The 2025-26 Budget: University of California

2025-26 BUDGET The 2025-26 Budget: University of California GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2025 SUMMARY Brief Covers the University of California (UC). This brief analyzes the state’s budget plan relating to UC’s core operations and enrollment. Under the 2025-26 budget plan, UC receives $10.8 billion in total core funding. Of this amount, 53 percent comes from tuition and fee revenue ($5.7 billion), 43 percent comes from state General Fund ($4.6 billion), and the remainder comes from various other sources. Under Plan, State Support for UC Declines but Tuition Revenue Increases. The budget plan includes a $272 million ongoing General Fund reduction for UC in 2025-26. This reduction is mostly offset by a projected $241 million increase in student tuition and fee revenue (due to higher tuition charges and planned enrollment growth). After accounting for these changes, total ongoing core funding for UC would decrease by $30 million (0.3 percent). Budget Plan Also Includes Funding Deferrals. The administration has a compact with UC’s President to provide UC with 5 percent annual base increases, as well as ongoing General Fund support to replace nonresident students with resident students at three high-demand campuses, from 2022-23 through 2026-27. The state budget plan, however, defers the 2025-26 base increase ($241 million) and nonresident replacement funding ($31 million) until 2027-28. As part of the deferral arrangement, the state would plan to provide UC with one-time back payments in 2026-27 and 2027-28. UC’s Spending Priorities Exceed Available Funding. UC’s 2025-26 spending plan identifies over $500 million in new expenditures (with 30 percent identified as nondiscretionary). In response to the state budget plan, UC has begun making budget adjustments, including implementing hiring freezes and reducing nonessential expenditures. Though UC does not yet know how it would respond to the deferrals, it would face more disruptive budget adjustments if it increased spending in 2025-26 and then the deferred payments were eliminated or postponed. The state has not yet indicated how it would pay for the deferral. UC Is Directed to Grow Enrollment Without Additional State Funding. The 2024-25 Budget Act directed UC to increase resident undergraduate enrollment by 2,927 full-time equivalent (FTE) students in 2024-25. UC reports that it is exceeding that expectation—growing by an estimated 6,209 resident undergraduate FTE students. The 2024-25 Budget Act also set a resident undergraduate enrollment expectation for UC in 2025-26 and 2026-27. The 2025-26 budget plan maintains these expectations. Specifically, UC is to grow by an additional 2,947 FTE students in 2025-26 and another 2,968 FTE student in 2026-27. Yet, no associated state funding is provided to support the additional enrollment. (These amounts include 902 FTE resident students resulting from replacing nonresident students at three high-demand campuses.) Four Recommendations in Response to Budget Plan. (1) Given the state’s projected budget deficits, we recommend the Legislature set a more realistic budget expectation for UC by rejecting the deferrals and their associated out-year payments. (2) We recommend revisiting the 2026-27 resident undergraduate enrollment target and (3) pausing the nonresident enrollment replacement plan in 2026-27. (4) Lastly, we recommend adopting language that maintains the resident enrollment growth achieved to date at the high-demand campuses and avoids them beginning to replace resident students with nonresidents. www.lao.ca.gov 1 2025-26 BUDGET INTRODUCTION Brief Focuses on UC. UC is one of California’s students across a range of disciplines, whereas one three public higher education segments. Under campus enrolls graduate health science students state law, UC provides undergraduate and graduate only. This brief analyzes the 2025-26 budget plan education, including doctoral programs and for UC. The first section of the brief provides an professional programs in law and medicine. It also overview of UC’s budget and the planned changes serves as the primary state-supported academic for 2025-26. The second section focuses on UC’s agency for research. The UC system consists core operations, whereas the third and final section of ten campuses. Nine of UC’s campuses enroll focuses on enrollment. OVERVIEW UC Budget Currently Is $53.6 Billion. Of the focuses its budget decisions around UC’s “core three public higher education segments, UC has funds”—the approximately 20 percent of UC’s the largest budget, with total funding greater budget that supports undergraduate and graduate than the California State University (CSU) and education and certain state-supported research California Community Colleges (CCC) combined. and outreach programs. Core funds at UC primarily As Figure 1 shows, UC receives funding from consist of student tuition and fee revenue and many different sources. The state generally state General Fund. A small portion comes from lottery funds, a share of patent royalty income, and overhead Figure 1 funds associated with federal and state research grants. Between UC Receives Funding From Many Sources 2023-24 and 2024-25, ongoing $53.6 Billion in 2024-25 core funds increased 3.4 percent. Ongoing core funds per student State Other increased by 1.3 percent. UC’s Core Funds noncore funds include revenue from its medical centers, sales and Tuition services, federal research grants, Private and Fees and philanthropic support. Ongoing Core Funding General Fund Federal Other Decreases by $30 Million (0.3 Percent) in 2025-26. As Figure 2 shows, revenue generated from tuition and fees is expected to increase by $241 million Sales and Services (4.4 percent) in 2025-26. State Medical Centers General Fund decreases by $272 million (5.6 percent), while other core funding is expected Noncore to remain flat. The increase in Funds tuition and fee revenue is a result of higher tuition charges as well as anticipated enrollment growth. 2 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET Figure 2 At UC, State Funding Reduction Is Mostly Offset by More Tuition Revenue Ongoing Core Funding (Dollars in Millions) Change from 2024-25 2023-24 2024-25 2025-26 Actual Revised Proposed Amount Percent Ongoing Core Funds Tuition and feesa $5,268 $5,498 $5,740 $241 4.4% General Fundb 4,717 4,858 4,587 -272 -5.6 Lottery 65 59 59 — — Other core fundsc 409 401 401 — — Totals $10,459 $10,817 $10,787 -$30 -0.3% FTE studentsd 293,483 299,486 300,111 625 0.2% Ongoing core funding per student $35,638 $36,119 $35,942 -$177 -0.5% a Includes funds that UC uses for tuition discounts and waivers. b Reflects reductions pursuant to Control Section 4.05 of the 2024-25 Budget Act. Specifically, the 2024-25 amounts reflects a $125 million General Fund reduction, and the 2025-26 amount reflects a $397 million General Fund reduction. c Includes a portion of overhead funding on federal and state grants and a portion of patent royalty income. d FTE is 30 credits for an undergraduate and 24 credits for a graduate student. Student counts include residents and nonresident students. FTE = full-time equivalent. Given a small expected increase in enrollment, this is offset by a restoration of $125 million, ongoing core funding per student decreases resulting a net reduction of $272 million.) 