LAO 2006-07 Budget Analysis: Education

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

Student Aid Commission (7980)

The California Student Aid Commission (CSAC) provides financial aid to students through a variety of grant and loan programs. The proposed 2006-07 budget for the commission includes state and federal funds totaling $1.6†billion. Of this amount, $862†million is General Fund support-all of which is used for direct student aid for higher education. A special fund covers the commissionís operating costs.

Below, we summarize the Governorís major budget proposals. We then discuss the Governorís proposals to increase the private university Cal Grant award and designate 600 loan forgiveness warrants for participants in the Governorís Science and Math Teacher Initiative. We also reference a Cal Grant issue linked to our student fees write-up earlier in this chapter. Lastly, we examine the organizational relationship between CSAC and its auxiliary, EdFund, and recommend a significant organizational restructuring intended to improve state-level financial aid administration.

Major Budget Proposals

Figure†1 compares the commissionís revised 2005-06 budget with the proposed 2006-07 budget. As the figure shows, funding for state financial aid programs would increase by $58†million, or 7.1†percent, from the current year. This increase is due to additional costs associated with the Cal Grant programs ($51†million) and the Assumption Program of Loans for Education, or APLE program ($6.8†million). As the figure also shows, in the budget year, General Fund support would increase considerably (by $109†million, or 15†percent). This is due in part to a large General Fund backfill. Whereas $51†million in Student Loan Operating Fund (Operating Fund) monies were used to support Cal Grant costs in the current year, the Governorís budget provides General Fund monies to backfill this amount in the budget year. Thus, no Operating Fund monies are proposed to be used for Cal Grant costs in 2006-07.

 

Figure 1

Student Aid Commission Budget Summarya

(Dollars in Millions)

 

2005-06
Revised

2006-07
Proposed

Change

 

Amount

Percent

Expenditures

 

 

 

 

Cal Grant programs

 

 

 

 

  Entitlement

$645.0

$697.2

$52.2

8.1%

  Competitive

115.5

118.2

2.7

2.4

  Pre-Chapter 403

4.9

0.9

-4.0

-81.6

  Cal Grant C

9.2

9.6

0.4

4.4

    Subtotals—Cal Grant

($774.6)

($825.9)

($51.3)

(6.6%)

APLEb

$40.9

$47.7

$6.8

16.7%

Graduate APLE

0.4

0.4

Law enforcement scholarships

0.1

0.1

      Totals

$816.0

$874.2

$58.2

7.1%

Funding Sources

 

 

 

 

General Fund

$752.4

$861.6

$109.2

14.5%

Student Loan Operating Fundc

51.0

-51.0

-100.0

Federal Trust Fundc

12.6

12.6

 

a  In addition to the programs listed, the commission administers the Byrd Scholarship, Child Development Teacher and Supervisor Grant, and California Chafee programs—all of which are supported entirely with federal funds. It also administers the Student Opportunity and Access program, a state outreach program supported entirely with Student Loan Operating Fund monies.

b  Assumption Program of Loans for Education.

c  These monies pay for Cal Grant costs.

 

Cal Grant Programs. As Figure†1 shows, the Governorís budget would increase funding for the Cal Grant Entitlement programs by $52†million (or 8.1†percent) and Cal Grant Competitive programs by $2.7†million (or†2.4†percent). Figure†2 provides a more detailed breakdown of these proposed augmentations.

 

Figure 2

Cal Grant Programs
Budget Summary

(In Millions)

 

Proposed Change

Entitlement Program

 

New High School awards

$4.4

New CCC Transfer awards

13.6

Increasing private-institution award

8.8

Renewal awards

25.4

  Total

$52.2

Competitive Program

 

New awards

-$0.1

Increasing private-institution award

3.1

Renewal awards

-0.3

  Total

$2.7

 

The Governorís budget funds approximately 1,600 new High School Entitlement awards. This reflects growth of 3.4†percent, consistent with the projected growth in high school graduates for 2005-06. It also funds 2,700 new Transfer Entitlement awards, a 59†percent increase over the current year (consistent with the percent change from the prior year to the current year). The Governorís budget includes no additional funding for new Competitive awards because the commission already issues the maximum number allowable under statute (22,500). For new Entitlement and Competitive recipients attending private institutions, the Governorís budget provides $11.9†million to raise the maximum grant from its current-year level of $8,322 to $9,708. The Governorís budget also makes adjustments to account for expected changes in the costs of Cal Grant renewal awards.

