The 2026-27 Budget: Higher Education Overview

analysis full 2026-27 BUDGET The 2026-27 Budget: Higher Education Overview GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2026 SUMMARY Under Governor’s Budget, Higher Education Funding Increases Notably. Compared to 2025-26, the Governor’s budget includes $3 billion in additional General Fund support for higher education—a 14 percent increase. Beyond state support, nonstate support (including local property tax revenue and tuition revenue) also increases. In 2026-27, ongoing core funding (state and nonstate combined) grows by 8.8 percent at the California Community Colleges (CCC), 8.1 percent at the California State University (CSU), and 7.1 percent at the University of California (UC). Governor’s Budget for Higher Education Is an Imprudent Starting Point. The Governor proposes large unrestricted base increases for the universities and notable enrollment growth across all three segments. Facing projected deficits, the Legislature typically would expect to see proposals that contain costs, rather than the Governor’s proposals for large new spending increases. Moreover, the Legislature would typically expect to see a plan for how any additional spending would be sustained, yet the Governor presents no such plan. Recommend Building a More Sustainable Higher Education Budget. We recommend the Legislature take several actions to better position the state to balance its budget this year and next year. • Recommend Reducing or Eliminating Base Increases for CSU and UC. Though base increases help the segments cover their core operating costs, the state budget likely will not be able to sustain ongoing non-Proposition 98 General Fund increases over the next few years. Even with no increases in state support, CSU and UC would still see their core funding grow by 4.2 percent and 3.5 percent, respectively. • Recommend Not Getting Further Entangled With Higher Education Compacts. The most recent compact has led to a string of convoluted budget actions that have muddled transparency and accountability. We recommend the Legislature take a different approach and make funding decisions for each segment each year based upon the best information available and the state’s overall budget condition at that time. We recommend the Legislature rescind funding commitments made in advance for 2027-28 and 2028-29. • Recommend Supporting Some Enrollment Growth but Pausing Nonresident Replacement Plan. Despite the difficult budgetary trade-offs, the Legislature could consider supporting some enrollment growth. If so, we recommend setting realistic, affordable growth targets in 2026-27 and funding that growth separate from unrestricted base increases. We recommend pausing UC’s nonresident replacement plan until the state’s fiscal condition improves. In 2026-27, high-demand UC campuses could grow their nonresident enrollment only if they grow their resident enrollment in tandem. For both UC and CSU, we recommend holding enrollment flat in 2027-28. • Recommend Using Any One-Time Funding to Build Fiscal Resiliency. If Proposition 98 or non-Proposition 98 one-time funding is available, we recommend using it to retire payment deferrals, retire the Middle Class Scholarship (MCS) pay-in-arrears approach, and address deferred maintenance and seismic-safety backlogs. • Recommend Considering MCS Proposal to Help Balance Budget. We recommend considering the MCS proposal as it likely is less disruptive than options that would affect more targeted, needs-based programs. www.lao.ca.gov 1 analysis full 2026-27 BUDGET INTRODUCTION Brief Focuses on Higher Education Budget. (CSAC). Over the coming weeks, our office will In the first half of this brief, we provide an overview release additional budget briefs that delve more of the Governor’s proposed 2026-27 budget for deeply into the Governor’s proposals for each of higher education. In the second half, we discuss these segments. All budget briefs can be accessed several key budget considerations and offer some from our Budget webpage. Budget tables showing budget recommendations. In the brief, we focus details of the Governor’s many education proposals on the major budget proposals for CCC, CSU, can be accessed from our EdBudget webpage. UC, and the California Student Aid Commission OVERVIEW In this part of the brief, we first summarize Local Property Tax Revenue for Community funding proposed for higher education under Colleges Continues to Trend Upward. Beyond the Governor’s budget. We then describe the state General Fund support, the three segments Governor’s enrollment proposals, followed by receive substantial core funding from other his other major spending proposals. At the end sources. For CCC, the largest nonstate fund of this section, we describe the Governor’s one source is local property tax revenue. CCC local proposed higher education budget solution to help property tax revenue that counts toward the address the state’s projected deficit in 2027-28. Proposition 98 minimum guarantee is projected Throughout the section, we focus on core funding to increase $227 million (5 percent) in 2026-27. used to support core operations. (We do not cover This local property tax growth rate is slightly self-supporting programs, federal grants and higher than its historical growth rate over the past contracts, or philanthropic and alumni support.) 