The 2024-25 Budget: California State University

2024-25 BUDGET The 2024-25 Budget: California State University GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2024 SUMMARY Brief Covers the California State University (CSU). This brief analyzes the Governor’s budget proposals relating to CSU’s core operations and enrollment. It also revisits recent one-time initiatives and capital projects the state has funded at CSU. Recommend Holding State Funding and Spending Expectations Flat for CSU. The Governor’s main budget proposal for CSU is deferring the $240 million base increase planned for 2024-25 under his compact. Under the Governor’s proposed approach, the state would delay the base increase until 2025-26, then double up the ongoing increase and provide a one-time back payment. In the meantime, CSU would increase spending in 2024-25 by the originally planned amount, most likely by using its reserves. We recommend rejecting this proposal. The Governor’s approach creates risk for the state, which would be committing to a $734 million General Fund increase for CSU in 2025-26, despite facing a significant projected budget deficit that year. The approach also creates risk for CSU, which would be increasing spending and likely drawing down its reserves in anticipation of a state funding increase in 2025-26. If the state is unable to provide these funds, then CSU likely would need to consider significant spending reductions that would be more disruptive than containing spending in the first place. Instead of the deferral, we recommend holding CSU funding and spending expectations flat for 2024-25, then revisiting once the state budget condition improves. Recommend Also Holding CSU’s Funded Enrollment Target Flat. In 2023-24, CSU estimates it is enrolling 368,042 resident full-time equivalent (FTE) students—an increase of 5,788 students over the previous year. The majority of the increase is attributed to campuses converting self-supported courses to state-supported courses in summer 2023, with little enrollment growth occurring in fall 2023. Even with the conversion of these summer courses, CSU remains 19,072 students (4.9 percent) below its funded enrollment target. The Governor’s compact had set forth a 1 percent annual increase in CSU’s funded enrollment target. The Governor’s budget maintains this approach despite CSU currently being below that target. We recommend rejecting this approach. Given that CSU could add many more students within its current funded enrollment target, we recommend instead holding the target flat and not allocating any new enrollment growth funding in 2024-25. Were the state budget condition to deteriorate further over the coming months, the Legislature could also consider whether to reduce CSU’s funded target to align with its current enrollment level, achieving up to $239 million in estimated ongoing General Fund savings. Recommend Pulling Back Some Unspent One-Time Funds From Prior Budgets. From 2021-22 to 2023-24, the state appropriated $1.1 billion one-time General Fund to CSU. Of this amount, we estimate $423 million remains unspent—consisting of $252 million for deferred maintenance, $145 million for certain cash-funded capital projects, and $26 million for various programs. Given the state’s projected operating deficits, we recommend the Legislature pull back all of these remaining one-time funds, except the amount for deferred maintenance (as removing those funds would likely increase future costs). Recommend a Few Changes Related to Debt-Financed Capital Projects. In 2023-24, the state appropriated $100 million ongoing General Fund for a total of 21 capital projects that CSU was to debt finance using university bonds. We recommend strengthening oversight of CSU capital projects, reducing last year’s appropriation to align with more recent estimates of debt service costs, and considering whether to pause projects for which bonds have not yet been issued. www.lao.ca.gov 1 2024-25 BUDGET INTRODUCTION Brief Focuses on CSU. CSU is one of an overview of the Governor’s CSU budget California’s three public higher education package. The next two sections focus on segments. Its 23 campuses provide undergraduate core operations and enrollment, respectively. and graduate education. CSU focuses on The fourth section discusses recent CSU one-time academic degrees through the master’s level, initiatives that could be revisited given the state’s but it also provides doctoral degrees in certain, projected budget deficits and the final section primarily applied, fields. This brief is organized provides an update on CSU capital projects that around the Governor’s 2024-25 budget the state approved for debt financing last year. proposals for CSU. The first section provides OVERVIEW CSU Budget Is $12.6 Billion in 2023-24. Governor Proposes to Delay Planned As Figure 1 shows, CSU receives funding from Base Increase for CSU. In May 2022, the various sources. The state generally focuses its administration announced a compact with CSU budget decisions around CSU’s “core funds,” or to provide the university with 5 percent annual the portion of its budget supporting its academic unrestricted base increases through 2026-27. mission. Core funds at CSU primarily consist of state The Governor’s budget, however, proposes a General Fund and student tuition revenue, with a “deferral” of the $240 million base increase planned very small share coming from state lottery revenue. for 2024-25. Under the proposed approach, the Core funds comprise about 70 percent ($8.7 billion) state would delay the base increase until 2025-26. of CSU’s budget. Between 2022-23 and 2023-24, ongoing core funds Figure 1 per student increased 2.6 percent at CSU. CSU Receives Funding From a Few Key Sources Ongoing Core Funding $12.6 Billion in 2023-24 Increases by $107 Million (1.2 Percent) Under Governor’s Budget. As Figure 2 shows, all of the increase in ongoing core Noncore Funds funding for CSU in 2024-25 comes Othera from student tuition and fee revenue. Specifically, tuition and fee revenue increases by $173 million General Fund (5.4 percent), while ongoing General Federal Fundsb Fund decreases by $65 million (1.2 percent). The increase in tuition and fee revenue is due Lottery Core Funds to both higher tuition charges Tuition and Fees and enrollment growth. Because expected enrollment growth outpaces funding increases, we estimate ongoing core funding per a Includes revenue from housing fees, parking fees, extended education charges, and fees for other noncore programs. student decreases 1 percent under b Primarily for student financial aid. the Governor’s budget. 2 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Figure 2 CSU’s Core Fund Increase Comes From Tuition Revenue (Dollars in Millions, Except Funding Per Student) Change From 2023-24 2022-23 2023-24 2024-25 Actual Revised Proposed Amount Percent Ongoing Core Funds General Funda $5,041 $5,409 $5,344 -$65 -1.2% Tuition and feesb 3,208 3,193 3,366 173 5.4 Lottery 83 76 76 —c —c Totals $8,332 $8,678 $8,785 $107 1.2% FTE studentsd 383,160 388,854 397,805 8,951 2.3% Funding per student $21,745 $22,317 $22,085 -$232 -1.0 a Includes funding for pensions and retiree health benefits. b Includes funds used for student financial aid. c Less than $500,000 or 0.5 percent. d Reflects total combined resident and nonresident enrollment. The 2024-25 number incorporates CSU’s planned resident enrollment growth. FTE = full-time equivalent. In that year, the state would double up the ongoing increase and provide a one-time back payment. Figure 3 In the meantime, CSU would increase spending in A Few Costs Are Projected to Change 2024-25 by the originally planned $240 million using other sources, such as its reserves. Accounting General Fund Changes, 2024-25 (In Millions) for the increased spending associated with the CSU Ongoing Spending deferral, CSU’s core funding in 2024-25 would rise to $9 billion—a $348 million (4 percent) increase over Retiree health benefit cost increase $64 Pension cost decrease -129 the 2023-24 level. CSU’s per-student funding would CENIC cost increasea — increase by 1.7 percent. Total -$65 Governor’s Budget Includes a Few Other Cost a The 2021-22 budget agreement included a five-year plan for covering Adjustments for CSU. Aside from the proposed higher CENIC charges. The annual funding increase