Analysis of the 2007-08 Budget Bill: Education

Higher Education Introduction

The Governor’s budget proposes a net augmentation of $539 million in General Fund support for higher education in 2007-08. This represents a 5 percent increase from the revised 2006-07 amount. Proposed augmentations would fund cost-of-living adjustments and enrollment growth funding at all three public segments, increased expenses of the Cal Grant program, and other costs. In addition, the Governor’s budget assumes student fee revenue will increase by a net $238 million, due largely to fee increases at the University of California and the California State University. The Governor’s budget assumes no fee increase at the California Community Colleges. The budget also would support 112 capital outlay projects at the three segments, using $1.5 billion in funding from higher education bonds.

Total Higher Education Budget Proposal

As Figure 1 shows, the 2007-08 budget proposal provides a total of $34.6 billion from all sources for higher education support costs. (Capital outlay expenditures are discussed at the end of this section.) This amount is $1.3 billion, or 3.8 percent, more than the Governor’s revised current-year proposal. The total includes funding for the University of California (UC), the California State University (CSU), the California Community Colleges (CCC), Hastings College of the Law, the California Student Aid Commission, and the California Postsecondary Education Commission. Funded activities include instruction, research, and related functions, as well as other activities, such as providing medical care at UC hospitals and managing three major U.S. Department of Energy laboratories.

Major Funding Sources

The 2007-08 budget proposal provides $11.4 billion from the General Fund for higher education. This amount is $539 million, or 5 percent, more than proposed current-year funding. The budget also projects that local property taxes will contribute $2.1 billion for CCC in 2007-08, which reflects an increase of $193 million, or 10 percent, more than proposed current-year funding.

Student fee revenue at all the public higher education segments (including Hastings College of the Law) supports $3.8 billion of proposed expenditures. This is $238 million, or 6.6 percent, greater than fee revenue in the current year. Most of this increase comes from an assumed 7 percent fee increase at UC (generating $105 million) and an assumed 10 percent fee increase at CSU (generating $98 million). Fee revenue at CCC is projected to decline by about $33 million, due mainly to the full-year effect of a $6 per unit fee reduction that went into effect in the middle of the current fiscal year.

The budget also includes about $17.3 billion in other funds, which reflects an increase of $284 million, or 1.7 percent. About $16.8 billion of these other funds constitute nonstate revenue—including federal funding and private contributions. The remainder is made up of various state revenues, including lottery and tobacco funds. In addition to the amounts reflected in Figure 1, local community colleges are projected to receive an additional $1.6 billion from locally budgeted resources. (These funds are identified in the “California Community Colleges” section of this chapter.)

Funding by Segment

For UC, the budget proposes General Fund appropriations of $3.3 billion, which is $192 million, or 6.2 percent, more than the proposed current-year estimate. The other major source of funding for UC’s educational programs is student fee revenue. This is projected to total $2.2 billion in 2007-08, which is 7.7 percent above the current-year estimate. When General Fund and fee revenues are combined, UC’s budget would increase by 6.8 percent.

For CSU, the budget proposes $3 billion in General Fund support, which is an increase of $165 million, or 5.9 percent, from the revised current-year level. Fee revenue would increase by $123 million, or 9.9 percent, to $1.4 billion. Total General Fund and fee revenue combined would increase by 7.1 percent.

For CCC, the Governor’s budget proposes $4.2 billion in General Fund support, which is $117 million, or 2.9 percent, above the current-year amount. Local property tax revenue (the second largest source of CCC funding) would increase by 10.4 percent, to $2.1 billion. Fee revenue would provide an additional $282 million, reflecting a reduction of $39.8 million, or 12.4 percent. Combined, these three sources of district apportionments (General Fund support, property taxes, and fee revenue) would amount to $6.6 billion, which reflects an increase of $271 million, or 4.3 percent.

Major Cost Drivers for Higher Education

Annual base adjustments for higher education generally arise from three major factors: (1) enrollment growth, (2) inflation, and (3) student fee levels. Specifically, these factors influence costs in the following ways:

Enrollment Growth. For UC and CSU, the state uses a “marginal cost” formula that estimates the added cost imposed by enrolling one additional full-time equivalent student. This estimate includes instructional costs (such as faculty salaries and teaching assistants), related educational costs (such as instructional materials and libraries), administrative costs, and student services. Because faculty (particularly at UC) spend part of their time performing noninstructional activities such as research, the marginal cost formula “buys” part of these other activities with each additional student enrolled. A different methodology is used to calculate funding for community college enrollment growth, although functionally the approaches are similar.

Inflation. Like other parts of the state budget, general inflationary pressures cause higher education costs to rise over time. For example, inflation increases the cost of supplies, utilities, and services that are purchased by campuses. In addition, inflation creates pressure to provide cost-of-living adjustments to maintain the buying power of faculty and staff salaries.

Student Fees. Student fees comprise a portion of total revenue available to the segments. When fees are increased, this generates new revenue that either can substitute for General Fund revenue (thus creating General Fund savings) or increase total funding for the higher education segments. Either way, fee revenue and General Fund support work together interchangeably to support a given level of services.

Major Budget Changes

The Governor’s higher education budget proposal results primarily from increases in the base budget (somewhat higher than inflation), enrollment and student fees, as well as increased financial aid costs. Figure 2 shows the major General Fund budget changes proposed by the Governor for the three segments.

Enrollment Growth. The Governor proposes enrollment increases from budgeted levels of roughly 2.5 percent at UC and CSU, and 2 percent at CCC. Figure 3 shows enrollment changes at the three segments. We discuss proposed enrollment levels in more detail later in this chapter.

Student Fees. As shown in Figure 4, the Governor proposes that student fees increase by 7 percent at UC and 10 percent at CSU. These increases would generate an additional $105 million for UC and $97.8 million for CSU. Fees at CCC were reduced by 23 percent in January 2007, and the Governor proposes that this reduced fee remain in place through 2007-08. The full-year effect of the fee reduction will reduce annual fee revenue by $33.2 million in 2007-08, requiring a General Fund backfill of the same amount.

Capital Outlay

As shown in Figure 5, the Governor’s budget proposal includes about $1.5 billion in new capital outlay funding for 2007-08. In addition to this funding, the budget provides $592 million in carryover and reappropriated funding that was originally appropriated in prior years. For CSU, the budget also includes $50 million in bond funding for special repairs that is counted as part of CSU’s support budget.

Of the proposed funding, $70 million would come from lease revenue bonds and the remainder from general obligation (GO) bonds. All but $87 million of GO bond funding would come from bonds authorized by voter approval of Proposition 1D in November 2006. Under the Governor’s proposal, just under $700 million in Proposition 1D bonds would be available for future years. Prior bond authorizations would be virtually exhausted.

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