20 years (4.8 percent). Proposed Funding Figure 1 Governor’s Budget Increases General Fund Support for Higher State Support for Higher Education Grows Education. As Figure 1 shows, Significantly Under Governor’s Budget the Governor’s budget for 2026-27 Ongoing General Fund (Dollars in Millions) contains a total of $25.1 billion in ongoing General Fund support for Change From 2025-26 2024-25 2025-26 2026-27 the three segments and CSAC. The Revised Revised Proposed Amount Percent proposed 2026-27 funding level is CCC $10,419 $9,111 $10,174 $1,063 12% $3 billion (14 percent) higher than CSU 5,479 5,622 6,175 553 10 the revised 2025-26 level. Ongoing UC 4,858 4,853 5,386 533 11 CSACa 2,646 2,556 3,398 842 33 General Fund support increases Totals $23,403 $22,143 $25,134 $2,991 14% notably for all three segments a Amounts included for Middle Class Scholarships (MCS) reflect ongoing appropriations each year. and CSAC. As we discuss in the For 2024-25, amount excludes $373 million in one-time MCS funding. For 2025-26, all MCS next two sections, the Governor funding is excluded given the program begins being funded in arrears. For 2026-27, amount excludes $541 million in one-time MCS funding (for 2025-26 awards). proposes the additional funding Notes: The CCC amounts consist of Proposition 98 General Fund that counts toward the minimum be used for supporting enrollment guarantee, non-Proposition 98 General Fund, and any withdrawals from the Proposition 98 Reserve. The CSU amounts include General Fund for pensions and retiree health benefits. growth and providing unrestricted CSAC = California Student Aid Commission. base increases to each of the segments, among various other purposes. 2 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Student Tuition Revenue at CSU Increases. The CCC enrollment fee was last raised in summer For CSU and UC, the largest nonstate core fund 2012, at which time the state increased the per-unit source is student tuition revenue. CSU and UC fee from $36 to $46. Community college fees both have tuition policies in place. Under CSU’s in California remain the lowest of any state and policy, tuition charges are set to increase 6 percent significantly below the national average. In 2024-25, annually for all students. In 2026-27, the annual tuition and fees at other community colleges tuition charge for a full-time student is set at $6,838 averaged approximately $5,300 nationally—about for resident undergraduates and $8,548 for most four times higher than the CCC tuition level. resident graduate students. (This EdBudget table Overall Core Funding Grows Substantially for shows 2026-27 tuition charges by educational level All Segments. Figure 2 on the next page shows the at each segment.) CSU’s tuition level has long been changes in funding at each segment accounting for lower than comparable public institutions nationally. both state and nonstate fund sources. All major core In 2024-25, CSU’s resident undergraduate tuition fund sources—state General Fund, local property tax and fees were $1,995 (20 percent) lower than revenue, and student tuition revenue—increase in the national average of other similarly classified 2026-27 under the Governor’s budget assumptions. public institutions. CSU estimates it will generate Annual growth in core funding in 2026-27 is $201 million in additional tuition revenue in 2026-27 8.8 percent for CCC, 8.1 percent for CSU, and (resulting from tuition increases as well as planned 7.1 percent for UC. enrollment growth). Both CSU and UC have policies Funding Also Increases on a Per-Student that set aside a portion of new tuition revenue for Basis. As Figure 3 on the next page shows, core student financial aid. funding per student would range from nearly $13,000 Student Tuition Revenue at UC Also at CCC to nearly $41,000 at UC in 2026-27. Core Increases. Under UC’s tuition policy, resident funding per student would increase at all three tuition charges increase each year for incoming segments—rising 8.4 percent at CCC, 6.3 percent undergraduate students and all academic at CSU, and 8.1 percent at UC. Per-student funding graduate students. Tuition charges for continuing at all three segments would reach all-time highs undergraduate students, however, are held flat in unadjusted