Loan Forgiveness Programs. Additionally, the Governorís budget includes a $6.8†million General Fund augmentation to cover loan-forgiveness costs associated with APLE warrants issued in previous years. The Governorís budget proposes to issue 8,000 new APLE warrants-the same level as in the current year. It also proposes to issue 100 new National Guard warrants. To date, the budget act has not authorized any National Guard warrants.

Promote Parity for Financially Needy Students Attending Public†and†Private Universities

We continue to recommend the Legislature adopt a policy linking the maximum Cal Grant for financially needy students attending private institutions to the General Fund subsidy the state provides to financially needy students attending public institutions. The Governorís budget proposal to raise the maximum private-student award to $9,708 would reduce (but not eliminate) the existing award disparity. Further award increases could be phased in gradually until parity between financially needy students attending public and private institutions was achieved.

Prior to 2001-02, the state had a longstanding statutory policy that linked the maximum Cal Grant for financially needy students attending private institutions to the average General Fund cost of educating a financially needy student at the University of California (UC) and the California State University (CSU). When the Cal Grant Entitlement program was created in 2000, this policy was replaced with a new provision linking the maximum private-student Cal Grant award to whatever amount was specified in the annual budget act. As shown in Figure†3, the maximum award was maintained at its 2000 level ($9,708) for three years and then reduced to $8,322 in 2004. The Governorís budget provides $11.9†million to restore the maximum award to $9,708. The proposal would affect approximately 12,300 new Cal Grant recipients.

 

Figure 3

Maximum Cal Grant for
Financially Needy Students
Attending Private Institutions

 

Actual
Amount

Parity-Based Formula Amount

2001-02

9,708

$9,470

2002-03

9,708

9,631

2003-04

9,708

10,575

2004-05

8,322

10,062

2005-06

8,322

10,568

2006-07

9,708a

11,011

 

a  Reflects Governor's budget proposal.

 

We recommend the Legislature restore the policy basis of the Cal Grant for financially needy students attending private institutions. Without a policy, annual Cal Grant decisions can appear arbitrary and unpredictable. These decisions also can be inconsistent and work at cross-purposes. For example, in recent years, benefits have been enhanced for some financially needy students while reduced for other needy students in similar financial situations. To establish a rational policy basis and promote consistency among student groups (across the segments and over time), we recommend establishing a policy that would base the maximum Cal Grant for financially needy students attending private institutions on the average General Fund subsidy provided to financially needy students at UC and CSU (weighted for enrollment). Figure†3 shows what the maximum award would have been from 2001-02 through 2006-07 using this parity-based formula. As the figure shows, the formula would have generated a slightly lower rate than the actual rate provided in 2001-02 and 2002-03 and then trended upward gradually and moderately.

For 2006-07, the formula generates a maximum Cal Grant rate of $11,011. (Providing this higher award to new recipients would cost $11.1†million relative to the Governorís budget.) This rate is approximately $1,300 higher than the private university award amount proposed in the Governorís budget. Having once restored the policy basis of the award, the Legislature could gradually phase in modest award increases until parity between financially needy students attending public and private institutions is achieved.

Avoid Complicating Existing, Well-Structured Program

We recommend the Legislature retain the existing structure of the Assumption Program of Loans for Education and reject proposed budget bill language to add various new, unneeded provisions.

The Governorís budget authorizes 8,000 new APLE warrants. It also contains language that would allocate 600 of these new warrants to UC and CSU for students participating in the Governorís Science and Math Teacher Initiative. Because this program is not authorized in statute, various budget bill provisions are needed to implement the Governorís proposal. In the current year, the administration had proposed similar language, which the Legislature rejected. We recommend the Legislature also reject the proposed budget-year language. The Legislature can meet the administrationís intended objective-encouraging and rewarding individuals to teach in high-need subject areas-simply by relying on the existing APLE program.

Existing Program Already Creates Strong Incentives to Serve as Science and Math Teachers. The existing APLE program is based on a tiered incentive system that links certain levels of loan forgiveness to certain behavior. Specifically, it provides up to $11,000 in loan forgiveness for individuals who teach full time for at least four consecutive years in a high-need subject area (as determined by the Superintendent of Public Instruction) or high-need school (those that are low performing, serve a large population of low-income students, or have 20†percent or more uncredentialed teachers). Having already targeted these high-need areas, the program then provides up to an additional $4,000 in loan forgiveness if the individual teaches science, math, or special education and up to another $4,000 in loan forgiveness if the individual teaches in one of these high-priority shortage areas and serves in a school ranked in the bottom two deciles of the Academic Performance Index. In short, the program encourages individuals to become math and science teachers by offering them significant additional benefits.

