The 2025-26 Budget: Higher Education Overview

2025-26 BUDGET The 2025-26 Budget: Higher Education Overview GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2025 SUMMARY Higher Education Plan Reflects a Tale of Two Budgets. In 2025-26, the non-Proposition 98 side of the budget is projected to be more constrained than the Proposition 98 side. Correspondingly, the California State University (CSU) and the University of California (UC)—supported by the non-Proposition 98 side of the budget—receive ongoing base reductions totaling nearly $800 million. In contrast, the California Community Colleges (CCC)—supported by the Proposition 98 side of the budget—receive $357 million in ongoing augmentations and $395 million in new one-time funds. Though the budget plan reduces state support for the universities, CSU and UC are planning to raise their tuition charges—a significant source of nonstate funding. Accounting for all core funding, CCC funding increases by 1.9 percent, CSU funding increases by 0.7 percent, and UC funding falls by 0.3 percent in 2025-26. Several Important Factors to Consider in Understanding Impact on Universities. The reductions that the budget plan includes for CSU and UC were made pursuant to Control Section 4.05 of the 2024-25 Budget Act, which applied reductions of up to 7.95 percent to the “state operations” component of most state agencies’ budgets. Though treated the same as most other state agencies, CSU and UC are different in notable ways: (1) all of their state funding is designated as state operations (with none designated as “local assistance”), (2) they can access additional tuition revenue, and (3) the state does not authorize their employee positions (or ratify their collective bargaining agreements). Though comparisons to other state agencies can be complicated for these reasons, CSU and UC have identified the kinds of things they would do in response to the fiscal constraints they are facing. The universities are considering leaving vacant positions open, postponing some facility projects, reducing travel and other lower-priority expenses, and using reserves, among other actions. In turn, students could end up with larger classes, fewer course offerings, and impacted student support services. Given total core funding for CSU and UC is not changing much in 2025-26, these responses would be driven mostly by certain projected cost increases, including benefit costs, that the universities have identified for the coming year. Recommend Signaling More Realistic Budget Expectations. Though the budget plan contains base reductions for CSU and UC in 2025-26, it includes large General Fund increases for them in 2026-27. Given updated data on the projected deficit, the state likely will not have budget capacity to support substantial increases in General Fund support for any programs, including for CSU and UC, in 2026-27. We think signaling this expectation is more realistic for the universities and avoids having the state create new fiscal obligations it cannot currently afford. Recommend Aligning State Funding With Enrollment Expectations. All three segments have exceeded their systemwide enrollment targets in 2024-25, and the universities are on track to meet their 2025-26 targets. Both CSU and UC, however, have expressed concern about continuing to grow enrollment in the absence of additional state funding, as doing so can negatively affect their programmatic quality. Consistent with historic practice, we recommend the Legislature keep funding connected with students. If General Fund resources are available, more enrollment could be supported, otherwise enrollment targets could be held flat. Given Proposition 98 funding is growing, the Legislature could consider funding more CCC enrollment growth than the Governor’s budget does. www.lao.ca.gov 1 2025-26 BUDGET INTRODUCTION Brief Focuses on Higher Education and the California Student Aid Commission Budget. In this brief, we first provide an overview (CSAC). Over the coming weeks, our office plans of the Governor’s proposed 2025-26 budget to release additional budget briefs that delve more plan for higher education. We then assess that deeply into the Governor’s proposals for each of plan. We conclude by offering a few budget these segments. Beyond these budget briefs, our recommendations. In the brief, we focus on the EdBudget website contains many budget tables major budget components for CCC, CSU, UC, showing the Governor’s education proposals. OVERVIEW In this section, we summarize the funding and are consistent with a multiyear budget agreement spending levels proposed for higher education reached last year. (As we cover in The 2025-26 under the Governor’s budget. Budget: Overview of the Governor’s Budget, the state agreed last year to $12 billion in total 2025-26 Funding spending reductions.) Governor’s Budget Reflects Reduced Local Property Tax Revenue for Community General Fund Support for Higher Education. Colleges Continues to Trend Upward. Beyond As Figure 1 shows, the Governor’s budget for state General Fund support, the three segments 2025-26 includes a total of $22.4 billion in ongoing receive substantial core funding from other General Fund support for the three segments and sources. For CCC, the largest nonstate fund source CSAC. The proposed 2025-26 funding level is is local property tax revenue. CCC