The LAO on Higher Ed Spending

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The Legislative Analyst's Office (LAO) has thoughts about higher ed spending in the future in a new report. LAO continues to argue that UC is accepting more students than are eligible under the Master Plan's original vision.

Executive Summary

Report Analyzes Cost Pressures at UC and CSU. California operates two public university systems: (1) the University of California (UC), consisting of 10 campuses, and (2) the California State University (CSU), consisting of 23 campuses. Compared with many other areas of the state budget, the Legislature has considerable flexibility through the annual budget process to decide which university costs to support. Despite this greater flexibility, the Legislature faces many pressures to increase funding for UC and CSU in 2020‑21. This report examines these university cost pressures, assesses the state’s capacity to fund some of them, and identifies options for expanding budget capacity to fund additional cost pressures.

Cost Pressures

Employee Salary Increases Likely to Remain Key Cost Pressure. Existing law grants both university systems authority to negotiate compensation levels for their employees. Since 2013‑14, both systems have provided annual salary increases, generally ranging from 2 percent to 5 percent depending on the employee group. Because contracts are not in place for most university employee groups in 2020‑21, salary increases will likely be a key issue facing the Legislature in the upcoming budget. We estimate the cost of a 1 percent salary increase to be around $45 million at each segment in 2020‑21.

Employee Benefit Costs Continue to Rise, Universities Have Notable Unfunded Liabilities. Like most government employees in California, university employees receive subsidized health care while they are employed, and they receive both pensions and subsidized health care when they retire. These benefit costs are among the fastest growing cost pressures at UC and CSU. We estimate benefit costs across both university segments will increase by around $195 million in 2020‑21. In addition, both university systems have billions of dollars in unfunded pension and retiree health liabilities resulting from underfunding earned benefits in previous years.

Universities Have Large Facility Maintenance Backlogs. Like most state agencies, UC and CSU dedicate a portion of their core budgets for facility maintenance, such as keeping electrical and plumbing systems in working order. As their spending on maintenance has tended to be insufficient over the years, campuses have accrued billions of dollars in unaddressed facility maintenance and seismic renovation projects. These backlogs create significant cost pressure for the Legislature in the budget year and future years. To better guide state funding decisions, the Legislature recently directed the universities to develop long‑term plans to address their backlogs. The Legislature is to receive CSU’s report by January 2020 and UC’s report by January 2021.

Some Pressure to Expand Enrollment but No Underlying Demographic Growth. When weighing enrollment growth decisions in the upcoming budget, the Legislature faces a number of key factors. First, the number of high school graduates is projected to decline slightly in the upcoming year. Both segments are also drawing from larger pools of high school students than expected under state policy. These factors potentially suggest further enrollment growth is not warranted in 2020‑21. On the other hand, the Legislature may wish to grow enrollment to improve access at high demand campuses. Based on the state’s existing per‑student funding rates, we estimate growing enrollment by an additional 1 percent would cost the state around $40 million at UC and $45 million at CSU.

Legislature Likely to Face Many Other University Cost Pressures. In recent years, the Legislature has considered various initiatives that change the level or scope of university services. These initiatives have included: (1) increasing the number of tenured/tenure‑track faculty; (2) improving graduation rates at CSU; (3) limiting nonresident enrollment at UC; (4) expanding student food, housing, and mental health programs; and (5) establishing new academic programs and campuses. In 2020‑21, the Legislature very likely will continue to face pressure for additional spending in each of these areas.

Planning Issues

State Budget Has Capacity to Fund Some University Cost Pressures. In The 2020‑21 Budget: California’s Fiscal Outlook (fiscal outlook), we calculate the state’s budget capacity for the coming year. In making our calculations, we first assume the state maintains existing services, as adjusted for inflation. For the universities specifically, we assume the state covers salary, pension, health benefits, and debt service cost increases. After accounting for these types of cost pressures, we estimate the state would have a $7 billion surplus. Given certain risks to the General Fund, we recommend the Legislature limit new ongoing spending commitments across all areas of the state budget to around $1 billion. In the case of the universities, any remaining ongoing pressures (such as enrollment growth, expansion of services, and new programs or campuses) likely would be up for legislative consideration for a portion of this $1 billion. After making new ongoing commitments, the remainder of the state surplus would be available for one‑time commitments, accelerated debt payments, or larger state reserves. If the Legislature would like to direct some of the remaining surplus to the universities, we encourage it to give high priority to addressing the universities’ unfunded liabilities and facility maintenance backlogs (including seismic renovations). Addressing these liabilities now would reduce the burden on future generations and improve the fiscal health of the state and universities.

Legislature Has Some University Options for Expanding Budget Capacity. Our fiscal outlook assumes the state covers inflationary cost increases, with no increases in tuition for resident students. However, one key option available to the Legislature for covering additional cost pressures is to share ongoing university cost increases with students through a tuition increase. We estimate that every 1 percent increase in tuition raises associated net revenue by about $15 million at UC and $10 million at CSU. Another option would be to work with the universities to pursue efficiencies in their operations and facility utilization. The amount of freed‑up funding that could be redirected would depend upon the specific efficiencies pursued, with some options creating budget‑year savings but others not yielding savings until later years. Another option would be to factor campuses’ reserves into state budget decisions. The Legislature could be strategic in the use of these reserves—using them to protect ongoing university operations during an economic downturn or using them to address key one‑time priorities, such as deferred maintenance, in the budget year. Each of the university systems potentially has hundreds of millions of dollars in reserves that are available for such spending purposes.

Full report at https://lao.ca.gov/Publications/Report/4127