dollars but would be somewhat (for up to six academic years). In 2026-27, resident below their peaks after adjusting for inflation. systemwide tuition and fees are set at $15,588 (These per-student growth rates vary from the for new undergraduate students (up 4.4 percent). total core funding growth rates due to underlying Tuition and fees range from $15,066 to $77,946 for enrollment changes.) resident graduate and professional school students. These levels also are generally increasing, with Proposed Enrollment growth rates varying by program and campus. Governor Proposes Supporting Additional In 2026-27, UC also plans to raise the nonresident Enrollment Growth at CCC in 2025-26. The supplemental tuition charge for undergraduates to state gets its first clear snapshot of current-year $39,270 (up 5.6 percent). UC’s tuition level has long community college enrollment trends in late February, been higher than comparable public institutions but early signals are that this enrollment is exceeding nationally. In 2024-25, UC’s resident undergraduate budgeted growth. In response, the Governor’s tuition and fees were $3,386 (27 percent) higher budget includes $55 million Proposition 98 than the national average of other similarly classified General Fund to support an additional 1 percent public institutions. UC estimates it will generate systemwide community college enrollment growth $273 million in additional tuition revenue in 2026-27. beginning in 2025-26. CSU and UC also are reporting Governor Proposes No Tuition Increase at that they are exceeding their enrollment expectations CCC. Under the Governor’s budget, the community for 2025-26. The Governor’s budget proposes no college enrollment fee remains at $46 per unit or additional state funding to CSU and UC for this $1,380 for a student enrolled full time (30 units). purpose. Typical budget practice is to have the segments accommodate any enrollment above state targets in the current year, then recalibrate to state enrollment expectations the next year. www.lao.ca.gov 3 analysis full 2026-27 BUDGET Figure 2 At All Segments, All Major Core Fund Sources Increase in 2026-27 Reflects Ongoing Core Funds Under Governor’s Budget (Dollars in Millions) Change From 2025-26 2024-25 2025-26 2026-27 Revised Revised Proposed Amount Percent CCCa General Fund, Proposition 98 $9,794 $8,441 $9,371 $930 11.0% Local property tax, Proposition 98 4,335 4,558 4,785 227 5.0 Additional General Fund 625 670 803 133 19.8 Additional local property tax 502 529 557 28 5.2 Student fees 440 440 441 1 0.2 Lottery 300 308 308 — — Totals $15,996 $14,947 $16,265 $1,318 8.8% CSU General Fundb $5,479 $5,622 $6,175 $553 9.8% Student tuition and fees 3,527 3,790 3,991 201 5.3 Lottery 69 82 93 11 13.4 Totals $9,075 $9,494 $10,259 $765 8.1% UC General Fund $4,858 $4,863 $5,386 $533 11.0% Student tuition and fees 5,822 6,000 6,273 273 4.5 Lottery 56 61 61 — — Otherc 488 488 488 — — Totals $11,224 $11,402 $12,208 $806 7.1% a Proposition 98” funding refers to funding that counts toward the Proposition 98 minimum guarantee. “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. b Includes funding for pensions and retiree health benefits. c Includes a portion of overhead funding on federal and state grants and a portion of patent royalty income. undergraduates expected to Figure 3 grow by 2.9 percent at CSU and Core Funding Per Student Increases at 1.4 percent at UC in 2026-27. All Three Segments The administration assumes CSU Ongoing Core Funding Per Full-Time Equivalent Student and UC would cover the cost of enrollment growth from within their 2024-25 2025-26 2026-27 Change From 2025-26 unrestricted base increases. Actual Revised Proposed Amount Percent Governor Proposes to CCCa $12,889 $11,923 $12,930 $1,007 8.4% Double-Up Funding for CSU 22,545 22,991 24,429 1,438 6.3 Nonresident Replacement Plan. UC 37,410 37,475 40,518 3,043 8.1 The Governor’s budget includes a Reflects Proposition 98 funding, including any reserve withdrawals. $61 million ongoing General Fund in 2026-27 to effectively provide Governor Proposes Supporting Enrollment two years of additional funding Growth at All Segments in 2026-27. Figure 4 for this plan. In 2021, the state enacted legislation shows budgeted enrollment expectations. directing UC to replace some nonresident The Governor’s budget includes $32 million enrollment with more resident enrollment. Proposition 98 General Fund for 0.5 percent Specifically, UC is to reduce nonresident enrollment systemwide enrollment growth at the community to no more than 18 percent of undergraduate colleges in 2026-27. For CSU and UC, the enrollment at each campus, including the administration maintains the enrollment Berkeley, Los Angeles, and San Diego campuses. expectations set forth last year, with resident 4 