local property $360 million (1.6 percent) lower than the revised tax revenue that counts toward the Proposition 98 2024-25 level. General Fund support declines for minimum guarantee is projected to increase UC and CSU, while increasing slightly for CCC $233 million (5.4 percent) in 2025-26. This local and remaining about flat for CSAC. The higher property tax growth rate is higher than its historical education reductions in the Governor’s budget growth rate over the past 20 years (4.7 percent). Student Tuition Revenue at UC and CSU Increases. For CSU Figure 1 and UC, the largest nonstate core Total General Fund Support for Higher Education fund source is student tuition Declines Somewhat in 2025-26 revenue. CSU and UC now have Ongoing General Fund (Dollars in Millions) tuition policies in place that generally raise tuition charges Change From 2024-25 2023-24 2024-25 2025-26 moderately each year (discussed Revised Revised Proposed Amount Percent in more detail below). UC began CCC $7,955 $9,689 $9,722 $33 0.3% raising its tuition charges in CSU 5,391 5,526 5,403 -122 -2.2 2022-23, with CSU following in UC 4,717 4,858 4,587 -272 -5.6 2024-25. Prior to having these CSAC 2,468 2,729 2,730 1 — Totals $20,532 $22,802 $22,442 -$360 -1.6% policies, CSU and UC had held Note: Amounts reflect Governor’s new proposals, as well as reductions applied pursuant to Control their resident undergraduate and Section 4.05 and Control Section 4.12 of the 2024-25 Budget Act. The CCC amounts consist of graduate tuition charges flat for Proposition 98 General Fund and non-Proposition 98 General Fund. In 2023-24, CCC received $788 million in Proposition 98 Reserve funds on top of the amount shown. All other amounts are an extended period, with these non-Proposition 98 General Fund. charges raised once only since CSAC = California Student Aid Commission. 2011-12. (In 2017-18, CSU and 2 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET UC raised resident tuition charges by 5 percent The planned increase for nonresident students and 2.7 percent, respectively. In a few other years, is higher than the inflation-based rate generally UC also assessed small increases to its Student aimed for under UC’s tuition policy. UC estimates Services Fee.) Beyond tuition increases, tuition increases in its tuition charges will generate revenue also grows as enrollment increases. $225 million in additional tuition revenue in Total tuition revenue (accounting for increases in 2025-26. UC’s tuition level has long been higher tuition charges and enrollment) is estimated to rise than comparable public institutions nationally. In $188 million (5.4 percent) at CSU and $241 million 2023-24, UC’s resident undergraduate tuition and (4.4 percent) at UC in 2025-26. Both CSU and fees were approximately $2,300 (18 percent) higher UC have policies that set aside a portion of new than the national average of public institutions tuition revenue for student financial aid. Of the classified as having very high research activity. new tuition revenue the segments expect to Governor Proposes No Tuition Increase at generate in 2025-26, CSU is planning to set aside CCC. The Governor proposes no increase in the $63 million (one-third) and UC is planning to set community college enrollment fee—retaining the aside $98 million (about 40 percent) for student existing per unit enrollment fee of $46. The annual financial aid. enrollment fee for a student enrolled full time Governor Assumes CSU Continues to (30 units) would remain at $1,380. The CCC Implement Its Tuition Policy. Under CSU’s tuition enrollment fee was last raised in summer 2012, at policy, the tuition charge is set to increase 6 percent which time the state increased the per-unit fee from annually for all students (both undergraduate $36 to $46. Community college fees in California and graduate students), beginning in 2024-25 remain the lowest of any state and significantly and extending through 2028-29. In 2025-26, the below the national average. In 2023-24, community annual tuition charge for a full-time student is set college tuition and fees averaged approximately at $6,450 for resident undergraduates, reflecting $5,300 nationally—about four times the CCC an increase of $366 over the 2024-25 rate. CSU tuition level. estimates increases in its tuition charges will Nonstate Funds Help Mitigate State generate $164 million in additional tuition revenue Reductions. Figure 2 on the next page shows in 2025-26. CSU’s tuition level has long been lower the changes in core funding by source for each than comparable public institutions nationally. segment. Core funding at CCC increases nearly In 2023-24, CSU’s resident undergraduate tuition 2 percent. At CSU, increases in student tuition and fees were approximately $2,171 (22 percent) revenue more than offset reductions in state lower than the national average of comparable funding, whereas increases in student tuition public institutions. revenue fall slightly short of offsetting reductions Governor Also Assumes UC Continues to in state funding at UC. Implement Its Tuition Policy. UC’s tuition policy Administration Expects All Segments to generally pegs increases in annual tuition charges Increase Resident Undergraduate Enrollment. to inflation. Incoming undergraduate students Figure 3 on the next page shows how core funding and all academic