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Analysis of the 2006-07 Budget BillLegislative Analyst's Office
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The Governor’s budget proposes $110 million to fund 2.5 percent enrollment growth at the University of California (UC) and the California State University (CSU). This amount would provide $10,103 in General Fund support for each additional student at UC and $6,792 for each additional student at CSU. (The proposed budget also provides $149 million for a 3 percent enrollment increase at the California Community Colleges.) In this write-up, we (1) review recent enrollment trends at UC and CSU, (2) analyze the Governor’s proposed enrollment growth and funding rates for 2006-07, and (3) recommend alternatives to those rates.
The Legislature provides funding in the annual budget act to support specific enrollment levels at each segment. Typically, this includes funding for enrollment growth. Because the number of eligible students enrolling at the segments cannot be predicted with complete accuracy, in any given year the University of California (UC) and the California State University (CSU) typically serve slightly more or less full-time equivalent (FTE) students than budgeted. Recently, however, actual enrollment has deviated more significantly from funded levels. In recognition of this disconnect between the number of students funded at each segment and the number of students actually enrolled, the Legislature adopted provisional language as part of the annual budget acts for 2004-05 and 2005-06 to ensure that UC and CSU use enrollment funding only for enrollment. Specifically, the language requires that the segments report in the spring on whether they met their enrollment target for that year. The language specifies that enrollment totals shall not include FTE students in non-state supported summer instruction programs. If a segment does not meet its goal, the Director of the Department of Finance (DOF) is to revert to the General Fund the total amount of enrollment funding associated with the unmet enrollment. As we discuss below, $15.5 million in enrollment funding provided to CSU in 2004-05 reverted to the General Fund last year.
As indicated in Figure 1, UC enrolled roughly 400 more FTE students in 2004-05 than it was budgeted to serve for that year. For the current year, the 2005-06 Budget Act provides $37.9 million to UC to enroll 5,000 additional FTE students above the 2004-05 funded enrollment level, for a total of 205,976 FTE students (excluding students in non-state supported summer instruction programs). As of January 2006, the university estimates that it will meet this current-year enrollment target. The 2005-06 Budget Act requires UC to report to the Legislature by March 15, 2006 on whether in fact it met the target.
As shown in Figure 2, CSU has not met its budgeted enrollment targets in the previous two years (2003-04 and 2004-05). In other words, the state provided funding for more students than the university enrolled. Based on recent trends and preliminary data, CSU appears unlikely to meet its 2005-06 enrollment target as well.
Did Not Meet 2003-04 Enrollment Target; $81 Million Redirected to Other CSU Programs. As we discussed in our Analysis of the 2004-05 Budget Bill, CSU enrolled about 12,000 fewer FTE students than it was funded to serve in 2003-04. Instead, the university redirected about $81 million of enrollment growth funding to essentially “backfill” budget reductions approved by the Legislature in other program areas. In effect, CSU campuses reduced spring 2004 admissions in order to help “free up” enrollment funds.
Did Not Meet 2004-05 Enrollment Target; $15.5 Million Reverted to General Fund. In recognition that CSU shifted some of its enrollment funding to backfill base budget reductions in 2003-04, the 2004-05 budget essentially “rebenched” CSU’s enrollment level downward to 324,120 FTE students. This amount was roughly 20,000 FTE students fewer than the number of students funded the year before. (In fact, the enrollment target was less than the number of students actually served in 2003-04.) Although the enrollment target was lowered, CSU retained the associated enrollment funding from the prior year in its base budget for 2004-05, thus permanently backfilling the earlier General Fund reductions.
Despite the downward rebenching of CSU’s enrollment target, the university again fell short of its 2004-05 enrollment target by about 2,800 FTE students (see Figure 2). The university states that the reasons for this shortfall include:
Increased Degree Conferrals. From 2002-03 to 2003-04, the number of students that received a CSU degree-bachelor’s, master’s, or joint doctoral-increased sharply by about 5,877 students or 8 percent (from 76,755 to 82,592 students). The university states that this increase, most of which occurred in the spring, significantly reduced the number of students campuses assumed would continue in fall 2004.
Decreased Demand for Teacher Preparation. From fall 2003 to fall 2004, the number of postbaccalaureate students enrolled in CSU teacher preparation programs decreased by 1,717 FTE students (from 14,746 to 13,029 FTE students). The university asserts that this decrease occurred in part due to the (1) softening of the market for elementary school teachers in California because of K-12 budget constraints and (2) elimination of state-funded teacher recruitment programs.
As required under provisional language in the 2004-05 Budget Act, the funding associated with CSU’s unmet enrollment target ($15.5 million) reverted to the General Fund on a one-time basis. This funding was restored to CSU’s base budget for 2005-06, thus providing a second opportunity and expectation to enroll the associated 2,800 FTE students.
Unlikely to Meet 2005-06 Enrollment Target. For the current year, the 2005-06 Budget Act provided $50.8 million to CSU to enroll about 8,100 additional FTE students above the 2004-05 funded enrollment level, for a total of 332,223 FTE students. (This total is about 11,000 more FTE students than it actually enrolled in 2004-05, as shown in Figure 2.)
According to the Chancellor’s Office, the estimated enrollment for fall 2005 is 325,542 FTE students. This is 6,681 FTE students below the university’s current-year enrollment target of 332,223 FTE students. Although CSU’s final enrollment numbers for 2005-06 will not be known until May 1, 2006, the fall estimate does suggest that CSU is unlikely to meet its enrollment target. Moreover, the university could end up serving fewer students than it did two years ago (2003-04), despite continued annual increases in enrollment funding. In a later section, we propose permanently adjusting CSU’s base budget if it does not meet its 2005-06 enrollment target.
The budget requests a total of $110 million in General Fund support to increase enrollment at UC and CSU. The $110 million total consists of:
UC ($52 Million). The Governor’s budget provides $52 million to UC for 2.5 percent enrollment growth (or 5,149 FTE students) above current-year budgeted enrollment. (This assumes a marginal General Fund cost of $10,103 per additional student.) The budget also assumes UC will enroll an additional 130 FTE students in its entry-level master’s nursing program, as required under Chapter 592, Statutes of 2005 (SB 73, Committee on Budget and Fiscal Review). This results in a budget-year total enrollment target for UC of 211,255 FTE students.