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Other Proposed Spending Figure 4 Governor’s Budget Contains Budgeted Enrollment Increases at All Three Segments Substantial Increase in Total Resident Undergraduate FTE Enrollment Expectations Higher Education Spending. As Figure 5 on the next page Change From 2025-26 2024-25 2025-26 2026-27 shows, the Governor’s budget Actual Budgeted Budgeted Amount Percent contains $4.2 billion in notable CCC 1,096,150 1,090,231 1,094,809 4,578 0.4% spending changes relative to the CSU 342,847 349,999a 360,160 10,161 2.9 2025-26 budget, including the UC 207,544 209,535b 212,503 2,968 1.4 enrollment growth proposals. Totals 1,646,541 1,649,765 1,667,472 17,707 1.1% a CSU estimates it will enroll 352,910 resident undergraduate FTE students in 2025-26. The largest set of changes are b UC estimates it will enroll 214,732 resident undergraduate FTE students in 2025-26. adjustments for actions in the Notes: For all segments, applies budgeted growth in 2025-26 and 2026-27 to 2024-25 levels. The 2025-26 budget taken to achieve 2024-25 level for CCC is actual funded enrollment (which is a three-year average). For CSU and UC, one-time budgetary savings. the 2024-25 level is actual enrollment. The percent change for CCC in 2026-27 reflects 0.5 percent enrollment growth, along with all other enrollment adjustments. Most notably, the state adopted FTE = full-time equivalent. payment deferrals for all three segments and began funding MCS Statute specifies that the Legislature intends to one year in arrears. Backfilling provide annual appropriations to assist UC with for these one-time actions upon entering 2026-27 implementation. The appropriations are intended to costs a total of $1.9 billion. The Governor’s budget backfill UC for the associated loss of nonresident also contains $1.5 billion in new ongoing higher supplemental tuition revenue and pay the higher education spending and $872 million in new cost of financial aid for resident students. Starting one-time spending. The largest ongoing spending in 2022-23, the state has provided UC with ongoing increases are for the Cal Grant program and base General Fund augmentations of about $30 million increases at each of the segments. each year. In 2025-26, the state paused funding. Cal Grant Spending Continues to Grow at Under the Governor’s proposal, UC would receive Historically High Rate. The Cal Grant program is funding to complete implementation, with the the state’s largest and longest-standing financial expectation that it reach the statutory 18 percent aid program. The Governor’s budget includes a cap in 2026-27. (Resident undergraduate students $337 million ongoing General Fund augmentation resulting from the replacement of nonresident (12 percent increase) to cover higher projected students count toward UC’s resident undergraduate Cal Grant costs in 2026-27. The Governor’s budget enrollment target.) also includes a $107 million upward adjustment Governor Does Not Set Enrollment Growth in the current year and a $52 million downward Expectations at CSU and UC for 2027-28. adjustment in the prior year to reflect updated In contrast to state practice over the past several Cal Grant spending data. After accounting for years, the Governor does not set enrollment growth these adjustments, Cal Grant costs grow each year expectations at CSU and UC for budget year plus over the budget window, averaging 12 percent— one. The state has been setting expectations for reflecting historically high annual growth. Rising budget year plus one in order to influence CSU and Cal Grant costs are largely attributable to several UC before they enter their corresponding admission policy changes adopted over the past several years. cycles. CSU and UC make most of their admission These policy changes include expanding eligibility decisions for the coming academic year in early for community college entitlement awards, creating spring, such that the state budget is enacted too new access awards for students with dependent late to influence their admission decisions that year. children, and providing larger Cal Grant tuition To date, the state has not set budget-year-plus-one awards in response to UC’s and CSU’s new tuition targets for CCC, as its admission cycle does not policies. The administration typically revises its begin as far in advance. Cal Grant cost estimates in the May Revision based upon updated caseload data in the spring. www.lao.ca.gov 5 analysis full 2026-27 BUDGET Base Funding for CSU and UC Increases universities by nearly $1 billion ongoing General Significantly. Largely consistent with Fund in 2026-27. Of this increase, the Governor’s intent language the state adopted in the budget includes $716 million for approximately 2025-26 Budget Act, the Governor’s budget 7 percent base increases ($366 million at CSU