graduate students are subject is changing on a per-student basis. As the top part to the tuition increases, with tuition charges for of Figure 3 shows, the administration expects each continuing undergraduate students held flat (for of the three segments to increase their enrollment up to six academic years). In 2025-26, systemwide in 2025-26. The administration proposes tuition and fees is set at $14,934 for new resident 0.5 percent systemwide enrollment growth undergraduate students, reflecting an increase of at community colleges. For CSU and UC, the $498 (3.4 percent) from 2024-25. UC also is raising administration maintains the expectations set forth nonresident supplemental tuition in 2025-26. The in the 2024-25 Budget Act. The 2024-25 Budget supplemental rate for nonresident undergraduates Act specified that CSU was to grow resident (which is in addition to the base rate for resident undergraduates by approximately 6,300 full-time students) is set at $37,602. The supplemental equivalent (FTE) students in 2024-25 and rate rises by $3,402 (10 percent) from 2024-25. about 10,200 FTE students in 2025-26. www.lao.ca.gov 3 2025-26 BUDGET Figure 2 Increases in Other Core Funds Help Mitigate General Fund Reductions Ongoing Core Funds (Dollars in Millions) Change From 2024-25 2023-24 2024-25 2025-26 Revised Revised Proposed Amount Percent CCC General Funda $7,410 $9,048 $9,041 -$6 -0.1% Local property taxa 4,070 4,304 4,538 233 5.4 Additional General Fundb 545 641 681 39 6.1 Additional local property taxb 454 481 509 27 5.7 Student fees 482 482 484 2 0.3 Lottery 364 316 316 — — Subtotals ($13,324) ($15,273) ($15,569) ($295) (1.9%) Proposition 98 Reserve $788 — — — — Totals $14,111 $15,273 $15,569 $295 1.9% CSU General Fundd $5,391 $5,526 $5,403 -$122 -2.2% Student tuition and fees 3,267 3,477 3,665 188 5.4 Lottery 83 76 76 —c 0.3 Totals $8,741 $9,078 $9,144 $66 0.7% UC General Fund $4,717 $4,858 $4,587 -$272 -5.6% Student tuition and fees 5,268 5,498 5,740 241 4.4 Lottery 65 59 59 — — Othere 409 401 401 — — Totals $10,460 $10,817 $10,787 -$30 -0.3% a Funds that count toward the Proposition 98 minimum guarantee. Excludes Proposition 98 Reserve funds. b “Additional General Fund” refers to non-Proposition 98 funds for CCC state operations, certain pension costs, and debt service. “Additional local property tax” refers to “excess” revenue for basic aid districts that does not count toward the Proposition 98 minimum guarantee. c Less than $500,000. d Includes funding for pensions and retiree health benefits. e Includes a portion of overhead funding on federal and state grants and a portion of patent royalty income. Figure 3 Core Funds Per Student Increase at CCC, While Falling at CSU and UC Change From 2024-25 2023-24 2024-25 2025-26 Actual Revised Proposed Amount Percent Enrollmenta CCC 1,031,323 1,036,480 1,041,662 5,182 0.5% CSU 391,268 401,300 407,936 6,636 1.7 UC 293,483 299,486 300,111 625 0.2 Totals 1,716,074 1,737,266 1,749,709 12,443 0.7% Per-Student Fundingb CCC $11,895 $12,882 $13,036 $154 1.2% CSU 22,339 22,622 22,416 -206 -0.9 UC 35,638 36,119 35,942 -177 -0.5 a Reflects full-time equivalent (FTE) students. For CCC, reflects estimated actual enrollment in 2023-24, adjusted for budgeted enrollment growth in 2024-25 and 2025-26. CCC numbers include resident students only. For CSU and UC, reflects actual/planned enrollment and includes both resident and nonresident enrollment. b Reflects ongoing core funds per FTE student. The CCC amounts reflect Proposition 98 funding (including reserve withdrawals in 2023-24). 4 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET The 2024-25 Budget Act specified that UC was to (down from $396.6 million) whereas the UC grow resident undergraduates by approximately amount is $20 million larger (up from $377 million). 3,000 FTE students each year from 2024-25 These changes are due to certain methodological through 2026-27. As of January 2025, both modifications the administration made to its segments report exceeding their growth targets calculations. Also consistent with the June 2024 in 2024-25, leaving less growth needed to meet budget plan, one-time base reductions made to their 2025-26 targets. (The annual targets for UC CSU ($75 million) and UC ($125 million) in 2024-25 include the expected replacement of 902 FTE are restored in 2025-26. Characterized differently, nonresident students with resident undergraduates each segment was subject to a base reduction in across three high-demand campuses. UC reports 2024-25 that gets larger in 2025-26, with CSU’s exceeding this expectation too in 2024-25.) reduction $300 million larger and UC’s reduction Core Funds Per Student Up at CCC, Down $272 million larger year over year. These reductions at Universities. As the bottom part of Figure 3 are pursuant to Control Section 4.05 of the shows, core funding per student would range from 2024-25 Budget Act. This budget control section, just over $13,000 at CCC to nearly $36,000 at which applied broadly across state government, UC in 2025-26. Core funding per student would authorizes reductions of up to 7.95 percent in rise in 2025-26 for CCC, while falling at CSU and state operations. UC. None of the changes, however, are large in Budget Plan Contains Deferred percentage terms. Per-student funding at CCC Augmentations for Universities. Also consistent increases