in 2024-25 is $152,000. deferral, the Governor’s budget includes only a few CENIC = Corporation for Education Network Initiatives in California. General Fund adjustments for CSU. As Figure 3 shows, the only new ongoing General Fund adjustments the Governor’s budget contains for CSU in 2024-25 are projected changes in retiree health and pension costs. The Governor does not propose any one-time funding for CSU in 2024-25. www.lao.ca.gov 3 2024-25 BUDGET CORE OPERATIONS In this section, we first provide background The remaining six unions (representing student on CSU’s cost pressures and funding. Next, we services staff, skilled trades workers, and describe the Governor’s proposal to delay a base graduate students, among others) together funding increase for CSU, followed by CSU’s comprise 10 percent of CSU’s overall salary base. plans to address the funding delay. Then, we Managers and executive staff, who comprise assess the Governor’s proposal and make an about 15 percent of CSU’s salary base, are not associated recommendation. represented by a union. Most Employee Salary Levels Are Determined Cost Pressures Through Collective Bargaining. Whereas the CSU’s Largest Operating Cost Is Employee Legislature ratifies collective bargaining agreements Compensation. Like other state agencies, CSU for most represented state employees, state law spends the majority of its core funds (73 percent authorizes the CSU Board of Trustees to ratify in 2022-23) on employee salaries and benefits. collective bargaining agreements for CSU’s Accordingly, compensation almost always employees. These collective bargaining agreements represents CSU’s largest cost pressure each year. determine salary increases for represented CSU Has About 47,000 FTE Employees. employees. The agreements also often indirectly Of these employees, about 45 percent are faculty, guide salary increases for CSU’s non-represented about 45 percent are staff, and the remaining employees. Over the past decade, CSU employees 10 percent are managers and executives. CSU’s have received salary increases in all years except workforce has grown over the past decade, except 2020-21, when the state reduced General Fund for a small decrease during the pandemic (fall 2020 support for CSU in response to a projected budget and fall 2021). As Figure 4 shows, staffing levels shortfall due to the COVID-19 pandemic. have since recovered and are now 4.9 percent higher than five years ago. Because student enrollment declined over Figure 4 the same period, the number of FTE students per FTE employee has CSU Staffing Levels Are Higher Than Five Years Ago decreased from 9.4 in fall 2018 to 8.4 in fall 2023. FTE Employees Most CSU Employees Are 48,000 10.0 FTE Students Represented by a Labor 46,000 Per FTE Employee 9.5 Union. The largest union is the 44,000 California Faculty Association 42,000 9.0 (CFA), which accounts for half of 40,000 CSU’s overall salary base. CFA 8.5 38,000 represents professors, lecturers, counselors, librarians, and 36,000 8.0 coaches. The second largest union, 34,000 7.5 accounting for nearly 25 percent 32,000 of CSU’s overall salary base, is 30,000 7.0 the California State University Fall 2018 Fall 2019 Fall 2020 Fall 2021 Fall 2022 Fall 2023 Employees Union (CSUEU). Note: Due to data limitations, chart excludes student employees (represented and non-represented) and temporary staff. CSUEU represents support FTE = full-time equivalent. staff in various roles, including administrative support, technology, operations, and health services. 4 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET CSU Has Negotiated Salary Increases for cost of every 1 percent increase in its compensation 2023-24. As Figure 5 shows, CSU has negotiated pool for all employee groups in 2024-25 would be agreements with all of its unions to provide a $55 million ongoing. 5 percent general salary increase in 2023-24. As of CSU Is Directly Responsible for Certain this writing, three of these agreements are tentative Pension Costs. The California Public Employees’ (pending ratification by the Board of Trustees and Retirement System (CalPERS) administers pension union membership) and the remaining have been benefits for CSU and most other state employees. ratified. As is its typical practice, CSU also is providing The CalPERS Board sets employer contribution rates a comparable (5 percent) salary increase to its for pensions as a percentage of payroll. The state non-represented employees in 2023-24. and CSU each pay a portion of the total employer CSU Also Has Some Contingent Salary contribution. The state’s contribution is determined Agreements in Place for 2024-25. As Figure 5 by applying the employer contribution rate to shows, CSU also has agreements extending into CSU’s 2013-14 payroll level. CSU’s contribution is 2024-25 with five unions. Three of these agreements determined by applying the employer contribution already have been ratified and two are tentative. rate to any payroll growth above that level. The state Several of these agreements provide a 5 percent adopted this arrangement in 2013-14 to provide general salary increase, contingent upon the state CSU with a stronger fiscal incentive to contain providing a specified amount of support to CSU in staffing costs. 2024-25. For example, the 5 percent increase for Governor Assumes Pension Contribution employees represented by CFA is contingent upon Rates Decrease in 2024-25. The Governor’s budget the state not reducing ongoing base funding to CSU assumes that employer CalPERS contribution rates relative to the 2023-24 Budget Act level, whereas will decrease in 2024-25 due to the application of a the salary increase for employees represented by supplemental pension payment made in 2023-24. CSUEU is contingent upon the state providing a Under the Governor’s proposal, the employer $227 million base augmentation to CSU. As of this contribution rate for the largest CSU employee group writing, 2024-25 compensation increases have not (miscellaneous) would be 26.6 percent of pay— yet been determined for three smaller unions, as well 5.4 percentage points lower than the rate in 2023-24. as non-represented employees. CSU estimates the The employer contribution rate for other CSU employees (peace officers and Figure 5 firefighters) would be 30.5 percent of CSU Has Negotiated 5 Percent Salary Increases pay—19.6 percentage points lower than Across Groups the rate in 2023-24. These lower rates result in associated budget savings. General Salary Increases by Employee Group Specifically, the Governor’s budget General Salary Increases reflects a $129 million decrease in the 2023-24 2024-25a 2025-26a state’s contribution towards CSU’s pension costs. We estimate the lower California Faculty Associationb,c 5% 5% Open California State University Employees Union 5 5 —d contribution rates would generate Academic Professionals of Californiab 5 Open Open between $63 million and $72 million Teamsters 2010b 5 —d —d in savings to CSU associated with United Auto Workers 5 5 Open payroll beyond the 2013-14 level. Statewide University Police Association 5 5 5% The Governor’s budget assumes that Union of American Physicians and Dentists 5 Open Open International Union of Operating Engineers 5 Open Open employer contribution rates and costs a Increases are contingent upon the state providing a specified amount of support to CSU. would return to their higher scheduled b Tentative agreements pending ratification by the CSU Board of Trustees and union membership. levels beginning in 2025-26. We analyze c Agreement also includes 2.65 percent service salary increases for faculty below certain salary levels, along with increases in the minimum salary for certain faculty positions, in 2023-24 and 2024-25. this proposal in a forthcoming brief. d In lieu of General Salary Increases, CSU and these unions have agreed to implement a salary step structure under which employees receive regular salary increases based on their length of service. www.lao.ca.gov 5 2024-25 BUDGET CSU Is Also Responsible for Certain Health As a result, the General Fund has been comprising Benefit Costs. CalPERS also administers CSU’s a growing share of CSU’s core funds. Whereas we health benefits. Each year, CalPERS negotiates estimate the General Fund comprised 50 percent of with health plan providers to establish premiums for CSU’s ongoing core funds in 2013-14, it comprises the plans offered to CSU’s employees. Pursuant to 62 percent in 2023-24. state law, CSU’s contribution to employee health CSU Is Implementing Tuition Increases benefits is based on the average premium of the Beginning in 2024-25. In 2022-23, CSU established most popular health plans. When premiums increase, a work group focused on fiscal sustainability that CSU covers the associated cost for its active identified a significant gap between the system’s employees. The state covers the cost for retirees’ costs and its revenues. Among the work group’s health benefits. Health care premiums in 2024 are recommendations was to adopt a tuition policy that increasing 11 percent—more than double the average provides for gradual and predictable increases. annual rate of increase over the past five years. CSU In response, the CSU Board of Trustees adopted estimates its associated costs for active employees a new tuition plan in September 2023. Under the in 2024-25 will increase $78 million. In addition, the plan, tuition will increase by 6 percent annually for all Governor’s budget includes $64 million to cover the students beginning in 2024-25 and extending through higher cost for CSU’s retirees. 