The 2024-25 Budget: University of California

2024-25 BUDGET The 2024-25 Budget: University of California GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2024 SUMMARY Brief Covers the University of California (UC) Budget. This brief analyzes the Governor’s budget proposals relating to UC’s core operations and enrollment. It also revisits recent one-time initiatives and capital projects the state has funded at UC. Governor Proposes Two Funding Deferrals for UC. Specifically, the Governor proposes deferring a $228 million base increase and a $31 million augmentation relating to a nonresident enrollment reduction plan. Under the Governor’s proposed approach, the state would delay these funding increases until 2025-26, at which time it would double up ongoing increases as well as provide one-time back payments. In the meantime, UC would increase spending in 2024-25 by the originally planned amounts, likely by borrowing internally. Recommend Holding State Funding and Spending Expectations Flat for UC. We recommend rejecting the proposed deferrals. The Governor’s approach creates risk for the state, which would be committing to a $790 million General Fund increase for UC in 2025-26, despite facing a significant projected budget deficit that year. The approach also creates risk for UC, which would be increasing spending and incurring costs associated with internally borrowing in anticipation of a state funding increase in 2025-26. If the state is unable to provide these funds, then UC likely would need to consider significant spending reductions that could be more disruptive than containing spending in the first place. Recommend Also Holding UC’s Funded Enrollment Target Flat. In 2023-24, UC estimates it is enrolling 202,278 resident full-time equivalent (FTE) students—an increase of 5,167 students over the previous year. Even with this growth, UC remains 1,383 FTE students below its funded enrollment target. The Governor’s compact intends for UC to grow resident undergraduate enrollment by 1 percent annually. The Governor’s budget maintains this expectation. Given that UC could add more students within its current funded enrollment target, some UC campuses have missed their recent enrollment targets, additional enrollment capacity exists at the California State University, and the state is facing deficits, we recommend instead holding UC’s enrollment target flat for 2024-25 and 2025-26. As an option, the Legislature could consider having UC use its reserves on a temporary basis to enroll additional resident students at its three highest-demand campuses. Recommend Pulling Back Some Unspent One-Time Funds From Prior Budgets. From 2021-22 to 2023-24, the state appropriated $1.3 billion one-time General Fund for about 40 UC initiatives. Many of these initiatives were campus specific and involved research activities. Of the $1.3 billion, we estimate $325 million remains unspent. Given the state’s projected operating deficits, we recommend the Legislature pull back all of these remaining one-time funds. Recommend a Few Changes Related to Debt-Financed Capital Projects. In 2023-24, the state appropriated $84 million ongoing General Fund for a total of 11 capital projects that UC was to debt finance using university bonds. Three of these projects remain in the preliminary planning phase and UC has not yet sold bonds to finance them. We recommend the Legislature pause these three projects and remove an associated $22 million ongoing General Fund from UC’s budget. We also recommend not moving forward at this time with the UC Merced medical education building and removing the associated $14.5 million in annual debt service funding. Though UC has entered a construction contract for this project, it has not yet sold bonds for it. We also recommend the state align the rest of its debt service funding with UC’s actual debt service costs. Doing so likely would yield at least $50 million in savings in 2023-24, followed by smaller amounts of savings over the next few years as UC sells additional bonds. www.lao.ca.gov 1 2024-25 BUDGET INTRODUCTION Brief Focuses on UC. UC is one of California’s disciplines, whereas one campus enrolls graduate three public higher education segments. health science students only. This brief analyzes Under state law, UC is to provide undergraduate the Governor’s 2024-25 budget proposals for UC. and graduate education, including doctoral The first section of the brief provides an overview programs and professional programs in law of those proposals. The next two sections focus and medicine. It also is to serve as the primary on core operations and enrollment, respectively. state-supported academic agency for research. The last section provides a recap of recent The UC system consists of ten campuses. Nine of UC initiatives that could be revisited given the UC’s campuses enroll students across a range of state’s projected budget deficits. OVERVIEW UC Budget Currently Is $51.4 Billion. Of the three public Figure 1 higher education segments, UC has the largest budget, with UC Receives Funding From Many Sources total funding greater than the $51.4 Billion in 2023-24 California State University (CSU) and California Community Colleges State Other (CCC) combined. As Figure 1 Core Funds shows, UC receives funding from General Fund a diverse array of sources. The Private state generally focuses its budget decisions around UC’s “core funds,” Federal Tuition and Fees or the portion of UC’s budget Other supporting undergraduate and graduate education and certain state-supported research and Sales and Services outreach programs. Core funds Noncore Funds Medical Centers at UC primarily consist of state General Fund and student tuition revenue. A small portion comes from lottery funds, a share of patent royalty income, and overhead funds associated with federal and state research grants. Between 2022-23 and 2023-24, ongoing core funds per student increased 4 percent at UC. 2 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Ongoing Core Funding Increases by installments of $75 million for expanding GME in $230 Million (2.2 Percent) Under Governor’s connection with the recently enacted managed Budget. As Figure 2 shows, the Governor care organization tax agreement.) The largest proposes to increase state General Fund for UC by one-time funding adjustments in the Governor’s only $17 million (0.4 percent), but tuition and fee budget involve carryover—$5 million for employee revenue is expected to increase by $213 million professional development programs and $4.5 million (4 percent). Other core funds increase slightly (by a for the UC Hematologic Malignancies Pilot. combined $62,000). The increase in tuition and Governor Proposes Two UC Funding fee revenue is a result of higher tuition charges “Deferrals.” In May 2022, the administration as well as anticipated enrollment growth. Under announced a compact with UC to provide 5 percent the Governor’s budget, ongoing core funding per annual base General Fund increases through student increases 0.7 percent. 