LAO on the Governor's Budget Proposal for UC & CSU

Typically, shortly after the governor releases his budget proposal (which he did on Jan. 10 and which we have reviewed in prior posts), the Legislative Analyst's Office (LAO) produces its initial response. At the macro level of the budget, the LAO this time suggests that the governor is spending too much and should leave more in reserve. The LAO continues the bad habit of using "surplus" loosely, in this case to mean what the governor should be spending in a "discretionary" fashion. This Alice in Wonderland notion that words mean what you want them to mean is unfortunate but endemic. So, we'll put that issue aside.

It's not surprising that the LAO wonders about the proliferation of programs and spending in the proposal since, as we have noted in an earlier post, there is no real sense of priorities. Just about every problem facing California is somehow reflected in the budget and the governor has something to say about them.

At the micro level, let's focus on what the LAO says about UC and CSU. Keep in mind, as we have pointed out elsewhere, the LAO is a service arm of the legislature. So, it always tilts toward saying the legislature should have more say and control (and the governor and also the Regents, who are supposed to enjoy constitutional autonomy) should have less. The LAO notes that the multiyear "compact" referred to in the governor's budget message was developed without participation of the legislature. Of course, the legislature ultimately enacts the budget and doesn't have to comply with any compact. Nor can a particular legislature obligate a future legislature to continue a multiyear deal.

Here is what the LAO says about university funding:

UNIVERSITIES

Governor Establishes Multiyear Compacts With the Universities. The Governor’s budget increases ongoing General Fund for the California State University (CSU) and the University of California (UC) by a total of $775 million. Much of the new spending is linked to the Governor’s recently announced compacts with CSU and UC.

The largest components of the compacts are 5 percent annual General Fund base increases over the next five years (through 2026-27). Whereas the Governor provides funding for approximately 3 percent resident undergraduate enrollment growth for CSU and UC in 2022-23, the administration’s expectation is that the segments increase resident undergraduate enrollment by approximately 1 percent annually over the subsequent four years using a portion of their base increases. Regarding tuition levels, the Governor’s budget assumes no increase at CSU in 2022-23. In contrast, the Governor’s compact with UC assumes the university implements the Board of Regents-approved tuition plan. This tuition plan generally pegs annual tuition increases to inflation, applies annual increases to all academic graduate students, and uses a cohort model in applying higher charges to incoming undergraduate students (with charges held flat for continuing undergraduate students).

Compacts Contain Many Expectations for the Universities. In tandem with providing ongoing base augmentations, the Governor sets forth a total of 40 associated expectations for the universities (22 for CSU and 18 for UC).

These expectations focus on student access, overall student outcomes, equity in student outcomes, college affordability, intersegmental collaboration, workforce preparedness, and online education. Some of the expectations (for example, improving graduation rates and closing equity gaps) build off goals the segments already had established. Other expectations (for example, improving the affordability of student housing and instructional materials) reflect priorities driven by the administration. Regarding accountability, the Department of Finance indicates that the administration reserves discretion to propose smaller future base increases were a segment not to demonstrate progress in meeting its expectations.

LAO Comment: Three Key Concerns With Governor’s Compact. Historically, several governors have established multiyear compacts with CSU and UC. The Legislature has been wary of these compacts for three reasons—all of which apply to the new compacts. First, the Governor and universities agreed to these compacts without legislative input. Though the Legislature likely shares some of the Governor’s interests (for example, to improve student outcomes and close equity gaps), its interests likely diverge at least in part (for example, the Legislature might prefer other outyear enrollment targets). Second, much like previous compacts, the Governor’s multiyear funding plan establishes arbitrary future base increases regardless of underlying cost drivers.

Even the Governor’s proposed base increases for 2022-23 are not linked to specific cost increases for personnel, equipment, and other operating expenses—the core building blocks of any university budget. Third, enforcement of the compact is unclear. For example, the Governor has not explained how he plans to determine if the segments have made sufficient progress toward meeting their expectations and to what extent he would reduce funding were one or more of the expectations not met. The lack of these key details hampers the Legislature’s ability to hold the universities and the Governor accountable for delivering on the compact promises.

LAO Comment: Legislature Has Better Budget and Planning Options for the Universities. Instead of focusing on the Governor’s compacts, we encourage the Legislature to think about its spending priorities and the universities’ underlying cost drivers, then fund CSU and UC accordingly. Importantly, the Legislature can couple this more standard budget approach with meaningful long-term planning. For example, state law already requires CSU and UC to submit annual performance reports. If interested, the Legislature could work with the administration and segments to establish specific performance benchmarks over the next five years, linked with appropriate repercussions. In some cases, repercussions likely would not be solely fiscal. For example, if a segment failed to close a student equity gap as planned, it could be required to report on the strategies it had implemented to date, how it would change those strategies moving forward, and how it would reallocate existing resources. 

Source: Pages 15-16 of https://lao.ca.gov/reports/2022/4492/2022-budget-overview-011322.pdf.