The 2024-25 Budget: Higher Education Overview

2024-25 BUDGET The 2024-25 Budget: Higher Education Overview GABRIEL PETEK | LEGISLATIVE ANALYST | JANUARY 2024 SUMMARY Governor’s Higher Education Budget Plan Relies on Reserves, Deferrals, and Reductions. The Governor’s budget includes $21.7 billion in General Fund support for higher education in 2024-25—an increase of $226 million (1.1 percent) from 2023-24. Nearly all of the new discretionary spending is for the California Community Colleges (CCC). The Governor proposes a 0.76 percent cost-of-living adjustment for CCC apportionments and certain categorical programs, along with 0.5 percent systemwide CCC enrollment growth. To cover these costs, together with some baseline CCC costs, the Governor proposes making discretionary withdrawals from the Proposition 98 Reserve ($236 million in 2023-24 and $486 million in 2024-25). The Governor proposes no programmatic expansions to student financial aid programs. He also proposes no base increases or enrollment growth for the University of California (UC) or California State University (CSU). The Governor instead proposes to “defer” 5 percent base increases by one year, then double up base increases in 2025-26, along with providing one-time back payments. The Governor also proposes a total of $2.4 billion in one-time spending reductions to recent higher education initiatives. Proposed Reductions Are a Practical Start, but Other Proposals Are Poor Fiscal Practice. Given the state’s large projected budget deficit in 2024-25 (potentially upwards of $58 billion), at least $2.4 billion in higher education savings seems a practical starting point. The Governor’s proposed reductions also generally would be among the least disruptive savings options. Though offering budget solution in 2024-25, all the proposed reductions are one time, such that they do not help the state address the multiyear deficits it faces. The Governor’s higher education plan worsens the state’s projected budget deficit in 2025-26 substantially, with the proposed deferrals contributing $1.5 billion to that deficit. The Governor’s proposed deferrals for UC and CSU are even worse than the deferrals the state has done to date. Whereas the state typically has used deferrals to protect existing programs from deeper cuts, the Governor is proposing that UC and CSU expand their programs. Rather than increasing university costs, the state historically has contained those costs during such times. The Governor’s plan also would increase CCC costs even though available Proposition 98 funding is not sufficient to cover even existing CCC costs. Recommend the Legislature Build a More Prudent Budget. We recommend the Legislature pull back additional unspent one-time funding from prior budgets. We estimate that hundreds of millions of dollars from recent one-time higher education initiatives remains unencumbered. Pulling back these funds now would allow the Legislature to maintain more of its reserves, which in turn could help protect ongoing programs from cuts over the next couple of years. We also recommend holding UC, CSU, and CCC funding flat in 2024-25 and revisiting those funding levels in 2025-26. Asking UC and CSU to operate their programs at a level the state currently cannot afford puts not only the state and the segments at risk but also other state programs that might be cut next year to make room for the added higher education spending. Similarly, relying on reserves to increase CCC spending in 2024-25 makes managing the CCC budget in 2025-26 even more difficult, with higher spending, lower reserves, and more disruptive choices remaining. www.lao.ca.gov 1 2024-25 BUDGET INTRODUCTION Brief Focuses on the Governor’s Proposed UC, and the California Student Aid Commission Higher Education Budget Plan. In this brief, (CSAC). Over the coming weeks, our office plans we first provide an overview of the Governor’s to release additional budget briefs that delve more recently proposed 2024-25 budget plan for higher deeply into the Governor’s proposals for each of education. We then assess that plan. We conclude these segments. Beyond these budget briefs, our by offering a few budget recommendations for the EdBudget website contains many budget tables Legislature to consider. In the brief, we focus on the showing the Governor’s education proposals. Governor’s major budget proposals for CCC, CUS, OVERVIEW Below, we summarize (1) General Fund and General Fund support for the three segments total core funding proposed for higher education, and CSAC. The proposed 2024-25 funding (2) the Governor’s major higher education spending level is $226 million (1.1 percent) higher than the proposals, and (3) the Governor’s proposed higher 2023-24 level. CSAC receives the largest relative education budget solutions (including those related augmentation, growing by 6.2 percent. CCC grows to student housing) that are designed to help the by 1.3 percent, and the university systems state solve a projected budget deficit in 2024-25. experience little or no growth. Nearly all of the funding increase shown in the top portion of the Funding by Source figure is non-Proposition 98 General Fund (which Governor Proposes a Small Increase in funds many government programs, excluding General Fund Support for Higher Education. K-14 education). As Figure 1 shows, the Governor’s budget for 2024-25 includes a total of $21.7 billion in ongoing Figure 1 Total General Fund Support for Higher Education Grows Under Governor’s Budget Ongoing General Fund (Dollars in Millions) Change From 2023-24 2022-23 2023-24 2024-25 Revised Revised Proposed Amount Percent CCCa $8,234 $8,744 $8,854 $110 1.3% CSUb 5,041 5,409 5,344 -65 -1.2 UCb 4,377 4,712 4,729 17 0.4 CSAC 2,416 2,655 2,819 164 6.2 Totals $20,068 $21,520 $21,746 $226 1.1% Non-Proposition 98 $12,434 $13,331 $13,553 $222 1.7% Proposition 98c 7,634 8,189 8,193 4 0.1 Proposition 98 Reserved — 236 486 250 106.1 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 for one-time purposes. d The administration proposes to withdraw the shown amounts from the Proposition 98 Reserve to support CCC ongoing apportionment costs. These amounts are excluded from the earlier portions of the table. In 2022-23, the proposed withdrawal is $11,000. CSAC - California Student Aid Commission. 2 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Governor Proposes to Withdraw Funds From tax revenue, along with changes in other core fund the Proposition 98 Reserve. In addition to the sources and the proposed Proposition 98 Reserve funds shown in the top portion of Figure 1, the withdrawals, CCC funding increases by 3.9 percent. Governor proposes to withdraw funds from the CSU and UC Benefit From Increases in Proposition 98 Reserve in 2023-24 and 2024-25 to Student Tuition Revenue. For CSU and UC, the support ongoing community college programs. (The largest nonstate core fund source is student tuition Governor also proposes Proposition 98 Reserve revenue. Both CSU and UC now have policies that withdrawals to support school districts.) Accounting increase tuition annually for at least some students. for the Governor’s proposed reserve withdrawals, Tuition revenue at CSU and UC also increases as community college Proposition 98 General Fund their enrollment increases. Total tuition revenue support increases 4 percent in 2024-25. The nearby is estimated to increase 5.4 percent at CSU and box provides more information about Proposition 98 4 percent at UC in 2024-25. After accounting for and the Proposition 98 Reserve. these increases, along with all other changes in Community Colleges Benefit From Increases core fund sources, total core funding is estimated in Local Property Tax Revenue. Whereas CSAC to grow 1.2 percent at CSU and 2.2 percent at UC. receives most of its funding from the state, the Governor Assumes CSU Implements Its three segments receive substantial core funding New Tuition Policy. CSU’s new tuition policy from sources other than the state. For CCC, the will go into effect for the first time in 2024-25. largest nonstate fund source is local property tax The last time tuition increased at CSU was in revenue. As Figure 2 on the next page shows, CCC 2017-18. Under CSU’s new policy, tuition is set local property tax revenue is projected to increase to increase 6 percent annually for all students $175 million (4.3 percent) in 2024-25, reflecting (both undergraduate and graduate students), growth that is somewhat lower than the historical beginning in 2024-25 and extending through growth rate over the past 20 years (5.5 percent). 2028-29. In 2024-25, the annual tuition charge After accounting for the increase in local property for a full-time student is set at $6,084 for resident Background on Community College Budgeting Community College Budgeting Is Impacted Significantly by Proposition 98. Proposition 98 (1988) established a constitutional funding formula that sets a minimum annual funding level for K-14 education, commonly known as the “minimum guarantee.” State General Fund and certain local property tax revenue count toward meeting the Proposition 98 minimum guarantee. California Community Colleges receive the bulk of their support from Proposition 98 funds. After calculating the minimum guarantee for any given year, the Legislature has discretion regarding how to allocate Proposition 98 funds among community colleges and school districts. Over the past several years, the Legislature in practice has allocated 11 percent of Proposition 98 funds to community colleges. Proposition 98 Reserve Is Intended to Help Insulate Colleges From Revenue