0.5 percent. This reduction is pursuant to Control Section Budget Plan Reflects Ongoing Reduction 4.05 of the 2024-25 Budget Act, which applied in State Support in 2025-26. The budget plan reductions of up to 7.95 percent to state operations includes a $272 million ongoing General Fund across state government. The administration reduction for UC. The reduction equates to a is giving UC flexibility in determining how it 5.6 percent decrease in UC’s state General Fund implements the reduction. (In the nearby box, support compared to 2024-25. (Though the we discuss the impact of Control Section 4.05 administration cites a reduction of $397 million, on UC in comparison to other state agencies.) Control Section 4.05 Impacts UC Differently Than Other State Agencies UC Differs From Other State Agencies in Significant Ways. Though the University of California (UC) was included in the Control Section 4.05 reductions, it differs from other state agencies in notable ways. One difference is that the state designates all UC appropriations as “state operations,” with none designated as “local assistance.” This means that all university spending at both the system and campus levels are designated as state operations. In contrast, the state is not applying Control Section 4.05 reductions to other agencies’ local assistance programs. Applying a flat percentage reduction to state operations funding for UC therefore results in a much more sizeable cut—one that is likely to have a direct impact on campuses. Another difference is that UC generates substantial nonstate revenue through student tuition. After accounting for anticipated growth in tuition revenue, UC’s total core funding is basically flat, even with the cuts to their state funding. A third notable difference is that the state does not directly authorize each employee position at UC, as is typically the case with other state agencies. Instead, the UC Board of Regents have that authority. This is why UC was excluded from the vacant positions sweep imposed on other state agencies by Control Section 4.12 of the 2024-25 Budget Act. www.lao.ca.gov 3 2025-26 BUDGET The budget plan also provides $1.3 million in and San Diego). Despite the deferrals, the one-time General Fund support for the Nutrition administration expects UC to continuing growing Policy Institute. This funding represents the final resident enrollment and reducing nonresident installment of a four-year funding agreement students in 2025-26, along with meeting various (totaling $7.4 million) for the institute. other compact expectations. Under the deferral Plan Includes Funding “Deferrals” for UC. plan, UC would receive the anticipated year five In May 2022, the administration announced a base increase and nonresident replacement compact with UC to provide 5 percent annual base funding in 2026-27, along with one-time back General Fund increases from 2022-23 through payments for 2025-26 costs. Then, in 2027-28, it 2026-27. As noted earlier, the state budget plan, would receive the deferred year four base increase however, includes no base increase for UC in and nonresident replacement funding, along 2025-26. As Figure 3 shows, the plan defers with one-time back payments for 2026-27 costs. the base increase ($241 million) the Governor The plan results in an initial reduction in General intended to provide in 2025-26 until 2027-28. It also fund support, followed by a large General Fund defers year-four funding ($31 million) for replacing increase in 2026-27 and a more moderate increase nonresident with resident students at three in 2027-28. high-demand UC campuses (Berkeley, Los Angeles, Figure 3 State Funding for UC Is Volatile Under Budget Plan Reflects Multiyear Assumptions Under Budget Plan, General Fund (Dollars in Millions) 2025-26 2026-27 Year 4a Year 5a 2027-28 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 prior year -5.6% 12.1% 5.3% a In 2025-26, the Governor will be entering year 4 of his compact with the UC President. The fifth and final year of this compact is 2026-27. A new governor will take office in 2027-28. b The Governor proposes to defer the year 4 base increase and nonresident replacement funding from 2025-26 to 2027-28. c In 2025-26, reflects the restoration of $125 million one-time base reduction applied in 2024-25. In 2027-28, reflects removal of prior-year, one-time back payments. 4 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET CORE OPERATIONS In this part of the brief, we provide background flat for continuing undergraduates (for up to on UC’s core operations, describe the state’s six academic years). Tuition increases generally are multiyear budget plan, assess that plan, and make based on a three-year rolling average of the annual an associated recommendation. (We address change in the California Consumer Price Index, with nonresident enrollment issues in the “Enrollment” an annual cap of 5 percent (unless modified by the section of this brief, but we address the associated Board of Regents). As a result of the new tuition funding deferral in this section.) policy, tuition and fee revenue has been growing more quickly at UC over the past few years. The BACKGROUND first year of tuition increases under this policy was 2022-23. In 2024-25, UC estimates it is generating In this section, we cover UC’s core funds and $191 million in additional net tuition revenue (from core operating costs. its tuition and enrollment increases combined, Funding after accounting for financial aid earmarks). UC Covers Its Core Operating Cost Increases Whereas previous tuition increases generally were From Two Main Sources. UC’s largest core precipitated by reductions in state General Fund fund source is student tuition and fee revenue. support, UC’s new policy was largely driven by a UC also relies heavily on state support for its desire to expand its overall budget capacity. core undergraduate and graduate programs. UC Relies on a Few Alternative Ways to In 2024-25, just over half of UC’s core funding came Support Core Operations. For many years, UC from student tuition and fee revenue, whereas has identified certain ways to improve its core 45 percent came from state General Fund. budget capacity beyond reliance on tuition revenue State Support Has Been Growing Somewhat and state support. One way has been to place More Quickly Than Tuition Revenue. Ten years its pooled cash in investment accounts and use ago, UC relied somewhat more heavily on student some of the annual investment earnings to support tuition and fee revenue (54 percent) and less core operations. In UC’s 2024-25 budget plan, it heavily on state support (41 percent). The primary identified $90 million in investment earnings that it reason for the decline in the tuition share is that designated for its core operations. UC also regularly UC generally held its tuition charges flat from seeks to contain growth in its operating costs. 