CSU ($57.7 Million). The Governor proposes to change the definition of a full-time graduate student load at CSU from 15 units to 12 units, which would be consistent with current practice at UC and most other higher education institutions. Under this new definition, CSU’s 29,543 graduate FTE students (excluding postbaccalaureates) budgeted for the current year is redefined as 36,929 FTE students. As a result, the proposed budget “rebases” CSU’s current-year budgeted total enrollment from 332,223 to 339,609 FTE students. Building upon this rebased current-year enrollment, the Governor’s budget for 2006-07 provides $57.7 million to CSU for 2.5 percent enrollment growth or 8,490 FTE students. (This assumes a marginal General Fund cost of $6,792 per additional student.) The budget also assumes CSU will enroll an additional 163 FTE students in its entry-level master’s nursing program, as required under Chapter 592. This results in a proposed budget-year total enrollment target for CSU of 348,262 FTE students.
For the California Community Colleges (CCC), the Governor’s budget includes $149 million (Proposition 98) for 3 percent enrollment growth (or 35,052 FTE students) above current-year budgeted enrollment. This is considerably higher than the statutory growth rate of 1.74 percent. This results in a budget-year enrollment target for CCC of 1,203,469 FTE students. (We further discuss enrollment at CCC, which is funded somewhat differently from UC and CSU, in the “California Community Colleges” write-up of this chapter.)
One of the principal factors influencing the state’s higher education costs is the number of students enrolled at the three public higher education segments. Typically, the Legislature and Governor provide funding each year for a particular level of enrollment growth at each of the state’s public higher education segments. This funding is based upon a per-student funding rate multiplied by the expected number of additional FTE students. For example, the Governor’s budget proposes a per-student funding rate of $10,103 for 5,149 additional students at UC, at a total cost of $52 million.
As noted earlier, the proposed budget includes a total of $110 million for 2.5 percent enrollment growth at UC and CSU. In reviewing the Governor’s enrollment growth funding proposal, the Legislature must determine the following:
How much enrollment growth (or additional students) to fund at UC and CSU for 2006-07.
How much General Fund support to provide the segments for each additional student (commonly known as the “marginal cost”).
Below, we examine each of these issues and make recommendations concerning the Governor’s enrollment funding proposals.
Determining the amount of additional enrollment to fund each year can be difficult. Unlike enrollment in compulsory programs such as elementary and secondary school, which corresponds almost exclusively with changes in the school-age population, enrollment in higher education responds to a variety of factors. Some of these factors, such as population growth, are beyond the control of the state. Others, such as higher education funding levels and fees, stem directly from state policy choices. As a result, enrollment projections must consider the interaction of demographic changes and state policies that influence enrollment demand.
There are two main factors influencing enrollment growth in higher education:
Population Growth. Other things being equal, an increase in the state’s college-age population causes a proportionate increase in those who are eligible to attend each segment. Population growth, therefore, is a major factor driving increases in college enrollment. Most enrollment projections begin with estimates of growth in the student “pool” (18- to-24-year old population) which for the rest of the decade is expected to range from 1.2 percent to 2.6 percent annually.
Participation Rates. For any subgroup of the general population, the percentage of individuals who are enrolled in college is that subgroup’s college participation rate. California’s participation rates are among the highest in the nation. Specifically, California ranks fourth in college enrollment among 18- to 24-year olds, and first among 25- to 49-year olds. However, predicting future participation rates is difficult because students’ interest in attending college is influenced by a number of factors (including student fee levels, availability of financial aid, and the availability and attractiveness of other postsecondary options).
Based on our demographic projections, we recommend the Legislature fund budgeted enrollment growth of 2 percent for the University of California and the California State University. Our proposal should allow the segments to easily accommodate enrollment growth next year due to increases in population, as well as modest increases in college participation.
If college participation rates remain constant for all categories of students next year, we project that enrollment at UC and CSU will grow by roughly 1.4 percent from 2005-06 to 2006-07. (See accompanying text box for a description of the demographics-based methodology we employ to estimate future higher education levels.) Since this projection is driven solely by projected population growth, it serves as a starting point for considering how much enrollment to fund in 2006-07. In other words, the Legislature can evaluate how various related budget and policy choices could change enrollment compared to this baseline. We note that DOF’s Demographics Unit also develops baseline enrollment projections using demographically based projections of growth in the number of high school graduates and in the adult population. However, unlike our model, DOF also assumes changes in college participation rates. As a result, DOF projects that in the budget year (2006-07), enrollment at UC and CSU will grow by about 1.6 percent, which is still significantly less than the 2.5 percent budgeted enrollment growth rate proposed by the Governor.
LAO Higher Education Enrollment ProjectionsIn our demographically driven model, we calculate the ethnic, gender, and age makeup of each segment’s student population, and then project separate growth rates for each group based on statewide demographic data. For example, we estimate a distinct growth rate for Asian females between 18 and 24 years of age, and calculate the resulting additional higher education enrollment this group would contribute assuming constant participation rates. When all student groups’ projected growth rates are aggregated together, we project that demographically-driven enrollment at the University of California and the California State University will grow annually between 1.4 percent and 1.8 percent from 2006-07 through 2010-11. In terms of the budget year (2006-07), we project enrollment growth of roughly 1.4 percent at the two university segments. In addition to underlying demographics, enrollment growth is affected by participation rates-that is, the proportion of eligible students who actually attend the segments. Participation rates are difficult to project because they can be affected by a variety of factors-state enrollment policies, the job market, and changes in the financial situation of students and their families. We have assumed that California’s participation rates will remain constant. This is because the state’s rates have been relatively flat over recent years, and we are not aware of any evidence supporting alternative assumptions. We do acknowledge that participation rates could change to the extent that the Legislature makes various policy choices affecting higher education. As such, our projections provide a baseline reflecting underlying population trends. |
Over the years, the Legislature has taken deliberate policy actions (such as funding student outreach programs and expanding the availability of financial aid) in an effort to increase college participation rates. Consistent with these actions, the state has provided funding for enrollment growth in some of those years that significantly exceeded changes in the college-age population. In view of the Legislature’s interest in increasing college participation, we recommend funding 2 percent enrollment growth at UC and CSU for the budget year. This is about 40 percent higher than our estimate of population-driven enrollment growth, and therefore should allow the segments to easily accommodate enrollment growth next year, due to increases in population, as well as modest increases in college participation.
