The 2023-24 Budget: California State University

2023-24 BUDGET The 2023-24 Budget: California State University GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2023 SUMMARY Brief Covers Governor’s Budget Proposals for the California State University (CSU). This brief analyzes the Governor’s budget proposals relating to CSU’s core operations, enrollment, and certain capital outlay projects. Recommend Legislature Link CSU’s Funding Increase to Spending Priorities. The Governor’s main proposal for CSU is a $227 million (5 percent) ongoing General Fund base increase—the second of five annual base increases included in his multiyear compact. The Governor does not designate the base increase for any particular purposes, and the amount is not connected to CSU’s identified operating cost increases. We recommend the Legislature take a more transparent budget approach by determining which of CSU’s operating cost increases it wishes to support in 2023-24 and providing funding designated for those particular purposes. In addition, given that the proposed General Fund base increases fall short of covering CSU’s projected operating cost increases in every year of the compact, the Legislature could consider supporting tuition increases to expand CSU’s budget capacity. Legislature Could Revisit CSU’s Enrollment Growth Funding and Targets. The 2022-23 Budget Act provided CSU with $81 million ongoing General Fund to grow resident undergraduate enrollment by 9,434 students. It also directed the administration to reduce these funds should CSU fall short of the target. Although CSU enrollment is declining in 2022-23, the Governor’s budget does not remove the $81 million. The Legislature could consider removing these funds as a potential budget solution. Several factors are contributing to CSU’s recent enrollment declines, including fewer community college transfer students, smaller cohorts of continuing students, lower retention rates, and reduced average unit load. We recommend the Legislature consider these factors when setting an enrollment target for CSU in 2023-24. We also recommend the Legislature send an early signal about its enrollment expectations for 2024-25, given the timing of CSU’s admissions cycle. Recommend Legislature Revisit Certain CSU Capital Projects. The 2022-23 Budget Act provided CSU with $405 million one-time General Fund for six specific capital outlay projects. As a budget solution, the Governor proposes to rescind these funds and instead provide $27 million ongoing General Fund beginning in 2023-24 to debt finance the projects using university bonds. Although debt financing can be a reasonable way to fund capital projects, it would significantly increase total project costs. We recommend the Legislature revisit whether each of these projects is justified under the new circumstances. Currently, these projects remain in early planning and design phases. If a given project does not meet certain criteria, the Legislature could consider withdrawing state support for it at this time. Any affected projects could be reconsidered for funding in a future budget. www.lao.ca.gov 1 2023-24 BUDGET INTRODUCTION Brief Focuses on the California State University the Governor’s CSU budget package. The remaining (CSU). CSU is one of California’s three public higher sections focus on core operations, enrollment, and education segments. Its 23 campuses provide capital outlay budget solutions, respectively. This undergraduate, teacher preparation, and graduate brief is the second in our series of higher education education. CSU generally offers degrees through budget analyses. The 2023-24 Budget: Higher the master’s level, while also providing doctorates Education Overview was our first brief in this series, primarily in a few applied fields. This brief is organized with subsequent briefs delving more deeply into each around the Governor’s 2023-24 budget proposals of the higher education segments’ budgets. for CSU. The first section provides an overview of OVERVIEW CSU Budget Is $12.4 Billion in 2022-23. at CSU. The remainder of CSU’s revenue comes from As Figure 1 shows, about 70 percent ($8.5 billion) of federal funds and other nonstate sources. Federal CSU’s budget comes from “core funds.” Core funds funds are primarily for student financial aid. The other primarily consist of state General Fund and student nonstate sources include revenue from noncore tuition revenue, with a small portion coming from programs, such as student housing, parking, and lottery funds. CSU uses its core funds to support its extended education. academic mission. Between 2021-22 and 2022-23, Ongoing Core Funding Increases by ongoing core funds per student increased 7.9 percent $310 Million (3.8 Percent) Under Governor’s Budget. As Figure 2 shows, nearly all of the increase comes from the General Fund. Ongoing General Figure 1 Fund would increase by $294 million (5.8 percent) CSU Receives Funding in 2023-24. In addition, CSU estimates its tuition From a Few Key Sources revenue would increase by $16 million (0.5 percent) due to planned enrollment growth, with no increase $12.4 Billion in 2022-23 due to changes in tuition charges. (At this time, the CSU Board of Trustees has not adopted any Noncore Funds plans to increase tuition charges in 2023-24.) Under the Governor’s budget, we estimate ongoing core funding per student would increase by 2.9 percent. Othera Governor’s Main Proposal Is an Unrestricted Base Increase. Last year, the Governor established a multiyear compact with CSU extending through General Fund Federal Funds 2026-27. Consistent with the compact, the Governor’s largest CSU proposal in 2023-24 is a 5 percent unrestricted base increase. As Figure 3 Lottery shows, the Governor’s budget also provides ongoing Tuition and Fees augmentations to cover retiree health benefit and pension cost increases, as well as debt service Core Funds associated with a proposed cost shift for certain capital outlay projects. The Governor does not a Includes housing fees, parking fees, extended education charges, and fees for other propose any new one-time funding for CSU in noncore programs. 2023-24, beyond funding one initiative consistent with last year’s budget agreement. 