2026-27. The Governor’s budget, however, includes Governor’s Budget Includes a Few Funding no base increase in 2024-25. The Governor Adjustments for UC. As Figure 3 on the next proposes to defer these funds ($228 million) until page shows, the Governor’s budget includes two 2025-26. The Governor also proposes to defer ongoing General Fund adjustments for UC. The funding ($31 million) for implementing the third largest is to pay debt service for a new medical year of a plan to replace nonresident with resident education facility at UC Merced. The box on the students at three high-demand UC campuses next page provides more information about this (Berkeley, Los Angeles, and San Diego). In 2025-26, project. We also discuss this project in the “Budget the Governor is committing to provide UC with Solutions” section of this brief. The other ongoing a total of $790 million in new General Fund adjustment is an additional $2.6 million General support, consisting of $259 million in one-time Fund backfill for a graduate medical education back payments and $530 million in new ongoing (GME) program. As Proposition 56 tobacco-tax funding. The new ongoing funding would build up revenue supporting this program declines, the UC’s base so it could continue accommodating the state has used General Fund to backfill for the loss, higher spending level from the prior year moving maintaining the program at $40 million annually. forward, along with providing a new 5 percent base In 2024-25, a total of $13 million in ongoing increase and additional funding for implementing General Fund would be provided to the program. another year of the nonresident enrollment (In 2024, UC also expects to begin receiving annual replacement plan. Figure 2 Largest Portion of UC Core Fund Increase Comes From Tuition (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 Fund $4,377 $4,712 $4,729 $17 0.4% Tuition and feesa 5,174 5,390 5,603 213 4.0 Lottery 72 58 58 — -0.1b Other core fundsc 243 242 242 — —b Totals $9,866 $10,402 $10,632 $230 2.2% FTE Students 289,695 292,457 296,937 4,480 1.5% Funding Per Student $34,056 $35,569 $35,807 $238 0.7 a Includes funds used for student financial aid. b Less than $500,000 or 0.5 percent. c Includes a portion of overhead funding on federal and state grants and a portion of patent royalty income. FTE = full-time equivalent. www.lao.ca.gov 3 2024-25 BUDGET Figure 3 Governor’s Budget Includes a Few Funding Adjustments for UC Reflects Governor’s Budget Proposals, 2024-25 (In Millions) Ongoing Spending Debt service for new UC Merced medical education facility $14.5 Graduate medical education backfilla 2.6 Subtotal ($17.1) One-Time Adjustments Carryover $9.5 Nutrition Policy Instituteb 1.1 Subtotal ($10.6) Total $27.7 a Reflects a General Fund backfill for a drop in Proposition 56 tobacco-tax revenue. The backfill maintains the program at $40 million. b Under a multiyear budget agreement, this institute received $1.3 million in 2023-24, rising to $2.4 million in 2024-25. State Approved a New UC Merced Medical Education Building New Facility Is Costliest State-Funded UC Project to Date. Chapter 23 of 2019 (AB 74, Ting) gave the University of California (UC) authority to construct a medical education facility on or near the Merced campus. The accompanying provisional language indicated that the state would cover the associated debt service. The provisional language did not contain the typical components of a state-approved capital project. Most notably, the provisional language did not specify the cost, scope, or schedule of the project. Based upon the most recent information available, the project is expected to cost $300 million to complete. Of this amount, $243 million is covered by state General Fund, $45 million by gift funds, and $12 million by campus funds. This project has the highest state-supported cost of any single capital project ever approved for UC. As one point of comparison, a new medical school building at UC Riverside (opened in fall 2023) had a state-supported cost of $94 million. Governor Proposes One UC Spending remaining one-time funds that the state had Reduction. The Governor proposes planned to provide for the project in 2024-25. eliminating $300 million one-time General The administration indicates that the additional Fund for the California Institute for Immunology funding originally planned for 2024-25 is no longer and Immunotherapy (to be located near needed due to a change in the project. Rather than UC Los Angeles). The state already has provided constructing a new facility, the institute is acquiring $200 million in prior-year, one-time funding for and plans to renovate an existing facility. the institute. This proposal would remove the 4 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET CORE OPERATIONS In this section, we provide background on UC’s currently serve in academic positions, with the core operating costs and how UC generally covers remainder serving in various nonacademic roles. these costs. Next, we describe the Governor’s In 2023, UC had 1 FTE employee for every 2.3 FTE proposed funding deferrals for UC, along with the students. This employee-student ratio has hovered options UC has identified for responding to those around 2.3 for the past several years. deferrals. We then assess the Governor’s proposed UC’s Largest Operating Cost Is Employee deferrals and make an associated recommendation. Compensation. Like many other state agencies, (We address nonresident enrollment issues in the the largest component of UC’s budget is employee “Enrollment” section of this brief, but we address salaries and benefits (comprising 69 percent of the associated funding deferral in this section.) its core expenditures in 2022-23). UC has more control than most state agencies, however, over Cost Pressures its compensation costs, partly because most UC Has a Large Workforce. In October 2023, of its employees (approximately 80 percent) are UC employed 131,727 FTE campus employees not represented by a labor union. The Board of (excluding its medical centers). As the first part of Regents directly sets salaries and benefits for Figure 4 shows, the number of FTE employees at these employees. UC collectively bargains salaries UC generally has been trending upward over time and benefits for its represented employee groups, (though UC’s staffing level dipped in 2020 when negotiating with eight labor unions. As with CSU, campuses were most affected by the shift to remote the Legislature does not ratify UC’s collective instruction). As the second part of Figure 4 shows, bargaining agreements. almost 40 percent of UC campus employees Figure 4 UC Staffing Levels Have About 40 Percent of UC Employees Tended to Grow Over Time Serve in Academic Positions Full-Time Equivalent Employees Full-Time Equivalent Employees (Excluding Medical Centers) (Excluding Medical Centers), October 2023 140,000 135,000 Academic Faculty 130,000 125,000 Other Nonacademic Other Academic 120,000 TAs/RAs 115,000 Student 110,000 Nonacademic Managersª Staff 105,000 2015 2016 2017 2018 2019 2020 2021 2022 2023 a Includes executives, managers, and senior professionals. TAs/RAs = teaching assistants and research assistants. www.lao.ca.gov 5 2024-25 BUDGET All UC Employee Groups Have Been the Board of Regents determines how much Receiving Salary Increases. Salaries for UC should contribute to the pension program. UC employee groups—both non-represented and For the last ten years, the UC employer contribution represented—have been increasing. In 2023-24, rate has increased gradually—from 14.72 percent UC provided faculty with a 4.6 percent general of payroll in 2014-15 to 16.31 percent in 2023-24. salary increase (GSI), along with 1.78 percent As Figure 5 shows, annual program costs have merit increases for qualifying faculty. UC also steadily grown over this period. The program’s provided non-represented staff employees with funded status (comparing assets to liabilities) a 4.6 percent GSI. UC’s budget plan for 2024-25 has fluctuated but generally has hovered around contains funding to cover another 4.2 percent 80 percent. In 2023-24, UCRP’s funded status was GSI for non-represented employees, along with 81 percent, with $20.4 billion in unfunded liabilities. additional funding for the faculty merit program. UCRP’s funded status has tended to be better than In 2023-24, salary increases for represented other California state retirement plans. The funded employee groups varied—ranging from a 3 percent status of the California Public Employees’ GSI and salary step increases for some groups Retirement System (CalPERS), for example, has to more than 15 percent salary increases for hovered around 70 percent over the past decade. academic student employees. UC already has Looking forward, the UC employer contribution negotiated 2024-25 salary increases with most rate is set to increase to 17.72 percent of payroll of its represented groups. These increases also in 2024-25. The increase in the 2024-25 employer range from a 3 percent GSI for some groups to contribution rate is largely due to continued more than 15 percent salary increases for academic implementation of UC’s plan for addressing the student employees. program’s unfunded liabilities. UC Administers Its Own Pension Program, UC Covers the Cost of Health Care Benefits. Associated Costs Have Been Rising. UC UC manages health care