and increases base General Fund support for the $351 million at UC). These augmentations reflect a proposed year-five compact Figure 5 increase of 5 percent, along with a delayed partial year-four Higher Education Spending Rises Notably compact increase of 2 percent. Under Governor’s Budget The Governor proposes to give Changes in General Fund Spending (In Millions) the segments discretion in how they use these unrestricted Adjustments for 2025-26 One-Time Actions base increases. MCS funding in arrears (2025-26 awards)a $1,054 CCC Also Receives Base CCC base restoration for payment deferral 408 CCC base restoration for expiration of one-time funds 134 Increase, Along With Various CSU base restoration for payment deferral 144 Other Augmentations. UC base restoration for payment deferral 130 The Governor’s budget Subtotal ($1,870) includes a $241 million ongoing New Ongoing Spending Proposition 98 General Fund Cal Grants cost increase $337 CSU year-five compact base increase 265 augmentation for community UC year-five compact base increase 254 colleges to receive a 2.41 percent CCC apportionments (2.41 percent COLA) 241 cost-of-living adjustment (COLA), CSU delayed partial year-four compact base increase 101 which effectively equates to an UC delayed partial year-four compact base increase 96 UC nonresident enrollment replacement 61 unrestricted base increase. Seven Calbright College 38 CCC categorical programs also CCC enrollment growth for 2026-27 (0.5 percent) 32 would receive a 2.41 percent CCC categorical programs (2.41 percent COLA) 31 COLA. (This COLA rate will CCC Healthy School Foods Pathway program 14 CCC Common Cloud Data Platform 5 be revised in late April based CCC credit for prior learning 2 on updated inflation data.) Subtotal ($1,477) Additionally, the budget more than New One-Time Spendingb triples ongoing Proposition 98 CCC deferral repayment $408 funding for Calbright College CCC deferred maintenance 121 CCC student support block grant 100 (raising support from $15 million CCC apportionments (cover 2025-26 shortfall) 89 to $53 million). Calbright College CCC additional enrollment growth for 2025-26 (1 percent)c 55 is a fully online college the state CCC Common Cloud Data Platform 36 established in 2018-19. Other CCC credit for prior learning 35 Golden State Teacher Grants reappropriation 14 major CCC proposals include CCC Apprenticeships (cover shortfalls) 13 $408 million—nearly half of the UC reappropriationsd — proposed one-time Proposition 98 Subtotal ($872) CCC spending—for retiring Total Changes $4,219 the apportionments deferral a Consists of $513 million ongoing funding and $541 million one-time funding. b About two-thirds of this spending is paid for using newly available prior- and current-year funds adopted in last year’s budget. resulting from upward adjustments in the Proposition 98 minimum guarantee. The next largest one-time CCC c Increases budgeted growth from the enacted 2025-26 level of 0.57 percent to 1.57 percent. The associated ongoing cost is built into apportionments in 2026-27. proposals are $121 million for d The Governor’s budget reappropriates funding for four research initiatives whose original expenditure deferred maintenance projects and periods have ended. The administration does not have estimates of the amount of remaining funds for each initiative. $100 million for a student support MCS = Middle Class Scholarships and COLA = cost-of-living adjustment. block grant. 6 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET CSU and UC Out-Year Commitments Would respond to the payment deferrals, such that no Remain. Under the Governor’s plan—consistent programmatic effect is intended at either segment.) with the budget plan enacted in June 2025—the Only Proposed Budget Solution Is to state would continue to make certain out-year Financial Aid Program. The administration has commitments to CSU and UC. Specifically, the only one proposed spending solution in the higher state would commit to providing CSU and UC education area. Specifically, the administration combined with $525 million one-time General proposes to contain MCS costs by reducing Fund in 2027-28 and nearly $300 million ongoing award coverage from 35 percent in 2025-26 General Fund in 2028-29. These commitments to 17.5 percent thereafter. The administration stem from the state not providing the full year-four estimates reducing award coverage would lower compact payment in 2025-26. In addition, the MCS costs by $541 million, resulting in a like Governor includes a new proposal to retire the amount of General Fund savings. Savings are not CSU and UC deferrals in 2027-28, providing an generated until 2027-28 because the state funds associated $274 million one-time General Fund the program in arrears. The Governor’s budget payment. (In 2026-27, the