2 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Figure 2 Nearly All of CSU’s Core Fund Increase Comes From General Fund Ongoing Core Funds (Dollars in Millions) Change From 2022-23 2021-22 2022-23 2023-24 Actual Revised Proposed Amount Percent Ongoing Core Funds General Funda $4,606 $5,050 $5,344 $294 5.8% Tuition and feesb 3,240 3,061 3,077c 16 0.5 Lottery 74 65 65 —d -0.1 Totals $7,920 $8,176 $8,485 $310 3.8% FTE studentse 394,930 377,757 381,191 3,434 0.9% Funding per student $20,055 $21,643 $22,260 $618 2.9 a Includes funding for pensions and retiree health benefits. b Includes funds used for student financial aid. c Reflects Governor’s budget level adjusted to reflect CSU’s estimate of additional revenue from proposed enrollment growth. d Less than $500,000. e Reflects total resident and nonresident enrollment in undergraduate, postbaccalaureate, and graduate programs. FTE = full-time equivalent. Figure 3 Governor’s Budget Plan for CSU Has a Few Components General Fund Changes, 2023-24 (In Millions) Ongoing Spending Base augmentation (5 percent) $227 Retiree health benefit cost increase 37 Debt service for capital outlay projectsa 27 Pension cost increase 3 CENIC cost increaseb —c Subtotal ($294) One-Time Initiatives Science and Technology Policy Fellows programd $10 Subtotal ($10) Total $304 a The Governor proposes to rescind $405 million in one-time General Fund provided for six capital outlay projects in 2022-23 and instead provide ongoing funding for CSU to debt finance these projects using university bonds. b The 2021-22 budget agreement included intent to provide these funds. c Less than $500,000. d The 2022-23 budget agreement included intent to provide these funds. CENIC = Corporation for Education Network Initiatives in California. www.lao.ca.gov 3 2023-24 BUDGET CORE OPERATIONS In this section, we first provide background 90 percent of CSU’s employees are represented on CSU’s core operations. Next, we describe by a union. The largest unions are the California the Governor’s proposed base increase for CSU, Faculty Association, which comprises about half followed by CSU’s plan for spending the funds. of CSU’s salary pool, and the California State Then, we assess the Governor’s proposal and make University Employees Union, which represents associated recommendations. support staff and comprises about one-quarter of CSU’s salary pool. Whereas the Legislature BACKGROUND ratifies collective bargaining agreements for most represented state employees, state law authorizes Below, we highlight CSU’s main operating cost the CSU Board of Trustees to ratify collective pressures and the fund sources available to cover bargaining agreements for CSU’s employees. cost increases. These collective bargaining agreements determine Cost Pressures salary increases for represented employees. CSU’s Largest Operating Cost Is Employee The agreements also often indirectly drive salary Compensation. Like other state agencies, CSU increases for the remaining 10 percent of CSU spends the majority of its core funds (about employees (primarily consisting of managers and 70 percent in 2021-22) on employee compensation, executives) who are not represented by a union. including salaries and benefits. Accordingly, CSU Often Provides Salary Increases. compensation almost always represents CSU’s As Figure 5 shows, CSU’s employees have received largest cost pressure each year. general salary increases in most of the past several CSU Has About 45,000 Full-Time Equivalent years. However, no employee groups received (FTE) Employees. Of these employees, about general salary increases in 2020-21 when the 45 percent are faculty, about state reduced General Fund support for CSU to 45 percent are staff, and the remaining 10 percent are managers Figure 4 and executives. (These data do CSU Staffing Levels Are not include student employees Somewhat Higher Than Five Years Ago and other temporary staff.) As Figure 4 shows, staffing levels are 1.9 percent higher now than five FTE Employees years ago. Staffing levels increased 46,000 9.8 from 2017 through 2019, dropped FTE Students Per FTE Employee in each of the next two years, 45,000 9.6 then rebounded somewhat in 9.4 2022. Because student enrollment 44,000 decreased over the same period, 9.2 43,000 the number of FTE students per 9.0 FTE employee decreased—falling 42,000 8.8 from 9.6 in fall 2017 to 8.8 in fall 2021. (We discuss the enrollment 41,000 8.6 decrease in the “Enrollment” 40,000 8.4 section of this brief.) Fall 2017 Fall 2018 Fall 2019 Fall 2020 Fall 2021 Fall 2022 Most Employee Salary Levels Are Determined Through Note: Due to data limitations, chart excludes student employees (represented and nonrepresented) and temporary staff. Collective Bargaining. About FTE = full-time equivalent. 4 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET address a projected shortfall in revenues due to the workforce and increasing 2.2 percentage points COVID-19 pandemic. Some groups also received no (reaching 51.1 percent) for CSU’s peace officers increases in 2021-22, followed by larger-than-average and firefighters. We estimate these rate increases increases in 2022-23. At this time, general salary will generate roughly $15 million in additional costs increases have not yet been determined for 2023-24. to CSU associated with payroll beyond the 2013-14 While most of CSU’s represented employees have level. (CSU’s 2023-24 operating budget request does agreements in place for 2023-24, those agreements not include these costs, as it is based on an earlier do not specify salary increases for that year, instead set of CalPERS projections showing lower rates in the allowing the union to reopen salary negotiations budget year.) As noted earlier, the state also plans to after the Governor’s May Revision is released. provide CSU with additional funding to cover the cost Two of CSU’s smaller bargaining units have collective of rate increases associated with payroll up to the bargaining agreements that expire before or during 2013-14 level. 2023-24, meaning salary increases for these CSU Is Also Responsible for Certain Health bargaining units also likely will be negotiated in the Benefit Costs. CalPERS also administers CSU’s coming months. health benefits, and it negotiates with health plan CSU Is Directly Responsible for Certain providers to establish premiums for the plans Pension Costs. The California Public Employees’ offered to CSU’s employees. CSU’s contribution to Retirement System (CalPERS) administers pension employee health benefits is based on the average benefits for CSU and most other state employees. premium of the most popular health plans. When The CalPERS Board sets employer contribution premiums increase, the state covers the cost rates for pensions. When employer contribution associated with CSU’s retirees. However, CSU is rates increase, the state covers the cost associated directly responsible for the cost associated with its with CSU’s payroll up to the 2013-14 level. However, active employees. Due to rising premiums, CSU’s CSU is directly responsible for any pension costs contribution to employee health benefits increased associated with payroll beyond the 2013-14 level. at an average annual rate of about 3 percent from (The state adopted this arrangement in 2013-14 2017 to 2022. In 2023-24, CSU has identified to provide CSU with a stronger fiscal incentive to $51 million in costs associated with an 8 percent contain staffing costs.) increase in its contribution rate. Pension Contribution Rates Are Scheduled CSU Has Various Other Operating Costs. to Increase. The Governor’s budget assumes Beyond employee compensation, CSU has other employer rate increases consistent with CalPERS’ ongoing costs, such as paying debt service most recent projections. These projections show on its systemwide bonds and covering other 2023-24 rates increasing 1.3 percentage points operating expenses and equipment (OE&E). (reaching 32.1 percent) for the largest tier of CSU’s Some of these other costs are also increasing. Figure 5 CSU Employees Have Had Salary Increases in Most Years General Salary Increases by Employee Groupa 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 