The California State University (CSU) consists of 21 campuses, including the new Monterey Bay campus (scheduled to open in fall 1995), which is located on a portion of the recently closed Fort Ord military base. In July 1995, the California Maritime Academy will become the twenty-second CSU campus. The budget proposes General Fund expenditures of $1.6 billion. This is an increase of $3 million, or 0.2 percent, from estimated current-year expenditures. The increase understates actual budget- year growth, as 1994-95 expenditures included $41 million in one-time spending. The General Fund increase represents the net effect of increases for unspecified general purposes and additional costs for lease-payment bonds, offset by a decrease due to the elimination of one-time carryover funds. The budget does not propose an enrollment level. It does, however, anticipate a fee increase of at least 10 percent.
We recommend that the Legislature take a variety of actions--in line with the principles we identify--in crafting a budget plan for the CSU.
We have developed budget proposals for the University of California (UC), and the CSU based on several principles that we discuss in an earlier section on higher education crosscutting issues. Figure 29 shows our proposal for the CSU in detail, compared to the Governor's proposal. As the figure shows, our recommendations result in no net General Fund increase above the level proposed by the Governor. In sections below, we discuss individual recommendations for each item where our proposed funding level differs from the Governor's funding level.
We recommend expenditures of $37.6 million to provide a 1.2 percent salary increase and merit salary increases for CSU faculty and staff on July 1, 1995. We also recommend that CSU report at budget hearings on its plans regarding merit compensation.
The Governor's Budget does not specifically provide for faculty and staff salary increases or merit salary adjustments (MSAs). At the time of this analysis, the CSU administration was proposing to allocate $37.5 million for compensation increases in 1995-96, which represents an overall increase of 2.5 percent.
In past years, the Legislature has sought to achieve a balance among various types of compensation increases. For example, the Legislature has provided funds both for general salary increases and for merit salary increases. With regard to faculty, the Legislature has been concerned about the extent to which the provision of any salary increases and MSAs would narrow or eliminate the gap between faculty salaries at CSU in relation to the CSU's comparison institutions. (As we discussed earlier in the higher education crosscutting issues section, our analysis indicates that CSU faculty salaries would lag behind comparison institutions by 3 percent in 1995-96 in the absence of salary increases.)
We believe an increase of roughly the amount proposed by the CSU administration is reasonable given fiscal constraints. In addition, it would eliminate most of the faculty salary gap we identify. Consistent with past legislative action to provide funding for merit salary adjustments and balance various types of compensation increases, we recommend an expenditure of $37.6 million for employee compensation increases, allocated as follows: $10.8 million for 1.2 percent general faculty salary increases, $7.2 million for 1.2 percent general staff salary increases (the same percentage we recommend for UC staff), and $19.6 million for merit salary increases for faculty and staff.
CSU Merit Proposal. For 1995-96, the CSU administration is proposing a new method for allocating employee compensation increases. Specifically, the administration is recommending that most or all the increases provided be based on employee merit. As is true for virtually all faculty and staff compensation issues at the CSU, this proposal would be subject to negotiation through the collective bargaining process. The CSU indicates that it will have more details available on its proposal this spring.
The Legislature, in its oversight role, needs additional information on CSU's merit proposal. Accordingly, we recommend that the CSU provide additional details on its proposal at budget hearings, including how the proposal would affect the traditional comparison of faculty salaries at CSU to the salaries at other comparable institutions.
We recommend an expenditure of $9.4 million for price increases, maintenance of employee benefits and new space, and small campus funding adjustments.
The Governor's Budget does not address various costs of continuing existing programs at the CSU. These costs are described below:
Recommendation. We recommend the expenditure of $9.4 million to recognize the estimated costs of continuing current programs. This recommendation is based on the following allocation: $6.8 million for price increases, $250,000 for benefits increases, $1.3 million for the maintenance of new space, and $1.1 million for small campus adjustments.
We recommend the expenditure of $2.8 million for phase-in costs related to the new CSU campus at Monterey Bay. We also recommend that the CSU report at budget hearings on its progress towards opening the campus in 1995-96.