2011-12 through 2021-22. During this period, UC One way it regularly realizes operational savings increased its systemwide tuition charges only once. is through negotiating discounts and rebates from In 2017-18, UC raised it resident undergraduate and vendors and service providers. In 2024-25, UC graduate academic charges by 2.7 percent. In a identified $11 million in annual savings attributable few other years, UC also assessed small increases to these efforts. to its Student Services Fee. In contrast to tuition UC Has Relatively Low Levels of Core charges, state support generally was rising over Reserves. Like many other universities (as well this period. Since 2013-14, the state has provided as public and private entities more generally), UC with General Fund base increases every year UC maintains reserves. It leaves some reserves but one. (In 2020-21, the state reduced General uncommitted, such that they are available to Fund support for UC, but it restored funding the address economic uncertainties, including state following year.) budget reductions. The rest of its reserves are UC Continues Implementing Its Tuition committed to planned activities, such as faculty Stability Plan. In 2021, the Board of Regents recruitment and retention, certain capital outlay approved a new tuition policy. Under this policy, costs, and other strategic program investments tuition is raised annually for new undergraduates (including developing new academic programs, and all graduate students, while tuition remains expanding existing programs, and upgrading campus-wide information technology systems). www.lao.ca.gov 5 2025-26 BUDGET Some, but not all, of these commitments could be Total core reserves (committed and uncommitted revisited in the face of a fiscal downturn. Unlike combined) ranged from less than one month of CSU, UC does not have a systemwide reserves expenditures at the San Diego campus to over policy that sets a reserve target. As of June 2024, seven months of expenditures at the Riverside UC reported $1.5 billion in total core reserves, campus. Uncommitted reserves for economic of which $155 million was uncommitted. UC’s uncertainties, however, equated to less than one uncommitted reserves reflect just under six days month of expenditures at all campuses. (1.6 percent) of its total annual core operating Cost Pressures expenditures. UC’s reserves are lower than general fiscal best practices. The Government Finance UC’s Workforce Is Large and Has Grown Officers Association historically has recommended Notably Over Time. In April 2024, UC employed that government agencies hold at least two nearly 143,000 FTE campus employees (excluding months of unrestricted budgetary fund balances medical centers). As Figure 5 shows, the number of (though exceptions are considered depending on FTE employees at UC has generally been trending certain factors such as the size of the agency, its upward over time. The only staffing decline from diversification of revenue streams, the volatility of 2014-15 through 2023-24 was a 5 percent decline those revenue streams, and overall risk exposure). in 2020-21, as UC responded to the pandemic and associated fiscal reductions. Over the past decade, Reserves Total Less Than One Month of staffing generally has been outpacing enrollment Expenditures at All Campuses. In the absence growth. Over the last ten years, UC’s FTE workforce of a systemwide reserves policy, UC allows its has grown by 24 percent, exceeding FTE student ten campuses to determine their own reserve growth of 17 percent. In 2023-24, UC had 1 FTE levels. Campus policies vary but typically aim for employee for every 2.1 FTE students. uncommitted core reserves worth one to three months of core expenditures. Figure 4 shows core UC Workforce Consists of a Mix of Academic reserves at each UC campus as of June 30, 2024. and Nonacademic Positions. As Figure 6 shows, more than one-third of Figure 4 UC campus employees in 2023-24 served in Uncommitted Core Reserves Are Low Across All UC Campuses academic positions, Total Core Reserves by Campus as of June 30, 2024, in Months of Expenditures with the remainder serving in various nonacademic positions. Riverside Nonacademic positions Berkeley include managers, program directors, Santa Barbara and support staff Merced serving in many areas, including maintenance, Irvineª food services, Davis student advising and counseling, human San Francisco Uncommitted Committed resources, budget, Santa Cruz accounting, and information technology, Los Angeles among others. While the San Diego composition of the -1 1 2 3 4 5 6 7 8 workforce has not changed much from a UC did not explain Irvine's negative uncommitted reserve level. 6 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET 2014-15 through 2023-24, the most Figure 5 pronounced change has been in the share of managers, which has UC Workforce Is Large and Growing grown from 7 percent to 10 percent Full-time Equivalent Employees (Excluding Medical Centers) of the total workforce. UC’s Largest Operating Cost 160,000 Is Employee Compensation. 140,000 Like many other state agencies, the largest component of UC’s 120,000 budget is employee salaries and 100,000 benefits (comprising 74 percent of its core expenditures in 2023-24). 