Accordingly, we recommend that the Legislature reduce the Governor’s proposed enrollment growth for UC and CSU from 2.5 percent to 2 percent. (In the next section on per-student funding rates, we discuss the General Fund savings associated with reducing the Governor’s proposed growth rate.)
If the California State University (CSU) does not meet its current-year (2005-06) enrollment target, we recommend the Legislature remove the unused enrollment funding from CSU’s base budget for 2006-07.
As part of the 2005-06 Budget Act, the Legislature adopted provisional language requiring CSU to provide a preliminary report to the Legislature by March 15, 2006, and a final report by May 1, 2006, on whether it met its enrollment target. If CSU does not meet this goal, the Director of DOF is required to revert to the General Fund by May 15, 2006, the amount of enrollment funding associated with the share of the enrollment goal that was not met. However, the budget language requires only that such a reversion be on a one-time basis and apply only to 2005-06 (as was the case with the enrollment funds that were reverted in 2004-05). This means that any enrollment funding not used for enrollment in 2005-06 would return to the base in 2006-07, thus providing “room” for CSU to increase enrollment more than 2.5 percent beyond its current-year level. To put it another way, CSU would have funding in the budget year to accommodate some enrollment growth even without any new growth funding.
As we discussed in an earlier section, recent enrollment trends and data on fall 2005 enrollments suggest that CSU may not meet its current-year enrollment target of 332,223 FTE students. This would trigger a current-year reversion of unused growth funding. If this happens, we recommend the Legislature reduce CSU’s budget for 2006-07 by an equal amount (which could range in the tens of millions of dollars). This would also require rebenching CSU’s budgeted enrollment levels to reflect the number of FTE students actually enrolled in 2005-06. This would set up more realistic enrollment expectations for CSU and reduce the ongoing disconnect between enrollment funding and actual enrollment. Moreover, the Legislature could use the freed up funds to address other priorities in the budget year, including addressing the state’s budget problem. Once we review CSU’s enrollment report this spring, we will advise the Legislature during budget hearings as to any specific actions we recommend.
We recommend the Legislature modify provisional language relating to enrollment targets for both the University of California and the California State University, in order to protect its priority to increase state-supported higher education enrollment.
The proposed budget bill for 2006-07 includes provisions that specify enrollment targets for both UC and CSU, which are based on (1) the Governor’s proposed 2.5 percent enrollment growth, (2) a redefinition of CSU graduate FTE students, and (3) a statutorily required increase in nursing students. The provisions require that the amount of enrollment funding associated with any enrollment shortfall revert to the General Fund. Unlike the language adopted in 2005-06, however, the Governor’s proposed new language does not specify that the enrollment targets and the segments’ enrollment reports must exclude students in non-state supported summer instruction programs. Since these programs do not receive enrollment growth funding from the state, past practice has been to exclude these students from state enrollment targets. (We discuss this issue further in the “Year-Round Operations at UC and CSU” write-up later in this chapter.)
In view of the above, we recommend modifying the proposed budget bill language to exclude non-state supported summer students from the enrollment target. This would ensure that enrollment growth funding was used strictly to increase the number of students enrolled at the segments. We further recommend clarifying that CSU’s enrollment target reflects a rebasing of graduate FTE students, as proposed by the Governor. The modified language below also assumes our proposed 2 percent enrollment growth and an increase in nursing students (as required under Chapter 592). Specifically, for UC we recommend the Legislature modify Provision 13 of Item 6440-001-0001 to read:
The amount appropriated in Schedule (1) includes funding for the University of California (UC) to enroll a total of 210,226 full-time equivalent (FTE) students (excluding summer students for which campuses only received funding in 2005-06 to buy down their summer fees). The Legislature expects the UC to enroll this number of FTE students during the 2006-07 academic year. The UC shall report to the Legislature by March 15, 2007, on whether it has met the 2006-07 enrollment goal. For purposes of this provision, enrollment totals shall not include FTE summer students for which campuses only received funding to buy down their summer fees. If the UC does not meet its enrollment goal, the Director of Finance shall revert to the General Fund by April 1, 2007, the total amount of enrollment funding associated with the share of the enrollment goal that was not met.
Similarly, for CSU we also recommend modifying Provision 7 of Item 6610-001-0001 as follows:
The amount appropriated in Schedule (1) includes funding for the California State University to enroll a total of 346,564 full-time equivalent (FTE) students (excluding summer students for which campuses only received funding in 2005-06 to buy down their summer fees), based on a graduate student FTE unit load of 12 units per term. The Legislature expects the university to enroll this number of FTE students during the 2006-07 academic year. The university shall provide a preliminary report to the Legislature by March 15, 2007, and a final report by May 1, 2007, on whether it has met the 2006-07 enrollment goal. For purposes of this provision, enrollment totals shall not include FTE summer students for which campuses only received funding to buy down their summer fees. If the university does not meet its enrollment goal, the Director of Finance shall revert to the General Fund by May 15, 2007, the total amount of enrollment funding associated with the share of the enrollment goal that was not met.
In addition to deciding the number of additional FTE students to fund in 2006-07, the Legislature must also determine the amount of funding to provide for each additional FTE student at UC and CSU. Given past practice, this funding level would be based on the marginal cost imposed by each additional student for additional faculty, teaching assistants (TAs), equipment and various support services. The marginal cost is less than the average cost because it reflects what are called “economies of scale”-that is, it excludes certain fixed costs (such as central administration) which may change very little as new students are added to an existing campus. The marginal costs of a UC and CSU education are funded from the state General Fund and student fee revenue. (A similar, but distinct, approach is used for funding enrollment growth at community colleges.)