Chapter 901, Statutes of 1994 (SB 1425, Mello) established a new CSU, Monterey Bay campus at Fort Ord, a former military base. The 1994 Budget Act provided $9.3 million in the current year for operating costs, in addition to $3 million that CSU had redirected from its own resources for this purpose. The federal government has also provided $15 million for capital outlay related to building alterations needed to open the campus. Another $14 million in federal funds for additional renovations has been approved by Congress.
In the Supplemental Report of the 1994 Budget Act, the Legislature adopted language specifying its intent that enrollment growth at the Monterey Bay campus be faster than projected by a March 1994 CSU report, "in order to (a) reduce the state's higher costs for funding enrollments at the campus and (b) utilize more of the existing Fort Ord facilities and thus reduce the state's future need to fund additional facilities at existing campuses." The language also specified enrollment goals of 4,000 FTES in 1999-2000 and 20,000 FTES in 2010-00, assuming that the federal government provides funding for facilities renovation and that "the state provides funding for systemwide enrollment growth above the 1994-95 level."
The CSU plans to open the new campus in fall 1995 with an initial enrollment of about 600 FTE students. Our analysis indicates that this is a reasonable first step in meeting the enrollment targets specified by the Legislature.
The CSU administration indicates that it will need an additional $2.8 million in 1995-96 for (1) full-year costs of 40 planning faculty hired in winter 1994 and (2) half- year costs of an additional 40 faculty to be hired by winter 1995. This funding level is consistent with the anticipated workload. Given the Legislature's interest in the new campus, we also recommend that the CSU report at budget hearings on its progress towards opening the campus and in ensuring that the Legislature's enrollment targets for CSU, Monterey Bay will be met.
We recommend the expenditure of $5.4 million in the critical area of deferred maintenance.
The Governor's Budget does not propose any funding changes in the area of deferred maintenance. We recommend the expenditure of $5.4 million to address the highest priority needs in this area.
For 1993-94 (the most recent year for which information is available), the CSU's deferred maintenance backlog was approximately $327 million. The backlog of priority-one projects was $35 million. Priority-one projects are generally defined as those requiring "immediate action to return a facility to normal operation, stop accelerated deterioration, or correct a cited safety hazard." The 1993-94 deferred maintenance backlog for each campus is displayed in our Analysis of the 1994-95 Budget Bill, (please see page F-48).
In 1994-95, the CSU plans to spend $25 million for priority one deferred maintenance projects. Of this amount, $17 million was specified in the 1994 budget package as being from lease-payment bonds for priority one deferred maintenance projects that would have an anticipated useful life of 15 years. Due to recent legal developments however, it appears that a different funding source (such as a loan) will be used for the planned expenditure. At the time of this analysis, the basis for the CSU's loan authority was not clear. The remaining $8 million is from one-time carry-over funds (as discussed in a later section). The backlog of priority one projects as well as the overall backlog will continue to be significant in 1995-96. An additional $5.4 million funds would address a small portion of the shortfall and would fully backfill a reduction of $5.2 million made in the current year. (We discuss the current-year reduction and the use of lease-payment bonds and/or loans for deferred maintenance in a later section.)
We recommend that undergraduate student fees be increased by $156 (10 percent)--from $1,584 to $1,740.
The Governor's Budget anticipates that student fees at CSU will increase by at least 10 percent. The CSU Trustees have approved an undergraduate fee increase of $156 (10 percent) and have also adopted a resolution urging that sufficient funding be provided to eliminate the need for a fee increase. We believe that this is a reasonable increase given the state's fiscal condition and the relative level of CSU fees. The budget indicates that CSU undergraduate fees (including the mandatory fee and campus-based fees) in 1994-95 are approximately $1,046 below the CSU's 15 public comparison universities. Even with the proposed increase, CSU undergraduate fees will continue to be well below charges at comparable universities.