by 1.2 percent, whereas per-student with the June 2024 budget plan, ongoing General funding at CSU and UC declines by less than Fund augmentations of about 5 percent for CSU 1 percent. and UC are deferred from 2025-26 until 2027-28. Plan Contains Deposits Into Proposition 98 Specifically, the plan defers augmentations of Reserve. The budget plan the state adopted $252 million for CSU and $241 million for UC. last year drew down all existing funding in the (As part of the Governor’s five-year compacts, Proposition 98 Reserve ($8.4 billion) to cover the Governor indicated intent to provide CSU and certain 2023-24 Proposition 98 costs. Of this UC with 5 percent annual base increases from amount, $788 million was designated for CCC costs 2022-23 through 2026-27 as a way to offer them ($546 million for 2023-24 apportionment costs and more predictable funding levels.) At UC, the budget $242 million for various CCC costs shifted from also defers $31 million in additional funding for 2022-23 to 2023-24). Under the Governor’s 2025-26 the nonresident replacement plan. For the past budget plan, the state would make deposits into the three years, the state has been providing UC with Proposition 98 Reserve in 2024-25 and 2025-26, funding to replace nonresident students at three ending 2025-26 with a Proposition 98 Reserve of high-demand campuses (Berkeley, Los Angeles, $1.5 billion. The state would decide how much of and San Diego) with resident undergraduate these reserves to designate for community college students. The fourth year of this funding, as purposes when it makes future reserve withdrawals. with UC’s base increase, is deferred two years (from 2025-26 until 2027-28). Under the deferral Spending arrangement, one-time back payments would be Governor’s Budget Reflects Reduced provided to CSU and UC in 2026-27 (for 2025-26 General Fund Support for Universities in costs) and 2027-28 (for 2026-27 costs). 2025-26. Consistent with the budget plan set Governor Retains Compact Expectations. forth in June 2024, ongoing base General Fund In exchange for receiving more predictable funding reductions are applied to CSU ($375 million) and levels, the Governor wanted CSU and UC to meet UC ($397 million) in 2025-26. CSU and UC would certain expectations. The compacts, for example, have flexibility in determining how to accommodate include expectations that CSU and UC increase these reductions. Compared to the June 2024 resident enrollment (including in high-demand estimates, the CSU amount is $21.4 million smaller areas), close equity gaps, and improve www.lao.ca.gov 5 2025-26 BUDGET workforce preparation. Although the budget plan Governor’s Budget Includes a Smattering does not include a base General Fund increase of Other Discretionary Proposals. Outside for CSU and UC in 2025-26, the administration of the community colleges, the Governor’s continues to expect the segments to meet compact budget includes four new discretionary spending goals. (The compacts remain uncodified, and proposals. The budget includes $50 million no statutory repercussions are set forth if the one-time General Fund to extend the Golden segments do not meet one or more compact goals.) State Teacher Grant program (which CSAC Budget Plan Reflects Reduction in Middle administers) by one year. Created as a temporary Class Scholarship (MCS) Funding. Consistent initiative in 2021-22, this program provides grants with last year’s budget agreement, the MCS to students in teacher education programs who program receives $527 million ongoing General agree upon graduation to work in certain subject Fund in 2025-26, down from a revised 2024-25 level areas or types of schools for a minimum-required of $925 million. The funding level in 2025-26 reflects amount of time. The budget includes $20 million the expiration of $289 million in one-time General one-time General Fund to provide general fiscal Fund, along with a $109 million reduction in ongoing support for the California College of the Arts (a General Fund. CSAC estimates MCS awards private, nonprofit school). The budget includes a accordingly would change from covering about $5 million ongoing General Fund augmentation for 30 percent of students’ remaining financial need in College Corps, raising total General Fund for that 2024-25 to 18 percent in 2025-26. Most New Higher Education Figure 4 Spending Is for Community Budget Plan Includes Higher Education Colleges. Figure 4 shows the Augmentations Governor’s proposed higher education augmentations, General Fund Changes, 2025-26a (In Millions) excluding certain caseload-related and technical changes. As the Ongoing Increases CCC apportionments (2.43 percent COLA) $230 figure shows, the Governor CCC enrollment growth (0.5 percent) 30 proposes $828 million in new CCC categorical programs (2.43 percent COLA) 30 higher education spending CCC Rising Scholars Network 30 ($358 million ongoing, $470 million CCC Systemwide Common Technology Platform, Phase 1 29 CCC credit for prior learning 7 one time). The bulk of proposed CSU Capital Fellows programs 1 new spending is for community Subtotal ($358) colleges. The Governor’s budget One-Time Increases covers a 2.43 percent cost-of-living CCC Systemwide Common Technology Platform, Phase 2 $168 adjustment (COLA) for CCC CCC Systemwide Common Technology Platform, Phase 1 134 CCC career passports 50 