As part of the 2005-06 budget package, the Legislature adopted language directing our office and DOF to jointly convene a working group to review the current marginal cost methodology for funding new enrollments at UC and CSU and to provide recommendations that would be considered for the 2006-07 budget. The working group met throughout the summer and fall, but was unable to reach consensus on specific modifications to the current methodology for the budget year, as envisioned by the Legislature. As we discuss below, the Governor’s budget proposes an entirely new marginal cost methodology that was independently developed outside of the working group. Based on his proposed methodology, which differs significantly from the current one, the Governor’s budget provides $10,103 in General Fund support for each additional student at UC and $6,792 for each additional student at CSU. In this section, we analyze the Governor’s proposed methodology and recommend an alternative approach.
For many years, the state has funded enrollment growth at UC and CSU based on the marginal cost of instruction. However, the formula used to calculate the marginal cost has evolved over the years. (The nearby text box provides a timeline of key state actions pertaining to marginal cost funding.) In general, the state has sought to simplify the way it funds enrollment growth and more accurately reflect costs. As we discuss below, the state has moved from utilizing a large number of complex funding formulas for each segment to a more simplified approach for calculating enrollment funding that is more consistent across the two university segments.
Chronology of Marginal Cost FundingPre-1992: The University of California (UC) and the California State University (CSU) use different methodologies to calculate marginal cost of instruction. 1992: Legislature and Governor suspend marginal cost funding practices for UC and CSU and do not provide funding specifically for enrollment growth. 1994: Legislature expresses intent to return to use of marginal cost funding and requests review of 1991-92 marginal cost formulas. 1995: The Legislative Analyst’s Office (LAO), Department of Finance (DOF), UC, and CSU jointly develop new marginal cost methodology. 1996: New marginal cost methodology is first implemented in 1996-97 budget. 2005: Legislature directs LAO and DOF to jointly convene a working group to review current marginal cost methodology and recommend possible modifications for 2006-07. |
From 1960 through 1992, CSU’s enrollment growth funding was determined by using a separate marginal cost rate for each type of enrollment category (for example, lower-division lecture courses). In other words, the different marginal cost formulas took into account education levels-lower division, upper division, and graduate school-and “instructional modes” (including lecture, seminar, laboratories, and independent study). Each year, CSU determined the number of additional academic-related positions needed in the budget year (based on specific student-faculty ratios) to meet its enrollment target. These data were used to derive the separate marginal cost rates. Unlike the current methodology, the marginal cost formula before 1992 did not account for costs related to student services and institutional support. The state made funding adjustments to these budget rates independent of enrollment funding decisions.
Similar to CSU, annual enrollment growth funding provided to UC before 1992 was based on the particular mix of new students, with different groups of students funded at different rates. However, UC’s methodology for determining the marginal cost of each student was much less complex than CSU’s methodology and did not require different rates based on modes of instruction. The university calculated separate funding rates for undergraduate students, graduate students, and for each program in the health sciences based on an associated student-faculty ratio. For example, the marginal cost of hiring faculty for new undergraduate students was estimated by dividing the average faculty salary and benefits by 17.48 FTE students (the undergraduate student-faculty ratio). Each marginal cost formula also estimated the increased costs of library support due to enrolling additional students. As was the practice for CSU, however, UC’s marginal cost formulas did not account for costs related to student services and institutional support.
Beginning in 1992-93, the Legislature and Governor suspended the above marginal cost funding practices for UC and CSU. While the state did provide base budget increases to the universities, it did not provide funding specifically for enrollment growth during that time. In the Supplemental Report of the 1994 Budget Act, the Legislature stated its intent that, beginning in the 1996-97 budget, the state would return to the use of marginal cost as the basis for funding enrollment growth. Specifically, the language required representatives from our office, UC, CSU, and DOF to review the 1991-92 marginal cost formulas and propose improvements that could be used in developing the 1996-97 budget.
Overall, the 1995 working group identified two major issues related to the 1991-92 marginal cost calculations. First, the data used in the calculations were out of date and did not accurately reflect actual costs. In addition, there was inconsistency between segments in the methods used to fund enrollment growth (such as the allocation of student fees toward the marginal cost). At the same time, the 1995 working group observed that many parts of the 1991-92 marginal cost calculations remained valid. These included: (1) determining the marginal cost for the budget year based on current-year costs and (2) setting the additional cost of hiring faculty to serve additional students at entry-level, rather than average, salaries.
Compromise Methodology Adopted for 1996-97. After a series of negotiations, the four agencies developed a new methodology for estimating the amount of funding needed to support each additional FTE student at each segment. This new methodology reflected a compromise that all parties agreed should be the basis for funding future enrollment growth. The methodology was first implemented in 1996-97 and has generally been used to calculate enrollment funding since that time. Some of the key features of this methodology include:
Single Marginal Cost Formula for Each Segment. Enrollment growth funding is no longer based on differential funding formulas by education level and academic program. Instead, each university segment uses one formula to calculate a single marginal cost that reflects the costs of all the system’s education levels and academic programs. For instance, a single student-faculty ratio helps determine the faculty costs associated with each additional student (regardless of education level). Thus, the state currently provides a different per-student funding rate depending only on which higher education segment that student attends.
Marginal Cost for Additional Program Areas. The 1995 working group concluded that the marginal cost formula should include additional cost components beyond salaries for faculty, TAs, and other academic support personnel. As a result, the current formula takes into account the marginal costs for eight program areas-faculty salary, faculty benefits, TAs, academic support, instructional support, student services, institutional support, and instructional equipment. These program costs are based on current-year funding and enrollment levels, and then discounted to adjust for fixed costs that typically are not affected by year-to-year changes in enrollment.