California Faculty Association 3.5% 3.5% 2.5% — 4.0% 3.0% California State University Employees Union 3.0 3.0 3.0 — — 7.0 Other represented employees 2.0-3.1 3.0 3.0-3.8 — 0-4.0 0-7.0b Nonrepresented employeesc 2.5 3.0 3.0 — — 7.0 a Unless otherwise noted, chart does not reflect other salary provisions, such as equity increases, service salary increases, and post-promotion increases. b Employee groups received 3 percent to 7 percent general salary increases, with the exception of represented student employees. Represented student employees received 1.3 percent increases in salary range minimums and maximums, but no general salary increase. c Chart reflects merit salary increases for executives, managers, and confidential employees. Chart does not include “excluded employees,” who are primarily temporary staff (such as student assistants and consultants). www.lao.ca.gov 5 2023-24 BUDGET For example, high inflation over the past year Share of Costs Covered by General has led to increased prices for equipment and Fund Has Been Increasing. As the state has supplies, while various factors, such as the provided CSU with regular General Fund base increased incidence of liability claims and wildfires, increases and tuition charges have remained are contributing to higher insurance premiums. flat most years, the General Fund has been As campuses open new facilities, they also incur comprising a growing share of CSU’s core funds. additional costs, including for utilities, routine Whereas we estimate the General Fund comprised maintenance, and custodial services. In 2023-24, 50 percent of CSU’s ongoing core funds ten years CSU has identified the following cost increases: ago, it comprises 62 percent today. Ongoing General Fund support per student has also been • $23 million to cover inflation on OE&E. growing. In 2022-23, ongoing General Fund support • $14 million to cover increased liability and per student was 48 percent higher than in 2017-18 property insurance premiums. (rising from $9,055 to $13,368) in unadjusted terms, • $6 million to cover operations and routine and 17 percent higher adjusted for inflation. maintenance of new facilities. CSU Maintains Reserves for Planned Expenses and Economic Uncertainties. Like many other Fund Sources universities, CSU maintains reserves. CSU commits State Commonly Provides General Fund part of its reserves for planned one-time activities, Augmentations to Cover Operating Costs. such as renovating a building or launching a new Over the past decade, CSU primarily has relied academic program. It also leaves some of its on state General Fund augmentations to cover reserves purposefully uncommitted to prepare for increases in its operating costs. Since 2013-14, economic uncertainties, including recessions. CSU’s the state has provided CSU with General Fund systemwide reserves policy sets a target to maintain base increases in all years but one. (In 2020-21, uncommitted reserves worth between three and six the state reduced General Fund base support for months of expenditures. At the end of 2021-22 (the CSU to address a projected shortfall in revenues most recent data available), CSU had $2.5 billion due to the pandemic. The funds were restored the in total core reserves, of which $714 million following year.) was uncommitted. As Figure 6 shows, CSU’s CSU Also Uses Tuition Revenue to Cover Operating Costs. Over the past decade, CSU Figure 6 has increased tuition only once, CSU’s Uncommitted Core Reserves Have Increased raising systemwide charges by 4.9 percent for undergraduate and In Millions of Dollars teacher credential students and $800 1.2 6.5 percent for graduate students in In Months of Expenditures 2017-18. Currently, the systemwide 700 1.0 tuition charge for full-time resident 600 undergraduate students is 0.8 500 $5,742 per year. About 60 percent of resident undergraduate students 400 0.6 receive financial aid awards that 300 fully cover this charge. Students 0.4 with financial need typically receive 200 tuition coverage through either the 0.2 100 state’s Cal Grant program or CSU’s institutional financial aid program. 2017-18 2018-19 2019-20 2020-21 2021-22 6 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET uncommitted core reserves have generally increased estimates could support a 1.8 percent increase in over the past five years, reaching 1.1 months of the compensation pool), as well as $51 million to expenditures in 2021-22. Nonetheless, the reserve cover increases in certain health care premiums. level remains below the system’s target. The next largest amounts would go toward Campuses Have Largely Spent Recent enrollment growth and the Graduation Initiative Federal Relief Funds. Between March 2020 and 2025 (CSU’s initiative to increase graduation rates March 2021, the federal government enacted and reduce equity gaps). three pieces of legislation providing COVID-19 relief funds to higher education institutions. These ASSESSMENT three rounds of funds are collectively called the Unrestricted Base Increase Lacks Higher Education Emergency Relief Fund (HEERF). Transparency and Accountability. The Governor’s CSU campuses received a combined $3.1 billion proposed unrestricted base increase for CSU lacks in HEERF funds. Of this amount, campuses were transparency, as the funds are not designated required to spend at least $1.3 billion on student for particular purposes. CSU has added some financial aid. Any remaining funds were available transparency to the Governor’s proposal by for a broad range of institutional expenses providing a spending plan, thereby allowing the associated with COVID-19. As of January 2023, Legislature to consider whether the funds would CSU campuses had spent $2.9 billion (96 percent) likely be used in ways that align with its priorities. of the total relief funds they received. Aside from Unlike with other types of augmentations, however, student financial aid, the largest categories of no statutory language requires CSU to spend the expenses were replacement of lost revenue, base increase consistent with its initial plan. As a salaries and benefits, and information technology. result, the Legislature does not have assurance Under current federal guidance, campuses that the funds will be spent in ways that advance have until June 30, 2023 to spend the remaining the outcomes it desires. While some amount of $134 million in relief funds. spending discretion can be appropriate when the state has put in place accountability systems with GOVERNOR’S PROPOSAL clear fiscal incentives for performance (such as the Governor Proposes Base Increase. Student Centered Funding Formula for community The Governor proposes a $227 million (5 percent) colleges), the state has not put these conditions unrestricted base increase for CSU in 2023-24. in place for CSU. Despite the performance This is the second of five annual base increases expectations included in the Governor’s compact, included in the multiyear compact the Governor no clear mechanism exists to increase or decrease established with CSU last year. In addition to CSU’s funding in response to its outcomes. the base increase, the Governor’s budget would provide a