apportionments and several CCC credit for prior learning 43 CCC categorical programs. Golden State Teacher Grants 50 The Governor’s budget funds California College of the Arts 20 0.5 percent systemwide enrollment College Corps augmentationb 5 Subtotal ($470) growth at CCC, supporting Total Changes $828 about 5,400 additional students. a Besides 2025-26, some CCC spending is attributed to 2023-24 and 2024-25. The Governor’s budget also b In 2025-26, total General Fund for the program would be $68 million, rising to $84 million in provides new funding for various 2026-27. other CCC purposes, including Note: The table excludes $60 million Proposition 98 Strong Workforce Program funds for a CCC nursing initiative (marking the second year of a five-year initiative totaling $300 million). It excludes initiatives related to information $1.3 million one-time General Fund for the UC Nutrition Policy Institute (marking the fourth of a four-year initiative totaling $7.4 million). It excludes $10 million Proposition 98 funds for LGBTQ+ technology and career education. centers (marking the third year of a three-year initiative totaling $30 million). It also excludes various adjustments to CCC and California Student Aid Commission state operations. COLA = cost-of-living adjustment. 6 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET program to $68 million (with intent to raise further other cost increases. Notably, the Governor’s to $84 million in 2026-27). California Volunteers budget covers projected cost increases for (within the Governor’s Office of Service and the Cal Grant program—providing $14 million Community Engagement) administers this program. in additional funding in 2024-25 and a further Established in 2021-22, College Corps provides $109 million in 2025-26 (reflecting a 4.5 percent paid service opportunities to undergraduates at increase over the revised 2024-25 level). CCC, CSU, UC, and private universities. Lastly, the The projected Cal Grant cost increases include Governor’s budget includes a $1.3 million ongoing $48 million to cover the higher tuition costs at General Fund augmentation for the Capital Fellows UC and CSU in 2025-26, as Cal Grants generally programs, which CSU’s Center for California cover tuition costs for students with financial Studies administers. The Governor proposes to need. The administration typically revises the increase the monthly salary for Capital Fellows from Cal Grant cost estimates again in the May Revision, $3,253 to $4,888, reflecting a $1,635 (50 percent) upon receiving updated caseload data in the increase in 2025-26. spring. The Governor’s budget also contains Governor’s Budget Covers Certain Cost ongoing General Fund adjustments to CSU’s Increases, Mostly in the Financial Aid Area. base budget in 2025-26 to reflect projected cost Beyond these new spending proposals, the increases for pensions ($136 million) and retiree Governor’s budget funds certain caseload and health ($41 million). ASSESSMENT In this section, we assess the higher education budget plan and discuss the potential effects on the segments. Figure 5 Budget Plan A Tale of Two Budgets Budget Plan Reflects Stark Net General Fund Changesª (In Millions) Differences in Funding Among the Segments. The higher education budget consists of two contrasting New One-Time CCC Spending stories. As Figure 5 shows, Proposition 98 General Fund spending for the community colleges increases. New Ongoing CCC Spending Associated ongoing and one-time spending each increase by nearly $400 million. In contrast, spending for One-Time Reductions for the rest of higher education (UC, CSU, Rest of Higher Educationb and CSAC) shrinks. Non-Proposition 98 General Fund support declines by a Ongoing Reductions for net of almost $800 million in ongoing Rest of Higher Education funding and about $200 million in one-time funding that had been -$1,000 -800 -600 -400 -200 200 400 $600 used for ongoing purposes. These a CCC spending comes from Proposition 98 General Fund. Spending for the rest of higher education comes from funding differences stem from certain non-Proposition 98 General Fund. b Reflects one-time funds being used for ongoing purposes. budgetary constraints. Most notably, Proposition 98 guarantees a minimum level of funding for community colleges www.lao.ca.gov 7 2025-26 BUDGET (and school districts). That guarantee does not impacts of these control sections, a fourth notable apply to the rest of higher education, which is difference is that the Legislature does not ratify impacted more directly by the state General Fund CSU and UC collective bargaining agreements.) condition. The combined effect is that the funding University Deferrals Are Poor Fiscal Practice. levels among the higher education segments do not The deferral plans contain large increases in necessarily reflect all of the factors the Legislature General Fund support for CSU and UC in 2026-27, may want to consider when budgeting. Ideally, as Figure 6 shows. Given updated projected the Legislature may want to account for factors deficits from our office and the administration, the such as the number of high school graduates, most likely scenario is that the state would not the labor market, college-going rates, the quality have budget capacity to provide General Fund of the segments’ academic programs, and base increases to CSU and UC in 2026-27 (absent employee trends. a significant positive change in the state’s fiscal Budget Plan Does Not Account for Key outlook). Given CSU and UC would have little Differences Between Universities and Other certainty of receiving payment in 2026-27, they State Agencies. Though CSU and UC were likely would be reticent to support new ongoing included in the Control Section 4.05 reductions, spending in 2025-26. Such an approach therefore they differ in some notable ways from other leaves the Legislature lacking clarity regarding state agencies. One difference is that the state how much CSU and UC would spend in 2025-26, designates all CSU and UC appropriations as and, in turn, exactly which spending priorities they “state operations,” with none designated as would cover. “local assistance.” This means all university Universities Are Not Experiencing More spending at both the system and campus levels Predictable State Funding Levels. Despite the are designated as state operations. Applying a flat Governor’s compacts and desire to provide CSU percentage reduction to state operations funding and UC with predictable annual funding increases, for the universities therefore results in a much more ongoing General Fund support for the universities sizeable cut—one that is likely to have a direct has not followed such a trajectory. As Figure 7 impact on campuses. In contrast, the state is not on page 10 shows, state funding for universities applying Control Section 4.05 reductions to other over the last several years has been volatile. From agencies’ local assistance programs. From this 2019-20 through 2024-25, ongoing General Fund perspective, the universities are more adversely support for UC and CSU has seen annual increases impacted by Control Section 4.05. Another notable as high as 16 percent and annual declines as deep difference, however, is both CSU and UC generate as 8 percent. Looking at the budget plan for the substantial nonstate revenue through student universities over the next three years, state support tuition. After accounting for anticipated growth in would remain volatile, with annual ongoing General tuition revenue, CSU’s and UC’s total core funding Fund increases as high as 12 percent (if state is not changing much, even with the cuts to their funding permitted) and annual declines as deep as state funding. Many other state agencies lack the 5.6 percent (or potentially deeper depending on the ability to generate much, if any, nonstate revenue. state’s budget condition). A third notable difference is that the state does In Line With Longstanding Legislative Priority, not directly authorize each employee position at Cal Grant Funding Is Maintained. As part of CSU and UC, as is typically the case with state the June 2024 budget agreement, the Legislature agencies. Instead, the CSU Board of Trustees and effectively decided to reduce programs elsewhere UC Board of Regents have that authority. This is so that it could maintain funding for the state’s why CSU and UC were excluded from the vacant longest-standing student financial aid program, the positions sweep imposed by Control Section 4.12 Cal Grant program. This program targets financial of the 2024-25 Budget Act. Other state agencies aid to students from low- and middle-income had to accommodate the effects of both Control families. It is notably more targeted than the Sections 4.05 and 4.12. (Though unrelated to the MCS program. Whereas the Cal Grant program 8 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET Figure 6 Deferral Plans Contain Steep General Fund Increases for CSU and UC in 2026-27 Reflects Multiyear Assumptions of Deferral Plans, General Fund (Dollars in Millions) 2025-26 2026-27 2027-28 Year 4a Year 5a CSU Ongoing Changes Base reduction -$375 — — Two-year deferral of year 4 base increaseb — — $252 Anticipated year 5 base increase — $265 — One-Time Back Payments Base costs — $252 $252 One-Time Adjustmentsc $75 — -$252 Totals $5,403 $5,921 $6,173 Change from previous year -2.2% 9.6% 4.3% UC Ongoing Changes Base reduction -$397 — — Deferral of year 4 base increaseb — — $241 Deferral of year 4 nonresident replacement fundingb — — 31 Anticipated year 5 base increase — $254 — Anticipated year 5 nonresident replacement funding — 30 — One-Time Back Payments Base costs — $241 $241 Nonresident relacement costs — 31 31 One-Time Adjustmentsc $125 — -$272 Totals $4,587 $5,142 $5,413 Change from previous year -5.6% 12.1% 5.3% a In 2025-26, the Governor will be entering year 4 of his compact with the CSU Chancellor and UC President. The fifth and final year of this compact is 2026-27. A new governor will take office in 2027-28. b Under the deferral plans, the year 4 base increases and UC nonresident replacement funding are deferred from 2025-26 to 2027-28. In 2026-27, one-time back payments are provided for 2025-26 costs. In 2027-28, one-time back payments are provided for 2026-27 costs, while at the same time the deferred base increase is funded. c In 2025-26, reflects the restoration of one-time reductions applied in 2024-25. In 2027-28, reflects removal of prior-year, one-time back payments. for low-income students has an income cap of The Governor’s College Corps, Golden State $69,000 (for a family of four in 2024-25), and the Teacher Grants, and College of the Arts proposals Cal Grant program for middle-income students