Rather Than Adding Unneeded Complications, Simply Retain Existing Program. Given the APLE program already has these strong incentives encouraging individuals to serve as science and math teachers, we recommend the Legislature reject the Governorís new budget bill provisions. These new provisions actually create restrictions-reserving 600 new warrants only for certain UC and CSU students-that could make meeting the programís intent more difficult. Rather than add unneeded complications to an already well-structured program, we recommend allowing the existing program to serve all individuals that meet its high-need subject and school criteria.

Intersegmental Issue Involving CSAC

In the student fees write-up in the intersegmental section of this chapter, we recommend maintaining nonneedy studentsí share of education costs at their current-year levels (33†percent at UC and 25†percent at CSU). Because the Governorís budget includes various augmentations that drive up per student costs at UC and CSU, holding studentsí share of cost constant would entail modest fee increases (3.5†percent at UC and 3†percent at CSU). In our fees write-up, we recommend a corresponding increase in Cal Grant award amounts sufficient to ensure that all eligible financially needy students receive grants that fully cover the fee increases. Based on the commissionís projections of Cal Grant participation, we estimate the additional coverage would cost $11.9†million ($8.3†million for financially needy students at UC and $3.6†million for financially needy students at CSU).

Restructuring How the State Administers Grant and Loan Financial Aid Programs

Last year, members of the education policy and fiscal committees expressed concern with the organizational relationship between CSAC and EdFund. Responding to a legislative directive, our office released a report in January 2006 that examined this relationship and identified options for restructuring it (Californiaís Options for Administering the Federal Family Education Loan Program). Below, we summarize the organizational options the state has for administering grant and loan financial aid programs. We then identify the shortcomings both of the stateís original single state-agency structure and its existing two-agency administrative structure. In the final section, we recommend the state restructure how it administers these financial aid programs.

Organizational Options

As we discuss in more detail in our January 2006 report, the Legislature has five basic options for coordinating administration of state grant programs and federal student loan programs. As summarized in Figure†4, these options can be grouped into single-agency structures and two-agency structures. To simplify the discussion, we describe these options before applying them to Californiaís experience in administering grant and loan programs.

 

Figure 4

Organizational Options

Single Agency

State Agency
Model

Nonprofit Public Benefit
Corporation Model

Single state agency administers state grant programs and federal loan
programs.

Single nonprofit public benefit corporation administers state grant programs and federal loan programs.

Agency subject to state employment and procurement laws and regulations.

Agency exempt from state employment and procurement laws and regulations.

Options as Applied to California:

(1) California Student Aid Commission (CSAC) (or another state agency) administers both grant and loan
programs.

(2) EdFund (or another nonprofit public benefit corporation) administers both grant and loan programs.

Two Agencies

State/Dependent
Guarantor Model

State/Independent
Guarantor Model

A state agency administers state
grant programs and a separate state-dependent or auxiliary agency
administers federal loan programs.

A state agency administers state grant programs and an independent agency administers federal student loan
programs.

State employment and procurement laws apply to state agency but not
loan agency.

State employment and procurement laws apply to state agency but not loan agency.

Options as Applied to California:

(3) Make no changes to existing CSAC/EdFund arrangement.

(5) Rely on CSAC (or another state agency) to administer state grant programs and an independent agency to administer federal loan programs.

(4) Modify CSAC and EdFund's roles and responsibilities.

 

Single-Agency Options. Under a single-agency structure, the Legislature could: (1) entrust a state agency with administering both grant and loan programs or (2) establish a nonprofit public benefit corporation to administer them. Under a state-agency model, the Legislature would give responsibility for grant and loan program administration to CSAC or another state agency. This entity would be subject to all applicable state laws and regulations, including those relating to hiring, compensation, promotion, and procurement. Under this model, the state agency could provide all program services internally or contract for any or all services. Under a nonprofit public benefit corporation model, the primary difference is that the agency would be exempt from state employment and procurement practices, thereby afforded greater autonomy and flexibility in its daily operations.