2028-29. Tuition charges are set at $6,084 for CSU Has Identified Various Other Operating resident undergraduate students in 2024-25, Cost Increases. Beyond employee compensation, reflecting a $342 increase from the current year. CSU CSU has ongoing costs related to various other estimates generating an additional $148 million in operating expenses, including facilities, technology, revenue from tuition increases in 2024-25. It plans to equipment, and supplies. CSU has identified the use $49 million (33 percent) of this additional revenue following associated cost increases in 2024-25: to provide larger tuition awards through the State University Grant program. (In addition, the California • $29 million to cover increased prices due to Student Aid Commission budget includes $35 million continued inflation. in higher associated Cal Grant costs in 2024-25. • $25 million to debt finance additional capital Many CSU students with financial need receive full outlay projects, primarily to address capital tuition coverage under the Cal Grant program.) renewal needs associated with aging academic CSU’s Reserves Have Increased but Remain facilities and infrastructure. Below Its Target. Like many other universities (as • $23 million to cover increases in insurance well as public and private entities more generally), premiums due to several factors, including CSU maintains reserves. CSU commits part of its the increased incidence of liability claims and reserves for outstanding financial commitments natural disasters. and planned one-time activities (such as launching • $13 million to cover additional costs of routine a new academic program or designing a new maintenance and operations (such as utilities capital project). CSU also leaves some of its and custodial services) as campuses open reserves purposefully uncommitted to prepare for new facilities. economic uncertainties, including recessions. CSU’s systemwide reserves policy sets a target to maintain Funding uncommitted reserves worth between three and six Share of CSU Costs Covered by General months of expenditures. At the end of 2022-23 (the Fund Has Increased Over the Past Decade. most recent data available), CSU had $2.5 billion Since 2013-14, CSU has primarily relied on state in total core reserves, of which $766 million General Fund augmentations to cover increases in its was uncommitted. As Figure 6 shows, CSU’s operating costs. From 2013-14 to 2023-24, the state uncommitted core reserves have generally increased provided CSU with General Fund base increases over the past five years, reaching 1.1 months of in every year except 2020-21. During the same expenditures in 2022-23. Nonetheless, the reserve period, CSU increased tuition only once (in 2017-18). level remains below the system’s target. 6 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET annual 5 percent base increases Figure 6 from 2022-23 through 2026-27. (The compact is not codified, and CSU's Uncommitted Core Reserves Have Increased the Legislature decides through the annual budget process which, Reserves in Millions of Dollars if any, of the components it will $900 1.2 Reserves in Months of Expenditures enact.) The Governor’s budget 800 does not fund the third year of 1.0 700 the base increases. Instead, the Governor proposes to delay 600 0.8 the associated $240 million in 500 ongoing funding until 2025-26. 0.6 400 The Governor intends to “double 300 0.4 up” funding in 2025-26, such that CSU would receive an ongoing 200 0.2 10 percent base increase of 100 $494 million that year. (This consists of $240 million to support 2018-19 2019-20 2020-21 2021-22 2022-23 the higher level of prior-year ongoing spending, along with $254 million for a new 5 percent CSU Reports Campuses Are Facing Funding base increase.) In addition, the Shortfall in 2023-24. In 2023-24, CSU allocated Governor intends to provide CSU with a one-time $123 million (slightly more than half) of its General back payment of $240 million in 2025-26 to Fund base increase for employee compensation compensate for the forgone funds in 2024-25. increases. This reflects the amount of the base The Governor describes this proposal as a deferral increase that remained available after covering of the third-year compact payment. Though CSU certain other costs (health care premium increases, could choose how to respond the funding delay, insurance premium increases, maintenance and the Governor expects CSU to spend at the higher operations of new facilities, and enrollment growth). assumed level in 2024-25 by using other means, It falls short, however, of covering CSU’s actual such as drawing down its reserves or borrowing employee compensation costs. CSU estimates that internally from noncore funds. The Governor gives employee compensation increases in 2023-24 are CSU the discretion to choose its corresponding costing $261 million—$138 million more than the spending priorities. amount covered by the base increase. Campuses CSU’s Plan are to cover the $138 million shortfall from their existing budgets. CSU is allowing each campus to CSU Would Likely Use Reserves to Address determine how to address its share of the shortfall. Funding Delay. Although the Governor’s budget CSU reports most campuses are exploring various delays the $240 million base increase originally actions, including holding positions vacant, planned for 2024-25, CSU still plans to allocate reducing course offerings, reorganizing programs this amount of funding to campuses. Although and departments, and reducing travel and other CSU has not yet made a final determination as to nonessential purchases. how it would cover the costs, it indicates the funds would likely come from its reserves. CSU could Governor’s Proposal then replenish its reserves in 2025-26 if the state Governor Proposes to Delay Base Increase provides back payment, as the Governor proposes. for CSU Until 2025-26. Two years ago, the Governor made a compact with CSU to provide www.lao.ca.gov 7 2024-25 BUDGET CSU Has Identified Several Priorities for The Governor’s proposed funding delay for Spending Increases in 2024-25. CSU’s planned CSU worsens those deficits, as we discuss in use of reserves, combined with an anticipated The 2024-25 Budget: Higher Education Overview. increase in tuition revenue, would support Under the proposed approach, the state would $413 million in new spending in 2024-25. This need to increase General Fund spending for CSU by reflects a 5 percent increase from CSU’s 2023-24 $734 million in 2025-26—consisting of a $494 million ongoing core spending level. As Figure 7 shows, ongoing augmentation and an additional $240 million CSU has identified several associated spending one-time back payment. Rather than increasing priorities for 2024-25. Within this preliminary university costs, the state historically has contained spending plan, 59 percent of new spending is these costs when facing multiyear budget deficits. for employee salaries and benefits, 28 percent Proposed Approach Increases Out-Year Risks is related to expanding enrollment and student for the State. Both our office and the administration