollment in funding due to uncontrollable events. Over counts, certain student group counts (including the past several years, relatively few community low-income student counts), and performance college districts have been affected by this outcomes (including transfer rates and degree statutory protection, in part because extraordinary attainment rates). Colleges with more enrollment, pandemic-related hold harmless provisions have serving more low-income students, and achieving been in place. In 2023-24, for various reasons better outcomes (including for their low-income (including the expiration of these other hold students) generally earn more funding than other harmless provisions), many districts could be colleges. In contrast, no formula links the funding affected by the funding stability provision. The way the Governor proposes for CSU and UC to their the Governor’s budget calculates the cost of this actual enrollment levels, the composition of their provision differs from the Chancellor’s Office’s student bodies, or their specific performance interpretation, and we believe it could understate outcomes. Furthermore, the Governor’s proposed the cost of funding CCC apportionments. base increases for CSU and UC generally are not The Legislature likely will want to investigate these linked to any specific cost increases (such as for differences more closely in the coming weeks to salaries, utilities, and equipment)—reducing both determine if an apportionment shortfall exists in budget transparency and accountability. 2023-24 and, if so, identify options for responding. Governor Does Not Update Enrollment We plan to cover this issue in more detail in our Plans Despite Better Data Being Available. forthcoming community college budget brief. The segments are reporting important enrollment Community Colleges and Universities trends. In particular, over the past few years, the Are Treated Differently Despite Similarities. number of transfer students, retention rates, and Under the Governor’s budget, community colleges credit load per term all have fallen. During this receive larger base funding increases than the period, the labor market also has been historically universities, with the 8.13 percent COLA for the strong, with many job openings. Though the colleges roughly comparable to the universities’ incoming freshman class at CSU rebounded from approximately 4 percent increases in core funding. fall 2021 to fall 2022, those rebounds have not been Though different base increases for each of the enough to offset the enrollment declines driven segments could be justified, the administration by these other factors. At UC, the total incoming offers no compelling cost or program basis for such freshman class dropped by 6.1 percent from fall differences this year. (The higher COLA rate for 2021 to fall 2022 (with resident undergraduates community colleges is due entirely to the colleges about flat and nonresident undergraduates being a part of Proposition 98 calculations. These dropping 26 percent from a peak 2021 level). calculations, however, do not have a strong nexus The combined effect of all these factors is that the to underlying community college cost pressures.) segments have smaller existing student cohorts Moreover, the three segments have similar cost that are likely to remain for the next few years drivers. All are experiencing salary pressures, as the cohorts work their way through college. www.lao.ca.gov 9 2023-24 BUDGET Despite these indicators, the Governor proposes no By comparison, most of the six projects that would changes to his enrollment expectations either for receive financing in 2023-24 under the Governor’s 2023-24 or the next few years. budget are for new facilities or expansions. UC Budget Solutions Have Odd Timing Moreover, some of these projects were not Issues. Typically, capital projects move through identified in CSU’s 2022-23 five-year capital plan, standard phases, beginning with preliminary plans indicating that the campus and the system had not and working drawings, followed by construction. considered them among their highest and most State funding, in turn, is linked with these phases. urgent capital priorities. The state tends to provide a relatively small amount of funding the first year or two of projects RECOMMENDATIONS as planning work is undertaken and construction In this section, we first identify various ways in cost estimates are refined. It then provides the which the Legislature could improve the Governor’s bulk of project funding in year two or three once proposed spending plan for higher education. We construction commences. In contrast to these then identify several options the Legislature has standard budget practices, UC capital outlay for improving the Governor’s package of higher projects under the Governor’s budget solution education budget solutions. We end by highlighting proposals would get a substantial round of initial major higher education initiatives for which the funding in 2022-23 (much more than needed for Legislature might wish to conduct oversight. preliminary plans and working drawings), no funding in 2023-24, and then substantial funding again in Improve Key Components of 2024-25. As of the time of this writing, it was not yet Spending Plan clear how UC would respond to these fluctuations Link University Funding Increases More in project funding. The proposed approach, Tightly With Spending Priorities. Overall, however, is questionable, as it disconnects