Student Fee Revenue Adjustments. In addition, the working group agreed that both the General Fund and student fee revenue should contribute toward the total marginal cost. This reflects a long-standing practice that students and the state share in the cost of education. It also acknowledges that fee revenue is used for general purposes-the same as General Fund revenue. Therefore, under the methodology, a portion of the student fee revenue that UC and CSU anticipate from the additional students is subtracted from the total marginal cost in order to determine how much General Fund support is needed from the state for each additional FTE student.
In adopting the 2005-06 budget, the Legislature called for a review of the marginal cost methodology that was developed in 1995. Specifically, the Supplemental Report of the 2005 Budget Act directed our office and DOF to jointly convene a working group, including representatives from UC and CSU, to (1) review the current process for determining the marginal cost of each additional FTE student and (2) examine possible modifications to that methodology for the 2006-07 budget. The intent was that the working group would recommend a new methodology that all parties agreed should be the basis for funding enrollment growth, as was done in 1995.
Working Group Met, but Could Not Reach Compromise. In response to the Legislature’s directive, our office and DOF worked collaboratively this past summer and fall to improve the formulas for calculating the marginal cost of instruction. For example, together we developed a series of principles to guide the discussion. Figure 3 outlines these principles. As the figure shows, many of these principles are features of the current methodology. In addition, we met with UC and CSU to solicit their input and needed data.
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Figure 3 Guiding Principles for Marginal Cost Funding |
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» Exclude Fixed Costs. The current approach of determining the average cost of individual program areas, and then discounting certain areas to adjust for fixed costs, makes sense. |
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» Comparability. To the extent possible, we should have comparable formulas for the University of California (UC) and the California State University (CSU). |
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» Growth-Related Costs. Include only costs that change with enrollment growth. |
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» Facts-Based. Calculations should be based on factual data. |
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» Student Fees Should Contribute. A portion of student fee revenue that UC and CSU anticipate from the additional students should be subtracted from the total marginal cost in order to determine how much General Fund support is needed from the state for each additional student. |
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» Data Accessibility. All parties (UC, CSU, Department of Finance, and the Legislative Analyst’s Office) should have access to the data necessary to independently calculate the marginal cost in a given year and reach the same conclusion. |
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Despite the above efforts, our office and DOF were not able to reach a compromise on a new marginal cost methodology, as envisioned by the Legislature. Moreover, DOF independently developed a new formula for calculating the marginal cost of an additional student, which is used in the Governor’s budget proposal for 2006-07. As a result, the proposed methodology neither reflects a compromise nor can be construed as a product of the working group. Below, we review the Governor’s proposed methodology and recommend an alternative approach.
The Governor’s budget for 2006-07 proposes a new marginal cost methodology for funding enrollment growth at UC and CSU, which differs significantly from the agreed-upon marginal cost methodology developed in 1995. Major features of the Governor’s proposed methodology include:
Calculates Only General Fund Contribution. As mentioned above, the current methodology calculates a total marginal cost, and then subtracts from this cost the fee revenue UC and CSU anticipate from each additional student, in order to determine how much General Fund support is needed from the state. In contrast, the Governor’s methodology attempts to isolate the amount of General Fund spent on each program area affected by changes in enrollment in order to determine the General Fund cost of each additional FTE student. Thus, the proposed methodology makes arbitrary assumptions about the distribution of General Fund support at each segment, which may over estimate the level of such support that actually funds certain programs.
Assumes Average Faculty Costs. Based on a fixed student-faculty ratio (as adopted in the budget act), the current methodology calculates the cost of hiring a new assistant professor (in other words, entry-level faculty) to serve a specified number of new students. The Governor’s proposal departs from this practice and bases the faculty costs for each additional student on the salaries paid to professors of all levels.
Modifies Marginal Cost Components. Rather than discount each program cost by a particular percentage to adjust for fixed costs, the Governor excludes the specific activities under each program area that typically are not affected by year-to-year changes in enrollment. For example, the Governor excludes funding museums and galleries from the marginal cost of academic support. In addition, the proposed methodology adds operations and maintenance services as a new cost component.
Changes Definition of Full-Time CSU Graduate Student Load. Currently, a graduate student FTE unit load at CSU is recognized in the marginal cost formula as 15 units per term. The Governor proposes to change this definition to 12 units.
Excludes UC Health Science Students. The current methodology includes UC health science students in calculating the marginal cost of each program area, except for instructional support. The Governor proposes to exclude such students from the entire marginal cost calculation.
Adjusts for Base Increases Assumed in Governor’s Compact. The current marginal cost methodology is based only on current-year expenditures and, therefore, does not account for any funding changes proposed for the budget year. The Governor, however, calculates a General Fund marginal cost for each segment using current-year data, and then adjusts that cost by the base increase specified in his compact with UC and CSU (3 percent for 2006-07). This adjusted amount would be used to fund enrollment growth in 2006-07 and increase each subsequent year based on the Governor’s compact. For example, for 2007-08, the 2006-07 marginal cost would be adjusted by the base increase called for in 2007-08, under the Governor’s compact. In other words, a new marginal cost rate would not be calculated each year based on the current expenditure data and legislative priorities.
Based on the Governor’s new marginal cost methodology, the proposed budget provides $10,103 in General Fund support for each additional student at UC and $6,792 for each additional student at CSU. In comparison, we estimate that the methodology developed in 1995 would call for a UC marginal General Fund cost of $8,087 and a CSU marginal General Fund cost of $5,597. (See Figure 4 for a detailed description of the marginal cost calculations based on the 1995 agreed-upon methodology.) Thus, the Governor’s proposal reflects an increase in the per-FTE student funding rates at the two segments of roughly 25 percent-$2,016 for UC and $1,195 for CSU-from the rates required under the current methodology. In terms of total enrollment growth funding, the Governor’s budget provides roughly $10 million more to each segment than called for by the current methodology (based on an assumed enrollment growth of 2.5 percent). In the following section, we raise concerns about the Governor’s proposed marginal cost methodology.