support programs, and the remaining 13 percent is project the state faces an operating deficit of more for other operating cost increases. CSU intends to than $30 billion in 2025-26. Given this projected adopt its final spending plan in July after the state deficit, increasing spending on CSU in that year enacts the budget. would require a like amount of other budget solutions. The Legislature likely will have fewer Assessment options for budget solutions next year, with lower Proposed Funding Delay Worsens State’s reserves and less one-time spending available to Projected Out-Year Budget Deficits. As we pull back. At that time, the Legislature might face discuss in The 2024-25 Budget: Overview the difficult choice of either cutting other ongoing of the Governor’s Budget, the state faces state programs to make room for the additional CSU significant operating deficits in the coming years. spending or, alternatively, forgoing the increase it had committed to providing CSU. Figure 7 Proposed Approach Also Increases Out-Year Risks for CSU Has Several Spending Priorities for 2024-25 CSU. Although the Governor’s Planned Spending Increases (In Millions) proposal benefits CSU in 2024-25 by allowing it to increase spending, Amount it comes with heightened risks Employee Salaries and Benefits for CSU the following year. Employee compensation pool increases $164 Health care premium increases 78 Under the proposed approach, Subtotal ($242) CSU would be entering 2025-26 Enrollment and Student Support with higher ongoing spending and Student financial aid increases $58 lower reserves than if the state Enrollment growth 55 had forgone the base increase. Student basic needs and mental health program expansions 3 If the state were then unable to Subtotal ($115) support that higher spending level Other Institutional Costs Liability and property insurance premium increases $23 in 2025-26, CSU would need to Operations and maintenance of new facilities 13 consider significant reductions Debt service for new capital outlay projects 10 at that time. Depending upon the Title IX and DHR program improvements 8 severity of the budget situation, State and federal NAGPRA compliance improvements 2 Subtotal ($55) CSU might consider actions such as Total $413a hiring freezes, layoffs, or furloughs— a Of this proposed higher spending, CSU plans to cover $240 million likely from its reserves and all actions it has taken over the $173 million from increases in tuition revenue. years in response to previous state DHR = Discrimination, harassment, and retaliation and NAGPRA = Native American Graves budget cuts. Such actions would Protection and Repatriation Act. negatively impact both employees 8 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET and students, as they likely would lead to fewer Recommendation classes and a reduction in support services. Hold State Funding and Spending Moreover, they would likely be more disruptive than Expectations Flat for CSU, Revisit Next containing spending increases in the first place. Year. We recommend the Legislature reject the Without a Base Increase, CSU Still Could Governor’s proposal to delay, then double up, Cover Some Cost Increases in 2024-25. If the funding for CSU. Such an approach substantially state were to forgo rather than delay the base worsens the state’s projected deficit in 2025-26, increase planned for 2024-25, CSU would have less and it is risky for the state, CSU, and other state ability to increase spending on various purposes, programs that might be cut more deeply in 2025-26 including employee compensation. It would, to make room for the additional CSU spending. however, still have some options for covering Rejecting the Governor’s proposal provides a portion of its cost increases. Most notably, $743 million in budget savings, nearly $500 million CSU’s tuition increases are estimated to generate of which is ongoing, beginning in 2025-26. $99 million in new ongoing revenue in 2024-25, net By taking this action this year, the Legislature of the amount committed for institutional financial can mitigate the need for other, potentially more aid. CSU also has $766 million in uncommitted disruptive budget solutions next year. As long reserves that could help cover costs temporarily, as the state is projected to have large, multiyear though they could not sustain costs on an ongoing budget deficits, we caution against raising CSU’s basis. These sources could help CSU cover certain General Fund spending levels or expectations. cost increases that it cannot avoid in the near We recommend the Legislature take a more prudent term, such as health care premium increases and approach to crafting its budget that aims to contain insurance premium increases, absent a General CSU spending. If the state budget situation were to Fund increase for 2024-25. improve in 2025-26, the state would then be in the more advantageous position of being able to set a CSU base increase that it can afford at that time. ENROLLMENT In this section, we first provide background on CSU. In addition to undergraduates, CSU enrolls CSU enrollment. Next, we cover recent enrollment postbaccalaureate and graduate students. trends. Then, we describe the Governor’s State Budget Typically Sets Enrollment enrollment expectations, followed by CSU’s Growth Expectations for CSU. In most years, enrollment growth plans. Finally, we assess CSU’s the state sets enrollment growth expectations enrollment situation and provide two associated for CSU in the annual budget act. These growth options for the Legislature to consider. expectations apply to resident students. In some years, the state sets expectations for total resident Background enrollment. In other years, its sets expectations only Most CSU Students Are California Residents. for resident undergraduates, with no expectation The vast majority of students at CSU are California for resident graduate students. CSU tracks a residents. About 90 percent of these resident running total of these growth expectations, which students are undergraduates. Over time, roughly it commonly refers to as its enrollment target or half of CSU’s incoming undergraduates have been “funded level.” CSU’s funded enrollment target freshmen and half have been transfer students. in 2023-24 is 387,114 resident FTE students. The state has historically viewed CSU as critical CSU does not track this target separately for to the transfer pipeline, with students able to undergraduates and graduate students. begin their education at a community college and subsequently earn a bachelor’s degree at www.lao.ca.gov 9 2024-25 BUDGET State Typically Funds Enrollment Growth Based on a review of campus websites, these fees According to Per-Student Formula. Typically, are different from, but not consistently higher or the state supports resident enrollment growth at lower than, the tuition charged for comparable CSU by providing a General Fund augmentation state-supported courses. Students in both types based on the number of additional students CSU of summer courses have opportunities to receive is to enroll. The per-student funding rate is derived financial aid, but those opportunities tend to be using a “marginal cost” formula. This formula greater for students in state-supported courses. estimates the cost of the additional faculty, support Recent Trends services, and other resources required to serve each additional student. Those costs are shared CSU Reports Increase in Resident FTE between state General Fund and student tuition Students in 2023-24. As of December 2023, revenue. In 2023-24, the total marginal cost per CSU estimates it is enrolling a total of 368,042 student is $14,749, with a state share of $10,070. resident FTE students in 2023-24—an increase The formula calculates one rate that applies to all of 5,788 students (1.6 percent) from the previous resident enrollment, whether at the undergraduate year. As Figure 8 shows, the 2023-24 increase or graduate level. Whereas the state subsidizes the follows two years of significant enrollment cost of educating resident students, nonresident declines. Despite the increase in 2023-24, CSU’s students are charged a higher tuition rate that is total estimated resident enrollment level remains intended to cover the full cost of their education. 