total $75 million one-time General Fund in 2025-26, has an income cap of $131,200 (for a family of with ongoing costs for College Corps growing to four), the MCS program benefits families with $84 million in 2026-27. We are still in the midst of annual income as high as $226,000. As a narrower evaluating these proposals, but each raises notable needs-based program, the Cal Grant program is concerns and trade-offs for the Legislature to designed to help those students most at risk of not consider, particularly as all of this new spending being able to enroll in and complete college due to effectively is coming at the expense of other financial issues. budget priorities. Non-Proposition 98 Augmentations Effects on Segments Come at the Expense of Other Priorities. Though preserving Cal Grant funding was an Regular Cost Pressures Are Adding to element of the two-year budget agreement, the Segments’ Fiscal Challenges. CSU’s and UC’s fiscal issues are being made more challenging Governor is proposing a few higher education because they, like community colleges, continue non-Proposition 98 General Fund augmentations to face all of their typical cost pressures. this year that were not part of that agreement. www.lao.ca.gov 9 2025-26 BUDGET University Reductions Will Figure 7 Have Some Campus Impact. Though the universities indicate State Funding for Universities they are still considering how Has Been and Would Remain Unstable they would respond to funding Annual Percent Change in Ongoing General Fund Supportª deferrals, they have identified the kinds of actions campuses could 20% take in response to reductions in their state funding. As the 2024-25 15 Budget Act already included small UC 10 base reductions and indicated CSU intent for deeper base reductions in 5 2025-26, the systems already have begun planning and responding. Actions include leaving vacant 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 positions open (hiring freezes), -5 consolidating services, postponing -10 some facility projects, reducing travel and other lower-priority a Data for 2019-20 through 2024-25 reflect actuals. Data for 2025-26 through 2027-28 reflect the types of expenses, using reserves, administration's budget plans. and generating more revenue through self-support programs. The largest component of all three segments’ Campuses generally would have budgets is compensation. All three segments will some discretion in making these choices. Some continue to face pressure to increase employee of these actions could affect students—leaving salaries. All three segments also are projecting them potentially with larger classes, fewer course higher pension and health care costs in 2025-26. offerings, and student support services that could (The state, however, directly pays a small share take longer to access. In turn, some students of community college pension costs, a large could take longer to graduate. Importantly, given share of CSU pension costs, and all of CSU projected total core funding is not changing much retiree health care costs.) Beyond compensation, at either segment between 2024-25 and 2025-26, smaller elements of the segments’ budgets also these types of programmatic reductions would are expected to increase. For example, insurance emanate mostly from the projected cost increases costs, utilities, and equipment costs are expected (including salary and benefit costs) that the to rise. The community colleges would be able to universities have identified. manage these typical cost increases more easily Meeting Enrollment Expectations Entails than the universities given they receive a COLA Trade-Offs. Both university systems anticipate under the Governor’s budget. In contrast, CSU and exceeding the state’s enrollment expectations in UC would need to make room for any such costs 2024-25 and are on track to meet the 2025-26 by adjusting other parts of their budgets. Such expectations. Growing enrollment while not adjustments could be particularly challenging for receiving associated state augmentations, however, CSU, as it already directed campuses in 2024-25 would deepen the programmatic ramifications to accommodate certain compensation cost noted earlier. Historically, the state has provided increases using existing funds, thereby requiring “marginal cost funding” for the additional students further savings to be found elsewhere within it directs CSU and UC to enroll. In 2025-26, the campus budgets. state marginal cost funding rate for CSU is $10,983 and for UC is $12,885. This funding is intended to 10 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET allow CSU and UC to hire the additional staff and $155 million is reserved for economic uncertainties. cover the additional operating costs that come with This amount equates to six days of operations educating additional students. If UC and CSU were (or 1.6 percent of total annual core operating to continue growing without additional funding, expenditures). CSU’s reserve levels are lower than they effectively would be covering the associated CSU’s reserve policy, which stipulates that reserves costs by making further programmatic adjustments, cover between three and six months of operating such as even larger class sizes. (In 2023-24, the expenses. UC does not have a systemwide policy student-faculty ratio was 19.9 at CSU and 21.9 requiring campuses