As we discuss earlier in the higher education crosscutting issues section, we took as a starting point the administration's total proposed funding levels for higher education in developing our alternative budget proposals. To the extent the Legislature increases the overall level of support for higher education, moderating the fee increase may be a high legislative priority. To assist the Legislature in its deliberations on this issue, we note that $29.8 million would be needed in 1995-96 to provide CSU with the same level of resources as is provided by a 10 percent fee increase (net of financial aid), given current enrollment levels. (Later, we recommend that enrollment be increased, thus, the amount that would be needed at the recommended enrollment level is $30 million.)
We recommend that graduate student fees be increased by $90 above the general fee increase for undergraduates.
The Governor's Budget does not propose a specific fee increase for graduate students. The CSU Trustees have approved the general increase of $156 proposed for undergraduates, plus an additional $90 fee increase for graduate and postbaccalaureate students (except for students in teaching credential programs). We believe this increase is reasonable, based on the reasons cited below:
We also believe that the state's charges for graduate studies should not be so high as to disadvantage California in relationship to other states in competition to attract highly qualified students. This is unlikely to be an issue at the CSU since graduate fees at the CSU are at least $1,046 below graduate fees at the CSU's 15 public comparison institutions.
We estimate that gross revenues prior to financial aid offsets from a fee increase of this amount would be approximately $2.5 million. However, this estimate may be subject to change later, pending receipt of additional information on the estimated number of teaching credential students who would be excluded from the fee increase.
We recommend the expenditure of $16.5 million for additional student financial aid for needy students to offset our recommended fee increases.
This aid amount is equal to 33 percent of the total fee increase for our recommended enrollment level and should be sufficient to offset the fee increase for needy students. In our analysis of the Student Aid Commission, we also recommend approval of a proposed $11.5 million increase to offset the impact of the 10 percent fee increase on Cal Grant award winners.
We recommend that the Legislature direct the CSU to increase its enrollment by 2,000 students in 1995-96.
The CSU estimates that it will serve roughly 250,000 students in the current year. The budget contains no enrollment proposal for 1995-96.
Current-year enrollments are roughly 28,000 students below the number served in 1990-91. This decline occurred during a period of little change in the population groups that typically attend the CSU. For example, the number of high school graduates and persons aged 18 to 35 (the major age group enrolled at the CSU) have shown slight increases between 1990-91 and 1994-95. Thus, the vast majority of the change is due to changes in "participation rates," that is, the proportions of (1) eligible students who enroll and (2) existing students who continue their education at the CSU.
The decline in participation rates is probably due to a number of factors, including course section reductions (and their impact on students being able to graduate in a timely manner) and other enrollment management techniques implemented by the CSU, fee increases, and declines in the economy generally.
If funding is provided for additional students, the CSU administration proposes to serve an additional 2,000 FTE students in 1995-96. Based on participation rates in the current year and on constraints due to the "pipeline" of existing students (for example, senior enrollments can only be increased significantly after freshman and transfer enrollments are increased), we believe an increase of 2,000 FTE students is reasonable. Accordingly, we recommend that the CSU be directed to enroll an additional 2,000 FTE students for a total enrollment of 252,000. This is the level that can be accommodated within the funding parameters we outlined earlier in this section. We propose $9 million to add faculty positions and related support to serve these students.
We recommend that the Legislature specify an enrollment level for 1995-96 in supplemental report language.
In the Supplemental Report of the 1994 Budget Act, the Legislature specified an enrollment level of 250,000 FTE students in 1994-95. The language also provided for a method of adjusting enrollments downward based on an amount of funding per additional student in anticipation of any budget declines that might occur later (such as through a veto or the budget "trigger" mechanism.) We believe that the language is an important component of the overall CSU budget, because it holds CSU accountable for meeting the Legislature's enrollment target, thereby maintaining the integrity of the budget process.
We recommend that the Legislature adopt similar supplemental report language again this year. Our proposed enrollment level for the CSU is 252,000 FTE students, an increase of 2,000 over 1994-95. (Including the transfer of California Maritime Academy FTE to the CSU systems in 1995-96, the total will be about 252,500.) We will propose specific supplemental report language prior to budget hearings.