19,072 FTE students (4.9 percent) below its funded enrollment target. (In the nearby box, we compare CSU Also Offers Self-Supported Courses. CSU’s estimated 2023-24 resident undergraduate Like the other public higher education segments, enrollment with the expectation set in the CSU offers some self-supported courses (also 2023-24 Budget Act.) referred to as extended education or professional and continuing education). Self-supported courses Growth Is Attributed Mostly to Shifting Some generally charge student fees intended to cover Summer Courses From Self-Supported to the full cost of offering them, without any state State-Supported. Of the estimated increase of subsidy. Self-supported course offerings include 5,788 resident FTE students in 2023-24, 5,459 FTE an array of academic courses, professional students are attributed to the summer 2023 term. certificate programs, and personal enrichment courses offered Figure 8 throughout the year. In 2022-23, CSU enrolled 26,334 FTE students CSU Reports Uptick in Enrollment in 2023-24 in self-supported courses. These Resident Undergraduate Full-Time Equivalent Students students are not counted toward state enrollment targets. 400,000 Many Summer Courses Have Target Enrollment Been Self-Supported. All CSU 380,000 Actual Enrollment campuses offer some academic courses during the summer. 360,000 Historically, many campuses have chosen to offer summer courses as 340,000 self-supported, while others have offered them as state-supported. 320,000 (Of the self-supported FTE enrollment in 2022-23, 52 percent 300,000 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24ª was generated in the summer term.) Each campus sets its own fees for a Reflects CSU's estimated enrollment level as of December 2023. self-supported summer courses. 10 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET As Figure 9 shows, state-supported summer FTE FTE students increased slightly, by 283 students students nearly doubled relative to the previous year. (0.1 percent), because students are taking more CSU explains the increase was due to units on average. Specifically, average unit load for campuses shifting certain summer courses from resident students across all levels was 12.8 units in self-supported to state-supported. The increase fall 2023, up from 12.7 units the previous fall. in state-supported students was largely offset Increase in New Freshmen Is Partly Offset by an accompanying decrease in self-supported by Drop in New Transfer Students. In fall 2023, students. CSU indicates the courses shifted to the number of new resident freshmen enrolling state-supported were generally academic courses at CSU increased 4.7 percent over the previous that students took to make progress toward their year, as Figure 10 on the next page shows. This is degree. These include courses taken by continuing CSU’s largest incoming freshman cohort to date. students as well as new students participating in The increase in new freshmen, however, was summer transition programs. Data is not available offset by decreases in new transfer and continuing on the specific courses that were shifted or the students. New transfer students decreased number of FTE students enrolled in those courses. 0.8 percent, reflecting the continued impact of Fall Enrollment Is About Flat From Previous recent community college enrollment declines Year. In contrast to summer 2023, fall 2023 total on CSU’s transfer pipeline. As a result, the share resident enrollment changed relatively little from the of new CSU students who are transfer students previous year. Fall resident headcount decreased by is down to 43 percent in fall 2023, compared to 3,645 students (0.8 percent). However, fall resident 47 percent before the pandemic in fall 2019. Figure 9 Total Summer Enrollment Grew Only Modestly in 2023-24 Summer Resident FTE Studentsa Change From 2022-23 2021-22 2022-23 2023-24 Amount Percent State-supported FTE students 5,547 5,836 11,295 5,459 94% Self-supported FTE students 14,608 13,050 8,345 -4,705 -36 Totals 20,155 18,886 19,640 754 4% a Reflects annualized full-time equivalent students across all student levels. FTE = full-time equivalent. Budget Act Expectations 2023-24 Budget Act Included Enrollment Growth Expectation for CSU. The 2023-24 Budget Act stated an intent for the California State University (CSU) to increase resident undergraduate enrollment by 4,057 full-time equivalent (FTE) students, bringing its resident undergraduate enrollment level to 330,080 FTE students in 2023-24. This growth expectation is relative to CSU’s actual enrollment level in 2022-23. It is unrelated to the funded enrollment target that CSU has been tracking for more than a decade. CSU estimates it is enrolling 331,139 resident undergraduate FTE students in 2023-24, thus somewhat exceeding the expectation set in the budget act. Based on CSU’s data, it generated the bulk of the new enrollment in its summer 2023 term, with little growth in the fall 2023 term. www.lao.ca.gov 11 2024-25 BUDGET Figure 10 Fall Headcount Slightly Decreased in 2023-24 Resident Fall Headcount Change From 2022 2021 2022 2023 Amount Percent Undergraduate New freshmen 56,444 61,272 64,125 2,853 4.7% New transfer students 54,649 48,006 47,613 -393 -0.8 Continuing students 293,020 277,959 273,080 -4,879 -1.8 Subtotals (404,113) (387,237) (384,818) (-2,419) (-0.6%) Postbaccalaureate/Graduate 50,159 46,420 45,194 -1,226 -2.6% Totals 454,272 433,657 430,012 -3,645 -0.8% Continuing Student Enrollment Is Also Down. As Figure 10 also shows, the number of continuing Figure 11 undergraduates in fall 2023 decreased 1.8 percent from the Most CSU Campuses Are Below Their Enrollment Target previous year. The decrease is due Actual Resident Full-Time Equivalent Students Relative to Target, 2023-24ª to multiple factors. CSU enrolled smaller-than-usual incoming cohorts Sonoma the past two years, translating to Maritime fewer continuing students now. Humboldt Moreover, retention rates have Channel Islands generally decreased since the start East Bay of the pandemic. The percent of Chico freshmen who return in their second San Francisco year, for example, decreased from Monterey Bay Dominguez Hills 85 percent for the fall 2019 incoming San Bernardino cohort to 82 percent for the fall 2022 Fresno incoming cohort. Bakersfield Most Campuses Are Below Stanislaus Their Enrollment Target. CSU Sacramento allocates its systemwide enrollment San Jose target and associated funding Northridge by campus. Whether a campus Long Beach meets its funded enrollment target San Diego San Luis Obispo depends on several key factors, Fullerton including the number of students Los Angeles who apply, admission rates, yield Pomona rates, retention rates, and other San Marcos aspects of student and campus -50 -40 -30 -20 -10 10 20% behavior. As Figure 11 shows, CSU estimates that 15 of 23 campuses are below their target in 2023-24. a Reflects CSU estimates as of December 2023. Eight of these campuses were more than 10 percent below their target. 12 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Several Campuses Have Reduced the Use the systemwide removal of standardized testing of Impaction. Historically, many CSU campuses requirements since fall 2021, and campus efforts have been designated as “impacted,” meaning to meet enrollment targets amid demographic and they have more student demand than enrollment fiscal challenges. slots. To manage student demand, impacted Governor’s Proposal campuses adopt stricter admissions criteria than the minimum systemwide eligibility requirements. Governor’s Budget Maintains Enrollment Campuses may apply the stricter admissions Expectations Set in Compact. As part of his criteria to applicants outside their local service compact with CSU, the Governor expects CSU area and/or applicants within specific high-demand to increase resident undergraduate enrollment programs. Amid recent enrollment declines, CSU by 1 percent annually from 2023-24 through reports that several campuses have removed 2026-27. (The compact does not include an these stricter admissions criteria. Specifically, the expectation for CSU to increase graduate Fresno, Northridge, Sacramento, San Bernardino, enrollment.) This expectation is added to CSU’s San Marcos, and Sonoma campuses have funded enrollment target, bringing that target discontinued impaction for nonlocal applicants at from 383,680 resident FTE