combined $39 million for CSU pension Figure 7 and retiree health care cost increases. CSU Intends to Spend Base Increase CSU’S PLAN on Various Cost Increases General Fund (in Millions) CSU Has Spending Plan for Proposed Base Increase. Though the Governor does not require Amount CSU to use the proposed $227 million base Compensation pool increases $92 increase for any particular purposes (other than Health care premium increasesa 51 “to support operational costs”), CSU’s operating Enrollment growth 35 budget request contains an associated spending Graduation Initiative 2025 30 plan. As Figure 7 shows, the largest amounts Liability and property insurance premium increases 14 Operations and maintenance of new facilities 6 would go toward employee compensation. Total $227 Specifically, the plan includes $92 million to a Reflects CSU’s employer contributions on behalf of active employees. increase employee compensation (which CSU www.lao.ca.gov 7 2023-24 BUDGET Amount of Governor’s Proposed Base to the Legislature in spring 2022. The study found Increase Is Arbitrary. The amount of the wage stagnation at CSU relative to other higher proposed 2023-24 base increase was determined education and general industry employers, with in an agreement made between the Governor and CSU salaries falling 12 percent below the market CSU, without being codified by the Legislature. median on average. (The study did not examine At the time of the initial agreement, the Governor differences in employee benefits.) In addition to did not provide clear justification for the proposed the staff salary study, CSU has initiated a study amount based on CSU’s identified operating focused on faculty salaries. It expects the findings costs. Moreover, since the initial agreement was of the faculty salary study to be available in spring made last year, new information has become 2023, in time to inform the Legislature’s final available on CSU’s cost increases as well as the budget deliberations. state budget condition. We believe these factors warrant revisiting the amount of General Fund RECOMMENDATION augmentation proposed for CSU in 2023-24. Link CSU’s General Fund Augmentation to Proposed General Fund Augmentation Spending Priorities. Rather than give CSU an Does Not Fully Cover CSU’s Projected Cost unrestricted base increase, we recommend the Increases. Under the Governor’s proposed Legislature determine which of CSU’s potential General Fund augmentation of $227 million, some operating cost increases it wishes to support in of CSU’s projected operating cost increases would 2023-24 and then provide associated funding not be covered in 2023-24. For example, CSU’s designated for those particular purposes. associated spending plan for the proposed base For example, with the same total ongoing increase does not include funding for projected funding increase that the Governor proposes cost increases due to inflation on OE&E. CSU’s for CSU ($227 million), the Legislature could spending plan also does not provide any funding fund a 3 percent increase in CSU’s employee for projects to address the system’s large and compensation pool ($157 million), projected growing capital renewal needs. Under the employee health benefit increases ($51 million), multiyear compact, CSU would likely continue to and some capital renewal projects ($20 million). have unaddressed costs in the out-years. As we (We cover funding for enrollment growth in the discuss in The 2023-24 Budget: Higher Education next section of this brief.) The Legislature also Overview, we estimate that the Governor’s could provide more or less than the Governor’s proposed General Fund increases would fall proposed amount, depending on its priorities and short of covering CSU’s projected operating cost the state’s budget capacity. For example, if the increases every year through 2026-27. Legislature wishes to support additional employee CSU Is Likely to Face Heightened Salary compensation increases, CSU estimates every Cost Pressures. Notably, CSU’s spending plan 1 percent increase in the compensation pool would for the proposed $227 million base increase in cost $52 million. 2023-24 accommodates a less than 2 percent Consider Expanding Budget Capacity at increase to its compensation pool. CSU, however, CSU Through Tuition Increases. Given that the faces significant upward pressure on employee Governor’s proposed General Fund increases compensation. Over the past year, both inflation fall short of covering CSU’s projected operating and wage growth (across the nation and in cost increases every year of the compact period, California) were at their highest levels in several the Legislature could consider supporting tuition decades. Furthermore, inflation and broad-based increases at CSU. Pursuing tuition increases in wage growth are expected to exceed 2 percent 2023-24 would require CSU to take quick action in 2023. Two employee compensation studies are over the next few months, including calling a also likely to contribute to salary cost pressures at special meeting of the Board of Trustees in the first CSU. The 2021-22 Budget Act provided funding for half of May. Pursuing tuition increases in 2024-25 a staff salary structure study, which was submitted would allow greater time for student consultation 8 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET and public notification. CSU recently indicated that increase over the next several years. Under both it does not intend to pursue a tuition increase in models, students who receive tuition coverage 2023-24 and has not yet made a determination for through either the state’s Cal Grant program or 2024-25. CSU estimates that a 5 percent increase CSU’s institutional financial aid program would in systemwide tuition charges for all students would not face higher costs. The state, however, would generate $83 million in net tuition revenue, as well see higher Cal Grant costs. We estimate Cal Grant as $42 million in additional funding for institutional costs would increase by approximately $30 million financial aid. If the tuition increase were applied ongoing if a 5 percent tuition increase were applied to the incoming student cohort only (similar to the to all students, or by a smaller but growing amount model recently adopted by UC), additional revenue if the tuition increase were applied to the incoming would be significantly lower in the first year but cohort only. ENROLLMENT In this section, we first provide background on year. This approach of setting expectations one the state’s approach to funding CSU enrollment. year in advance gives campuses more time to plan Next, we cover recent trends in CSU enrollment. for growth, particularly since campuses make most Then, we describe the Governor’s enrollment of their admissions decisions for any given year proposals as well as CSU’s enrollment plans. before the budget is enacted in June. Finally, we assess those proposals and plans and State Typically Funds Enrollment Growth make associated recommendations. According to Per-Student Formula. Typically, the state supports enrollment growth at CSU by BACKGROUND providing a General Fund augmentation based on Most CSU Students Are Resident the