funding we continue to recommend the Legislature from specific project activities—likely providing too take a more transparent budget approach for much project funding too soon and then delaying the universities. In contrast to the Governor’s funding even when projects could be shovel ready. approach, the Legislature could identify its budget It also places UC projects in a particularly risky priorities in 2023-24 and provide funding linked position, with large amounts already provided to those priorities. For example, with the same for each project, but large amounts of remaining total ongoing funding increase that the Governor project funding not guaranteed. proposes for CSU ($227 million), the Legislature CSU Budget Solutions Could Be Crowding could fund a 3 percent increase in CSU’s employee Out Higher-Priority Projects. As part of his compensation pool ($157 million), certain health budget solutions, the Governor is proposing to benefit increases ($51 million), and some capital provide CSU with an ongoing $27 million General renewal projects ($20 million). (Growing resident Fund augmentation to cover debt service on six undergraduate enrollment by 1 percent would cost capital budgets (rather than providing $405 million approximately $35 million, but CSU is not expecting upfront for the projects). Though the Governor’s to grow its enrollment in 2023-24 above already budget includes this augmentation for debt funded levels.) service, it does not include any augmentation for Consider Expanding Budget Capacity at CSU debt service on the capital outlay projects that Through Tuition Increases. Under the Governor’s CSU submitted through the standard state review budget, CSU fares worst among the segments process last fall. The CSU Board of Trustees from a fiscal perspective, receiving a smaller base requested a $50 million General Fund augmentation increase than CCC and no additional revenue from for these latter projects. Many of these project tuition increases as UC does. Moreover, CSU is proposals are for renovating existing facilities unable to cover all of its projected operating cost and infrastructure that are in poor condition. increases within the Governor’s proposed 5 percent 10 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET base funding increase. (We compare CSU’s and 2023-24 or 2024-25. Importantly, pursuing tuition UC’s funding and operating cost increases in the increases in 2023-24 would require quick action nearby box.) Given this shortfall, the state could over the next few months whereas pursuing them consider expanding CSU’s budget capacity by for 2024-25 would allow ample time for consultation supporting tuition increases beginning either in and notification. Whether begun in 2023-24 or Comparing Proposed Funding and Projected Cost Increases We compare the Governor’s proposed base funding increases for the universities under the compacts to their projected operating cost increases from 2023-24 through 2026-27. For this analysis, we assume annual salary growth of approximately 4 percent, growth in annual health care costs in the 4 percent to 7 percent range, and growth in operating equipment and other expenses of approximately 4.5 percent (on average over the period). We also account for estimated increases in the universities’ pension and debt-service costs. We assume any enrollment growth funding and associated cost is treated separately. The figure below shows the results of this analysis. For 2023-24, projected operating cost increases at the California State University (CSU) exceed the Governor’s proposed 5 percent base increase by more than $100 million. At the University of California (UC), projected operating cost increases in 2023-24 are approximately $60 million higher than increases in General Fund, tuition, and alternative UC Fares Better Than CSU Over Outlook Period fund sources combined. (Each year, UC aims to Projected Operating Cost and Core Fund Increases (In Millions) identify procurement and other operational savings, CSU investment earnings, and $500 supplemental nonresident 400 tuition revenue that it can 300 direct to its core operations.) 200 Whereas CSU’s operating cost increases consistently 100 exceed the Governor’s 2023-24 2024-25 2025-26 2026-27 proposed base increases over the outlook period, the UC pattern for UC changes over $500 the last three years of the period. Those years, UC’s 400 operating cost increases 300 consistently are lower than 200 what we project UC would 100 receive from General Fund, tuition, and alternative fund 2023-24 2024-25 2025-26 2026-27 sources combined. The Cost Revenue main difference between the Other Operations Alternative Fundsª segments over the period Compensation Tuition is that UC raises additional General Fund revenue from tuition a Reflects procurement and other operational savings, investment earnings, and supplemental increases, whereas CSU nonresident tuition revenue that can be directed to core operations. does not. www.lao.ca.gov 11 2023-24 BUDGET 2024-25, the state could encourage CSU to develop them. Many factors have changed since these a tuition policy similar to UC’s tuition policy—that projects were first considered. Most notably, is, a policy that results in gradual, predictable, the state’s budget situation has deteriorated, and moderate increases in student charges. construction costs have escalated at a historically Such a tuition policy would not only expand fast pace, and interest rates are higher. All of