students in 2022-23 both freshman and transfer levels. to 397,623 resident FTE students in 2026-27. In addition, the Channel Islands, Maritime, Northridge, Sacramento, Figure 12 and San Marcos campuses Freshman Admission Rates Have Increased Notably have discontinued impaction within specific programs, such Fall Admission Rates for Resident Freshman Applicants as engineering, biology, and health science. Fresno Admission Rates Have Stanislaus Increased Significantly Over Maritime Past Few Years. As Figure 12 Sonoma San Marcos shows, freshman admission rates Monterey Bay have increased at nearly all CSU Sacramento campuses over the past few years. Channel Islands Fourteen campuses had freshman Los Angeles admission rates of 90 percent or Northridge higher in fall 2023, compared to Chico only two campuses in fall 2019. San Francisco Only four campuses continue San Bernardino to have freshman admission East Bay rates lower than 75 percent. Dominguez Hills Transfer admission rates have Bakersfield also increased notably over the Fullerton past few years. In sum, at most Humboldt San Jose CSU campuses, a higher share Pomona of applicants is being admitted, Long Beach meaning access is widening. The San Diego 2019 2023 higher admission rates could be San Luis Obispo due to multiple factors, including 10 20 30 40 50 60 70 80 90 100% the removal of stricter admissions criteria for certain previously impacted campuses and programs, www.lao.ca.gov 13 2024-25 BUDGET The Governor expects CSU to cover the cost of Under the Governor’s budget proposal to delay that this enrollment growth from within its base increase increase, CSU instead would likely use its reserves. each year. Although the Governor’s budget delays CSU Also Plans to Reallocate Existing the planned base increase under the compact until Enrollment Funding Among Campuses. 2025-26, it makes no changes to the associated In addition to providing new enrollment growth enrollment expectations. (We discuss the delayed funding, CSU plans to reallocate some existing base increase in the “Core Operations” section of enrollment funding among campuses in 2024-25. this brief.) Eight campuses are currently more than 10 percent below their enrollment target. For each of these CSU’s Plan campuses, CSU plans to reduce its enrollment CSU Intends to Catch Up to Enrollment Target target and associated funding by 3 percent in by 2026-27. As Figure 13 shows, CSU’s actual 2024-25 and reallocate those amounts to campuses enrollment level was significantly below its funded currently at or above their target. (These reallocated enrollment target at the start of the compact period funds would be in addition to any funds the in 2022-23. As a result, it would need to grow actual campus receives from the new $38 million for enrollment by more than 1 percent annually (the enrollment growth in 2024-25.) CSU also intends rate at which the target is increasing) to catch up to to repeat a similar reallocation process in 2025-26 the target. Accordingly, CSU plans to grow actual and 2026-27. enrollment by 2 percent to 3 percent annually for the next few years. Under this plan, CSU effectively Assessment would catch up to its enrollment target by the last CSU’s Actual Enrollment Level Is Notably year of the compact in 2026-27. Below Its Funded Enrollment Target. In 2023-24, CSU Plans to Allocate New Enrollment CSU’s estimated enrollment level of 368,042 Growth Funding to Certain Campuses in resident FTE students is 19,072 students 2024-25. The 1 percent increase in CSU’s (4.9 percent) below its enrollment target. This target enrollment target set forth in the compact equates reflects the number of students for which CSU has to 3,468 additional resident undergraduate FTE previously received ongoing state support, either students in 2024-25. CSU plans to allocate an directly or from within its base funding. Given that associated $38 million in new funding to campuses, CSU is notably below its target, it could add many corresponding to the state share of the marginal more students before it needs to allocate new cost of adding those students. (CSU estimates funding for enrollment growth, indicating new it would also generate $17 million in additional funding for enrollment growth is unwarranted at student tuition revenue from this growth.) CSU this time. New funding is particularly unwarranted indicates it would allocate those funds among nine if those funds are to come from CSU’s reserves, campuses that are planning for growth above their as they likely would under the Governor’s budget. 2023-24 funded target. Originally, CSU intended It would be more prudent to use those reserves to cover the cost from within its base increase. to temporarily cover operating costs that cannot be avoided. Figure 13 Under CSU’s Plan, Enrollment Would Reach Target by 2026-27 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 – 0.9% 0.9% 0.9% 0.9% CSU’s planned enrollment level 362,254 368,042 376,794 387,091 397,823 Annual percentage growth – 1.6% 2.4% 2.7% 2.8% CSU’s planned enrollment relative to target -5.6% -4.9% -3.5% -1.8% 0.1% 14 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Enrollment Growth in 2023-24 Is Overstated This suggests the transfer pipeline has yet to Due to Shift in Summer Courses. When the recover from community college enrollment Legislature sets enrollment growth expectations declines during the pandemic. for CSU in the state budget, it intends for CSU to • Continuing Students. Since fall 2021, add more students. The majority of the increase CSU’s incoming cohorts (particularly new in FTE students that CSU is reporting in 2023-24 transfer students) have been smaller than is unrelated to adding more students and instead pre-pandemic levels. Some of these smaller stems from shifting summer courses from cohorts will remain at CSU in 2024-25, self-supported to state-supported. This approach likely leading to fewer continuing students. to enrollment growth does not appear to align In addition, it remains to be seen whether with legislative intent. Moreover, given the retention rates begin to recover from the state’s projected budget deficits, the state likely declines seen since the start of the pandemic. cannot afford to begin supporting activities Demographic Trends Are Likely to Limit that were previously self-supported. Based on Growth in Out-Years. Whereas CSU has seen the decline in self-supported enrollment from increases in new freshmen over the past few years, the previous summer, we estimate CSU shifted demographic trends could limit this growth moving 4,705 resident FTE students from self-supported to forward. Based on the most recent projections state-supported in summer 2023. If not for this shift, from the Department of Finance, the number of we estimate CSU would be enrolling only 363,337 high school graduates in California has peaked. resident FTE students in 2023-24—23,777 students As Figure 14 shows, the number of high school fewer than its funded enrollment target. graduates is projected to decline by 40,097 Enrollment Growth Is Likely to Be Relatively students (9 percent) from 2023-24 to 2026-27. Low in 2024-25. While the 2024-25 admissions All else equal, this would translate to smaller new cycle remains in its early stages, early indicators freshman cohorts in the out-years. suggest CSU could see some growth from its current enrollment level. The growth rate likely would not Figure 14 be large, as potential increases in new freshman could be offset High School Graduates Are Projected to Decline by continued challenges related California Public High School Graduates to new transfer students and continuing students. 