We recommend that the CSU report at budget hearings on its plans for funding deferred maintenance in the current year. We recommend that the Legislature avoid debt financing for deferred maintenance in 1995-96.
In the 1994 Budget Act and related legislation, the Legislature provided $17 million from lease-payment bonds for deferred maintenance projects (such as roof replacements). About $5.2 million of this amount was to replace existing expenditures--$3.2 million from the General Fund, and $2 million from redirection of ongoing CSU funds. Debt payments on the bonds would be made from an annual General Fund appropriation to the CSU.
Typically, lease-payment bonds have been used for long-term capital improvements and not for deferred maintenance purposes, which have been funded as part of ongoing state operations. Given this departure, the Legislature adopted various provisions in the 1994 budget package regarding these bonds. First, the Legislature specified that the bonds were to be used for deferred maintenance projects with a useful life of at least 15 years. The Legislature also specified that the projects were to be "priority one" projects which are those requiring "immediate action to return a facility to normal operation, stop accelerated deterioration, or correct a cited safety hazard."
Finally, the budget package provided for an "asset transfer" mechanism to ensure that sufficient "collateral" was available to back-up the sale of the bonds. Asset transfer involves identifying an asset of sufficient value to support the amount of bonds to be sold. Under this mechanism, the asset identified may bear no relationship to the deferred maintenance projects being undertaken, though the total value must generally be in the same range as the projects. For example, an existing building (on one campus) valued at $15 million may be identified through asset transfer as the collateral for lease-payment bonds, but the projects undertaken using the bond monies may be the replacement of 15 new building roofs (throughout all the existing campuses) at an average cost of $1 million each.
Under current law, the state Attorney General is responsible for determining whether a proposed use of lease-payment bonds meets various legal requirements, such as constitutional requirements related to debt. Since enactment of the budget package, the Attorney General has raised concerns that the proposed use of lease- payment bonds (and particularly the asset transfer provisions) may not meet various legal requirements. As of late-January 1995, the Attorney General had not made a positive determination that the use of $17 million in lease-payment bonds for deferred maintenance meets legal requirements.
At the time of this analysis, the CSU administration indicated that it was seeking an alternative funding source (such as a loan) for the $17 million in planned current- year expenditures. (As we discussed earlier in our analysis of the UC budget, the UC is also affected by the legal developments we describe above.) We recommend that the CSU report on its plans to fund deferred maintenance expenditures in 1994-95 including the estimated impact on the 1995-96 budget of any repayments needed for 1994-95 costs.
Debt Financing Not Prudent. At the time of this analysis, the CSU administration indicated that it was seeking an alternative funding source (such as a loan) for additional budget-year expenditures on deferred maintenance. In our view, proposed debt financing of the CSU's operating budget in 1995-96 is ill-advised because prudent budget policy calls for annual balancing of the CSU budget. If the state provides new loans each year for the indefinite future, it will have to pay these loan amounts--plus interest--out of future years' operating budgets. We believe the state should recognize this ongoing cost and provide for it in the ongoing budget.
We recommend that the Legislature avoid debt financing for deferred maintenance in 1995-96. In various sections of this analysis, we have recommended alternatives to the use of debt financing for deferred maintenance. Earlier, we recommended the expenditure of $5.4 million for deferred maintenance in 1995-96. This amount would fully backfill the $5.2 million in deferred maintenance reductions made in the current year. Later in this analysis, we recommend that the Legislature adopt Budget Bill language to target the use of carryover funds for deferred maintenance and instructional equipment replacement.
We recommend that the Legislature adopt Budget Bill language establishing limits on, and priorities for, the use of one-time carryover funds given serious concerns about the CSU's recent actions.
Prior to 1992-93, the annual Budget Act contained language providing that the CSU could carry over ("reappropriate") General Fund monies for two years and specified the purposes for which the funds could be spent. Generally, the main purposes identified were deferred maintenance and instructional equipment replacement, though additional purposes were sometimes added from year to year. The language also required the CSU, by September 30 of each year, to report to the Joint Legislative Budget Committee (JLBC) and the Department of Finance (DOF) on the amounts of funding carried over and the uses of these funds.
