LAO on UC

The Legislative Analyst's Office (LAO) goes to work after the governor presents his January budget analyzing the key features of the proposal and suggesting alternatives. Basically, in broad terms, the LAO seems upset that UC spending in real terms is rising - which would seem to be the expected result of the legislature's insistence on increasing enrollment. The LAO has never been keen on multiyear "compacts" (even though these are often pushed aside in periods of budget stringency). To save money, it suggests less substitution of residents for out-of-state students (who pay higher tuition). But squeezing out-of-state enrollment to make more spaces for Californians seems to be a major legislative commitment. In any case, LAO seems to want to achieve lower state spending on UC by one means or another.

LAO acknowledges problems UC faces with regard to its conflict with the federal government, but seems to believe that maybe - in the end - the budgetary implication will turn out to be less dire than initially expected.

Excerpt from the LAO report on UC:

Over the Past Ten Years, UC Spending Has Outpaced Inflation. Over this period, core spending grew at an average annual rate of 4.3 percent, compared to inflation growing by 3.3 percent. This faster growth reflects increases both in student enrollment and underlying cost drivers. UC’s largest cost driver is employee compensation, accounting for about 75 percent of UC spending in 2024‑25. Growth in employee compensation has been mostly driven by the expansion of UC’s workforce.

Recommend Reducing or Eliminating Base General Fund Increase. The Governor proposes a $351 million (7 percent) base increase for UC in 2026‑27 and assumes UC generates $273 million in additional tuition revenue. Given the state’s fiscal outlook, the Legislature could provide a smaller base increase aligned with inflation. Alternatively, it could provide no base increase to help manage the structural deficit and reduce pressure for more significant reductions over the coming years. Even without a base increase, UC’s core funding would grow by 3.5 percent.

Recommend Using Available One‑Time Funding to Retire Payment Deferral. In 2025‑26, the state began deferring a $130 million General Fund payment from one fiscal year to the next. If one‑time funding becomes available, we recommend the Legislature make retiring this payment deferral a high priority. Retiring the deferral would return UC’s state payments to their regular schedule, eliminate the associated debt obligation, and reduce state budgetary pressures in the out‑years.

Recommend Removing Out‑Year Commitments. Under the Governor’s budget, the state commits to providing UC with a one‑time back payment of $241 million in 2027‑28, followed by a 3 percent ongoing base increase of $144 million in 2028‑29. We recommend removing these out‑year commitments. The Legislature could determine each year how much support to provide UC in light of overall fiscal conditions and its budget priorities.

Recommend Funding Enrollment in 2026‑27 at Original Target, Separately From Base Increase. The Governor’s budget maintains the original resident undergraduate enrollment target established in the 2025‑26 Budget Act for 2026‑27, a level that UC expects to exceed by more than 3,000 students. Given the projected budget deficits and moderating demographic pressures, we recommend the Legislature maintain the original target set for 2026‑27. We further recommend the Legislature fund enrollment growth separately from, and in addition to, any base increase to enhance transparency and accountability. For 2027‑28, we recommend holding enrollment flat to help UC avoid the potential negative programmatic impacts of adding students without associated funding.

Recommend Pausing the Nonresident Replacement Plan. The Governor’s budget provides $61 million ongoing General Fund to replace a certain number of nonresident students with resident students at three high‑demand campuses. We recommend an alternative that funds the same number of resident students while leaving the number of nonresidents flat. This alternative costs $36 million less than the Governor’s proposal. Given all three high‑demand campuses have added resident students beyond replacing nonresidents the past few years, they appear to have associated physical capacity.

Full LAO report: https://lao.ca.gov/Publications/Report/5143.