Fluctuations. Proposition 2 (2014) added constitutional provisions creating the Public School System Stabilization Account (Proposition 98 Reserve). The state generally is required to make deposits into this reserve when capital gains revenue is strong and make withdrawals when state revenue has weakened. The Constitution also allows the Legislature to make discretionary withdrawals if the Governor declares a budget emergency. As with Proposition 98 funds more generally, the Legislature has discretion regarding how to allocate Proposition 98 Reserve withdrawals among community colleges and school districts. To date, the state has made no withdrawals from the account for either colleges or schools. Entering 2022-23, the account held a total of $8.1 billion in deposits. www.lao.ca.gov 3 2024-25 BUDGET undergraduates, reflecting an increase of $342 over held flat. Under the policy, tuition, together with the 2023-24 rates. CSU estimates it will generate UC’s systemwide fee, is set at $14,436 for new $148 million in additional tuition revenue in 2024-25 resident undergraduate students, reflecting an from the new policy. CSU plans to use $49 million increase of $684 (5 percent) from the 2023-24 of this additional revenue for its systemwide student rate. Consistent with its policy, UC also is raising financial aid program. CSU’s tuition level has long nonresident supplemental tuition in 2024-25. been lower than comparable public institutions The rate for nonresident undergraduates is set nationally. In 2022-23, CSU’s undergraduate at $34,200, reflecting an increase of $1,626 tuition level was approximately $2,100 (28 percent) (5 percent) from the 2023-24 rate. UC estimates lower than the national average of comparable generating an additional $191 million in revenue public institutions. from its tuition increases. It plans to use $75 million Governor Assumes UC Continues to of this additional revenue for its systemwide student Implement Its Tuition Policy. UC’s tuition financial aid program. UC’s tuition level has long policy pegs annual tuition increases to inflation been higher than comparable public institutions (with certain caps). Incoming undergraduate nationally. In 2022-23, UC’s undergraduate tuition students and all academic graduate students level was approximately $2,200 (18 percent) higher are subject to the tuition increases, with tuition than the national average of public institutions charges for continuing undergraduate students classified as having very high research activity. Figure 2 Increases in Other Core Funds Help Mitigate General Fund Situation Ongoing Core Funds (Dollars in Millions) Change From 2023-24 2022-23 2023-24 2024-25 Revised Revised Proposed Amount Percent CCC General Funda $7,634 $8,189 $8,193 $4 0.1% Local property taxa 3,860 4,036 4,210 175 4.3 Additional General Fundb 600 555 661 106 19.0 Additional local property taxb 451 474 496 22 4.7 Student fees 407 407 409 1 0.4 Lottery 367 316 316 —c -0.1 Subtotals ($13,319) ($13,977) ($14,285) ($308) (2.2%) Proposition 98 Reserve —c $236 $486 $250 106.1% Totals $13,319 $14,213 $14,771 $559 3.9% CSU General Fundd $5,041 $5,409 $5,344 -$65 -1.2% Student tuition and fees 3,208 3,193 3,366 173 5.4 Lottery 83 76 76 —c -0.1 Totals $8,332 $8,678 $8,785 $107 1.2% UC General Fund $4,377 $4,712 $4,729 $17 0.4% Student tuition and fees 5,174 5,390 5,603 213 4.0 Lottery 72 58 58 —c -0.1 Othere 243 242 242 — — Totals $9,866 $10,412 $10,642 $230 2.2% 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. d Includes funding for pensions and retiree health benefits. e Includes a portion of overhead funding on federal and state grants and a portion of patent royalty income. 4 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Governor Proposes No Tuition Increase at the universities—a $2.6 million General Fund CCC. The Governor proposes no increase in the augmentation for UC graduate medical education community college enrollment fee—retaining the to backfill for a drop in Proposition 56 tobacco-tax existing per unit enrollment fee of $46. The annual revenues supporting a residency training program. enrollment fee for a student enrolled full time This General Fund backfill would maintain overall (30 units) would remain at $1,380. The CCC program support at $40 million. Although the enrollment fee was last raised in summer 2012, at Governor proposes no other funding increases for which time the state increased the per-unit fee from UC or CSU, he expects the two university segments $36 to $46. Community college fees in California to continue working toward meeting certain remain the lowest of any state and significantly enrollment growth targets by 2026-27. (We discuss below the national average. In 2022-23, community these enrollment expectations in our forthcoming college tuition