Governor’s budget package has no proposals that reduce higher continues to allow CSU and UC to remain eligible education spending in 2026-27. for short-term, no-interest loans to help them KEY CONSIDERATIONS In this part of the brief, we raise some concerns income tax revenues would fall considerably, with the Governor’s proposed 2026-27 budget for and the misalignment between state revenues higher education and offer some recommendations and proposed spending would widen. (Under for building a more sustainable budget. the Governor’s budget, proposed state spending Governor’s Budget for Higher Education Is already is higher than projected state revenues an Imprudent Starting Point. As discussed in by nearly $21 billion in 2026-27.) All of higher The 2026-27 Budget: Overview of the Governor’s education is vulnerable to spending reductions Budget, the administration’s revenue estimates in such a situation. Community college funding is over the budget window are $42 billion higher linked to the Proposition 98 minimum guarantee, than previous budget-act assumptions and which tends to drop when state revenues decline. almost $30 billion higher than our November The universities—lacking constitutional, federal, or 2025 estimates. Even with the higher revenues, court-ordered mandates—generally are considered the administration estimates a roughly $3 billion a discretionary component of the state budget deficit for 2026-27, growing to a $27 billion deficit in and are particularly subject to funding reductions 2027-28. Facing projected deficits, the Legislature during fiscal downturns. As stock market typically would take action to contain costs, developments unfold over the course of the next rather than considering proposals for large new 18 months (through the end of the budget year), spending increases. The Governor’s budget for all the segments could see their fiscal situations higher education for 2026-27 is billions of dollars change significantly. higher than the current year, with no plan for how to Base Increases sustain that funding in 2027-28. Recommend Reducing or Eliminating Base New Higher Education Spending Is at Risk General Fund Increases for CSU and UC. Given Stock Market Signals. The administration’s Base increases help the segments with their core higher revenue estimates are mainly driven by operating costs—notably employee salaries; strong stock market performance. Certain factors health benefits; pensions; and non-personnel signal the stock market might be approaching costs, including debt service, utilities, equipment, a peak. If a stock market downturn occurs, www.lao.ca.gov 7 analysis full 2026-27 BUDGET and supplies. The state budget, however, likely will to implement the side agreements the Governor not be able to sustain ongoing non-Proposition 98 makes with the segments. Compacts that commit General Fund increases over the next few years. to funding increases several years into the future Rather, in the coming months and years, the historically have failed to be honored, as budget state will likely have to take significant action to conditions have changed over time. The most reduce spending on existing ongoing programs, recent compact also has contributed to a string raise additional tax revenues, or find other of convoluted budget actions that have led to a budget-balancing solutions. If the Legislature lack of transparency, lack of accountability, and considers base increases for CSU and UC a high resulting confusion. For instance, under the current priority—even given the potentially very difficult budget construction, the state has committed to budget trade-offs—then approving smaller base provide CSU and UC with 3 percent base increases increases would be more prudent. The Legislature, in 2028-29, even though the state faces a large for example, could consider providing CSU and UC projected deficit in 2028-29. Those proposed with base increases more in line with the current increases in 2028-29 would be for honoring the CCC COLA rate of 2.41 percent. Alternatively, the compact commitments the former Governor could Legislature could eliminate the base increases for not honor back in 2025-26. UC and CSU altogether, thereby making the state’s Recommend Not Getting Entangled With structural deficit more manageable to address and Higher Education Compacts Moving Forward. increasing the chances that core programs could From the Legislature’s perspective, little is to be sustained moving forward. be gained from implementing a Governor’s Even With No Increases in State Support, compact. The Legislature can still plan, establish CSU’s and UC’s Total Core Funding Grows. performance goals, set spending priorities, make In contrast to some state agencies, the universities appropriations, support enrollment growth, and have a fiscal advantage in