460,000 • New Freshmen. The number Projected 450,000 of high school graduates in California is projected to 440,000 increase by 0.7 percent in 430,000 2023-24, potentially leading 420,000 to an increase in the incoming 410,000 freshman class for fall 2024. As of January 2024, CSU 400,000 is reporting a 5 percent 390,000 year-over-year increase in 380,000 freshman applicants for 2010-11 2012-13 2014-15 2016-17 2018-19 2020-21 2022-23 2024-25 2026-27 fall 2024. • New Transfer Students. In contrast to freshman applicants, transfer applicants for fall 2024 are about flat year over year. www.lao.ca.gov 15 2024-25 BUDGET (We discuss these and other demographic trends the compact proposes, particularly if CSU would in our recent report, Trends in Higher Education: draw down its reserves for this purpose. Student Access.) If More Budget Solution Is Needed, Most CSU Campuses Are Already Meeting Consider Aligning CSU Funding With Its Actual Student Demand. In the past, a key reason the Enrollment. One of the first options the state Legislature has funded CSU enrollment growth was tends to consider when facing budget deficits is to expand access to eligible students who might aligning funding with actual caseload. This is an otherwise not be admitted. This issue is less of a approach the state has used across sectors of concern today. Over the past few years, admission its budget—from education programs to health rates have increased at nearly all CSU campuses, and social service programs. Given CSU’s and fewer campuses and programs are impacted. funded enrollment target is substantially higher A majority of campuses are currently below than its actual enrollment level, the Legislature their enrollment targets—several by more than could achieve notable budget savings using 10 percent. Moreover, CSU’s plan to reallocate this approach. We estimate it could achieve existing enrollment targets among campuses can $239 million in ongoing General Fund savings if it help expand capacity at those campuses that reset CSU’s funded enrollment target at 363,337 continue to have unmet enrollment demand without FTE students—reflecting its estimated 2023-24 requiring additional state funds. enrollment level, adjusted to remove the estimated number of students shifted from self-supported Budget Options courses. (It could set the enrollment target at As Starting Point, Hold CSU’s Funded a higher level for less corresponding savings.) Enrollment Target Flat for 2024-25. Consistent Depending on the severity of the state budget with our recommendation in the previous section condition, the Legislature could apply such a to hold state funding for CSU flat, we recommend reduction retroactively to 2023-24 or beginning holding CSU’s enrollment target flat at the current in 2024-25. This option is unlikely to have a direct level of 387,114 resident FTE students. CSU is impact on student access, as the new target would 19,072 FTE students (4.9 percent) below this be based on the number of students CSU currently current target, meaning the system could add enrolls. It could, however, impact CSU operations, that many more students without additional as it would reduce the amount of funding available funding. Given the relatively low enrollment growth for its operating costs. Nonetheless, having this expected in 2024-25 and the out-years, CSU is option available could help balance the budget, likely to remain below its current funded target for particularly were the state budget condition to at least a couple more years. We see no rationale deteriorate further over the coming months. for increasing the target by 1 percent annually as ONE-TIME BUDGET SOLUTIONS In this section, we discuss the Legislature’s State Adopted Many One-Time Initiatives options for achieving additional budget savings Over Past Three Years. From 2021-22 through at CSU by pulling back unspent one-time funding 2023-24, the state appropriated a total of from prior budgets. Although the Governor does $1.1 billion one-time General Fund to CSU for not propose this action for CSU, it could be among about 50 one-time initiatives and capital projects. the less disruptive options for addressing the (These amounts exclude capital projects that the 2024-25 budget deficit and reducing out-year state later converted from cash funding to debt fiscal pressure to the state. financing, as we discuss in the following section.) The state adopted these one-time appropriations in response to the large operating surpluses it originally was estimating for 2021-22 and 2022-23. 16 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Designating funds for one-time purposes when that would have future operations, maintenance, the state has a surplus can be a prudent budget and capital renewal costs. To maximize potential approach, as it avoids building up ongoing savings, the Legislature might want to take early programs, particularly when revenues could be action, as doing so would ensure that additional spiking and potentially contract in subsequent funds are not spent before the end of the fiscal years. Now that prior surpluses have been year. At this time, we do not recommend pulling replaced with projected multiyear deficits, the back the $252 million in deferred maintenance state could revisit recent one-time initiatives to funds. Doing so would likely increase future costs, determine how much associated funding remains as the foregone projects likely will turn into more unspent. The more funds the Legislature pulls expensive facility projects (including emergency back from previous one-time initiatives now, the repairs) in the long run. Nonetheless, were the state less the Legislature might need to turn to ongoing budget condition to deteriorate significantly in the programs for budget solutions moving forward. coming months, then the Legislature might need to CSU Has Some Unspent One-Time Funding consider pulling back even these funds. From Prior Budgets. Based on a data request to CSU, our Figure 15 preliminary estimate is that Some Recent One-Time Funding for CSU Initiatives $423 million of the $1.1 billion in Remains Unspent one-time funding for CSU has not General Fund (In Millions) yet been spent or encumbered by campuses (as of January 1, 2024). Maximum As Figure 15 shows, $252 million Purpose Available Fundsa of this amount is for deferred Deferred Maintenance and Related Projectsb maintenance and related projects; 2021-22 appropriation $162 $145 million is for various 2022-23 appropriation 91 Subtotal ($252) cash-funded capital projects that Capital Projectsc remain in planning and design University farms facilities and equipment $46 phases; and $26 million is for CSU Humboldt applied research facilities 43 various academic programs, CSU Humboldt science building renovations 35 student support programs, and CSU Dominguez Hills Dymally Institute facility 15 CSU Dominguez Hills wellness, health, and recreation center 6 research initiatives. Subtotal ($145) Recommend Pulling Back Other Initiatives Some of the Available One-Time CSU Monterey Bay Computing Talent Initiative $7 Funding. Of the identified unspent Asian Bilingual Teacher Education Program Consortium 4 one-time funds, we recommend CSU Bakersfield nursing and health professional programs 4 Project Rebound student housing and other services 3 the Legislature pull back the Council on Ocean Affairs, Science and Technology 3 $145 million for capital projects CSU Dominguez Hills California Black Women’s Think Tank 3 and $26 million for various CSU San Francisco Asian American Studies 3 programs. Pulling back these Subtotal ($26) Total $423 funds would achieve near-term a Reflects amount not spent or encumbered by campuses as of January 1, 2024. savings. In a few cases, it would b Includes deferred maintenance, energy efficiency, and seismic mitigation projects. also generate out-year savings, c Includes capital projects in design phases only. We exclude any projects that have already entered as the funds are for new facilities construction. www.lao.ca.gov 17 2024-25 BUDGET DEBT-FINANCED CAPITAL PROJECTS In this section, we provide an update on various instead issue bonds for these projects while many CSU capital projects for which the state provided of them were still in earlier stages. CSU indicates it ongoing General Fund beginning in 2023-24, raise a took this approach because some campuses had couple of implementation concerns, and provide a already begun to spend the cash they had initially few associated recommendations. received for these projects on planning and design costs, and they were awaiting bond proceeds to Update cover those costs after the state reverted the cash. Last Year, State Converted Some Capital As Figure 16 shows, many of these projects remain Projects From Cash to Debt Financing. In in planning and design phases as of January 1, 2024. 