averaged approximately $5,100 segment-specific budget briefs.) The Governor’s nationally—more than triple the CCC tuition level. budget includes no programmatic expansions for student financial aid. Spending Proposals Plan Covers Certain Cost Increases, Nearly All New Discretionary Spending Mostly in the Financial Aid Area. Beyond Is for Community Colleges. As Figure 3 these proposals, the Governor’s budget contains shows, the Governor proposes $171 million in funding to cover certain caseload and other cost new discretionary higher education spending increases. Specifically, the Governor’s budget ($111 million ongoing, $60 million one time). covers cost increases projected for the Cal Grant Nearly all of the proposed new spending is for program ($83 million in 2023-24 and an additional community colleges. The Governor’s budget $148 million in 2024-25), the CCC Student Success proposes to cover a 0.76 percent cost-of-living Completion Grant program ($50 million), CSU adjustment (COLA) for CCC apportionments and retiree health care ($64 million), and debt service several CCC categorical programs. (This proposed for a new medical education building at UC rate is linked to a measure of inflation that will be Merced ($15 million). The projected Cal Grant cost updated in late April.) In addition, the Governor’s increases include funds to cover the higher tuition budget funds 0.5 percent systemwide enrollment costs at UC and CSU, as Cal Grants generally growth at CCC. The Governor’s budget includes cover tuition costs for students with financial need. only one discretionary spending proposal for The administration typically revises the Cal Grant and Student Success Completion Grant cost estimates in the May Figure 3 Revision, upon receiving updated Despite Budget Deficit, Governor Proposes Some caseload data in the spring. Higher Education Augmentations Budget Solutions Discretionary General Fund Changes (In Millions) Governor Proposes Actions Ongoing Spending Increases in Response to Projected State CCC apportionments (0.76 percent COLA) $69 Budget Deficit. As we discuss in CCC enrollment growth (0.5 percent) 30 The 2024-25 Budget: Overview of CCC categorical programs (0.76 percent COLA) 9 UC graduate medical education (backfill)a 3 the Governor’s Budget, the state Subtotal ($111) has a large budget deficit. To begin One-Time Spending aligning available funding with CCC nursing educationb $60 overall state costs, the Governor Subtotal ($60) proposes budget solutions Total $171 involving one-time spending a The Governor proposes to backfill a drop in Proposition 56 tobacco-tax revenue with General Fund. b Reflects the first year of a five-year initiative totaling $300 million. reductions, reserve withdrawals, fund shifts, cost shifts, revenue COLA = cost-of-living adjustment. www.lao.ca.gov 5 2024-25 BUDGET increases, and funding delays. As Figure 4 Governor Proposes Several Higher Education shows, the Governor relies on three types of Spending Reductions. The largest of the solutions within the higher education area—reserve non-Proposition 98 proposals is removing one-time withdrawals, one-time spending reductions, and funding for a recently created higher education funding delays. Of the higher education budget housing revolving loan program. This budget solutions, three have Proposition 98 impacts, proposal achieves one-time General Fund savings whereas the remainder have non-Proposition 98 of nearly $1.7 billion. The Governor also proposes impacts. The Proposition 98 actions involve the to remove $300 million one-time General Fund for proposed discretionary withdrawals from the the Institute for Immunology and Immunotherapy, Proposition 98 Reserve, together with a spending as recent developments suggest the Institute can reduction to CCC apportionments. The Governor be developed at a lower than initially expected cost. expresses intent to insulate community colleges Additionally, the Governor proposes to remove from the impact of that reduction, though details $289 million in one-time General Fund support for of that proposal were not available at the time of the Middle Class Scholarship program, with the this writing. The non-Proposition 98 actions involve program retaining $636 million in ongoing funding. several funding reductions and three proposed funding delays. Figure 4 Governor’s Plan Contains Several Higher Education Budget Solutions General Fund Adjustments (In Millions) Segment/Program Amount Action Description Proposition 98 Solutions CCC apportionments $910 Reduction The administration reduces funding in 2022-23 but indicates intent to introduce a proposal insulating community colleges from any associated programmatic effects. CCC apportionments 486 Reserve Amount shown would be withdrawn from the Proposition 98 reserve in 