these budget capacity at CSU but also would help avoid factors make the trade-offs among capital projects the tuition spikes and plateaus that have been and across the capital and operating sides of the common historically. segments’ budgets more difficult. Begin Developing a Plan to Keep Existing Could Change Approach to Financing Campus Facilities in Good Condition. Though University Capital Projects. Were the Legislature each of the higher education segments has an to decide that certain capital projects are worth extensive footprint, with some building components approving in 2023-24, it could consider the most reaching the end of their useful life each year, advantageous way to finance those projects. If the neither the state nor the segments have a plan for Legislature were to choose to provide upfront funding these capital renewal projects. Moreover, General Fund cash for the projects (as the Governor neither the CCC roadmap nor university compacts proposes for the UC projects), overall project costs include any discussion of how the segments and would be lower given no interest costs would be state should address capital renewal. Furthermore, incurred. If the Legislature were to choose to have the Governor’s budget includes no funding the segments sell systemwide revenue bonds with increases specifically for keeping colleges’ or the state covering the associated debt service (as universities’ existing academic facilities and the Governor proposes for CSU projects), then infrastructure in good condition. (It does contain a overall project costs would be higher given the proposed decrease in facility maintenance funding associated interest costs. More projects, however, for the colleges.) Perhaps unsurprisingly given likely could be financed over the near term. Given these factors, spending on capital renewal to date these significant trade-offs, the Legislature could has been insufficient to keep pace with emerging consider establishing some criteria for when needs, and project backlogs have been large and to finance a project using upfront cash versus growing. Absent a plan to address these issues borrowing. The method the state selects for moving forward, project backlogs very likely will financing projects could depend in part upon its continue to grow—leading to higher costs and relative near-term and long-term fiscal outlook, with greater risk of programmatic disruptions. We borrowing more preferable if the near-term situation recommend the Legislature work with the segments is poor but the long-term outlook is strong. As it to begin developing capital renewal plans. Such has typically done, the state also could require plans likely would involve several key elements, projects to meet criteria such as addressing a including setting a funding target that is aligned critical life-safety issue or mitigating overcrowding, with emerging needs, sharing the cost between with a somewhat more stringent threshold used the state and the segments, and phasing in funding for projects that incur interest costs. (It could apply increases over time. (We discuss these plans and such criteria to many proposed capital projects, related issues in more detail in our recent brief, including ones outside of higher education.) Addressing Capital Renewal at UC and CSU.) Could Recognize Savings Due to Enrollment Declines. Rather than allowing the segments to Explore a Revised Package of use enrollment growth funding in 2022-23 for other Budget Solutions purposes, the Legislature could reduce enrollment Could Revisit Whether to Move Forward With funding proportionally to enrollment declines or, Certain University Capital Projects. Rather than for CCC, sweep unearned growth funding. Once changing how certain capital projects are financed the segments begin growing their enrollment, the or delaying some of their funding, the Legislature Legislature could provide corresponding funding could reconsider whether to move forward with at that time. Under this approach, the state 12 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET could achieve up to an additional $133 million the May Revision. One way the Legislature could in non-Proposition 98 General Fund savings start identifying additional budget solutions is by ($81 million at CSU and $52 million at UC), while revisiting recent augmentations. In some cases, potentially freeing up several millions of dollars in large augmentations authorized in 2021-22 or Proposition 98 funding at CCC. 2022-23 might not yet have been spent or might be Could Consider Adding Other Budget viewed in a different light given the projected state Solutions. The Legislature could identify other budget deficit. Figure 5 lists temporary spending potential higher education budget solutions authorized over the past couple of years. For the to give it more options moving forward. The initiatives listed in the figure, the Legislature could Legislature might prefer some of its new options decide whether to reduce funding or delay funding to the ones the Governor proposes. Moreover, relative to the Governor’s already proposed levels. considering additional budget solutions now would In some cases, such as with UC’s climate change allow the state to better prepare for a possible initiatives, the Legislature likely would want to deterioration of the state’s budget condition learn more about implementation to date before given the heightened risk of revenue shortfalls. proceeding. In most cases, the Legislature also