benefits for both its employees may participate in the University of active employees and retirees. (In contrast to California Retirement Plan (UCRP). The Board CSU, CalPERS does not administer health care of Regents manages this program. Each year, benefits for UC retirees.) A range of health plans Figure 5 UC Pension Costs Continue to Rise UCRP Employer Contribution Costs (In Millions) $700 100% UCRP Funded Status 90 600 80 500 70 60 400 50 300 40 200 30 20 100 10 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 UCRP = University of California Retirement Plan. 6 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET are available for UC employees and retirees, with UC with a base increase. In such years, this budget premiums set annually for the respective plans. approach effectively provides UC some additional The share of premium costs that UC covers capacity to undertake new capital projects. depends on an employee’s income level, with The state also allowed UC to refinance its state lower-paid employees receiving a higher share of lease revenue bonds. The state has authorized their premium costs covered. (For example, in one $3.3 billion of new academic facility projects under UC health care plan, employees who are single the current system through 2023-24. UC’s total debt earning less than $68,000 contribute $100 to their service associated with general obligation bonds, monthly premium, whereas similar employees refinanced bonds, and new bonds is $471 million earning more than $204,000 contribute $239.) in 2023-24, up from $386 million in 2022-23. UC’s health care spending generally has increased The large increase is due to the state approving over time, but it has not grown notably as a share several new projects for UC debt financing last year. of UC’s total core expenditures. Over the past Looking forward, UC estimates its debt service decade, health care spending on behalf of active costs in 2024-25 will increase another $10 million, employees has hovered around 5.7 percent of UC’s reaching $481 million. total core expenditures. UC estimates that its health UC Has Large Capital Renewal and Seismic care costs for active employees are increasing by Safety Backlogs. Of the new state-supported $23 million in 2023-24. UC projects these health academic facility projects UC has undertaken care costs to increase by $47 million in 2024-25, since 2013-14, more than $1 billion has been largely due to premiums increasing 7.8 percent—the for capital renewal or seismic safety projects. largest increase in premiums over the past decade. Despite these additional facility projects, Costs Also Are Rising for Retiree Health UC continues to report large and growing project Benefits. Unlike many other state agencies, backlogs. As of January 2024, UC identified UC does not pre-fund retiree health benefits $7.5 billion in state-eligible capital renewal by making contributions while the employee projects, up approximately $900 million from is still working. Instead, UC continues to use a one year ago. In addition to these costs, UC pay-as-you-go approach. Thus, UC’s annual costs has identified $13.8 billion of state-supportable are driven by changes in the number of retirees seismic safety projects. and health care premiums. UC estimates retiree Student Financial Aid and Other Cost health care costs are increasing by $6 million in Pressures Also Exist. Beyond employee 2023-24. It projects an increase of $11 million in compensation and ongoing facility costs, UC faces 2024-25, reflecting a 3 percent increase in the various other annual cost pressures. The largest number of retirees, together with higher premiums. remaining cost involves student financial aid UC assesses a payroll charge of 2.23 percent to programs. UC designates a portion of new cover these costs. student tuition revenue for student financial UC Is Responsible for Its Facility Upkeep and aid programs, such that any time tuition rates Growth. Prior to 2013-14, the state financed UC increase or enrollment increases, UC has more academic facilities directly through state general funding it directs into its institutional aid programs. obligation bonds and state lease revenue bonds. In 2024-25, UC is planning for large increases Chapter 50 of 2013 (AB 94, Committee on Budget) in funding for institutional aid, with an additional established the current system whereby UC is $75 million generated from tuition increases authorized to sell its own bonds and use a portion and another $17 million generated from planned of its annual state appropriation to cover associated enrollment growth. Though much smaller in debt service. As part of this transition, the state magnitude, UC also can experience cost increases shifted $200 million General Fund associated with relating to operating expenses and equipment general obligation debt service into UC’s main state (OE&E). OE&E costs tend to grow with inflation appropriation. As part of UC’s budget, this amount over time, though UC tries to contain these costs now indirectly grows whenever the state provides through operational efficiencies. www.lao.ca.gov 7 2024-25 BUDGET Funding Lastly, some campuses continue to grow their nonresident enrollment. In 2024-25, UC estimates UC Covers Its Operating Cost Increases From those campuses will collect a combined $4.1 million Two Main Sources. UC’s largest core fund source in additional associated nonresident supplemental is student tuition and fee revenue. In 2023-24, tuition revenue. UC also uses this revenue to 52 percent of its ongoing core funds came from support its operations. this source. UC also relies notably on state General Fund support for its core operations, with UC Has Core Reserves. Like many other 45 percent of its ongoing core fund coming from universities (as well as public and private this source in 2023-24. Since 2013-14, the state entities more generally), UC maintains reserves. has provided UC with General Fund base increases UC commits part of its reserves for planned every year but one. (In 2020-21, the state reduced activities, such as faculty recruitment and retention, General Fund base support due to a projected certain capital outlay costs, and other strategic shortfall, but it restored funding the following year.) program investments. It leaves some reserves uncommitted, such that they are available to UC Continues Implementing Its Tuition address economic uncertainties, including Stability Plan. A few years ago, the Board of state budget reductions. Some, but not all, of Regents approved a UC tuition policy. Under UC’s reserve commitments could be revisited this policy, tuition is increased annually for new in the face of a fiscal downturn. Whereas CSU undergraduates and all graduate students, while has a systemwide policy that aims to have core remaining flat for continuing undergraduates. uncommitted reserves equivalent to three to six Tuition increases generally are based on a months of operating expenses, UC does not have three-year rolling average of the annual change a systemwide reserve policy. As of June 2023, UC in the California Consumer Price Index, with a reported $1.4 billion in total core reserves, of which cap of 5 percent (unless increased by the Board $238 million was uncommitted. UC’s uncommitted of Regents). The first year of tuition increases reserves equate to nine days (2.5 percent) of its under this policy was 2022-23. In 2024-25, tuition total annual core operating expenditures. and systemwide fee rates are set at $14,436 for new undergraduate resident students, reflecting Campus Reserve Levels Vary. In the absence an increase of $684 (5 percent). In 2024-25, of a systemwide reserves policy, UC allows its UC estimates generating an additional $191 million ten campuses to determine their own reserve in revenue from tuition increases. It plans to levels. Campus policies vary but typically aim for use $75 million of this additional revenue for uncommitted core reserves worth one to three institutional student financial aid. (In addition, the months of core expenditures. Figure 6 shows core California Student Aid Commission budget includes reserves at each UC campus as of June 30, 2023. $43 million in higher associated Cal Grant costs for Total core reserves (committed and uncommitted UC students in 2024-25. Many UC students with combined) ranged from less than one month of financial need receive full tuition coverage under the expenditures at the San Diego campus to almost Cal Grant program.) six months of expenditures at the Riverside campus. Uncommitted reserves for economic UC Also Relies on Various Alternative uncertainties, however, equated to less than one Fund Sources. In recent years, UC has begun month of expenditures at all campuses. In dollar using certain investment earnings from its asset terms, uncommitted core reserves ranged from as management program to support its operations. In little as $2.1 million at UC Irvine to $51 million at 2024-25, UC has identified $90 million in investment UC Santa Barbara. earnings that it intends to use to support its operating cost increases. In recent years, UC also has been achieving savings through operational efficiencies and procurement savings that it redirects back into its core operations. In 2024-25, UC is anticipating $11 million from these savings. 