2024-25. CCC apportionments 236 Reserve Amount shown would be withdrawn from the Proposition 98 reserve in 2023-24. Non-Proposition 98 Solutions University housing revolving $1,271 Reduction Rescinds nearly all 2023-24 funds and forgoes funds scheduled over loan program subsequent five years. Community college housing 424 Reduction Rescinds nearly all 2023-24 funds and foregos funds scheduled over revolving loan program subsequent five years. UCLA Institute for Immunology 300 Reduction The state provided $200 million in prior-year, one-time funding for this and Immunotherapy institute. Proposal would remove remaining one-time funds. Middle Class Scholarships 289 Reduction Proposal would remove planned one-time funds for program. Program would retain $636 million in ongoing funding. CSU core operations 240 Delay A 5 percent base increase would be delayed by one year, with the intent to double up base funding in 2025-26, along with providing a one-time back payment. UC core operations 228 Delay A 5 percent base increase would be delayed by one year, with the intent to double up base funding in 2025-26, along with providing a one-time back payment. CCC student housing projects 61 Reduction Rescinds funds for 2024-25 given no debt-service payments are expected to be incurred that year. UC nonresident enrollment 31 Delay New funding for plan would be delayed by one year, with intent to double reduction/replacement plan up funding in 2025-26, along with providing a one-time back payment. CCC student housing projects 11 Reduction Converts three projects from debt financing to cash. Reverts remaining unspent funds in 2023-24. 6 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Governor Proposes Some Community CSU) until 2025-26. The Governor expresses intent College Student Housing Modifications. The to “double up” funding in 2025-26, such that each 2023-24 budget agreement included $61.5 million segment would receive 10 percent base increases ongoing non-Proposition 98 General Fund to that year. In addition, the Governor proposes debt finance 16 CCC student housing projects. to provide each segment with a one-time back The Governor has a couple of spending reduction payment in 2025-26 to compensate for the forgone proposals relating to these projects. Though the base increases in 2024-25. The administration administration is committed to using a state lease describes this proposal as a “deferral” of the revenue bond to finance 13 of these projects, third-year compact payment. UC and CSU could the associated state program has not yet been choose how they address these funding delays. established. The Governor intends to submit Options include drawing down their reserves or a proposal designing the new program at the borrowing externally to support spending increases May Revision. Until the new lease revenue bond in 2024-25 until state funding is received in program is enacted and housing projects have been 2025-26. The segments tend to use base increases completed, the state would incur no associated for general operating expenses, including cost borrowing costs. The Governor therefore proposes increases for employee salaries, benefits, utilities, to remove the entire $61.5 million in associated maintenance, and insurance. funding in 2024-25. In examining the standard Governor Also Proposes to Delay Funding criteria for qualifying for state lease revenue for UC Nonresident Enrollment Reduction Plan. bonds, the administration also has determined The state has adopted trailer legislation and budget that three of the CCC projects (in the Napa, Santa provisional language specifying intent that each Rosa, and Imperial Valley areas) are not good UC campus limit nonresident enrollment to no more candidates for this type of financing. The Governor than 18 percent of total undergraduate enrollment. proposes to fund these three projects up-front Campuses are directed to replace any nonresident with cash. Specifically, the Governor proposes students above that cap with resident students. using $50.6 million of the $61.5 million provided in Campuses have until 2026-27 to meet the new 2023-24 for debt service for these three projects, requirement, with progress expected each year. generating $10.9 million in 2023-24 savings. To support UC in implementing the plan, the state Governor Proposes to Delay, Then Double agreed to provide funding to backfill UC for the Up, Base Increases for UC and CSU. Two years loss of nonresident supplemental tuition revenue. ago, Governor Newsom made “compacts” with Similar to the proposals relating to UC and CSU UC and CSU to provide annual 5 percent base base increases, the Governor proposes to delay increases beginning in 2022-23 and extending funding for the third year of implementing the through 2026-27. (The compacts are not