2021-22 and 2022-22, at the height of its budget surpluses, the state Figure 16 provided one-time General Fund Many Debt-Financed Capital Projects at CSU for many new capital projects. In Remain in Early Phases 2023-24, facing a moderate budget deficit, the state converted some of (In Millions) those projects from cash funding to Project Bond Current debt financing. For CSU specifically, Project Costa Issuedb Phasec the state reverted $1 billion in Student Housing Projectsd one-time General Fund associated San Francisco $116.3 Yes C with a total of 16 capital projects. San Marcos 91.0 Yes C Instead of receiving cash for these San Jose 89.1 No P projects, CSU was to debt finance Fullerton 88.9 Yes P Long Beach 53.3 Yes W them using university bonds. In Dominguez Hills 48.8 Yes W 2023-24, the state also approved Sacramento 41.3 No P 5 new projects totaling $209 million Northridge 37.5 Yes C in costs that CSU would also debt Fresno 31.1 Yes P Humboldt 27.1 Yes C finance using university bonds. Stanislaus 18.9 No P The state appropriated $100 million San Diego/Imperial Valley College 4.6 Yes P ongoing General Fund for CSU to Subtotal ($647.8) support the debt service associated Other Projects with the 21 projects altogether. Humboldt Housing, Health Care, and $101.0 Yes P Dining Facility CSU Issued Bonds While Many Humboldt Engineering and Technology 100.0 Yes W of These Projects Were Still in Commons Bakersfield Energy Innovation Center 83.0 Yes P Early Phases. In summer 2023, San Diego Brawley Center 80.0 Yes W CSU issued a total of $662 million San Bernardino Palm Desert Center 79.0 Yes W in bonds for the projects approved Fullerton Engineering and Computer Science 67.5 Yes P for debt financing in 2023-24. Hub San Luis Obispo Swanton Pacific Ranch 20.3 Yes P These bonds are to cover some or Chico Human Identification Lab 55.0 Yes P all of the costs associated with 18 San Bernardino physician assistant program 4.3 Yes C of the 21 projects. (CSU intends to facilities Subtotal ($590.1) issue additional bonds in summer Total $1,237.9 2024 to cover any remaining costs for these projects as well as the a Reflects state cost of project (excluding nonstate costs). b Reflects whether CSU issued bonds for any of the project costs in summer 2023. costs of the other three projects.) c Reflects project status as of January 1, 2024. Whereas CSU typically issues d The state also approved $7.5 million to cover cost overruns across CSU’s student housing projects. bonds as projects are beginning P = preliminary plans; W = working drawings; and C = construction. the construction phase, it chose to 18 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Whereas the state typically has the ability to pause Upon receiving this documentation, the state often and remove funding for projects that remain in advances a project by phase, allowing for regular early stages, CSU indicates that doing so for these oversight of a project as it is being developed. projects after the bonds have already been issued The state also typically waits to finance the would have negative consequences for its bond construction phase of a project until after designs program, possibly including harm to its perceived have been developed and cost estimates have been credit quality. refined. Over the past three years, the Legislature Most of the Bonds Issued for These Projects has approved many CSU projects without applying Were Taxable. CSU may issue bonds that are either these standards. tax-exempt (meaning investors do not owe taxes Issues Have Emerged in the Absence of on the income they receive) or taxable. Tax-exempt Regular Controls. Without regular state standards bonds typically have somewhat lower interest rates, of review, CSU has had greater discretion than but they also have requirements that bond proceeds most agencies to proceed with projects, with some be spent within a certain time frame. Of the issues emerging as a result. Most notably, CSU $662 million in bonds that CSU issued for these has financed projects that remain in early planning projects last summer, $462 million was taxable. This phases. Borrowing large sums before projects was at least in part because some of these projects have advanced to the construction phase generally were still in too early of a stage to spend down the is viewed as poor budget practice, incurring proceeds within the required time frame. CSU’s unnecessary interest costs. In addition, CSU has use of taxable bonds generates higher debt service changed at least one project, the San Jose student costs. The state, in turn, is effectively bearing these housing project, midcourse. Although the San Jose higher costs. project ultimately might be worthwhile, changing After State Approval, CSU Changed One the project after it received state approval further Student Housing Projects. In February 2023, weakens legislative oversight. CSU submitted a request to the administration Recommendations and Legislature for a student housing project at Recommend Strengthening Oversight of the San Jose campus. As originally submitted, CSU Projects. Were the Legislature to approve and later approved by the state in the 2023-24 later rounds of funding for CSU student housing budget package, the project entailed constructing projects or approve direct state support for other a new housing facility on campus. CSU now CSU projects, we recommend it apply its regular indicates that the San Jose campus has entered standard of review and approval to these projects. into an agreement to lease an existing commercial Specifically, we recommend it (1) identify each property off campus, with the option to purchase project’s scope, cost, and schedule in the budget the property in fall 2025. CSU indicates the new act; (2) require the timely notification of significant project would still provide 517 affordable beds—the changes to project scope, cost, and schedule, same as the original project. Moreover, the cost consistent with regular state requirements; and per bed would be lower and the beds would be (3) authorize funding to advance projects by phase available two to three years earlier than under the rather than all at once. original project. Recommend Aligning Funding With Estimated Assessment Debt Service Costs. Whereas the state provided Legislature Authorized Many CSU Projects $100 million ongoing General Fund intended to Without Applying Its Regular Standard of support the debt service associated with the Review. For most state agencies, the state applies 21 projects, actual debt service costs (even with the a certain level of scrutiny to capital projects. higher rates for taxable bonds) are expected to be Traditionally, the state requires a project to have a lower than originally budgeted. The savings will be well-defined scope, reliable cost estimates, and most substantial in the first two years because not a detailed schedule before requesting funding. all of the bonds will have been sold. Beginning in www.lao.ca.gov 19 2024-25 BUDGET the third year, costs might still be slightly lower than Legislature Could Consider Pausing Projects the original appropriation depending on interest for Which Bonds Have Not Been Issued. rates. Based on CSU’s most recent estimates, To date, CSU has not yet issued bonds for three the debt service costs associated with these of the projects approved for debt financing last projects total $25 million in 2023-24, $68 million in year. These three projects are student housing 2024-25, and $87 million in 2025-26 and ongoing. projects at the San Jose, Sacramento, and Especially in light of the state’s budget deficit, we Stanislaus campuses. Whereas the Sacramento recommend the Legislature reduce the $100 million and Stanislaus projects remain in preliminary plans, appropriation to align with actual debt service the San Jose campus has already entered into an costs. Based on current estimates, this would yield agreement with the intent to purchase an existing $75 million in savings in 2023-24, $32 million in property using bond proceeds. Given the state’s 2024-25, and $13 million annually thereafter. projected multiyear budget deficits, the Legislature could consider pausing some or all of these projects and sweeping the associated funding for debt service. We estimate pausing all of the projects would yield $12 million in ongoing General Fund savings (on top of the amounts cited in the previous paragraph). LAO PUBLICATIONS This report was prepared by Lisa Qing and reviewed by Jennifer Pacella. 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