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Figure 4 2006-07 Marginal Cost Calculations |
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(Based on Current Methodology) |
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Marginal Cost Per FTEa Student |
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Basic Cost Components |
UC |
CSU |
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Faculty salary |
$2,932 |
$2,418 |
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Faculty benefits |
670 |
889 |
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Teaching assistants salary |
676 |
282 |
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Instructional equipment |
461 |
129 |
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Instructional support |
3,879 |
771 |
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Academic support |
676 |
1,221 |
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Student services |
1,137 |
844 |
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Institutional support |
992 |
1,009 |
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Totals |
$11,423 |
$7,563 |
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Less student fee revenue |
-$3,336 |
-$1,966 |
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State Funding Per Student |
$8,087 |
$5,597 |
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a Full-time equivalent. |
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Although we believe some of the changes in the Governor’s proposed marginal cost methodology merit legislative consideration (such as redefining a full-time CSU graduate student load), many of them raise serious concerns (such as assuming average faculty costs). This is because the Governor’s methodology represents a significant departure from the underlying rationale behind the 1995 agreed-upon methodology. We also believe the Governor’s proposal is not aligned to the guiding principles developed during our marginal cost discussions with DOF this past summer and fall. Figure 5 summarizes our concerns, which we discuss in further detail below.
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Figure 5 Governor’s Proposed Marginal Cost Methodology: |
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» Ignores Contribution of Student Fees. The proposed methodology does not account for new student fee revenue—resulting from fee increases—available to support a greater share of the marginal cost of instruction. In addition, the methodology does not recognize that General Fund and fee revenue are “fungible” resources that support the total marginal cost. |
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» Over Budgets Certain Costs. The Governor’s proposal assumes faculty costs at the University of California (UC) and the California State University will increase on the average (rather than on the margin) with each additional full-time equivalent student. The proposal also over budgets other program costs, because it does not appropriately adjust the costs for health science students at UC. |
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» Limits Legislative Budgetary Discretion. The methodology assumes that the Legislature will approve the annual base adjustments contained in the Governor’s compact each year. Moreover, it “shields” the marginal cost from future legislative policy decisions (such as possible changes to student-faculty ratios or the share of education cost paid by students). |
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In adopting the current marginal cost methodology in 1995, the Legislature recognized that both General Fund and student fee revenue together fund the marginal cost of serving an additional FTE student. After a total marginal cost is calculated, the fee revenue UC and CSU anticipate collecting from each additional student gets subtracted from this cost, in order to determine the state’s share. Thus, the current methodology acknowledges that because General Fund and fee revenue are “fungible” resources used for general purposes, it is difficult-and unnecessary-to determine how much of specific program costs are borne by the General Fund as opposed to student fee revenue. For example, CSU reports that both fund sources-General Fund and fee revenue-are deposited in one account, which is used to fund a variety of activities. As a result, CSU’s and the Governor’s budget displays only reflect the combined total General Fund and fee revenue allocated to a particular program.
Unlike the current marginal cost methodology, the Governor’s proposal does not account for new student fee revenue resulting from fee increases. Since the methodology calculates only General Fund contributions, it ignores the availability of fee revenue to account for a greater share of the marginal cost of instruction. For example, the Governor’s proposal would in effect allow UC and CSU to use revenue from fee increases for whatever they deem worthwhile. Rather, we believe that the Legislature should continue to consider new fee revenue as available to meet legislatively determined needs of the segments.
The Governor’s proposed methodology includes the faculty costs associated with all professor levels-assistant professor, associate professor, and (full) professor. In effect, this assumes that a cohort of faculty hired at each segment because of enrollment growth will reflect the make-up of existing faculty at that segment, in terms of level or classification. However, data provided to us by the segments indicate that most new professors are in fact hired at the assistant professor level and thus receive a lower salary than the average of existing faculty. For example, UC hired a total of 505 new faculty members in 2003-04. Of this amount, 67 percent were hired at the assistant professor level. The CSU reports that 85 percent of the 393 faculty members the university hired in fall 2004 were assistant professors. In view of the above, we find that the Governor’s marginal cost proposal over budgets the marginal cost of hiring additional faculty.
The proposed methodology also over budgets other program costs. Unlike the current methodology, the Governor’s proposal attempts to exclude health science students from UC’s entire marginal cost calculation. In other words, the proposed methodology for UC is intended to calculate the marginal cost of an additional nonhealth science student. Specifically, in calculating a per-student cost for each program area (such as academic support and operation and maintenance services), the methodology excludes the number of health science students currently enrolled at UC from the base students. However, the proposed methodology does not appropriately exclude all of the funding spent on health science students in each program area. As a result, the proposed methodology for UC over estimates the marginal cost of an additional nonhealth science student.
According to DOF staff, under the Governor’s methodology, the marginal General Fund cost would be adjusted each year according to the base budget increase called for in his compact with UC and CSU for that particular year. Thus, the 2006-07 marginal cost would serve as a baseline for future years-meaning there would be no recalculation each year based on recent expenditure and enrollment data. We find that such an approach significantly limits the impact of the Legislature’s actions to adopt alternative budget and policy proposals based on its own priorities. For example, the proposed methodology assumes that the Legislature will approve the annual base adjustments contained in the Governor’s compact. Moreover, the methodology essentially “shields” the marginal cost from future legislative policy decisions. For example, the Legislature in the future may want to (1) increase or decrease the student-faculty ratio at the segments, (2) increase the share of education cost paid by students, or (3) institute a more differential funding system (such as by education level).
Given our concerns about the Governor’s proposed marginal cost methodology, we recommend below an alternative approach that we believe better preserves legislative prerogatives and builds upon the existing methodology. We further recommend that the Legislature fund enrollment growth at UC and CSU in the 2006-07 budget based on our proposed methodology.
We recommend the Legislature revise the current marginal cost methodology, in order to more effectively fund the increased costs associated with enrollment growth. Specifically, we recommend (1) excluding unrelated costs, (2) reflecting actual costs for faculty and teaching assistants, (3) including operation and maintenance costs, (4) redefining a full-time equivalent graduate student at the California State University, and (5) adjusting the total marginal cost by the average fee revenue collected per student.