codified. nonresident enrollment reduction plan. Specifically, The Legislature decides through the annual the Governor delays $31 million until 2025-26, budget process which, if any, of the compact with the intent of doubling up ongoing funding components it will enact.) The Governor’s budget and providing a one-time back payment that year. does not fund the third year of the base increases. This proposal impacts the three UC campuses The Governor proposes to delay the associated (Berkeley, Los Angeles, and San Diego) that funding ($228 million for UC and $240 million for currently are above the 18 percent cap. www.lao.ca.gov 7 2024-25 BUDGET ASSESSMENT Governor’s Higher Education Spending State payment deferrals also can add borrowing Reduction Package Is a Start. The Governor’s costs to the affected government entities—costs package of proposed higher education spending the state does not cover. In addition, state payment reductions achieves a total of $2.4 billion in deferrals transfer risk to the affected government non-Proposition 98 General Fund savings. entities, as the state sometimes decides to increase Given the state’s large projected budget deficit the size of payment deferrals the next year rather in 2024-25 (potentially upwards of $58 billion), at than eliminate them. The Governor’s proposed least $2.4 billion in non-Proposition 98 General funding delays for UC and CSU have even greater Fund higher education savings seems a practical risk than the deferrals the state has done to date. starting point. Moreover, the Governor’s basic Whereas the state typically has used deferrals to approach to building the higher education reduction protect existing programs from deeper cuts, the package appears reasonable, with the Governor Governor is proposing that UC and CSU expand pulling back funds from some of the largest their programs, despite the multiyear deficits remaining one-time higher education initiatives, facing the state. Under the Governor’s approach, including a housing revolving loan program and UC and CSU would enter 2025-26 with higher the Institute for Immunology and Immunotherapy. ongoing spending and lower reserves. Rather than Most of the non-Proposition 98 reductions the increasing university costs, the state historically has Governor proposes also are likely to be among the contained those costs during such times. least disruptive options the state has for achieving Growing CCC Apportionment Shortfall Also budget savings within higher education. Although Is Poor Fiscal Practice. The 2023-24 Budget Act the state commonly pulls back one-time funds relied on $290 million in one-time Proposition 98 as an initial response to budget problems, these funds to support ongoing community college solutions offer no ongoing savings to help the state apportionment costs. Under the Governor’s address the budget deficit projected for 2025-26. budget, this shortfall grows, reaching $486 million Proposed Funding Delays for UC and CSU Worsen State’s Projected Out-Year Budget Deficits. As discussed in The 2024-25 Budget: Figure 5 Overview of the Governor’s Budget, the state faces Governor’s Plan Generates $1.5 Billion significant operating deficits in the coming years. in Higher State Costs in 2025-26 The Governor’s proposed funding delays for UC (In Millions) and CSU contribute to those deficits. Specifically, as Figure 5 shows, they add $1.5 billion in costs One-Time Costsa in 2025-26—consisting of $499 million in one-time CSU base increase (2024-25) $240 back payments and a $1 billion ongoing General UC base increase (2024-25) 228 UC nonresident replacement plan (2024-25) 31 Fund augmentation. Given the state’s projected Subtotal ($499) budget deficit in 2025-26, the additional $1.5 billion Ongoing Costs for UC and CSU would require a like amount Base adjustmentsb $499 of other budget solutions, meaning other state CSU base increase (2025-26) 254 programs might need to be cut to make room for UC base increase (2025-26) 241 the additional higher education spending. UC nonresident replacement plan (2025-26) 31 Subtotal ($1,025) Deferring State Payments Is Poor Fiscal Total $1,524 Practice. Our office has long advised against a Reflects payments the Governor proposes deferring from 2024-25 to payment deferrals, as paying bills late is poor 2025-26. b In 2025-26, the Governor proposes not only to make one-time back fiscal practice and ultimately can affect the state’s payments for costs the universities already incurred in 2024-25, but credit rating, resiliency, and overall fiscal health. he also builds up their ongoing base budgets so they can continue to accommodate those costs moving forward. 