8 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Figure 6 Uncommitted Core Reserves Are Low Across All UC Campuses Total Core Reserves by Campus as of June 30, 2023, in Months of Expenditures Riverside Santa Barbara Santa Cruz Davis Irvine Berkeley Merced Los Angeles Uncommitted Committed San Francisco San Diego 1 2 3 4 5 6 Governor’s Proposals Governor Also Proposes to Defer Nonresident Enrollment Replacement Funding. UC has Governor Proposes to Defer General Fund committed to reducing nonresident enrollment Base Increase. Two years ago, the Governor made at three campuses (Berkeley, Los Angeles, and a compact with UC to provide annual 5 percent San Diego) in order to free up space for more unrestricted base increases from 2022-23 through resident undergraduates. Under a multiyear plan, 2026-27. (The compact is not codified, and the these three campuses are to lower their nonresident Legislature decides through the annual budget enrollment so that it comprises no more than process which, if any, of the components it will 18 percent of total undergraduate enrollment enact.) The Governor’s budget does not fund by 2026-27. The past two years, the state has the third year of the base increases. Instead, provided UC with funding to offset the associated the Governor proposes to delay the associated loss of nonresident supplemental tuition revenue. $228 million in ongoing funding until 2025-26. The Governor proposes deferring $31 million As Figure 7 on the next page shows, the Governor linked to the third year of this plan. As Figure 7 intends to double up funding in 2025-26, such shows, like with the base deferral, the Governor that UC would receive a base increase to support intends to double up this funding in 2025-26, the higher level of prior-year ongoing spending such that UC would receive $62 million ongoing ($228 million), along with a new 5 percent base General Fund in 2025-26. The Governor also would increase ($241 million)—for a total increase of provide a one-time back payment of $31 million $469 million in ongoing General Fund support that in 2025-26 to compensate for the foregone funds year. In addition, the Governor intends to provide in 2024-25. Though the Governor defers the UC with a one-time back payment of $228 million nonresident enrollment replacement funding, the in 2025-26 to compensate for the foregone funds budget bill contains provisional language specifying in 2024-25. The administration describes this that UC continue implementing the nonresident proposal as a deferral of the third-year compact enrollment replacement plan in 2024-25. payment. The Governor expects UC to spend at the higher assumed level in 2024-25 by using interim financing, such as drawing down its reserves or borrowing. The Governor gives UC discretion to choose its corresponding spending priorities. www.lao.ca.gov 9 2024-25 BUDGET UC’s Plan UC Has Identified Its Figure 7 Spending Priorities. As Figure 8 shows, UC has identified a total Governor Proposes Funding "Deferrals" for UC of more than $650 million in new (In Millions) spending priorities for 2024-25. These spending priorities include $800 covering cost increases for UCRP, student financial aid, and 700 New Base employee health benefits, along Increase 600 with providing salary increases to non-represented and represented Nonresident Reduction Plan 500 staff. UC indicates that its spending Base Increase priorities exceed the amount 400 Base Funding available to it under the Governor’s Restored 300 compact by nearly $70 million. As of this writing, UC had not 200 yet determined how it would Deferred Back align its spending priorities with 100 Funding Payment available funding. In Response to Proposed 2024-25a 2025-26b Deferrals, UC Could Use a The Governor proposes to defer this funding but still have UC spend at the higher associated level. Its Reserves. One option b In 2025-26, the Governor proposes a one-time back payment to cover the higher UC spending authorized in 2024-25. UC is exploring in response to The Governor then proposes base funding to continue supporting that spending moving forward. On top of restoring base funding, the Governor proposes a new year of compact funding. the Governor’s proposed funding deferrals is drawing down its uncommitted core reserves. UC’s uncommitted core reserves ($238 million), however, are not sufficient to cover Figure 8 the proposed $259 million in deferrals entirely. UC Has Identified Several Spending Moreover, entirely depleting reserves for economic Priorities uncertainty is considered poor fiscal practice, Planned Spending Increases, 2024-25 (In Millions) as it leaves entities unequipped to deal with unexpected issues that might arise throughout Spending Priorities the year. Entirely depleting UC’s core reserves for Retirement contributions $105 economic uncertainty could place at least some Student financial aid increases 92 UC campuses in fiscal distress in 2024-25 if such Represented employee salary increases 90 emergencies arose. Faculty general salary increases 89 Non-represented staff salary increases 75 UC Indicates Its Reserves Generally Are Enrollment growth 58 Held in a Short-Term Investment Account. Health benefits for active employees 46 UC indicates that it holds its reserves generally in Operating expenses and equipment 45 its Short Term Investment Pool (STIP). STIP holds Faculty merit program 39 cash primarily slated for payroll and other common Health benefits for retirees 11 Other 4 expenses for all UC campuses and medical centers. Total $653 As of June 30, 2023, UC reported that STIP held $4.2 billion (after backing out certain restricted funds). If UC were to borrow $259 million from STIP (in quarterly installments), it anticipates an effective interest rate of approximately 3 percent. 10 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET (Though STIP investment returns average UC would be entering 2025-26 with higher approximately 4.5 percent annually, UC would ongoing spending and potentially depleted core not need to borrow the full $259 million for a full uncommitted reserves. If the state were then unable 12 months, assuming the state was able to make to support that higher spending level in 2025-26, the back payment early in fiscal year 2025-26.) UC could need to consider significant reductions At this point in time, UC indicates this internal at that time. Depending upon the severity of the borrowing likely would be its lowest-cost financing budget situation, UC might consider actions such option. If the state ultimately were to adopt funding instituting hiring freezes or furloughs, both of which deferrals for UC, UC indicates it would re-evaluate it has done over the years in response to previous its internal and external borrowing options at state budget cuts. These types of actions would that time. negatively impact both employees and students, as they likely would lead to fewer classes and a Assessment reduction in support services. Moreover, such Proposed Funding Delay Worsens State’s actions would likely be more disruptive than Projected Out-Year Budget Deficits. As we containing