80,000 UC has more control than most 60,000 state agencies, however, over its compensation costs, partly 40,000 because most of its employees 20,000 (nearly 80 percent) are not represented by a labor union. The Board of Regents directly sets 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 salaries and benefits for these employees. UC generally offers these employees annual salary increases, though it tends not to provide such increases during Figure 6 fiscal downturns. UC collectively bargains salaries and benefits for More Than One-Third of UC Employees its represented employee groups, Serve in Academic Positions negotiating with eight systemwide Full-Time Equivalent Employees (Excluding Medical Centers), 2023-24 labor unions. As with CSU, the Legislature does not ratify UC’s collective bargaining agreements. UC Manages Its Own Faculty Retirement System, Costs Have Been Rising. Whereas many state employees participate in Other Academic the California Public Employees’ Other Nonacademic Retirement System or the California TAs/RAs State Teachers’ Retirement System, UC employees participate Student in the University of California Staff Retirement Plan (UCRP). The Managersª UC Board of Regents manages UCRP. Each year, the Board of a Includes executives, managers, and senior professionals. Regents determines how much TAs/RAs = teaching assistants and research assistants. UC contributes to the pension program. For the last ten years, the UC employer contribution rate has increased gradually, from www.lao.ca.gov 7 2025-26 BUDGET 14.6 percent of payroll in 2015-16 to 17.72 percent in general obligation bonds and state lease revenue 2024-25. As Figure 7 shows, annual program costs bonds. Chapter 50 of 2013 (AB 94, Committee have steadily grown over this period, reaching more on Budget) established a new system for UC. than $800 million in 2024-25. In 2024-25, UCRP’s Under this system, UC is authorized to sell its funded status (comparing assets to liabilities) was own university bonds and use a portion of its 85 percent. UCRP’s funded status has tended to be annual state appropriation to cover associated better than other California state retirement plans debt service. Since this new system has been in Health Care Costs Have Been Growing. place, the state has given UC authority to finance UC offers a range of health plans for UC employees $4 billion in facility projects using university bonds. and retirees, with premiums set annually for the UC is using unrestricted funds from within its main respective plans. The premium costs that UC state appropriation to cover the debt service costs covers for employees depends on an employee’s associated with $2.4 billion of these projects. The income level, with lower-paid employees receiving a state has earmarked General Fund to cover the higher share of their premium costs covered. UC’s remaining debt service costs (as described below). health care spending generally has increased over Debt Service Obligations Have Been time, growing from $532 million in 2015-16 to an Increasing. The state changed the way it financed estimated $760 million in 2024-25. While health care UC facilities primarily because it wanted to provide costs at UC are growing, these costs as a share UC with a greater incentive to contain costs of UC’s total core expenditures have remained by having to prioritize its operating and capital fairly stable over the past decade, hovering spending from within its annual state appropriation. around 7 percent. The state, however, recently veered from this Way UC Finances Its Facilities Differs From approach. Over the past few years, the state Other State Agencies. Prior to 2013-14, the state approved $1.6 billion in new UC projects, including financed UC academic facilities the same way it certain student housing projects as well as new financed most other state facilities—using state medical education buildings and other expansion projects at the Merced and Riverside campuses. Figure 7 UC Pension Costs Continue to Rise (In Millions) $900 100% 800 UCRP Funded Status 90 80 700 70 600 60 500 UCRP Program Costs 50 400 40 300 30 200 20 100 10 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 UCRP = University of California Retirement Plan. 8 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET Though UC still was directed to sell university General Fund support for UC is reduced by bonds for these projects, the state earmarked $272 million (5.6 percent) in 2025-26. (Compared to General Fund support to cover the associated debt. June 2024 estimates, the UC amount is $20 million This approach increased annual state debt service larger due to the administration calculating costs for UC facilities by $105 million. In 2024-25, the reduction off a higher 2024-25 base.) This UC estimates its total debt service costs are further reduction is pursuant to Control Section 4.05 of the increasing by $8 million (2 percent), altogether 2024-25 Budget Act. The administration is providing reaching $469 million. UC flexibility in deciding how to accommodate UC Has Large Seismic Safety and Capital the reduction. Renewal Backlogs. Of the state-supported Budget Plan Defers General Fund Base academic facility projects UC has undertaken since Increase. Also consistent with the June 2013-14, nearly $1.2 billion has been for seismic 2024 budget plan, an ongoing General Fund safety and capital renewal projects (including augmentation of $241 million (about 5 percent) major renovations, building replacements, and for UC is deferred from 2025-26 until 2027-28. infrastructure improvements). Despite these Under the deferral arrangement, one-time back additional facility projects, UC continues to payments would be provided to UC in 2026-27 report large and growing project backlogs. (for 2025-26 costs) and 2027-28 (for 2026-27 costs). As of November 2024, UC identified backlogs Budget Plan Also Defers Nonresident of $12 billion in state-supported seismic safety Enrollment Replacement Funding. For the past projects and $9.1 billion in state-supported capital three years, the state has been providing UC with renewal projects. funding to replace nonresident students at three Student Financial Aid and Other Cost high-demand campuses (Berkeley, Los Angeles, Pressures Also Exist. Beyond employee and San Diego) with resident undergraduate compensation and facility costs, UC faces various students. Consistent with the June 2024 budget other annual cost pressures. The largest remaining plan, the fourth year of this funding ($31 million) cost involves its institutional student financial aid is deferred two years (from 2025-26 to 2027-28). programs. UC designates a portion of new student Similar to the deferred base augmentation, tuition revenue generated by tuition and enrollment one-time back payments would be provided to increases to its institutional aid programs. UC in 2026-27 (for 2025-26 costs) and 2027-28 In 2024-25, UC reports spending an estimated (for 2026-27 costs). Despite the lack of funding, the $1.2 billion on its largest institutional aid program, administration continues to expect UC to replace which provides gift aid for undergraduates with nonresident students at the three high-demand financial need. Though much smaller in magnitude, campuses in 2025-26. UC also can experience cost increases relating to UC Anticipates Additional Revenue From operating expenses and equipment (OE&E). OE&E Tuition and Fees. In 2025-26, systemwide costs tend to grow with inflation over time, though tuition and fees is set at $14,934 for new resident UC tries to contain these costs through operational undergraduate students, reflecting an increase of efficiencies. $498 (3.4 percent) from 2024-25. UC also is raising nonresident supplemental tuition in 2025-26. The 2025-26 BUDGET supplemental