number of additional students CSU is to enroll. Undergraduates. About 85 percent of The per-student funding rate is derived using a CSU’s students are resident undergraduates. “marginal cost” formula. This formula estimates the Undergraduates may enter CSU either as cost of the additional faculty, support services, and freshmen or as transfer students. Historically, other resources required to serve each additional roughly half of CSU’s incoming class each year student. It then shares those costs between state has consisted of freshmen, and the other half General Fund and anticipated tuition revenue. has consisted of transfer students. In addition Last Year’s Budget Provided Enrollment to resident undergraduates, CSU also enrolls Growth Funding for 2022-23. The 2022-23 resident postbaccalaureate and graduate students Budget Act provided $81 million ongoing General (comprising about 10 percent of its students) as Fund for CSU to grow resident undergraduate well as nonresident students (comprising about enrollment by 9,434 FTE students. The funding 5 percent of its students). level was calculated at the 2021-22 marginal State Budget Typically Sets Enrollment cost per student of $13,087, with a state share of Growth Expectations for CSU. In most years, $8,586. (The state used the 2021-22 rate because the state sets enrollment growth expectations it had originally signaled its enrollment growth for CSU in the annual budget act. These growth expectation that year, providing CSU more time expectations historically applied to all resident to plan for growth.) Should CSU not meet the students, but in recent years the state has enrollment target, provisional language in the applied them to resident undergraduates only. In 2022-23 Budget Act directed the administration to addition, whereas the state historically set growth reduce the enrollment growth funding in proportion expectations for the budget year, some recent to the shortfall. budgets have set an expectation for the following www.lao.ca.gov 9 2023-24 BUDGET RECENT TRENDS are not yet finalized, preliminary estimates show enrollment decreasing by an additional 18,125 CSU Enrollment Continues to Decline in resident FTE students (4.8 percent)—bringing 2022-23. As Figure 8 shows, CSU enrollment enrollment down to 356,848 resident FTE students. increased over much of the past decade, growing at an average annual rate of 1.6 percent from Increase in New Freshmen Is Offset by Larger 2011-12 through 2020-21. CSU enrollment peaked Drop in New Transfer Students. In fall 2022, in 2020-21 at 392,793 resident FTE students. the number of new resident freshmen enrolling In the past two years, enrollment has decreased at CSU increased 8.6 percent over the previous notably. In 2021-22, enrollment decreased by year, as Figure 9 shows. This rebound brings the 17,820 resident FTE students (4.5 percent) from number of new freshmen closer to pre-pandemic the previous year. Though 2022-23 enrollment data levels. However, the increase in new freshmen was more than offset by a 12 percent decrease in incoming transfer students. Figure 8 The steep decrease in transfer students is linked to community After Many Years of Growth, college enrollment declines, CSU Enrollment Drops Notably which accelerated at the start of Resident Full-Time Equivalent Students the pandemic. Continuing Student 400,000 Enrollment Is Also Down. As 390,000 Figure 9 also shows, continuing 380,000 resident undergraduates 370,000 declined by 5.1 percent from 360,000 fall 2021 to fall 2022. Several 350,000 factors are contributing to the 340,000 enrollment decline among 330,000 320,000 continuing students. First, CSU 310,000 enrolled a smaller-than-usual 2011-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21 21-22 22-23ª incoming cohort in fall 2021, a Reflects estimated enrollment level as of Governor's budget. Figure 9 Enrollment Declined Among Many Student Groups in Fall 2022 Resident Fall Headcount Change From 2021 2019 2020 2021 2022 Amount Percent Undergraduate New First-time freshmen 62,633 58,774 56,444 61,272 4,828 8.6% Incoming transfers 56,385 60,420 54,649 48,006 -6,643 -12.2 Subtotals (119,018) (119,194) (111,093) (109,278) (-1,815) (-1.6%) Continuing 290,939 294,616 293,020 277,959 -15,061 -5.1% Totals 409,957 413,810 404,113 387,237 -16,876 -4.2% Postbaccalaureate/Graduate New 17,494 20,360 19,007 16,797 -2,210 -11.6% Continuing 28,886 28,646 31,152 29,623 -1,529 -4.9 Totals 46,380 49,006 50,159 46,420 -3,739 -7.5% 10 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET translating to fewer continuing students in fall 2021-22, the cumulative change in resident FTE 2022. Second, retention rates have generally students ranged from an 8.3 percent increase decreased over the past couple of years. (at Dominguez Hills) to a 34 percent decrease (at The percent of freshmen who return in their second Humboldt). In general, the campuses experiencing year, for example, decreased from 85 percent for the most growth were concentrated in Southern the fall 2019 incoming cohort to 82 percent for California and the campuses experiencing the the fall 2021 incoming cohort. Third, average unit steepest declines were concentrated in Northern load among continuing undergraduates has also California. While campus-level data are not yet decreased over the past couple of years, from available for 2022-23, nearly all campuses (except 13.3 units in fall 2020 to 12.9 units in fall 2022. San Diego, Humboldt, and San Bernardino) saw The reduction in unit load is leading FTE students to a decline in resident student headcount in the fall decrease even faster than the headcounts shown in 2022 term. the figure. Some Campuses Are Below Their Enrollment Recent Enrollment Trends Have Varied Target. Over the years, CSU has tracked a running Among Campuses. As Figure 10 shows, total of systemwide enrollment growth expectations, enrollment trends varied widely among campuses which it refers to as its enrollment target. It also over the past five years. From 2017-18 through tracks enrollment targets for each campus, reflecting that campus’s share of the system’s enrollment target Figure 10 and associated funding. In any Enrollment Trends Vary Among Campuses given year, there is some variation Cumulative Percent Change in Resident Full-Time Equivalent Students, between a campus’s actual 2017-18 to 2021-22 enrollment level and its enrollment target. This is because campuses cannot perfectly predict yield rates, Dominguez Hills retention rates, and other aspects Pomona of student behavior. In 2021-22, as San Marcos Long Beach Figure 11 on the next page shows, San Diego about half of campuses were above San Jose their target, while the other half Sacramento were below. Seven campuses were Fullerton more than 10 percent below their Fresno enrollment target. Bakersfield Some Campuses Have Northridge Stanislaus Recently Discontinued Los Angeles “Impaction.” Over the years, many Monterey Bay CSU campuses and programs have San Luis Obispo been designated as “impacted,” San Bernardino meaning they have more student San Francisco demand than enrollment slots. Channel Islands In managing their enrollment, East Bay impacted campuses and