Analysis of the 2005-06 Budget Bill Legislative Analyst's Office February 2005

California State University (6610)

The California State University (CSU) consists of 23 campuses. The Governor's budget includes about $6 billion for CSU from all fund sources—including General Fund, student fee revenue, federal funds, and other funds. This is an increase of $187 million, or 3.2 percent, from the revised current-year amount. Of that increase, $101 million will be generated from student fees. The budget proposes General Fund spending of $2.6 billion for the system in 2005-06. This is an increase of $111 million, or 4.4 percent, from the revised 2004-05 budget. Figure 1 summarizes changes from the enacted 2004-05 budget to the Governor's 2005-06 proposal.

Proposed Augmentations. The proposed budget provides CSU with $122.5 million in General Fund augmentations to fulfill an agreement the Governor made with CSU. Specifically, the budget provides $71.7 million for a 3 percent base budget increase and $50.8 million to accommodate a 2.5 percent enrollment increase (to serve an additional 8,100 full-time equivalent [FTE] students).

Proposed Reductions. The budget also proposes $12 million in General Fund reductions. These changes include a $7 million reduction to enrollment growth and outreach, which would be allocated between the two areas at CSU's discretion.

Student Fee Increases

For 2005-06, the Governor's budget assumes increases in the systemwide fee for undergraduate and graduate students and nonresident tuition. These increases have already been approved by the Board of Trustees. The fee increases are expected to provide an additional $76 million in new student fee revenue. The Governor's proposal assumes the additional student fee revenue will not be offset by a reduction in CSU's General Fund support. (For a detailed description about the need for a long-term fee policy and how fees represent another source of funding for the university's operations, please see the "Student Fees" write-up earlier in this chapter.)

Undergraduate and Graduate Systemwide Fees. As Figure 2 shows, the Governor's budget assumes an increase from 2004-05 of 8 percent, or $186, in the systemwide fee for undergraduate students. The proposed budget also assumes a 10 percent increase, or $282, in the graduate student systemwide fee.

Nonresident Fees. At CSU, nonresident students also pay a supplementary fee in the form of nonresident tuition. The budget assumes this supplementary fee will remain at the current level of $10,170.

Intersegmental Issues Involving CSU

In intersegmental write-ups earlier in this chapter, we address several issues relating to CSU. For each of these issues, we offer an alternative to the Governor's proposal. We summarize our main findings and recommendations below.

Evaluate Higher Education Funding Needs Based on Master Plan, Not Governor's "Compact." The General Fund support and student fee increases proposed for 2005-06 are consistent with the compact that the Governor developed with CSU and the University of California (UC) last spring. This compact specifies targets for the Governor's budget requests through 2010-11. Notwithstanding the Governor's compact, we advise the Legislature to enact a budget for higher education as it normally does, by examining each of the Governor's proposals on its own merits. Specifically, the Legislature should evaluate funding for higher education based on its Master Plan for Higher Education and not the Governor's compact.

Fund Enrollment Growth Consistent With Demographic Projections and Agreed-Upon Funding Practices. The Governor's budget provides $50.8 million to fund 2.5 percent enrollment growth at a marginal General Fund cost of $6,270 per additional FTE student. We recommend the Legislature instead provide funding for enrollment growth at a rate of 2 percent, which better matches anticipated need under the Master Plan. We also recommend adopting budget bill language specifying an enrollment target of 330,602 FTE students for CSU. Moreover, using our marginal cost estimate based on the agreed-upon 1995 methodology, we recommend reducing the Governor's proposed per student funding rate for CSU from $6,270 to $5,999. Accordingly, we recommend a General Fund reduction of $11.9 million for CSU. In the "Enrollment Growth and Funding" write-up of this chapter, we also propose that the Legislature revisit and assess how the state determines the amount of funding to provide CSU for each additional FTE student in future budget years.

Align Student Fee Increases to Share of Education Costs. The proposed budget assumes an additional $101 million in student fee revenue largely due to various fee increases recently approved by the CSU Board of Trustees. However, the Governor's budget does not account for this revenue, ceding to CSU full discretion in deciding how to spend the additional funds. We recommend that the Legislature consider this revenue as part of the base support for CSU's programs, as it always has. In the "Student Fees" write-up, we also propose the Legislature adopt a long-term fee policy that sets fees at a fixed percentage of students' total education costs. Moreover, we recommend the Legislature reduce CSU's General Fund appropriation to reflect $24.4 million in new revenue and savings associated with the second-year phase in of the excess unit fee policy that was adopted as part of the 2004-05 budget.

Impact of LAO Recommendations

Adopting all the above recommendations would result in a much different approach to CSU's budget than that taken by the administration. In our view, the Legislature should approach CSU's budget as it traditionally has: (1) assessing the cost of funding the programmatic objectives the Legislature has identified and (2) directing available funding—including both General Fund support and student fee revenue—to cover those costs. Figure 3 shows how CSU's budget would be affected if the Legislature adopted our recommendations under this approach. Specifically, it shows the additional expenditures and resources above 2004-05 levels.

Expenditures. Figure 3 first shows new spending components:

• Base Increase. As discussed earlier, the Governor proposes a 3 percent base increase for CSU. Given that we project inflation in 2005-06 will roughly match this percentage, we do not take issue with it. However, the Governor applies the 3 percent increase only to the portion of CSU's budget funded from the General Fund. We believe that a base increase should be applied to all of CSU's base budget, including that portion which is funded with student fee revenue. As a result, under our approach, a 3 percent base increase would cost $105 million.
• Enrollment Growth. As discussed earlier, we recommend the Legislature fund a 2 percent increase in enrollment for CSU. This would cost $38.9 million.
• Other Adjustments. The Governor's budget includes a net $5 million reduction to CSU's base budget. This includes accounting for the one-time effect of a carryover appropriation and other technical adjustments.

Resources. Figure 3 displays two sources of new revenue:

• Fee Revenue. We estimate that the planned fee increases for the budget year will provide CSU with $75.5 million in new student fee revenue. This amount assumes additional revenue from the university's excess course unit policy and our proposed 2 percent enrollment growth.
• General Fund Support. As discussed earlier in this analysis, the Governor's budget proposes to increase General Fund support for CSU by $110.5 million from the revised 2004-05 budget (see Figure 1). As a starting point, therefore, these funds are available to fund the additional costs identified above.

Uncommitted Resources. As shown in Figure 3, the Legislature could (1) fully fund enrollment growth and a cost-of-living adjustment for CSU and (2) reject the Governor's proposed $7 million reduction to CSU's outreach programs and enrollment funding, all at a lower General Fund cost than proposed by the Governor. In fact, under our proposal the Legislature would free up over $71 million in General Fund support (from the level in the Governor's budget proposal) to address other priorities.

As discussed earlier, the Legislature may wish to use some of this amount to provide increased financial aid for CSU graduate students, given that these students, unlike needy UC undergraduates, are not protected from fee increases by the Cal Grant entitlement program. Our identified General Fund savings could also be used to fund legislative priorities in other areas, including addressing the state's budget problem.