rate for nonresident undergraduates In this section, we discuss UC’s sources (which is in addition to the base rate for resident of funding as well as its spending priorities students) is set at $37,602. The supplemental rate for 2025-26. rises by $3,402 (10 percent) from 2024-25. The planned increase for nonresident students is higher 2025-26 Funding than the inflation-based rate generally aimed for Budget Plan Reflects Ongoing Reduction in under UC’s tuition policy. UC indicates this will State Support for UC in 2025-26. Consistent with likely be a one-time action and was done so that the budget plan set forth in June 2024, ongoing nonresident tuition rates are more in-line with select www.lao.ca.gov 9 2025-26 BUDGET peer institutions, such as the University of Michigan to cover the costs of compensation packages for and the University of Virginia. UC estimates it will represented personnel with contracts already in generate $225 million in additional revenue from place, certain faculty merit salary adjustments, its tuition increases in 2025-26. It plans to use and certain contractual costs associated with $84 million of this additional revenue for institutional retirement and employee health benefits. Various financial aid. (In addition, the California Student other costs are discretionary. These costs include Aid Commission budget includes $44 million in salary enhancements for nonrepresented personnel higher associated Cal Grant costs for UC students and certain OE&E costs (such as office supply due to its tuition increases. Many UC students with purchases, travel, and subscription services). financial need receive full tuition coverage under the Benefit Costs Estimated to Grow by a Total Cal Grant program.) $71 Million in 2025-26. UC expects its costs to UC Anticipates Additional Revenue From increase for health care and pension benefits. Other Sources in 2025-26. In addition to General UC estimates that health benefit costs for active Fund support and tuition and fee revenue, UC plans employees will grow by $40 million. This growth to use $20 million from its investment earnings is based on an anticipated increase in health care for its core operating costs in 2025-26. UC also costs of 7.1 percent in 2025-26. UC also projects anticipates generating $9 million in freed-up funds retiree health benefit costs will grow by $11 million from procurement savings and other operational due to the combined effect of higher premiums efficiencies that it can use for its core operations and a projected increase in the number of retirees. in 2025-26. UC will continue assessing a payroll charge of 2.23 percent in 2025-26 to cover these costs. While UC Spending Priorities the UC employer contribution rate for UCRP is set UC Has Identified Its Spending Priorities for to decrease to 17.42 percent of payroll in 2025-26 2025-26. As Figure 8 shows, UC has identified (down from 17.72 percent in 2024-25), retirement a total of $513 million in new spending priorities costs are expected to grow by $19 million due to for 2025-26. UC treats some of these spending overall growth in payroll costs. priorities as nondiscretionary (meaning they must Some Collective Bargaining Agreements be covered). For example, UC is legally required Already Are in Place for 2025-26. UC has contracts in place that extend through 2025-26 for Figure 8 six of its eight unions. The terms of these contracts UC Has Identified Several Spending vary, but they generally provide 3.5 percent to Priorities 5 percent salary increases. UC has open contracts with the American Federation of State, County, Estimated Spending Increases, 2025-26 (In Millions) and Municipal Employees and the University Spending Priorities Professional and Technical Employees, which Nondiscretionary reflect approximately 3 percent of UC’s workforce. Represented employee salaries $51 UC has a total of $51 million in its budget plan Health benefits for active employees 40 for cost increases associated with its collective Faculty merit salary adjustments 36 bargaining agreements. Retirement contributions 19 Health benefits for retirees 11 Funds Permitting, UC Has Plan to Raise Subtotal ($158) Employee Salaries for Nonrepresented Discretionary Employees. The 2025-26 budget plan approved by Student financial aid $102 the Board of Regents includes a total of $150 million Faculty general salaries 80 for potential salary increases for nonrepresented Non-represented staff salaries 70 Enrollment growth 63 faculty and staff. UC indicates that this reflects an Operating expenses and equipment 36 estimated 3.7 percent in UC’s associated salary Other 4 pool (intended to be comparable to the increases Subtotal ($354) provided for represented employees). UC indicates Total $513 it will wait to make final decisions regarding most 10 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET salary increases for nonrepresented faculty and Campuses Are Already Taking a Range of staff until its fiscal picture for 2025-26 is clearer. Actions. Campus actions have generally fallen into UC Also Anticipates Other Cost Increases three broad categories: in 2025-26. In addition to anticipated growth in • Cost Reduction. These measures include compensation costs, UC has plans to increase hiring freezes, holding vacant positions open, its institutional student financial aid spending reducing nonessential expenditures (such as by $102 million in 2025-26. UC uses a portion travel), and deferring capital projects. of its tuition revenue to pay for these costs. • Operational Efficiencies. These UC also estimates that costs associated with measures include restructuring and continued enrollment growth would be $63 million. consolidating services. Additionally, UC projects that 2025-26 OE&E • Revenue Generation. These measures costs will grow by $36 million. The 2024-25 include expanding self-supporting programs OE&E costs are projected to increase by and growing nonresident enrollment at certain the year-over-year percentage growth in the campuses currently below the 18 percent cap. California Consumer Price Index. UC Plans Further Action to Address 2025-26 ASSESSMENT Reduction. UCOP plans to allocate the proposed $272 million General Fund base reduction across In this section, we assess the impact of the its campuses. Campuses, in turn, will continue multiyear budget plan on UC and the state. to have discretion in making any needed budget Impact on UC adjustments. UCOP notes that many campuses intend on keeping the reductions adopted in UC Has a Projected Budget Gap in 2025-26. 