programs Chico adopt stricter admissions criteria Maritime Sonoma than the minimum systemwide Humboldt eligibility requirements. Amid recent enrollment declines, Chapter 465 -40 -30 -20 -10 10 20% of 2022 (AB 2973, Committee on Higher Education) simplified the www.lao.ca.gov 11 2023-24 BUDGET process for campuses to remove Figure 11 these stricter admissions criteria. CSU reports that five campuses Some Campuses Are Above Target, (Fresno, Maritime, Northridge, While Others Are Below San Bernardino, and San Marcos) Actual Resident Full-Time Equivalent Students Relative to Target, 2021-22 have made changes to impaction under the new process. Some of Pomona these campuses have discontinued San Marcos the use of stricter admissions Los Angeles criteria for nonlocal applicants, Dominguez Hills while others have discontinued the San Jose use of stricter admissions criteria Sacramento for all applicants within specific Fullerton programs. Many other campuses Northridge and programs remain impacted Long Beach for 2023-24. San Diego Some Eligible Applicants Fresno Continue to Be Redirected Bakersfield to Other Campuses. Due to Stanislaus impaction, some applicants Monterey Bay meeting CSU’s minimum San Luis Obispo systemwide eligibility requirements San Bernardino are not accepted at any campus San Francisco to which they apply. Since fall Channel Islands 2019, CSU has been redirecting East Bay these applicants to nonimpacted Chico campuses. Yield rates among Sonoma redirected applicants have Maritime tended to be low. In fall 2021 Humboldt (the most recent data available), -50 -40 -30 -20 -10 10 20 30% CSU redirected 11,143 eligible applicants, of whom 356 (3.2 percent) went on to enroll at a CSU campus. GOVERNOR’S by 1 percent (3,434 FTE students) in 2023-24. PROPOSALS The Governor also expects CSU to continue Governor Does Not Reduce 2022-23 increasing resident undergraduate enrollment by Enrollment Growth Funding. Although CSU 1 percent annually through 2026-27 (the last year enrollment is declining, the Governor’s budget does of the compact). The compact does not specify not implement the 2022-23 Budget Act provisional the number of students CSU is to enroll each year, language directing the administration to reduce but it sets forth that CSU is to add approximately enrollment growth funding correspondingly. 14,000 FTE students in total over the next four years. Rather than provide designated funding for Governor Has Enrollment Growth Expectation this enrollment growth, the Governor expects CSU for 2023-24 and Out-Years. As part of the to cover the associated cost from within its base multiyear compact established between the increase each year. Governor and CSU, the Governor expects CSU to increase resident undergraduate enrollment 12 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET CSU’S PLANS $16 million in tuition revenue from enrollment growth and allocating these funds in the same way.) CSU Intends to Recover Enrollment Over Multiyear Period. In its fall 2022 compact progress In 2024-25, CSU Plans to Begin Reallocating report, CSU calculated its baseline 2022-23 Enrollment Funding Among Campuses. For many enrollment target by adding the 2022-23 Budget years, CSU has allowed campuses that miss Act expectation (an additional 9,434 resident their enrollment target to keep the associated undergraduate FTE students) to the previous funding. As part of its efforts to attain systemwide systemwide enrollment target it had been tracking enrollment growth, CSU recently developed a over time. To set the enrollment target for 2023-24, plan to begin reallocating enrollment funding it further added 3,434 resident undergraduate from campuses below their target. In 2024-25, FTE students to this level. (Consistent with the if a campus is 10 percent or more below its compact, CSU assumes no growth in resident enrollment target in the previous year, CSU will postbaccalaureate or graduate students.) reallocate 5 percent of the campus’s target and As Figure 12 shows, this approach leads to the associated funding to campuses at or above an enrollment target of 387,114 resident FTE their target. CSU will reallocate another 5 percent students in 2023-24, growing to 397,623 resident in 2025-26 for campuses 7 percent or more below FTE students by 2026-27. Because of CSU’s their target in the previous year, as well as another current-year enrollment declines, it would need to 5 percent in 2026-27 for campuses 5 percent or grow faster than 1 percent annually (as originally more below their target in the previous year. This proposed in the compact) to reach these targets. plan is intended to incentivize all campuses to CSU is planning to grow enrollment by 2 percent grow, while potentially also adding capacity at the in 2023-24, followed by an additional 3 percent highest-demand campuses. annually in the out-years. Under this plan, CSU effectively would catch up to its enrollment target by ASSESSMENT the last year of the compact. 2022-23 Enrollment Growth Funds Are Not CSU Would Set Aside Funds From Its Serving Intended Purpose. The $81 million 2023-24 Base Increase for Enrollment Growth. ongoing General Fund provided in 2022-23 was Under CSU’s spending plan for the Governor’s intended to support costs associated with adding proposed $227 million General Fund base increase students, such as hiring more faculty and staff. (discussed in the “Core Operations” section of this Based on fall term data, most CSU campuses brief), $35 million would be used for enrollment are likely to experience enrollment declines in growth. CSU indicates it would allocate these 2022-23, such that they are not expected to incur funds to campuses that are at or above their these additional costs. By allowing CSU to retain target in 2022-23, with the specific allocations the enrollment growth funding, the Governor to be determined after 2022-23 enrollment data is effectively allowing it to use the funding for are finalized. (CSU also anticipates generating purposes other than the original intent. Figure 12 Under CSU’s Plan, Enrollment Would Recover Over Multiyear Period Resident Full-Time Equivalent Students 2022-23 2023-24 2024-25 2025-26 2026-27 Enrollment target under compact 383,680 387,114 390,582 394,085 397,623 Annual percentage growth 1% 1% 1% 1% CSU’s planned enrollment level 356,848a 364,140 375,064 386,316 397,906 Annual percentage growth 2% 3% 3% 3% CSU's planned enrollment relative to compact target -7% -6% -4% -2% —b a Reflects CSU’s estimated enrollment level as of Governor’s budget. b In 2026-27, CSU plans to slightly exceed the enrollment target under the compact (0.1 percent higher). www.lao.ca.gov 13 2023-24 BUDGET Some Early Signs Suggest Enrollment CSU Is Taking Certain Actions to Increase Challenges Are Likely to Persist Into 2023-24. Enrollment. While various factors are likely to create While the 2023-24 admissions cycle remains in its enrollment challenges in the coming years, CSU is early stages, several early indicators suggest that also taking certain actions that could offset those growth could be challenging. effects. For example, if CSU continues to remove stricter admissions criteria from previously impacted • High School Graduates. The number of high campuses or programs, yield rates might increase school graduates in California is projected to as more students get into their campus of choice. be roughly flat in 2022-23 compared to the In addition, given the incentives created under previous year. As a result, we do not expect CSU’s new enrollment reallocation plan, campuses to see demographically driven growth in the might pursue additional recruitment and retention incoming freshmen class for fall 2023. strategies. The potential reallocation of unused • New Applicants. As of January 2023, CSU enrollment slots to higher-demand campuses reports a modest (3.1 percent) increase in might also expand the number of students served freshmen applicants for fall 2023 compared systemwide in the out-years. to the previous year. However, this is offset Under CSU’s Plan, Enrollment Would Remain by a larger (11 percent) decrease in transfer Below Previously Funded Levels in 2023-24 and applicants, reflecting the continued impact 2024-25. The rates of enrollment growth under of community enrollment declines on CSU’s CSU’s plan (2 percent to 3 percent annually) are transfer pipeline. relatively high compared to historical averages. • Continuing Cohorts. In the past couple of For comparison, CSU grew at an average annual rate years, CSU has enrolled smaller cohorts of new of 1.6 percent during the decade of growth preceding students. New resident student headcount the pandemic. Nonetheless, even if CSU were to decreased by 6.8 percent compared to achieve the planned growth, its enrollment level the previous year in fall 2021, and then would remain below the previously funded level (that decreased an additional 1.6 percent in fall is, the 2022-23 enrollment target of 383,680 resident 2022. These smaller cohorts will remain at FTE students) in both 2023-24 and 2024-25. This CSU in 2023-24, leading to smaller cohorts of suggests CSU could support its planned enrollment continuing students. levels in these years within existing resources. Legislature Has More Time to Influence 2024-25 Enrollment. As CSU is already in the RECOMMENDATIONS midst of making 2023-24 enrollment decisions, the Consider Reducing 2022-23 Enrollment Growth Legislature has less ability to influence its enrollment Funds as Budget Solution. As we discuss in level in the budget year. The Legislature could, The 2023-24 Budget: Overview of the Governor’s however, send an early signal to campuses about its Budget, we recommend the Legislature plan for the enrollment expectations for 2024-25. In setting an risk of a larger budget problem by developing a larger enrollment target for 2024-25, it would likely want to set of potential budget solutions than the Governor consider the trends described above. The number has proposed. Given the 2022-23 enrollment growth of high school graduates next year is projected funds provided to CSU are not serving their intended to increase by 0.6 percent, allowing for some purpose, the Legislature could consider adding these demographically driven growth among new students funds ($81 million) to the set of potential budget in 2024-25. However, the smaller incoming cohorts solutions. Removing these funds also would align from the past couple of years will still be enrolled, with the provisional language enacted in the 2022-23 potentially leading continuing student enrollment Budget Act. to remain low. At this time, other factors such as Recommend Setting 2023-24 Enrollment application volume, retention rates, and average unit Target in Budget Act. We recommend the load are uncertain for 2024-25. Legislature specify the total number of students it expects CSU to enroll in 2023-24 in the 2023-24 14 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Budget Act. This would enhance accountability by Recommend Also Signaling Enrollment providing a clear goal against which CSU’s actual Growth Intentions for 2024-25. Given the timing enrollment level can be measured. In deciding upon of the admissions cycle, we recommend the a target, the Legislature could use CSU’s planned Legislature also signal any intent for additional enrollment level of 364,140 resident FTE students as a enrollment growth in 2024-25 in the 2023-24 starting point. It could choose to increase or decrease Budget Act. As with the budget-year target, we this target based on the factors described above. recommend providing an augmentation for this As long as the target remains below the previously enrollment growth only if the new target exceeds funded level (383,680 resident FTE students), we previously funded levels. The augmentation, if do not recommend providing any new enrollment warranted, could be provided in the 2024-25 growth funding. budget to align the timing of the funding with the arrival of the students. CAPITAL OUTLAY BUDGET SOLUTIONS In this section, we first provide background projects proposed for 2023-24 through 2027-28, on capital outlay at CSU. Next, we describe the subject to available funding. The total amount Governor’s proposed budget solutions relating consists of $22.7 billion in academic facilities and to six CSU capital projects. Then, we assess that infrastructure projects as well as $6.9 billion in package of proposed budget solutions and make self-supporting projects. Of the total amount, more an associated recommendation. (The Governor than 70 percent is for improvements to existing also proposes budget solutions related to student facilities. This includes projects to address fire and housing projects across the higher education life safety concerns, seismic risks, capital renewal segments. We plan to review those proposals in (including the deferred maintenance backlog), and the coming weeks.) other programmatic issues. Less than 30 percent is for projects to add new space to support BACKGROUND campus growth. State Funds Academic Facilities and Two Main Ways to Fund CSU Capital Projects Infrastructure at CSU. Traditionally, the state Are Cash and Debt Financing. One way the state has funded CSU’s academic facilities, including may fund capital projects is by providing one-time classrooms, laboratories, and faculty offices. General Fund to CSU to pay for the project upfront It has also funded certain campus infrastructure, in cash. The state commonly uses this approach to such as central plants, utility distribution systems, fund deferred maintenance projects, for example. and pedestrian pathways. In addition to these A second way is by supporting the debt financing of state-supported assets, CSU has self-supporting capital projects. Under this approach, CSU borrows facilities, including student housing, parking money for the projects by issuing university bonds, structures, certain athletic facilities, and student then repays the associated debt using its core unions. These types of facilities typically generate funds. (State law authorizes CSU to use its main their own fee revenue, which covers associated General Fund appropriation for this purpose.) CSU capital and operating costs. commonly uses this approach for larger projects, such as projects to renovate, replace, or construct CSU Has Identified Many Capital Outlay an entire