having access not only monitor the segments’ outcomes—all without a to state funding but also considerable nonstate Governor’s compact. With a new Governor to take funding. With CSU and UC set to raise tuition office next year, we recommend the Legislature charges in 2026-27, each segment will generate not get entangled with any new compact. Instead, hundreds of millions of dollars in new tuition we recommend the Legislature make funding revenue. This additional revenue will allow each decisions for each segment each year based upon segment to cover some of its spending priorities. the best information available at that time and Even with no increase in base General Fund the state’s overall budget condition. In this vein, support, CSU and UC would see their core funding we recommend the Legislature rescind funding grow by 4.2 percent and 3.5 percent, respectively. commitments made in advance for 2027-28 and Governor’s Compact Has Been a Budgetary 2028-29. The Legislature can make funding Hindrance. Back in 2022, Governor Newsom decisions for those fiscal years as part of the announced a compact with the segment heads. regular budget process for each of those years. In those compacts, the Governor made fiscal Enrollment Growth commitments to propose annual funding increases Recommend Supporting Some Enrollment for the segments. The compacts were intended Growth. We recommend the Legislature fund to provide the segments with more predictable some enrollment growth at each segment in funding levels, while also promoting certain 2026-27. All segments report being over their performance goals, such as enrolling more resident targets in 2025-26, and CSU and UC are on track undergraduates and improving graduation rates. to grow further in 2026-27. Moreover, UC and CSU Though the Governor may propose funding already are in the midst of making their admission increases, the Legislature has appropriation decisions for the 2026-27 academic year based authority and ultimately decides how much to upon the enrollment expectations set in the provide the segments given the state’s overall 2025-26 Budget Act. Both segments, particularly budget situation. The Legislature is not beholden 8 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET CSU, still have options for managing their 2026-27 Recommend Holding Enrollment Flat at enrollment levels. Providing at least some Universities in 2027-28. Given the sizeable enrollment growth funding, however, allows the projected deficit in 2027-28, we recommend state to support the actions the segments already holding enrollment expectations flat for UC and have taken to meet the state’s initial 2026-27 CSU that year. Setting higher enrollment targets growth targets. for the segments without providing them funding Recommend Providing Enrollment Growth comes with downsides. Most notably, there can Funding Separately From Base Increases. be programmatic impacts, including larger class Consistent with historical legislative practice, as sizes, fewer course offerings, and less academic well as current practice for CCC, we recommend support. Another consideration is that demographic the Legislature fund enrollment growth at CSU and pressures are projected to be somewhat weak over UC apart from and on top of any base increase, the next few years. Little, if any, growth in projected as doing so provides greater transparency and high school graduates, the age 18-24 population, accountability. We recommend the Legislature and the age 25-29 population signals enrollment fund CSU and UC enrollment growth using the pressures will be tempered in 2027-28. marginal cost formula. Based on the 2026-27 Financial Aid marginal cost state rate, the ongoing General Fund cost of 1 percent growth in resident Recommend Giving High Budget Priority to undergraduate enrollment is $40 million at CSU and Needs-Based Cal Grant Program. Cal Grant costs increased at a historically high rate in 2024-25 $30 million at UC. and are projected to increase at even higher rates in Recommend Pausing Implementation of 2025-26 and 2026-27. Program costs are increasing Nonresident Replacement Plan in 2026-27. due to both higher caseload and higher award Given the state’s projected deficits, we recommend amounts resulting from various policy changes. pausing implementation of the nonresident The Legislature could revisit some of these replacement plan in 2026-27. Pausing the plan cost drivers. We recommend, however, that the would generate $61 million in ongoing General Legislature generally look for other budget solutions Fund savings. During the pause, we recommend in the higher education policy area before making setting the nonresident undergraduate cap for the substantial changes to the Cal Grant program. Berkeley, Los Angeles, and San Diego campuses at The Cal Grant program