spending increases in the first place. discuss in The 2024-25 Budget: Overview Without a Base Increase, UC Still Could Cover of the Governor’s Budget, the state faces Some Cost Increases in 2024-25. If the state significant operating deficits in the coming were to forgo rather than delay the base increase years. The Governor’s proposed funding delay planned for 2024-25, UC would have less ability to for UC worsens those deficits, as we discuss in increase spending on various purposes, including The 2024-25 Budget: Higher Education Overview. employee compensation. It would, however, still Under the proposed approach, the state would have some options for covering a portion of its need to increase General Fund spending for cost increases. Most notably, UC estimates it will UC by $790 million in 2025-26—consisting of generate $117 million in additional tuition revenue a $531 million ongoing augmentation and an (net of financial aid) and have $105 million from additional $259 million one-time back payment. alternative fund sources available for addressing Rather than increasing university costs, the state operating cost increases. It also could draw down historically has contained these costs when facing some of its uncommitted core reserves to cover multiyear budget deficits. certain cost increases that it cannot avoid in the Proposed Approach Increases Out-Year near term, such as health care premium increases, Risks for the State. Both our office and the absent a General Fund increase for 2024-25. administration project the state faces an operating Recommendation deficit of more than $30 billion in 2025-26. Given this projected deficit, increasing spending on Hold State Funding and Spending UC in that year would require a like amount of Expectations Flat for UC, Revisit Next Year. other budget solutions. The Legislature likely will We recommend the Legislature reject the have fewer options for budget solutions next year, Governor’s proposals to defer, then double up, with lower reserves and less one-time spending funding for UC. Such an approach substantially available to pull back. At that time, the Legislature worsens the state’s projected deficit in 2025-26, might face the difficult choice of either cutting and it is risky for the state, UC, and other other ongoing state programs to make room for the state programs that might be cut more deeply additional UC spending or, alternatively, forgoing in 2025-26 to make room for the additional the increase it had committed to providing UC. UC spending. Rejecting the Governor’s proposals Proposed Approach Also Increases Out-Year provides $790 million in budget savings, Risks for UC. Although the Governor’s proposal more than $500 million of which is ongoing, benefits UC in 2024-25 by allowing it to increase beginning in 2025-26. By taking this action spending, it comes with heightened risks for UC this year, the Legislature can mitigate the need the following year. Under the proposed approach, for other, potentially more disruptive, budget www.lao.ca.gov 11 2024-25 BUDGET solutions next year. As long as the state is projected budget that aims to contain UC spending. If the to have large, multiyear budget deficits, we caution state budget situation were to improve in 2025-26, against raising UC’s General Fund spending levels the state would then be in the more advantageous or expectations. We recommend the Legislature position of being able to set a UC base increase take a more prudent approach to crafting its that it can afford at that time. ENROLLMENT In this section, we first provide background on State Typically Sets Resident Enrollment the state’s approach to funding enrollment growth Targets and Provides Associated Funding. at UC and cover UC enrollment trends. We then Over the past two decades, the state’s typical discuss the Governor’s enrollment proposals enrollment approach for UC has been to along with UC’s corresponding enrollment plans. set systemwide resident enrollment targets. Next, we assess those proposals and make These targets typically have applied to total resident associated recommendations. enrollment, giving UC flexibility to determine the mix of undergraduate and graduate students. Background If the total systemwide target has included growth UC Enrolls a Mix of California Resident (sometimes the state leaves the target flat), the and Nonresident Students. In 2022-23, of state typically has provided associated General the nearly 290,000 FTE students UC enrolled, Fund augmentations. Augmentations have been 81 percent were California residents and 19 percent calculated using an agreed-upon per-student were nonresidents. Compared to the other two funding rate derived from the “marginal cost” segments, UC enrolls a notably larger share of formula. This formula estimates the cost to enroll nonresident students. (About 5.5 percent of each additional student and shares the cost CSU FTE students are nonresidents and about between the state General Fund and student tuition 3.5 percent of CCC FTE students are nonresidents.) revenue. In 2023-24, the total marginal cost per Within UC, nonresident students are more common student is $21,137, with a state share of $11,640. in graduate programs. Whereas approximately Recently, State Has Made Two Modifications one-third of UC graduate students are classified to Its Enrollment Growth Approach. One as nonresidents, approximately 15 percent of modification is that the state has been setting UC undergraduates are nonresidents. enrollment growth targets only for undergraduates. UC Enrolls a Mix Freshmen and Transfer Another modification is that the state generally Students. Besides aiming to enroll a mix of has been trying to better align its targets with UC’s resident and nonresident students, UC tries to have admissions cycle. UC completes its admissions each new incoming undergraduate class have a cycle for the coming fall term before the state certain share of freshmen and transfer students. enacts the annual budget each June. Setting an Specifically, UC aims to enroll one resident transfer enrollment growth target for budget year plus one student for every two resident freshmen. In fall allows the state to influence UC’s planning for the 2023, UC fell somewhat short of its transfer goal, next admissions cycle. with 70 percent of its new resident undergraduates State Continues Nonresident Enrollment being freshmen while 30 percent were resident Reduction Plan. Another important change in transfer students. UC achieved its goal a few recent years is that the state has acted to limit the years ago, but the transfer pipeline shrank notably number of nonresident undergraduates at UC, with during the pandemic years and is just beginning the intent to make more slots available for resident to rebound. undergraduates at high-demand campuses. Specifically, the state has directed UC to reduce nonresident undergraduate enrollment at the 12 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Berkeley, Los Angeles, and San Diego campuses by to graduate enrollment. Specifically, UC set a plan to a total of 902 FTE students annually and increase increase enrollment in its state-supported graduate resident undergraduate enrollment by the same programs by a total of 2,500 students (resident and amount. The nonresident enrollment reduction nonresident students combined) over four years. plan began in 2022-23 and is intended to extend UC originally intended to add this enrollment in even through 2026-27. By 2026-27, all UC campuses are increments (625 FTE students per year) beginning to have nonresident students comprise no more than in 2023-24 and extending through 2026-27. 