Based on our review of marginal cost funding, we recommend the Legislature reject the Governor’s proposal for an entirely new marginal cost methodology. Rather, we continue to support the underlying basis of the current marginal cost methodology (as developed in 1995)-that is, determining a total marginal cost based on current-year expenditures and “backing out” a student fee component to determine the state’s share. We have, however, identified individual components of the current methodology that could be improved in order to more appropriately fund the increased costs associated with enrollment growth.
Our proposed improvements reflect legislative attempts over the years to (1) simplify the way the state funds enrollment growth, (2) more accurately account for costs, and (3) provide greater consistency across segments. In developing our recommendations, we also sought to advance the guiding principles outlined in Figure 3, such as ensuring that the marginal cost calculations are based on factual data. Our proposed changes also incorporate some of the suggestions made by the segments during the marginal cost working group discussions and in their budget requests to the Governor (such as including costs for operation and maintenance services). Specifically, we recommend the Legislature adopt a marginal cost methodology that:
Excludes activities whose costs are essentially unaffected by additional students.
Adjusts the faculty and TA components of the marginal cost formula to better reflect actual costs.
Includes the marginal cost of operation and maintenance services.
Changes the definition of a full-time CSU graduate student load from 15 units per term to 12 units, as proposed by the Governor.
Accurately accounts for available student fee revenue by adjusting the marginal cost based on the average systemwide fee revenue collected for each additional FTE student.
Exclude Costs for Specific Activities. Under the current methodology, the marginal cost for each program area (such as institutional support) is calculated by first determining the average cost based on current-year funding and enrollment levels, and then discounting that amount by a particular percentage to adjust for fixed costs that typically are not affected by year-to-year changes in enrollment. For example, the current discount factor for institutional support at UC is 50 percent. The different discount percentages contained in the current methodology for each segment were essentially negotiated as part of the 1995 working group. Since there is obviously no one correct discount factor, the current percentages are somewhat arbitrary.
Rather than continue to use or modify the current discount percentages, we propose eliminating entire activities under each program area whose costs increase very little with additional students. In other words, simply exclude activities that primarily reflect fixed costs. Such an approach was discussed by the recent working group and is very similar to how the Governor’s methodology adjusts for fixed costs. In fact, our proposal would exclude the same activities as the Governor. For example, we exclude from academic support funding for (1) museums and galleries, (2) ancillary support, and (3) academic personnel development. We believe that this change to the current methodology would more accurately reflect the marginal cost of each additional student.
Adjust Faculty and TA Components to Better Reflect Actual Costs. The expenditure and enrollment data used to calculate the marginal cost of hiring additional faculty and TAs should reflect actual costs. In developing the current marginal cost methodology, the 1995 working group observed that the additional cost of hiring faculty to serve additional students should be set at entry-level, rather than average, salaries. Thus, the current methodology calls for the faculty salary to be based on each university’s published salary of an assistant professor (step 3), which currently is $54,828 at UC and $45,696 at CSU. According to the segments, they typically have to pay new assistant professors more than the published salaries, in order to hire their first-choice candidate. As a result, both segments have proposed in their budget requests to increase the faculty salary component of the marginal cost. We believe that such a change is reasonable, but that the salary component should still reflect the level of the recently hired professors.
As discussed earlier, most of the new professors at UC and CSU continue to be hired at the assistant professor level. We therefore recommend that the marginal cost be based on the average annual salary paid to all new assistant professors (regardless of step) that were hired in 2004-05 and adjusted for the base budget increase approved in the 2005-06 Budget Act, which was 3 percent. (Since UC was unable to provide the average salary of new assistant professors in 2004-05, we used an adjusted 2003-04 average salary.) This approach results in a faculty salary cost of $69,576 for UC and $58,262 for CSU.
We further propose that the above faculty salaries for 2006-07 be the base amounts in the marginal cost calculation for future years. For each year after 2006-07, the faculty salary in the marginal cost formula would be the prior-year marginal cost salary adjusted for the segments’ current-year base budget increase (as approved in the enacted budget for that year). For example, the faculty salary for the 2007-08 marginal cost would be the salary used in the 2006-07 marginal cost formula adjusted by the base budget increase approved for each segment in the 2006-07 Budget Act.
Another key component of the current marginal cost methodology is an underlying assumption that the annual salary of a TA at CSU is roughly 50 percent of an entering faculty member’s salary and benefits cost, which currently translates to an annual full-time TA salary of $30,226. According to the CSU Chancellor’s Office, however, the average salary for a full-time TA is only $10,133 (about 16 percent of an entering faculty member’s salary and benefits). This means that the state is currently over budgeting the marginal cost of hiring additional TAs at CSU. We, therefore, recommend that the current marginal cost formula for CSU be revised to use the average annual TA salary at the university ($10,133). This would be consistent with how the state budgets for additional TAs at UC.
In addition to the salary of a full-time TA, the current methodology also assumes a fixed student-TA ratio of 44:1 at UC and 107:1 at CSU to determine the marginal cost of a TA per FTE student. We believe these ratios are significantly low and do not accurately reflect the current make-up of students and TAs. For example, the student-TA ratio currently used for CSU is essentially based on “headcounts” rather than FTE students and TAs. In addition, UC’s student-TA ratio accounts only for undergraduate students, whereas the marginal cost funding rate is intended to fund all additional FTE students (regardless of education level). Based on recent data the segments provided us on FTE students and full-time TAs, we calculate a student-TA ratio of 62:1 at UC and 608:1 at CSU. (The high student-TA ratio at CSU reflects the fact that, unlike UC, many courses at CSU do not include TA support.) We recommend that these ratios be used in determining the marginal cost of instruction.
Include Costs for Operation and Maintenance. The current marginal cost methodology does not include costs for operation and maintenance. (Operation and maintenance primarily includes funding for the administration, supervision, maintenance, preservation, and protection of the university’s physical plant.) As previously mentioned, the Governor proposes to include these costs in his calculation of the marginal cost. (We note that the segments also requested that the marginal cost account for such costs.) In including operation and maintenance costs, the Governor adjusts for (1) specific operation and maintenance services whose costs increase very little with additional students (such as physical plant administration) and (2) the maintenance costs for UC’s research facilities. We have taken a similar approach in our proposed methodology.