is a needs-based program their respective shares in 2024-25—the last year the that is designed to help students most at risk of not state provided associated funding. In 2025-26, the being able to enroll in and complete college due to three campuses combined made no net progress financial issues. Depending on the Cal Grant award toward the lower cap. In 2026-27, if UC resumes type, household income is capped at $76,100 or progress toward the lower cap based upon actions $144,700 (for a family of four in 2026-27). it already has taken, the Legislature could begin funding the associated cost on an ongoing basis MCS Proposal Is a Budget-Balancing Option once its fiscal condition improves. Alternatively, the Legislature May Want to Consider. Despite projecting a $27 billion deficit in 2027-28, the UC could grow nonresident enrollment at the administration has only the one proposal to reduce three campuses in 2026-27, but only to the extent higher education spending—cutting MCS award resident enrollment grows in tandem. When state coverage in half. In contrast to the Cal Grant budget conditions improve and the Legislature program, MCS does not require students to meet decides to resume appropriations, it could financial need criteria. MCS does have an income then reestablish the expectation that the three cap, but it is very high ($250,000 in 2026-27) campuses continue to make progress toward the and not based on family size. With such a high 18 percent cap. income cap, MCS is not targeted. The majority of CSU and UC resident undergraduates qualify for the program. Many CSU and UC students from www.lao.ca.gov 9 analysis full 2026-27 BUDGET high-income households would very likely still a student support block grant also are reasonable. attend and complete college regardless of the level Importantly, addressing deferred maintenance of MCS support. Moreover, students from low- and helps avoid higher project costs in the future as middle-income households would continue to well as potential programmatic disruptions due receive Cal Grants to help with college costs. In to failing building components. Given community 2025-26, about 50 percent of MCS recipients colleges report a backlog of these projects, we also receive Cal Grants. In addition, students from recommend giving deferred maintenance projects lower-income households may receive federal Pell high priority among one-time activities after paying Grants and institutional grants to help with college off the deferral. costs. For all these reasons, the Legislature might Recommend Using Any Non-Proposition 98 deem MCS budget solutions less disruptive than One-Time Funding Also to Build Fiscal other options that would affect more targeted, Resiliency. Given the state’s projected deficit needs-based programs. in 2026-27, the Governor’s budget includes little one-time Non-Proposition 98 General Fund Other spending. If one-time Non-Proposition 98 funding, Recommend Using One-Time CCC Funding however, becomes available later this year or over to Build Fiscal Resiliency. With stock market the next few years, we recommend the Legislature performance strong over the past two years and use it to place the state on a stronger fiscal footing. state revenues revised upward in the Governor’s Specifically, within the higher education budget, we budget, more prior- and current-year Proposition 98 recommend retiring payment deferrals at CSU and funding is available for one-time activities at the UC and paying for MCS costs in the year in which community colleges. The Governor’s budget also those costs are incurred (rather than in arrears). allocates some ongoing Proposition 98 funding Using one-time funding in these ways helps return for one-time activities—an approach that creates the state to better fiscal practices and also better a cushion to protect core programs in case the positions the state to address a future fiscal Proposition 98 minimum guarantee declines downturn. If further one-time funding becomes in the future. Among the Governor’s one-time available, we recommend designating it for capital proposals, we think the proposal to first retire renewal and seismic safety projects at CSU and the CCC payment deferral is prudent, as it leaves UC (similar to the Governor’s approach for CCC community colleges in a better position to weather this year). CSU and UC have billions of dollars of a fiscal downturn. We think the Governor’s one-time outstanding projects in these areas. proposals for deferred maintenance projects and 10 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET www.lao.ca.gov 11 analysis full 2026-27 BUDGET LAO PUBLICATIONS This report was prepared by Jennifer Pacella, with contributions from Florence Bouvet, Natalie Gonzalez, and Lisa Qing, and 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