2024-25 in place for 2025-26, but campus planning Though UC has identified $513 million in core remains ongoing and subject to change depending spending increases (with about 70 percent of on the state’s budget condition. UC has no explicit that spending identified as discretionary), its core plans regarding how it would respond to a deferred funding is projected to decrease by $30 million, augmentation, with state payment being delayed leaving a budget gap. To accommodate any of one or more years. Were UC to raise its spending UC’s identified cost increases, it will need to make in 2025-26 on the assumption it would receive a budget adjustments. deferred state payment in 2026-27, and then state UC Began Making Budget Adjustments in payment were not forthcoming, UC would face Current Year. In 2024-25, UC’s ongoing core more disruptive spending choices at that time. funding increased $358 million (3.4 percent). This increase consisted of $230 million additional State Impact tuition revenue and $142 million additional state Budget Plan Calls to Increase UC Funding General Fund support. Despite this increase, UC Significantly in 2026-27 Despite Projected indicates it did not receive enough support to cover Deficit. As we discuss in The 2025-26 Budget: all of its budget priorities. Moreover, UC was aware Overview of the Governor’s Budget, the state of the state budget plan to reduce its funding by faces significant General Fund operating deficits $272 million in 2025-26. In response, the University in the coming years. Under the budget plan for of California Office of the President (UCOP) UC, the state is committing to increase General established a systemwide budget management Fund spending for UC by $556 million in 2026-27. workgroup to identify common campus budget Rather than increasing university costs, the state challenges, along with potential actions campuses historically has contained costs when facing could implement to align their funding and multiyear budget deficits. Moreover, the state has spending. Specific budget decisions, however, set forth no plan as to how it would pay for such a were ultimately left up to each campus (with a large UC augmentation while facing a deficit. Given majority of the budgetary decisions made at the the state budget plan does not include a base unit/department level). www.lao.ca.gov 11 2025-26 BUDGET increase for UC in 2025-26, it is unlikely the state any programs, including UC. Rather than continuing could afford such an increase in 2026-27 (absent with the deferral plans and committing to out-year a change in the state’s fiscal condition or new funding increases, we recommending sending a budget solutions). more realistic signal to UC that it may not receive an increase in its state General Fund support RECOMMENDATION in 2026-27. Signaling this expectation is more helpful to UC than setting an explicit expectation Recommend Removing Deferrals to Signal it will receive substantial additional state support More Realistic Budget Expectations. Last year, in 2026-27, without any specific plan to ensure the state provided a clear signal to UC that it was to that funding is forthcoming. It also avoids having begin planning for a base General Fund reduction in the state create new fiscal obligations it cannot 2025-26. This approach gave UC time to plan and currently afford. If the state’s fiscal condition make the associated adjustments within its budget. improves over the next year, the Legislature could Given the state’s projected deficit in 2026-27, the consider providing additional General Fund support state likely will not have budget capacity to support for UC at that time. substantial increases in General Fund spending for ENROLLMENT In this section, we first provide background on In fall 2024, UC estimates that it will nearly achieve the state’s approach to funding enrollment growth this goal. at UC and cover enrollment trends. We then discuss State Typically Sets Resident Enrollment the state’s enrollment plans for UC in 2025-26 and Targets and Provides Associated Funding. 2026-27. Next, we assess those plans and make Over the past two decades, the state’s typical associated recommendations. enrollment approach for UC has been to set systemwide resident enrollment targets. These Background targets typically have applied to total resident UC Enrolls a Mix of California Resident and enrollment, giving UC flexibility to determine the Nonresident Students. In 2023-24, of the nearly mix of undergraduate and graduate students. If 293,500 FTE students UC enrolled, 82 percent the total systemwide target has included growth were California residents and 18 percent were (sometimes the state leaves the target flat), the nonresidents. Compared to the two other state typically has provided associated General segments, UC enrolls a notably larger share of Fund augmentations. Augmentations have been nonresident students. (In 2023-24, nonresidents calculated using an agreed-upon per-student comprised 5.5 percent of CSU FTE students and an funding rate derived from the “marginal cost” estimated 3 percent of CCC FTE students.) Within formula. This formula estimates the cost to enroll UC, nonresident students are more common in each additional student and shares the cost graduate programs. In 2023-24, one-third of UC between the state General Fund and student tuition graduate students are classified as nonresidents, revenue. In 2024-25, the total marginal cost per compared to 15 percent of UC undergraduates. student is $21,455, with a state share of $11,930. UC Enrolls a Mix of Freshmen and Transfer Recently, State Has Made Two Modifications Students. Besides aiming to enroll a mix of to Its Enrollment Growth Approach. One resident and nonresident students, UC tries to have modification is that the state has been setting each new incoming undergraduate class have a enrollment growth targets only for undergraduates. certain share of freshmen and transfer students. Another modification is that the state generally Specifically, UC aims to enroll one resident has been trying to better align its targets with UC’s transfer student for every two resident freshmen. admissions cycle by setting enrollment targets for 12 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET budget year plus one. UC completes its admissions base General Fund augmentations provided in each cycle for the coming fall term before the state of those years. Under this growth plan, UC resident enacts the annual budget each June. Setting an undergraduate enrollment would reach 212,503 enrollment growth target for budget year plus one in 2026-27. allows the state to influence UC’s planning for UC Has Graduate Growth Plans. Unlike for the next admissions cycle prior to UC making its UC undergraduates, the state has not been setting admission decisions. enrollment targets for UC graduate students. The State Continues Nonresident Enrollment Governor and UC, however, have compact goals Reduction Plan. Another important change in relating to graduate enrollment. Specifically, UC set recent years is that the state has acted to limit a plan to