Change Definition of CSU Graduate FTE Student. We recommend that the current marginal cost methodology be changed to recognize a graduate FTE student unit load at CSU of 12 units per term, rather than 15 units (as requested by the university and proposed by the Governor). This would be consistent with how such a load is defined at UC and most other higher education institutions. The proposed change would be revenue neutral, simultaneously increasing the defined number of graduate students and decreasing the defined cost of a graduate student.
Accurately Account for Available Student Fee Revenue. In order to determine how much state General Fund support is needed for each additional FTE student at UC and CSU, the marginal cost formula must back out the fee revenue that the segments anticipate collecting from each student. Under the current methodology, this is based on the percentage of the university’s entire operating budget that is supported by student fee revenue. For example, if fee revenue makes up 30 percent of UC’s budget for 2005-06, then new fee revenue would be deemed to support 30 percent of the total marginal cost for 2006-07. The remaining 70 percent would be funded by the state’s General Fund. Based on the current methodology, the fee backout for the budget year (2006-07) would be $3,336 for UC and $1,966 for CSU.
In our review of the current marginal cost methodology, we found that the above approach underestimates the student fee revenue available to support enrollment growth. This is because the percentage share of fees is calculated based on the university’s total operating budget, which includes program costs that are not supposed to be covered by fees (such as research and UC’s teaching hospitals). In other words, the “base” (or denominator) is larger than appropriate, which in turn depresses the percentage supported by fees. We recommend the total marginal cost be adjusted for the average systemwide fee revenue colleted from each additional FTE student (regardless of education level). In order to calculate the average fee per FTE student at UC and CSU, total current-year mandatory systemwide fee revenue (registration and education fees for UC and state university fees for CSU) is divided by total current-year FTE students. This approach results in a fee backout for the budget year of $6,211 for UC and $2,949 for CSU. These amounts reflect the average fee amount that each additional student will pay towards their educational costs.
Using our revised methodology and our proposed 2 percent enrollment growth, we recommend deleting $30.8 million from the $110 million requested in the budget for enrollment growth at the University of California (UC) and the California State University (CSU). Our proposal would leave sufficient funding to provide $8,574 for each additional UC student and $6,407 for each additional CSU student. We further recommend the Legislature adopt (1) provisional language specifying the marginal cost funding rate for each segment and (2) supplemental report language specifying that enrollment growth funding provided in future budgets be based on our proposed methodology. (Reduce Item 6440-001-0001 by $16.7 million and Item 6610-001-0001 by $14.1 million.)
Based on our above proposals to revise the current marginal cost methodology, we recommend the Legislature provide $8,574 in General Fund support for each additional FTE student at UC and $6,407 for each additional FTE student at CSU. (See Figure 6 for a detailed description of our marginal cost calculations.) Our proposed methodology would provide UC and CSU with more General Fund support than the current marginal cost methodology ($8,087 per student at UC and $5,597 per student at CSU). At the same time, our rates are lower than the Governor’s proposed funding rates.
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Figure 6 LAO Marginal Cost Recommendations |
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2006-07 |
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Marginal Cost Per FTEa Student |
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UC |
CSU |
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Faculty salary |
$3,721 |
$3,083 |
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Faculty benefits |
714 |
1,133 |
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Teaching Assistants |
479 |
17 |
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Instructional equipment replacement |
461 |
126 |
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Instructional support |
4,310 |
783 |
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Academic support |
1,507 |
1,293 |
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Student services |
1,028 |
992 |
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Institutional support |
837 |
988 |
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Operation and maintenance |
1,729 |
942 |
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Totals |
$14,785 |
$9,356 |
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Less student fee revenue |
-$6,211 |
-$2,949 |
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LAO’s Proposed State Funding Rate |
$8,574 |
$6,407 |
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Current Methodology |
$8,087 |
$5,597 |
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Governor’s Proposed Methodology |
$10,103 |
$6,792 |
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a Full-time equivalent. |
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After incorporating our earlier proposal to fund enrollment growth at a rate of 2 percent at both UC and CSU, we therefore recommend reducing the Governor’s proposed General Fund augmentation for enrollment growth by a total of $30.8 million, including $16.7 million from UC and $14.1 million from CSU. Under our proposal, the segments would still receive sufficient funding to cover estimated costs of enrollment growth due to increases in population and college participation. At the same time, the Legislature could use our identified General Fund savings to address other priorities, including addressing the state’s budget problem.
We further recommend the Legislature adopt provisional language, for both UC and CSU, specifying the (1) amount of funding provided for enrollment growth, (2) estimated marginal cost funding rate, and (3) number of additional FTE students funded. This is because the Legislature, the Governor, and the public should have a clear understanding of how much enrollment growth is funded at UC and CSU in the annual budget act. Additionally, the segments should be expected to use enrollment growth funding provided by the state to serve additional students and not to supplement funding for existing students (such as those enrolled in non-state supported summer instruction programs). Moreover, we recommend the Legislature adopt supplemental report language specifying its intent that enrollment growth funding provided to UC and CSU in subsequent budgets be based on our proposed marginal cost methodology.
For the above reasons, we propose the Legislature add the following provision to Item 6440-001-0001:
Of the amount appropriated in Schedule (1), $35,325,000 is to fund 2 percent enrollment growth (or 4,120 additional full-time equivalent students) at the University of California, based on a marginal General Fund cost of $8,574 per additional student. This funding shall not be used to provide additional state support to students for which campuses only received state funding in 2005-06 to buy down their summer fees.
Similarly, we also recommend adding the following provision to Item 6610-001-0001:
Of the amount appropriated in Schedule (1), $43,516,000 is to fund 2 percent enrollment growth (or 6,792 additional full-time equivalent students) at the California State University, based on a marginal General Fund cost of $6,407 per additional student. This funding shall not be used to provide additional state support to students for which campuses only received state funding in 2005-06 to buy down their summer fees.