to hold a minimum level of at UC.) Both university systems have expressed reserves for economic uncertainties, but all UC concern about continuing to grow enrollment in the campuses are below their own uncommitted absence of additional state funding. reserve targets, which typically range from one CSU’s and UC’s Uncommitted Reserves to three months of operating expenses. Both Are Not High as Share of Operating Expenses. systems’ reserves also are lower than general Though reserves are one way to respond to fiscal best practices. The Government Finance temporary fiscal downturns, neither segment is Officers Association historically has recommended carrying high levels of uncommitted reserves. that government agencies hold at least two As of June 30, 2024, CSU reported $2.4 billion in months of unrestricted budgetary fund balances total core reserves. Of that amount, $777 million is (though exceptions are considered depending on reserved for economic uncertainties, which equates certain factors such as the size of the agency, its to 34 days of operations (or 9.1 percent of total diversification of revenue streams, the volatility of annual core operating expenditures). UC reported those revenue streams, and overall risk exposure). $1.5 billion in total core reserves. Of that amount, RECOMMENDATIONS In this section, we provide a few budget setting an explicit expectation they will receive recommendations for the Legislature. substantial additional state funding in 2026-27, Recommend Signaling More Realistic Budget without any specific plan to ensure that funding is Expectations for CSU and UC in 2026-27. To forthcoming. It also avoids having the state create balance the budget in 2024-25, the state applied new fiscal obligations it cannot currently afford. If small General Fund reductions to CSU and UC. the state’s fiscal condition improves over the next At the same time, the state provided a clear signal year, the Legislature could consider providing base to CSU and UC that they were to begin planning increases for the universities at that time. for deeper base reductions in 2025-26. Such an Recommend Aligning State Funding With approach gave the university systems time to plan Enrollment Expectations. As the Legislature and make the associated difficult adjustments traditionally has done, we recommend it continue within their budgets. Given the state’s projected to link the universities’ General Fund support budget deficit in 2026-27, the state likely will not with specified enrollment targets. If no additional have budget capacity to support substantial General Fund support is provided, we recommend increases in General Fund spending for any the Legislature hold CSU’s and UC’s enrollment programs, including for CSU and UC. Rather than targets flat for one year. This would help maintain continuing with the deferral plans and committing the universities’ programmatic quality at existing to out-year funding increases, we recommend levels. If more General Fund resources materialize, sending a more realistic signal to CSU and UC the Legislature could provide state marginal cost that they might not receive any increases in their funding to support more enrollment at one or both base funding in 2026-27. We think signaling this segments. It also could continue funding UC for expectation is more helpful to the universities than replacing nonresident students at high-demand www.lao.ca.gov 11 2025-26 BUDGET campuses with resident students. Given the Fund spending, as new spending now could come non-Proposition 98 side of the budget is much more at the expense of existing programs the following constrained at this time than the Proposition 98 year. In this vein, we recommend the Legislature side of the budget, supporting CSU and UC examine the Governor’s proposals relating to enrollment growth is much more challenging Golden State Teacher Grants, College Corps, and than supporting CCC enrollment growth. Given College of the Arts especially carefully, as they Proposition 98 funding is growing, and some would be funded from the non-Proposition 98 colleges are exceeding their existing enrollment side of the budget. The Legislature also could targets, the Legislature could consider funding examine the Governor’s proposed new initiatives more CCC enrollment growth than the Governor’s relating to CCC technology and career education budget does. Funding more CCC enrollment growth carefully, potentially replacing one or more of these could have added benefit at a time when some Proposition 98 proposals with other CCC activities students effectively might be redirected to the it deems of higher budget priority. Overall, as colleges by one or more of the university systems. basic alternatives to the Governor’s proposals, the Recommend Requiring Strong Case Be Made Legislature could consider funding other activities for Any New Higher Education Spending. Given it deems of higher statewide priority or making projected out-year budget deficits, we recommend larger reserve deposits to help address future the Legislature set a high bar for any new General budget challenges. LAO PUBLICATIONS This report was prepared by Jennifer Pacella, with contributions from Natalie Gonzalez, Ian Klein, and Lisa Qing. It was reviewed by Ross Brown. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 12 LEGISLATIVE ANALYST’S OFFICE