increase enrollment in its state-supported the number of nonresident undergraduates at graduate programs by a total of 2,500 students UC, with the intent to make more slots available (resident and nonresident students combined) for resident undergraduates at high-demand over four years. UC originally intended to add this campuses. Specifically, the state has directed UC enrollment in even increments (625 FTE students to reduce nonresident undergraduate enrollment per year) beginning in 2023-24 and extending at the Berkeley, Los Angeles, and San Diego through 2026-27. Though not earmarked in the campuses by a total of 902 FTE students annually state budget act, graduate enrollment growth is and increase resident undergraduate enrollment by supported by state funding and tuition revenue, the same amount. To help the campuses achieve among other sources. this goal, the state has provided UC with ongoing Trends General Fund support primarily to backfill the lost nonresident supplemental tuition revenue. UC Enrollment Has Grown Over the Past The nonresident enrollment reduction plan began Decade. As Figure 9 shows, UC enrollment in 2022-23 and was intended to extend through has increased every year but one (2022-23) over 2026-27. By 2026-27, UC campuses are to have the past decade. Total enrollment has grown nonresident students comprise no more than by approximately 46,000 students (18 percent). 18 percent of their total undergraduate enrollment. As enrollment has increased, the share of (The 18 percent cap applies to all UC campuses, undergraduates has grown slightly (from 80 percent but only the Berkeley, Los Angeles, and San Diego to 82 percent of overall enrollment), as the share campuses currently are above that cap.) of graduate students has declined slightly (from Last Year’s Budget Act Included Enrollment Growth Figure 9 Expectations for the Next Few UC Enrollment Has Trended Upward Over the Last Decade Years. Specifically, the 2024-25 Full-Time Equivalent Students Budget Act set an expectation that UC grow by 2,927 resident undergraduate FTE students 350,000 Graduate in 2024-25, another 2,947 FTE 300,000 Undergraduate students in 2025-26, and another 2,968 FTE students in 2026-27. 250,000 These amounts reflect annual 200,000 growth of 1.4 percent. (These 150,000 amounts include the additional 902 resident undergraduate 100,000 FTE students resulting from the 50,000 nonresident replacement plan.) The state’s intent was that UC 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 would fund this new growth from www.lao.ca.gov 13 2025-26 BUDGET 20 percent to 18 percent). Undergraduate time since fall 2020. The number of new resident enrollment growth has varied somewhat across freshmen declined year over year, breaking a UC campuses. Over the past decade, UC Santa pattern of annual growth for this group that began Cruz has experienced the least amount of growth. in fall 2020. UC San Diego has added the greatest number of UC Expects to Meet Its Nonresident undergraduates, and UC Merced has grown at the Enrollment Reduction Goals in 2024-25. fastest rate. Compared to 2023-24, nonresident undergraduate UC Expects to Exceed Its Resident enrollment declined at the Berkeley campus Undergraduate Enrollment Target in 2024-25. by 782 FTE students and at the Los Angeles Based on data from the summer and fall 2024 campus by 294 FTE students. Together, these two terms, UC estimates that its resident undergraduate campuses exceeded the combined state reduction enrollment is 3,270 FTE students above the target of 902 FTE students. UC San Diego 2024-25 Budget Act target. This growth is more increased its nonresident undergraduate enrollment than double the state’s enrollment expectation by 83 FTE students, but it grew its resident that year. Rather than reaching a resident undergraduate enrollment at an even greater undergraduate enrollment level of 206,588 FTE pace. All three campuses reduced nonresident students, UC anticipates growing to 209,858 undergraduate enrollment as a share of their total FTE students. This level of growth even exceeds undergraduate enrollment. The Berkeley campus the 2024-25 Budget Act enrollment target set for made the most progress (reducing its nonresident UC in 2025-26 (by a few hundred students). UC is share by 2.2 percentage points), whereas the planning to apply the excess growth in 2024-25 San Diego campus made the least progress toward its 2025-26 enrollment target. (reducing its nonresident share by 0.4 percentage Growth in New Transfer Students More points). All three campuses have a nonresident Than Offsets Decline in New Freshmen. share that is below 20 percent in 2024-25. Figure 10 shows UC’s cohort of new incoming UC Does Not Plan to Meet Graduate Growth students (headcount) grew slightly in fall 2024 Target. Unlike for undergraduate enrollment, over fall 2023. Reversing a three-year trend, graduate enrollment growth targets were not new transfer enrollment increased for the first included in the 2024-25 Budget Act. Nonetheless, UC has been tracking its graduate enrollment relative to its compact Figure 10 goals. UC does not expect to Growth of New Transfer Students More Than Offsets meet the overall 2,500 graduate Decline in New Freshmen enrollment growth target identified in the compact. UC notes that the New Undergraduate Headcount, Fall Term baseline from which that target Change From Fall 2023 was set reflected an unusual high Fall 2023 Fall 2024 Amount Percent point in 2021-22. Though it did not realize at the time, UC has since Freshmen learned that graduate enrollment Resident 42,108 41,950 -158 -0.4% Nonresident domestic 4,616 4,262 -354 -7.7 in 2021-22 was particularly high Nonresident International 4,245 4,409 164 3.9 given a relatively large number Subtotals (50,969) (50,621) (-348) (-0.7%) of graduate students deferred Transfer/Othera enrollment in 2020-21 due to issues Resident 17,899 18,694 795 4.4% relating to the pandemic. While Nonresident domestic 396 366 -30 -7.6 Nonresident international 1,489 1,621 132 8.9 UC believes graduate enrollment Subtotals (19,784) (20,681) (897) (4.5%) will not grow by 2,500 graduate Totals 70,753 71,302 549 0.8% students by 2026-27, it indicated a Includes CCC and other transfer students. to us that campuses will continue 14 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET to expand enrollment in graduate programs, with Assessment a particular emphasis on enrollment in programs UC Has Concerns About Continuing to Meet that meet state workforce needs in the science, Enrollment Targets Without State Funding. technology, engineering, mathematics and health As noted in the “Trends” section, UC is exceeding sciences areas. its 2024-25 resident undergraduate enrollment target. UC also reports it is on track to exceed its Enrollment Expectations for 2025-26 resident undergraduate