Two-Agency Options. Under a two-agency structure, the Legislature could: (3) retain the existing two-agency arrangement, (4) modify the existing two-agency arrangement, or (5) rely on a state agency to administer grant programs and an independent agency to administer federal loan programs. Maintaining the status quo obviously is the simplest option in that no statutory changes would be required. The Legislature, however, could modify the existing arrangement by making various statutory changes to clarify the roles and responsibilities of the grant agency vis-ŗ-vis the loan agency. For example, the Legislature likely would want to clarify which agency had responsibility for budget development, resource allocation, policy leadership, and representation before the state and federal governments. Instead of using a loan agency that was an auxiliary of or otherwise dependent on the state, the Legislature could use an independent loan agency-either a reconstituted EdFund or another existing loan agency. This latter option would be more involved in that it would entail selling EdFundís existing loan portfolio and entering into a contractual agreement with some other existing loan agency (either a private corporation or another stateís loan agency).

Single State-Agency Structure Had Shortcomings

Of the five organizational options identified above, California relied on a single state-agency structure from 1979 to 1996. During this period, CSAC administered both grant and loan programs. By the mid-1990s, the state Legislature, federal government, and financial aid stakeholders expressed concern with this structure and specifically with CSACís ability to administer the federal loan programs.

Single State-Agency Model Deemed Too Rigid, Not Adequately Responsive. To understand better the problems that spurred the initial creation of EdFund, we reviewed independent evaluations, state audits, and federal audits conducted in the early- and mid-1990s. We also conducted interviews with individuals familiar with CSAC operations during this period. The problems identified were far reaching-ranging from financial aid processing difficulties and accounting errors to staff inexperience and perceptions among colleges that CSAC was not adequately responsive or service-oriented.

EdFund Designed to Be More Responsive. In 1996, the Legislature authorized CSAC to create an auxiliary agency for the purpose of administering federal student loan programs. As defined in statute, the auxiliary agency is a nonprofit public benefit corporation that is exempt from certain state employment and procurement laws. Individuals involved in developing the 1996 legislation state that these particular statutory provisions were viewed as critical changes designed to allow the auxiliary agency to respond more quickly and effectively to loan market dynamics, colleges, and students.

Existing Two-Agency Structure Has Shortcomings

Since 1996, the state has relied on a two-agency structure-using CSAC to administer state grant programs and EdFund to administer federal loan programs. By 2005, the Legislature, as well as various stakeholders, was expressing growing concern with this two-agency, shared-control structure. We think much of this concern can be linked with three shortcomings of the existing organizational structure. (The Bureau of State Audits is currently reviewing EdFundís employment and procurement practices to determine if other problems exist. The auditor is expected to release its findings in spring 2006. Given the audit is still underway, we do not address these particular issues.)

Separate Governing Bodies Has Led to Tension Among Organizational Leadership. We think one of the major shortcomings of the existing organizational arrangement stems from its competing governing bodies. Figure†5 shows the composition of these governing bodies (as of April 2005). As reflected in the figure, state law specifies that CSAC is to be

governed by a 15-member commission. The commission is responsible for appointing a board of directors for its auxiliary agency. The commission is given broad authority to determine both the size and composition of this board. Furthermore, EdFundís bylaws permit the commission to remove any individual serving on the board at any time, with or without cause. Despite being given no ultimate, independent authority, EdFund is delegated (both by law and its operating agreement) major operational responsibilities. Ever since the inception of EdFund, this disconnect between organizational authority and operational responsibility has created considerable tension between the two agencies.

This tension was evident in spring 2005 when the commission voted to dismantle the EdFund board. In the minutes from the April 2005 commission meeting, the commission indicated its action was motivated by concerns with governance as well as by a desire to ensure both agencies were working together toward a united set of goals. Many parties (including legislators, financial aid administrators, and lenders) expressed concern that the decision to dismantle the board threatened EdFundís stability and viability.

State Law Lacks Clarity on Which Agency Is Responsible for Which Operational Functions. A second shortcoming of the existing organizational arrangement is the lack of clarity and agreement on which agency should be entrusted with which specific operational responsibilities. Silent on specific operational issues, state law calls for these responsibilities to be negotiated in a jointly developed annual operating agreement approved by the commission. In our discussions with CSAC and EdFund leadership, several areas of concern were raised about the existing ambiguity in law and resulting tension within the negotiation process. Most importantly, concerns revolved around determining who is responsible for developing EdFundís budget, designating the use of Operating Fund monies, representing EdFundís interests to the state Legislature, negotiating EdFundís working agreements with the federal government, and resolving grievances of EdFundís remaining civil service employees. This interagency tension continues to manifest itself in the currently unresolved discussion involving the agenciesí roles. After several months of discussion and various draft proposals regarding these responsibilities, the issues remain unresolved.