8 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET in 2024-25. Under the Governor’s proposal, year’s CCC programs. The Governor must dedicate 5.1 percent of ongoing apportionment costs would part of his proposed Proposition 98 Reserve be covered with one-time funds. Entering 2025-26, withdrawal in 2024-25 for covering the added cost first call on any growth in Proposition 98 funding of the COLA. Historically, the state has not used would be to backfill this $486 million shortfall (along reserves in this way. Rather, the state historically with any K-12 budget shortfalls). Having an ongoing has used reserves during times of recessions to funding shortfall, especially a large and growing mitigate the size of base reductions. Importantly, one, positions the state poorly moving forward, state law does not require the Governor to propose making its future choices more difficult. a COLA for community college apportionments or Proposed CCC COLA Contributes to Overall any other community college program, especially CCC Funding Shortfall. The Governor not only one that cannot be accommodated with the has UC and CSU increasing their ongoing spending Proposition 98 minimum guarantee. If the Governor in the midst of projected state deficits, he also had aligned the COLA for Proposition 98 programs has community colleges receiving a COLA for with available Proposition 98 funding last year, apportionments and several categorical programs the Proposition 98 budget in 2024-25 would be in 2024-25. The Governor proposes providing in balance without requiring reserve withdrawals. a COLA to these programs even though the (We cover these Proposition 98 issues in more Proposition 98 minimum guarantee is not expected detail in a forthcoming budget brief.) to be able to accommodate even the cost of last RECOMMENDATIONS Pull Back Additional One-Time Funding Hold University Funding Flat, Revisit From Prior Budgets. Though the Governor’s Available Funding Next Year. As we discuss in package of proposed higher education spending The 2024-25 Budget: Overview of the Governor’s reductions appears a reasonable starting point, Budget, the Governor’s budget runs the risk we recommend the Legislature pull back additional of understating the degree of fiscal pressure unspent one-time funding from prior budgets. facing the state in the future. The state faces We are in the midst of working with the segments significant operating deficits in the coming years, to identify the amount of one-time funding that including a $37 billion deficit in 2025-26 under remains unencumbered. Additional one-time the administration’s projections. The Legislature savings likely could be achieved by removing funds likely will face more difficult choices next year, for certain capital projects that remain in early with lower reserves and fewer options to reduce planning phases and removing funds for certain one-time spending. Given the difficulty entailed new initiatives that remain in early implementation in cutting other ongoing state programs to make phases. Based upon our initial review, we estimate room for more higher education spending, there the Legislature could achieve at least hundreds of is no guarantee the state would be able to provide millions of dollars in additional higher education UC and CSU with the $1.5 billion the Governor savings. The Legislature might want to take early proposes in 2025-26. To mitigate these challenges, action to maximize the savings it could achieve we recommend the Legislature hold university in these areas. Maximizing one-time spending funding and associated spending expectations flat reductions allows the Legislature to minimize the in 2024-25 rather than relying on revenue that is use of other budget tools—like reserves—that likely not currently available to support that spending. will be needed in future years. Such an approach would be consistent with the state’s traditional approach of containing rather than increasing university costs when facing multiyear budget deficits. www.lao.ca.gov 9 2024-25 BUDGET Hold Community College Funding Flat, higher ongoing costs. Such an approach sets up Revisit Available Funding Next Year. Similarly, we the state for more difficult choices next year. Were recommend the Legislature hold community college the Legislature not to provide the COLA in 2024-25, funding flat in 2024-25 and not provide a COLA to it would be minimizing the ongoing shortfall for CCC apportionments and certain CCC categorical CCC programs and allowing for better choices programs. Under the Governor’s budget proposal, in 2025-26. one-time reserves are required to cover these 10 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET www.lao.ca.gov 11 2024-25 BUDGET LAO PUBLICATIONS This report was prepared by Jennifer Pacella, with contributions from Ian Klein, Lisa Qing, and Paul Steenhausen. 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. 12 LEGISLATIVE ANALYST’S OFFICE