enrollment target, 2025-26 and 2026-27 despite the lack of an increase in its state General Budget Plan Continues Resident Fund support under the 2025-26 budget plan. Undergraduate Enrollment Expectations, but For the 2025-26 academic year, UC already has Does Not Provide Funding. The 2024-25 Budget made many of its admissions decisions. UC has Act set a resident undergraduate enrollment expressed concern about meeting the 2026-27 expectation for UC in 2025-26 and 2026-27. resident undergraduate enrollment target in the The 2025-26 budget plan maintains these absence of additional state funding. Similarly, expectations. Specifically, the budget plan sets UC has expressed concern about continuing forth that UC is to grow its resident undergraduate to implement the nonresident undergraduate enrollment by 2,947 FTE students in 2025-26, and enrollment reduction plan in 2026-27 without another 2,968 FTE students in 2026-27, for a total additional associated state funding. These level of 212,503 FTE students that year. The budget concerns are warranted given the state’s projected plan does not contain any enrollment growth out-year budget deficits. funding for UC in 2025-26. However, it maintains Enrollment Growth Above Target in 2025-26 provisional language permitting the Director of the Likely to Impact Academic Programming. Department of Finance (DOF) to reduce UC funding UC projects that its resident undergraduate for each student below the expected 2025-26 level. enrollment will surpass the 2025-26 state target The provisional language indicates the reduction by 1,225 FTE students. However, the state’s would be taken at the 2025-26 state marginal cost multiyear budget plan does not include funding rate of $11,640 per student. for any enrollment growth and, instead, includes an Budget Plan Also Maintains Nonresident ongoing General Fund reduction for UC in 2025-26. Enrollment Reduction Expectations, but Defers To accommodate the student growth, while at the Funding. The budget plan also maintains the same time seeing a reduction in its state support, expectation that UC continue to reduce nonresident UC anticipates holding some positions open and undergraduate enrollment by a total of 902 FTE slowing the hiring of faculty. The result of these students at the Berkeley, Los Angeles, and San actions is that class sizes will likely increase and Diego campuses in 2025-26, replacing those fewer courses could be available for students in students with residents. (The additional resident fall 2025. students are included in the targets mentioned Funding Enrollment Growth at Community above.) As with the base funding deferral, the Colleges Helps Maintain Overall College budget plan defers $31 million ongoing General Access. As we discuss in The 2025-26 Budget: Fund that otherwise would have been provided in Higher Education Overview, the Governor’s budget 2025-26 to continue implementing the nonresident includes an increase in Proposition 98 General enrollment reduction plan to 2027-28. The Fund to support enrollment growth at community Governor proposes provisional budget language colleges. If the state were to reduce ongoing stipulating that if the actual reduction in nonresident General Fund for UC over one or more years and undergraduate enrollment in 2025-26 is fewer than UC were to constrain its enrollment, community 902 FTE students, then the Director of DOF is not colleges could begin to attract students who obligated to provide the deferred payment. otherwise might have enrolled directly at UC. That is, community colleges could help maintain overall college access in the state. Moreover, community www.lao.ca.gov 15 2025-26 BUDGET colleges do so at a lower state cost relative to the Pause Nonresident Replacement Enrollment state funding enrollment growth at the universities. Reduction Plan. As previously mentioned, with (Another effect of this initial enrollment shift, many 2025-26 admissions decisions already made, however, is that UC could see pressure in the future the Legislature has a greater ability to impact resulting from a greater pool of transfer students.) UC’s 2026-27 enrollment decisions. In light of the state’s projected budget deficits, we recommend Recommendations the Legislature pause the expectation that UC Revisit 2026-27 Resident Undergraduate replace 902 nonresident undergraduate students Enrollment Target. With UC having already with resident students in 2026-27 at the three made many of its 2025-26 admissions decisions, high-demand campuses. The state could resume modifying state 2025-26 enrollment targets would implementation of the nonresident reduction plan have little effect at this point. The Legislature, when its fiscal condition improves. however, still can influence UC’s 2026-27 Adopt Language to Maintain Existing enrollment levels. Given the state’s projected deficit Ratio of Resident-to-Nonresident Students in 2026-27, the state likely would not have budget at High-Demand Campuses in 2025-26 and capacity to support enrollment growth in 2026-27. 2026-27. We recommend the Legislature adopt The Legislature could consider a couple of options. provisional budget language directing UC to One option would be to hold UC’s enrollment flat maintain the existing progress that campuses at the estimated 2025-26 level of 210,760 resident already have made regarding replacing nonresident undergraduate FTE students. Under this option, with resident students at its high-demand UC would likely continue to implement cost saving campuses. Specifically, the provisional language measures, likely resulting in larger class sizes and would stipulate that campuses exceeding the potentially fewer course offerings. The effects would 18 percent nonresident undergraduate threshold be less severe, however, than if the state maintained shall not increase the percentage of nonresident the higher enrollment targets under the budget undergraduate FTE students above their 2024-25 plan (requiring UC to grow resident undergraduate levels. Adopting this language would ensure that enrollment to 212,503 FTE students in 2026-27). these campuses do not undo some of the progress Alternatively, the Legislature could lower UC’s made over the past three years. That is, the resident undergraduate FTE enrollment level in language would deter the high-demand campuses 2026-27 to some level it deemed appropriate given from effectively beginning to replace resident changes in UC’s total core funding. Lowering UC’s students with nonresident students. resident undergraduate enrollment target would alleviate some or all of the pressure UC would face to implement further cost savings measures. LAO PUBLICATIONS This report was prepared by Ian Klein, and reviewed by Jennifer Pacella and 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. 16 LEGISLATIVE ANALYST’S OFFICE