Incompatible Incentive Systems Detract From a Student Focus. Third, whereas CSAC is structured as a traditional state agency whose employees are subject to civil service laws, EdFundís status as a nonprofit corporation has fostered more market-driven practices. For example, EdFund uses variable compensation plans that offer incentive compensation to reward employees for providing high-quality service in their respective domain. These plans are notably different from the typical civil service compensation plans based on routine step increases. Both CSAC and EdFund leadership expressed concern that these incompatible incentive systems have led to certain perceptions of unfairness among staff and directors. Equally important, the resulting interagency tension has detracted from a public focus on providing students with high-quality grant and loan services.

Recommend Single Agency With Flexibility in Daily Operations but Stronger Accountability Requirements

We recommend the Legislature enact legislation that would restructure how the state administers grant and loan programs. Specifically, we recommend the Legislature authorize a single agency, with a single board and Executive Director, to administer both state grant and federal loan programs. We recommend the agency be structured as a nonprofit public benefit corporation but subject to stronger accountability requirements.

As described in more detail in our January 2006 report, we think any restructuring proposal should overcome both the original shortcomings that led to EdFundís creation and the shortcomings of the existing two-agency structure. In particular, we think an organizational solution should reduce tension among organizational leadership, clarify certain roles and responsibilities, and promote incentives that reward high-quality service to students. Given the unique intricacies of student financial aid and the unique aspects of the federal student loan programs, we think these objectives could best be met with a single nonprofit public benefit agency that has a unified leadership and an incentive system that rewards employees based on the quality of service they provide to students.

This Option Most Likely to Overcome Existing Problems. Compared to a two-agency, shared-control structure, a single-agency structure has certain inherent advantages. With a single agency, board structure, and Executive Director, tension is less likely among organizational leadership, and confusion about roles and responsibilities is likely to be more easily and quickly resolved. Moreover, as a nonprofit public benefit corporation, the agency would have more flexibility in its daily operations. This would allow the agency to adapt more quickly to changes in loan programs and loan competitors-changes that can have significant effects on agenciesí market share and the benefits they are able to provide student borrowers. This structure also would allow the agency to reward all employees-in both the loan and grant divisions-for providing high-quality service to students.

Greater Autonomy Should Be Coupled With Greater Accountability. Increasing an agencyís autonomy over its daily administrative activities should be coupled with increased attention to accountability. Toward this end, the Legislature could establish accountability requirements to ensure the agency is meeting legislative intent and providing students with excellent service. Specifically, we recommend the Legislature require the agency to submit various budget documents, conduct annual audits, and report on program outcomes. (Additionally, depending on the findings of the pending state audit, the Legislature might want to establish other safeguards or limitations on the agencyís operations.) Because the agency would be a statutory creation, the Legislature, as further protection, would retain ultimate authority over it.

New Structure Could Accommodate Broader Reform. We think another distinct advantage of our recommendation is that it creates a structure within which other reforms could easily be accommodated. As a single agency, it would be better situated to integrate grant and loan information and services. As such, the Legislature could consider a variety of other reforms related to financial aid administration. For example, the new agency could assume responsibility for the stateís savings and scholarship programs (currently administered by the Scholarshare Investment Board). This would unify all state-level financial aid administration in one umbrella agency and create a one-stop shop for state-level financial aid information.

Conclusion

Over the last several decades, California has experimented with two organizational structures for administering state student grant programs and the federal student loan programs. It has tried both a single state-agency structure and a two-agency, shared-control structure. It has had notable problems with both structures. We recommend the Legislature establish a new structure. Specifically, given the unique intricacies of student financial aid, we recommend the Legislature authorize a single agency with a unified leadership to administer both grant and loan programs. Furthermore, given the unique market-oriented and competitive nature of the federal student loan programs, we recommend the Legislature structure this agency as a nonprofit public benefit corporation that would have greater flexibility over its daily operations, with the ultimate intent of increasing public accountability and providing the best possible services and benefits to students.


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