18 percent of their total undergraduate enrollment. Though not earmarked in the state budget act, (The 18 percent cap applies to all UC campuses, graduate enrollment growth is supported by state but only the Berkeley, Los Angeles, and San Diego funding and tuition revenue, among other sources. campuses currently are notably above that cap.) Trends Last Year’s Budget Act Included 2023-24 Enrollment Growth Expectations. Specifically, UC Enrollment Has Grown Over the Past the state set an expectation in the 2023-24 Budget Decade. As Figure 9 on the next page shows, UC enrollment has increased every year but one Act that UC grow by 7,800 resident undergraduate (2021-22) over the past decade. Total enrollment FTE students in 2023-24 over the 2021-22 level. has grown by approximately 47,000 FTE students This growth target consisted of three components. (19 percent). As total enrollment has increased, the First, the state provided $51.5 million to grow resident share of undergraduate and graduate students has undergraduate enrollment by 4,730 students. remained about the same, with about 80 percent Second, the state provided $30 million for UC to being undergraduates and 20 percent being graduate replace an additional 902 nonresident students students. Undergraduate enrollment growth has with resident students at its three highest-demand varied somewhat across UC campuses. Over the campuses. Third, the state directed UC to grow past decade, UC Santa Cruz has experienced the by an additional 2,168 resident students using least amount of growth. UC San Diego has added the part of its General Fund base augmentation. greatest number of undergraduates, and UC Merced Altogether, the state expected UC to enroll a total has grown at the fastest rate. of 203,661 resident undergraduate FTE students in 2023-24. The budget act included provisional Number of Resident Undergraduate Applicants language allowing the administration to reduce Has Been Increasing. From fall 2013 through fall funding if UC fell short of this target. In this case, 2022 (the most recent data available), the number the Director of the Department of Finance may of resident undergraduate UC applicants increased reduce UC funding at the state marginal cost rate of notably. In 2013, about 129,000 unique resident $11,640 for each student slot below the target. applicants applied to UC. (Some applicants apply to multiple UC campuses.) By 2022, UC had about Last Year’s Budget Act Also Included 168,000 unique applicants, reflecting a 30 percent Enrollment Growth Expectations for the Next increase. Growth was faster among freshman Few Years. Specifically, the 2023-24 Budget applicants (33 percent) than transfer applicants Act set an expectation that UC grow by 2,927 (19 percent). As the number of applicants has grown, resident undergraduate FTE students in 2024-25, so too has the share of California public high school 2,947 FTE students in 2025-26, and 2,968 FTE graduates applying to UC. In 1994, 13.6 percent students in 2026–27. These amounts reflect annual of California public high school graduates applied growth of 1.4 percent. The state’s intent was that to UC (generally in line with state master plan UC would fund this new growth from base General expectations that UC draw from the top 12.5 percent Fund augmentations provided in each of the of high school graduates). A decade later, this next three years. share had risen slightly (by 1.8 percentage points). UC Has Graduate Enrollment Goals for By 2014, however, the share was up to 21 percent, Next Few Years. Unlike for UC undergraduates, and, by 2022, it was up to 26 percent. (We cover the state has not been setting enrollment targets these trends in more detail in Trends in Higher for UC graduate students. The Governor and Education: Student Access.) UC, however, have compact goals relating www.lao.ca.gov 13 2024-25 BUDGET Figure 9 UC Enrollment Has Trended Upward Over the Last Decade Full-Time Equivalent Students 350,000 Undergraduate Graduate 300,000 250,000 200,000 150,000 100,000 50,000 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 Resident Freshman Admission Rates UC Enrollment Trends in 2023-24 Are Generally Have Been Declining. As the number Mixed. UC estimates that its total FTE enrollment of resident applicants have increased over the past will increase in 2023-24 by 1 percent. Growth decade, all but two UC campuses (Riverside and in resident undergraduate enrollment accounts Merced) have lowered their freshman admission for all of the expected growth. UC estimates rates. For example, UC Berkeley admitted that its resident undergraduate enrollment will 18 percent of applicants in 2012, compared to increase 5,167 students (2.6 percent) above the 14 percent in 2022. The trend is different for 2022-23 level. New resident freshman enrollment transfer students, with only four of the nine general is expected to increase by 5.2 percent, while campuses lowering their transfer admission rates. enrollment from new resident transfer students is UC Berkeley, for example, increased its admission expected to increase by 0.2 percent compared rate for transfer students, from 22 percent in 2012 to fall 2022. An expected drop in nonresident to 25 percent in 2022. undergraduate enrollment will offset some of this Enrollment of California Public High School growth. UC also estimates its graduate enrollment Graduates Has Not Changed Much. Though will be down by 1,570 FTE students (3 percent) from student demand for UC has increased markedly 2022-23. UC indicates that campuses were more and freshman admission rates have also generally conservative enrolling new doctoral students in increased, access to UC among California public 2023-24 due to funding concerns. high school graduates has not changed much Governor’s Proposals over the past nearly 30 years. As Figure 10 shows, the share of California public high school Governor Maintains Resident Undergraduate graduates who enroll at a UC campus has Enrollment Growth Expectations Set in Compact. Consistent with his compact with UC, the Governor changed only slightly—from 7 percent in 1994 to expects UC to increase resident undergraduate 8 percent in 2022. enrollment by 1 percent annually through 2026-27. The administration retains provisional budget language allowing the Director of the Department of Finance to reduce UC funding if a target is not met. 14 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Figure 10 Access to UC for Public High School Graduates Has Not Changed Much Over Time Share of California Public High School Graduates Applying, Admitted, and Enrolling at UC 30% 25 20 Applicants 15 Admits 10 Enrollees 5 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Specifically, for each student below the 2024-25 UC’s Plans target, UC funding could be reduced at the state UC Expects to Get Close to Its Undergraduate marginal cost rate of $11,930. Under the compact, Enrollment Target in 2023-24. Based on data from UC is expected to accommodate enrollment growth the summer and fall 2023 terms, UC estimates that from within its 5 percent annual base General its resident undergraduate enrollment is 1,383 FTE Fund increases. The Governor’s budget makes no students below the 2023-24 Budget Act target for changes to these enrollment expectations, although 2023-24. UC indicates that it likely will get closer to it delays the planned base General Fund increase its target for 2023-24 over the coming months. UC until 2025-26. (We discuss this delay in the “Core will finalize its 2023-24 enrollment counts later this Operations” section of this brief.) year after it has better data on student unit-taking. Governor Also Maintains Nonresident UC Plans to Meet Its Out-Year Enrollment Enrollment Reduction Expectations. Targets. Despite being somewhat below its The Governor’s budget also maintains the 2023-24 enrollment target, UC believes that it can expectation that UC continue to reduce nonresident meet the enrollment targets set for it in each of enrollment by a total of 902 FTE students at the the next few years. The exact amount UC would Berkeley, Los Angeles, and San Diego campuses need to grow in those years to reach its targets will in 2024-25, replacing those students with resident depend on its final 2023-24 enrollment level, but the undergraduates. As with the base funding deferral, annual growth is likely to be about 3,000 resident the Governor proposes to defer $31 million ongoing undergraduate FTE students. Though UC plans to General Fund that otherwise would have been remain on track to meet these enrollment targets, provided in 2024-25 to continue implementing its plans could change if the state does not provide the nonresident enrollment reduction plan. UC with annual base General Fund augmentations. The $31 million is intended to backfill UC for the UC Expects to Meet Its Nonresident associated loss of nonresident supplemental tuition Enrollment Reduction Goals in 2023-24. revenue. Under the Governor’s approach, UC would Compared to the fall 2022 term, nonresident use other means to implement the plan as it awaits undergraduate enrollment in the fall 2023 term state funds next year. www.lao.ca.gov 15 2024-25 BUDGET declined at the Berkeley, Los Angeles, and their enrollment targets. Additionally, UC’s San Diego campuses by an estimated 1,138 FTE first-to-second-year retention rate declined for students. This exceeds the state reduction target three consecutive years (from 2019 through 2021)— of 902 FTE students. Each of the three campuses dropping by 0.9 percentage points. UC attributes made progress toward lowering its nonresident this decline to challenges students encountered enrollment and increasing its resident enrollment. during the COVID-19 pandemic. Even a small UC San Diego made the most progress, accounting decline in retention rates makes meeting enrollment for 43 percent of the reduction in nonresident targets more difficult. enrollment across the three campuses. Demographic Trends Could Potentially Limit UC Expects to Continue Meeting Its Growth in Out-Years. While the number of new Nonresident Enrollment Reduction Goals. freshmen enrolling at UC has increased in four Despite the proposed deferral, UC indicates of the past five years, demographic trends could that it plans to continue implementing the limit this growth moving forward. Based on the nonresident enrollment reduction plan. Specifically, most recent projections from the Department of UC anticipates replacing a total of 1,036 FTE Finance, the number of high school graduates nonresident undergraduate students with in California is expected to peak in 2023-24. resident students at the Berkeley, Los Angeles, The number of high school graduates is projected and San Diego campuses in 2024-25. Given the to decline by 40,097 students (9 percent) from Berkeley campus needs to make the most progress 2023-24 to 2026-27. Such a decline typically would among the three campuses, its reduction target translate into smaller new freshman cohorts in the would be greater than the other two campuses. out-years. More broadly, California’s college-age Specifically, UC plans for the Berkeley campus population (ages 18-24) already has been declining to reduce nonresident enrollment by 554 FTE and is projected to continue declining. Since 2012, students, whereas the other two campuses each California’s college-age population is estimated would have reduction targets of around 250 FTE to have declined by about 10 percent. Over the students. The fiscal impact of the proposed deferral next five years, it is projected to decline by another would be experienced at these three campuses. 4 percent. This demographic trend also is expected UC could change these plans were the Governor to to relieve enrollment pressure at UC. change his deferral proposal. CSU Has Enrollment Capacity. As we discuss in The 2024-25 Budget: California Assessment State University, CSU’s existing enrollment level Undergraduate Demand for UC Remains is substantially lower than its funded target. High. Based on preliminary data, UC estimates the We estimate CSU could enroll an additional number of unique resident applicants in fall 2024 approximately 24,000 FTE students from within will increase over fall 2023. New unique resident its existing budget, accounting for all the state freshman applicants are expected to grow by enrollment funding CSU has been provided to date. 1.3 percent, marking another year of being the Were the state not to be able to afford enrollment highest number of such applicants in UC history. growth at UC over the next year, the impact on UC estimates the number of transfer applicants will students would be mitigated given the additional grow 9.7 percent, likely indicating some rebound in room available at CSU. the transfer pipeline. Budget Situation Has Changed From Despite High Demand, Some Signs That June 2023. When the state set its enrollment Meeting Targets Is Becoming Somewhat expectations for UC in the 2023-24 Budget Act, More Difficult. While the new freshman cohort is the state budget condition appeared notably estimated to increase for 2023-24, UC indicates better than it does today. As we noted in The that several campuses needed to go further 2024-25 Budget: Overview of the Governor’s into their waitlists later in the admissions cycle Budget, the state now faces large projected last year, which left a few campuses short of operating deficits for the next several years. 16 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Should the Legislature wish to continue funding or revenue increases elsewhere in the budget. resident undergraduate growth at UC, these Moreover, even without raising UC’s enrollment increased costs would require a like amount of target for 2024-25 or 2025-26, UC still could add other budget solutions elsewhere. some students. At its existing funded level, UC still has some room to grow (by as many as 1,383 FTE Recommendations students). Furthermore, CSU has considerable Revert Any Unearned 2023-24 Enrollment room to accommodate undergraduate enrollment Growth Funds. After the state enacts the 2024-25 growth within its existing funded level. budget, UC will finalize its enrollment counts for Reserves Are an Option for Keeping the 2023-24. If actual enrollment that year falls short Nonresident Enrollment Reduction Plan on of the state target, we recommend the state revert Track. Given student demand is so strong at the any unearned funds as part of the 2025-26 budget. Berkeley, Los Angeles, and San Diego campuses, Existing provisional budget language allows the state might want to request that UC use its this reduction to occur administratively, without system reserves for the specific purpose of keeping requiring legislative action. (Legislative action the nonresident enrollment reduction plan on track. would be needed only if the Director of Finance If UC were to continue implementing this plan chose not to exercise this authority.) Based on UC’s in 2024-25, as it now expects to do, more than 2023-24 enrollment estimates as of February 2023, 1,000 slots for resident undergraduate students $16 million in enrollment growth funding has would become available at UC’s highest-demand been unearned. campuses. Though the associated enrollment Hold UC’s Resident Undergraduate costs are ongoing, using system reserves for Enrollment Target Flat for 2024-25 and 2025-26. this specific purpose for a year or two would Consistent with our recommendation in the help relieve substantial enrollment pressures previous section of this brief to hold state funding at these campuses. While using reserves for for UC flat, we recommend holding UC’s enrollment ongoing enrollment costs is not sustainable over target at the current level of 203,661 resident FTE many years, the approach might be considered students for 2024-25 and 2025-26. While student on a temporary basis given the nonresident demand to attend UC generally is strong, the state enrollment reduction plan has been such a high budget at this time cannot afford to fund enrollment legislative priority. growth at UC unless it can find spending reductions BUDGET SOLUTIONS In this section, we first discuss the Legislature’s $1.3 billion one-time General Fund to UC for about options for achieving budget savings at UC by 40 one-time initiatives. (These amounts exclude pulling back unspent one-time funding from capital projects that the state converted from prior budgets. Although the Governor does cash funding to debt financing, as we discuss at not propose any such actions for UC, pulling the end of this section.) The state adopted these back these funds likely would be less disruptive one-time appropriations in response to the large than many of the other options the state has for operating surpluses originally estimated for 2021-22 addressing its projected budget deficits. We then and 2022-23. Designating funds for one-time provide an update on various UC capital projects purposes when the