facility. Debt financing decreases the Priorities. Under state law, CSU is to submit a up-front cost of these projects by spreading the capital outlay plan to the Legislature annually by cost out over many years. However, it increases the November 30, identifying the projects proposed total project cost because CSU must pay interest for each campus over the next five years. CSU’s on the borrowed amount. most recent five-year plan identifies $29.6 billion in www.lao.ca.gov 15 2023-24 BUDGET In 2022-23, State Funded Many CSU Capital ASSESSMENT Projects in Cash. At the 2022-23 Budget Act, Shifting Projects to Debt Financing Can the state had a significant General Fund surplus. Be a Reasonable Budget Solution. Changes in In addition, the state appropriations limit (SAL) the state’s budget condition have made it more constrained how the state could use revenues difficult to pay for large capital projects up front in above a certain limit. One way the state addressed cash. Given that facilities are typically used over its SAL requirements was by spending on purposes many years, debt financing can be a reasonable excluded from the limit, including capital outlay. alternative that spreads a facility’s costs across its The 2022-23 Budget Act provided over $400 million useful life. In converting projects from cash to debt in one-time General Fund to CSU for specific capital financing, the state can achieve near-term savings. projects, in addition to $125 million for deferred The state also maintains the flexibility to accelerate maintenance, seismic mitigation, and energy debt payments in the future, if it has a large surplus efficiency projects across the system. in any given year. Debt Financing Would Increase Overall GOVERNOR’S PROPOSALS Project Costs. Although the Governor proposes Governor Proposes to Shift Six Projects From to use a reasonable alternative financing option for Cash to Debt Financing. Since the enactment of these six CSU capital projects, his proposal also the 2022-23 Budget Act, the state budget condition contributes to the state’s out-year operating deficits. has deteriorated, and the state now faces a budget Moreover, it results in higher total project costs problem. To reduce near-term spending, the due to the associated interest payments. Under the Governor proposes to rescind $405 million one-time Governor’s proposal, we estimate the state would General Fund provided for six CSU capital projects spend roughly $810 million on the six projects— in 2022-23 and instead provide $27 million ongoing twice as much as originally budgeted—assuming the General Fund beginning in 2023-24 to debt finance debt is repaid over 30 years at the proposed funding these projects using university bonds. Figure 13 level of $27 million annually. (Depending on interest lists the six projects, along with the associated rates, actual debt service might be higher or lower one-time funds that would be rescinded and the than the proposed level.) Given the significantly associated debt service augmentation that would be higher cost, we think it would be reasonable to hold provided under the Governor’s proposal. these projects to a more stringent standard before approving them for debt financing. Figure 13 Governor Proposes Changing How Six CSU Capital Projects Are Funded (In Millions) 2022-23 New Estimated One-Time Funding Annual Debt Campus Project Rescinded Service Bakersfield New Energy Innovation Center $83.0 $5.5 San Diego (Brawley center) New STEM building 80.0 5.3 San Bernardino (Palm Desert center) New student services building 79.0 5.3 Chico, Fresno, Pomona, San Luis Obispo University farms facilities and equipment 75.0 5.0 Fullerton New Engineering and Computer Science 67.5 4.5 Innovation Hub San Luis Obispo Swanton Pacific Ranch rebuilding 20.3 1.4 Totals $404.8 $27.0 STEM = science, technology, engineering, and math. 16 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Projects Likely Do Not Address Highest RECOMMENDATION Capital Outlay Priorities at CSU. Some of the Revisit Whether to Move Forward With Each capital projects identified in CSU’s five-year plan Project. Given that the Governor’s proposal to are critical and urgent. Those projects often address debt finance the six projects significantly increases deficiencies with existing facilities and infrastructure their total costs, we recommend the Legislature that could otherwise present life safety concerns revisit whether each project is justified under the or disrupt campus operations. In contrast, most of new circumstances. In making this determination, it the projects that would be debt financed under the could consider the following criteria: Governor’s proposal do not address these types • Whether the project is among the most of deficiencies with existing space. Moreover, four pressing of CSU’s capital needs, including of the six projects primarily would add new space. projects that address critical life safety issues Adding new space increases ongoing operations and minimize the risk of disruptions to existing and maintenance costs, and it creates future campus operations. capital renewal costs as building components eventually age. • Whether justification for any new facilities has been provided based on factors such as Projects Affected by Proposal Are in Early unmet enrollment demand and overutilization Stages. Based on information provided by CSU, of existing facilities. the six projects to be converted to debt financing are in planning and design stages. One project • Whether the campuses constructing new at the San Bernardino campus began preliminary facilities have a plan for covering any plans in July 2022 and has spent $3.3 million to associated operating cost increases, as well date. The remaining five projects are scheduled to as a plan to keep the facility in good condition begin preliminary plans in the coming months, with across its life. small amounts (less than $36,000 total) spent on If the Legislature finds that a given project meets these projects to date. To minimize project delays these criteria, it could approve the Governor’s and the associated construction cost escalation, proposal to debt finance that project. On the other CSU is exploring options for these projects to hand, if the Legislature finds that a given project move forward as budget deliberations over their does not meet these criteria, it could consider funding continue. For example, campuses might withdrawing state support for that project at this use reserves to fund these projects over the next time. CSU could consider including any affected few months, or CSU might issue short-term debt projects in one of its future five-year capital plans, if authorized by the Board of Trustees. (Under the with the Legislature reconsidering funding those latter approach, CSU would be responsible for projects at that time. the debt service if the state were to withdraw its support for the projects.) www.lao.ca.gov 17 2023-24 BUDGET 18 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET www.lao.ca.gov 19 2023-24 BUDGET LAO PUBLICATIONS This report was prepared by Lisa Qing, 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. 20 LEGISLATIVE ANALYST’S OFFICE