From the mid-1980s until 1992-93, the amounts carried over from the CSU's main support item averaged about $6 million annually, with a high of about $13 million.
Beginning with the 1992 Budget Act, the Legislature removed the restrictions on the use of carryover funds at the CSU in recognition of the impact of large General Fund budget reductions.
Current-Year Actions. Figure 30 below shows the expenditure plan for the $41 million (excluding lease-payment bond funds) in one-time carryover funds available in 1994-95. The CSU indicates that about $22 million from 1993-94 was carried over intentionally--that is, they are in excess of a "normal" carryover amount. We note that these "forced savings" occurred in a year (1993-94) when the number of course sections taught declined by about 2,000 and FTE student enrollments declined by 10,000.
According to the CSU, its decision to carry over 1993-94 funds into the current year was influenced by the failure of a higher education capital outlay bond measure in June 1994, and various budget "threats" such as possible (1) delays in enacting the 1994-95 budget, (2) shortfalls in the 1994-95 budget (such as through automatic budget "trigger" reductions), and (3) delays or shortfalls in the receipt of federal funds for earthquake-related repairs at CSU, Northridge. However, the CSU did not ultimately face the budget threats it identified (with the exception of the failure of the capital outlay bond measure).
Generally, we believe the expenditure plan for the $41 million shown in Figure 30 is reasonable. Many of the expenditures--such as in the areas of deferred maintenance, instructional equipment, and telecommunications infrastructure--reflect legislative priorities identified over the past several years.
We have serious concerns, however, that the CSU was generating this significant "savings" by limiting student access. For example, the $22 million the CSU intentionally carried over could have been used in the current year on a one-time basis to offer roughly 2,000 course sections (roughly the number lost in 1993-94), reduce the fee increase from 10 percent to about 3 percent, or some combination of the two.
The Legislature, however, was precluded from specifying its priorities for use of the funds in the current year. This is because the CSU did not file the report identifying the amounts of carryover funds available from 1993-94 until late-January 1995 even though the report was due September 30, 1994. Thus, the Governor's Budget document provided the first "notification" to the Legislature of the availability of carryover funds.
As a practical matter, however, the CSU informs us that it has already committed the entire $41 million in expenditures. Thus, it is too late for the Legislature to specify different priorities for use of the funds in 1994-95.
Budget-Year Implications. The CSU's actions in the current-year raise two fundamental legislative oversight issues for the budget year and beyond:
For at least the past 15 years, the Legislature has granted the CSU more budget flexibility than most other state agencies. For most state agencies, any General Fund monies that are not spent by the end of the fiscal year revert to the General Fund. Given the Legislature's long history of providing budget flexibility to CSU, we believe it is reasonable to continue to provide some level of carryover authority to the CSU. Such authority would reduce the incentive to spend the funds quickly prior to the end of the fiscal year in which the funds were originally budgeted.
There is evidence, however, that the current unlimited carryover authority was used by the CSU to carry over high fund balances to address selected priorities without legislative oversight. Accordingly, we recommend that the Legislature limit the CSU's carryover authority to $15 million from each fiscal year, in recognition of "normal" levels of carryover funds. We further recommend that the Legislature re- establish prior Budget Bill language specifying that carryover funds shall be used for deferred maintenance and instructional equipment replacement, because there are significant shortfalls in these areas that could be addressed through one-time expenditures.
Specifically, we recommend that the Legislature replace Provision 1 of the existing carryover language in Item 6610-490 with the following:
"Up to $15 million of the reappropriated funds from Item 6610-001-001, Budget Act of 1994, shall be available for deferred maintenance and special repair projects and replacement of instructional equipment. As of June 30, 1994, any amount above $15 million shall revert to the General Fund." (In our analysis of the UC budget, we recommend the adoption of similar language.)
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