state has a surplus can be a that the state recently approved and make a few prudent approach, as it avoids building up ongoing associated recommendations. programs, particularly when revenues could be State Adopted Many One-Time Initiatives spiking and potentially contract in subsequent Over Past Three Years. From 2021-22 through years. Now that prior surpluses have been replaced 2023-24, the state appropriated a total of with projected multiyear deficits, the state could www.lao.ca.gov 17 2024-25 BUDGET revisit recent one-time initiatives to Figure 11 determine how much associated funding remains unspent. The more Some One-Time Funding From Recent funds the Legislature pulls back UC Initiatives Remains Unspent from previous one-time initiatives General Fund (In Millions) now, the less the Legislature might need to turn to ongoing Maximum Available programs for budget solutions Recent One-time Initiatives Fundsa moving forward. Campus-specific climate change initiatives $83.3 Recommend Pulling Back UC San Diego Scripps Reserve Vessel 34.8 Unspent One-Time Funding From UC Berkeley Local Public Affairs Grant Initiative 23.1 California Institutes for Science and Innovation 18.6 Prior Budgets. Based on a data UC Davis Institute for Regenerative Cures 16.1 request to UC, our preliminary UC Los Angeles Latino Policy and Politics Institute 13.7 estimate is that $325 million of the UC Riverside School of Medicine operations 13.6 $1.3 billion in one-time funding for K-14 Student Academic Preparation and Educational Partnerships 12.6 UC Los Angeles Ralph J. Bunche Centerb 14.2 UC has not yet been encumbered UC San Francisco Dyslexia Centerc 13.2 or spent by campuses as of UC-CSU Collaborative on Neurodiversity and Learning 8.8 January 1, 2024. (An additional UC Los Angeles Asian American and Pacific Islander Multimedia 7.9 $11 million has not yet been Textbook Project Animal Shelter Assistance Act 7.1 encumbered for the UC Riverside Cancer research relating to firefighters 7.0 Center for Environmental Research UC Berkeley School of Journalism Police Records Access Project 6.7 and Technology, though UC UC Institute of Transportation Studies 5.9 anticipates awarding a design-build UC Riverside Survey of Asian and Pacific Islander Americans 5.4 Equal Opportunity Practices and professional development for UC 5.0 contract in February 2024 and faculty committing the remainder of project UC Davis Equine Performance and Rehabilitation Center 5.0 funds in April 2024.) As Figure 11 UC San Diego Student Mental Health App 4.6 Plant-based and cultivated meat research 4.6 shows, most of the remaining Climate Change Research and Entrepreneurship Grants 4.0 funding is associated with UC Los Angeles Institute on Reproductive Health, Law, and Policy 3.2 campus-specific initiatives, many UC San Diego Scripps Institute Fire Camera Mapping System 3.2 of which have a research focus. K-12 Subject Matter Projects in Learning Loss Mitigation 2.5 UC Merced Center on Food Resilience 1.3 We recommend the Legislature Total $325.4 pull back all of the unencumbered a Reflects amount not spent or encumbered by campuses as of January 1, 2024. and unspent one-time funds from b Reflects total amount of unencumbered funds from 2021-22, 2022-23, and 2023-24. these initiatives, achieving a like c Reflects total amount of unencumbered funds from 2021-22 and 2022-23. amount of General Fund savings. To maximize potential savings, the $1.2 billion in one-time General Fund associated Legislature might want to take early action, as doing with a total of 11 capital projects. Instead of so would ensure that additional funds are not spent receiving cash for these projects, UC is to debt before the end of the fiscal year. financing them using university bonds. The state Last Year, State Converted Some Capital appropriated $84 million ongoing General Fund for Projects From Cash to Debt Financing. At the UC to cover the debt service associated with the height of the state’s budget surpluses, the state 11 projects altogether. approved many new capital projects and decided Recommend Pausing Projects for Which UC to fund those projects up front with General Fund Has Not Sold Bonds. Based on a data request to cash. In 2023-24, facing a moderate budget deficit, UC, three of the capital projects recently converted the state converted many of those projects from to debt financing remain in the preliminary planning cash funding to debt financing. As Figure 12 phase and have no associated debt. That is, UC shows, for UC specifically, the state reverted has not yet sold bonds for any of these projects. 18 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Figure 12 Many Debt-Financed Capital Projects at UC Remain in Early Phases (In Millions) Project Project Costa Annual Debt Service Bond Issuedb Current Phasec Student Housing Projects Riverside/Riverside City College $126.0 $8.9 Yes C Santa Cruz/Cabrillo College 111.8 8.1 No P Merced/Merced College 100.0 7.1 No P Berkeley 100.0 6.8 Yesd C San Diego—Pepper Canyon West 100.0 6.8 Yes C Santa Cruz—Kresge College 89.0 6.1 Yes C Irvine 65.0 4.4 Yes C Los Angeles 35.0 2.4 Yes W,C Subtotals ($726.8) ($50.7) Other Projects Berkeley Clean Energy Project $249.0 $16.7 Yes P,C Riverside campus expansion project 154.5 10.3 Yesd P Merced campus expansion project 94.5 6.3 No P Subtotals ($498.0) ($33.3) Totals $1,224.8 $84.0 a Reflects state cost of project (excluding nonstate costs). b UC issued bonds in September 2023 and February 2024. c Reflects project status as of January 1, 2024. d UC indicates that it has drawn commercial paper for these projects. P = preliminary plans; W = working drawings; and C = construction. The projects are estimated to cost a total of construction is to begin in summer 2024 and be $306 million. The state budgeted $22 million to cover completed by fall 2026, with the building opening the associated debt service. We recommend the to students in fall 2027. We recommend pausing Legislature pause these projects and remove the this project and removing the $14.5 million ongoing $22 million ongoing General Fund from UC’s budget. General Fund for debt service from UC’s budget. Pausing these projects now not only helps the state The state could revisit the project once its budget address its projected multiyear budget deficits, it also condition improves. helps reduce cost pressures for decades to come, as Recommend Aligning Funding With Estimated it would avoid creating new facilities that would need Debt Service Costs. Whereas the state’s typical to be maintained over time. fiscal practice is to cover actual debt service costs Recommend Pausing New UC Merced Medical when they become due, the state forward-funded Education Building. In 2019-20, the state approved UC for debt service on all the projects noted above. a new medical education building at or near the UC That is, the state provided the funds before UC had Merced campus. The state authorized UC to finance issued bonds and knew its actual debt service the new building using UC bonds, with the state costs. Because UC has not yet sold bonds for all committing to cover the associated debt service. of the approved projects, it has not needed all the Based on the most recent estimates, this project associated state funding. We estimate UC has at has a state cost of $243 million (the most expensive least $50 million in unspent debt service funding in state-supported UC project to date). The Governor 2023-24. The state could achieve some one-time is proposing to provide $14.5 million beginning savings by aligning the state appropriation for in 2024-25 to cover the associated debt service. debt service with UC’s actual debt service costs. While having entered into a construction contract for The state could continue to achieve some one-time the project, UC indicates that it has neither drawn savings until UC has sold all the bonds. The amount commercial paper nor issued a revenue bond for of one-time savings would shrink over the next few the project. Under the existing project schedule, years as additional bonds are sold. www.lao.ca.gov 19 2024-25 BUDGET LAO PUBLICATIONS This report was prepared by Ian Klein 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