Furthermore, developing a larger set of potential would first need to confirm the availability of funding budget solutions now allows the Legislature to do to ensure savings could be achieved. so deliberately rather than under the pressure of Figure 5 Adding to List of Potential Solutions Helps With Budget Preparation Major, One-Time, Non-Proposition 98 General Fund Higher Education Augmentations (In Millions) Segment/ Department Description 2021-22 2022-23 2023-24 Various California Student Housing Revolving Loan Fund — — $900 Various Higher Education Student Housing Grant Program $700 $752 750 CSU CSU Humboldt transition to polytechnic universitya 458 25 25 CSU Deferred maintenance and energy efficiency projects 325 125 — CSU CSU Dominguez Hills capital outlay projects 60 — — CSU CSU Stanislaus Stockton Center Acacia Building replacement 54 — — CSU CSU Bakersfield Energy Innovation Center — 83 — CSU CSU San Diego Brawley Center — 80 — CSU CSU San Bernardino Palm Desert Center — 79 — CSU CSU University Farms — 75 — CSU CSU Fullerton Engineering and Computer Science Innovation Hub — 68 — UC Deferred maintenance and energy efficiency projects 325 125 — UC UC Los Angeles Institute for Immunology and Immunotherapy — 200 200 UC Climate change initiatives — 185 — UC UC Riverside and UC Merced campus expansion projects — 83 83 UC UC Berkeley Clean Energy Project — 83 83 UC Charles R. Drew University medical education buildings 50 — — CSAC Golden State Education and Training Grants 500 — — CSAC Golden State Teacher Grants 500 — — CSAC Learning-Aligned Employment Program 200 300 — CSAC Middle Class Scholarships — — 227 DGS Regional K-16 Education Collaboratives 250 — — Totals $3,422 $2,263 $2,268 a 2021-22 augmentation consists of $433 million one time and $25 million ongoing. CSAC = California Student Aid Commission and DGS = Department of General Services. www.lao.ca.gov 13 2023-24 BUDGET Conduct Oversight of Major Initiatives Figure 6 Closely Monitor Implementation of Major Legislature Could Monitor New and Higher Education Initiatives. Though the Expanded Programs Governor’s budget for 2023-24 proposes few new initiatives, the state over the past several years Major Initiatives, 2019-20 Through 2022-23 has launched many higher education initiatives, CCC including major expansions of student financial aid Cybersecurity strategies programs. The Legislature has expressed interest Foster youth programs in keeping apprised of the implementation of these Health Care Pathways for English Learners initiatives and monitoring their outcomes. Figure 6 High Road Training Partnerships Part-Time Faculty Health Insurance contains a list of major higher education initiatives State operations undertaken the past several years. This list focuses Strong Workforce and apprenticeship program expansions on ongoing programs as well as large, one-time Student Basic Needsa initiatives that likely have a considerable amount of Student enrollment and retention strategies Student Housing Construction Grants funds still available to be spent over the next few Student Housing Planning Grants years. The Legislature could have informational Student Success Completion Grants hearings or otherwise collect related information Student support program expansions about some or all of these initiatives. Key oversight Transfer and common course numbering reforms Zero-textbook-cost degrees questions include: CSU • What implementation activities have been Foster youth programs undertaken to date? What major activities Graduation Initiative 2025 have yet to be launched? What is the time line Student Basic Needsa Student Housing Construction Grants for launching those remaining activities? UC • Is the program over- or under-subscribed? Climate change initiatives To what factors does the segment/department Foster youth programs attribute the mismatch between funded slots Nonresident enrollment reduction plan and program demand? Programs in Medical Education (PRIME) Student Basic Needsa • Have any previously unknown or unexpected Student Housing Construction Grants factors affected program costs? Are costs per UC Merced medical school project participant (or outcome) notably different from UC Riverside medical school project budget assumptions? CSAC Cal Grant CCC Expanded Entitlement Awards • What have been program outcomes to date? Is Cal Grant nontuition awards for foster youth and SWDC certain data being collected that will enhance Golden State Education and Training Grant Program program assessment over the coming years? Golden State Teacher Grant Program Learning-Aligned Employment Program • Has the segment/department identified ways Middle Class Scholarship Program the programs could be improved? State operations a Consists of programs to address student housing and food insecurity as well as student mental health. CSAC = California Student Aid Commission and SWDC = students with dependent children. 14 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET www.lao.ca.gov 15 2023-24 BUDGET CONTACT LIST Ian Klein University of California (916) 319-8336 Ian.Klein@lao.ca.gov Lisa Qing California State University (916) 319-8306 California Student Aid Commission Lisa.Qing@lao.ca.gov Paul Steenhausen California Community Colleges (916) 319-8303 Paul.Steenhausen@lao.ca.gov LAO PUBLICATIONS This report was prepared by Jennifer Pacella, with contributions from Ian Klein, Lisa Qing, and Paul Steenhausen, and reviewed by 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