The Legislative Analyst’s Office has just issued the following report:

The 2017-18 Budget: Higher Education Analysis
In this report, we analyze the Governor’s higher education budget proposals. Though we think some of these proposals are reasonable and recommend the Legislature approve them, we recommend rejecting others and requesting additional information in a few cases. Below, we highlight a few of these recommendations.
We recommend the Legislature consider providing base increases for the University of California (UC), California State University (CSU), and California Community Colleges (CCC), as such increases would help the segments address certain cost increases, including salary, health care, and pension cost increases. Were it to support university cost increases beyond those that could be covered using the Governor’s proposed augmentations, the Legislature may want to consider tuition increases linked to anticipated inflation in 2017-18.
We caution against augmenting funding for some other proposals coming from either the administration or the segments—including UC’s Academic Excellence initiative, CSU’s Graduation Initiative, and CCC’s Innovation Awards—as they lack sufficient justification at this time. Instead, we recommend improving implementation of existing student support programs before expanding these initiatives.
We think a few proposals, such as the CCC guided pathways and CCC Chancellor’s Office staffing proposals, lack sufficient detail. We recommend the Legislature ask the administration to provide certain additional information about these proposals during spring budget hearings.
We discuss these recommendations as well as many others, including ones involving Hastings College of the Law, Cal Grants, and Middle Class Scholarships, in our report, which may be accessed using the following link: http://lao.ca.gov/Publications/Report/3559

If you’re looking for the CSU part. Here it is:

California State University

In this section, we provide an overview of the Governor’s proposed budget for CSU, describe CSU’s proposed spending plan, and assess key components of that plan.

Overview

CSU’s Budget Proposed to Reach $10 Billion From All Sources in 2017‑18. As Figure 15 shows, CSU’s budget would increase by $182 million (1.8 percent) over revised 2016‑17 levels. Of total CSU funding, about two‑thirds ($6.7 billion in 2017‑18) comes from core funds—a combination of state General Fund, state lottery, and student tuition and fee revenue. These three fund sources, which would increase by a combined $126 million (1.9 percent) in the budget year, supporting CSU’s core mission of providing undergraduate and graduate education. CSU also receives federal funds and operates various campus enterprises, such as student dormitories and parking facilities. The remainder of CSU’s revenues ($3.3 billion in 2017‑18) mostly supports these other operations.

Figure 15

California State University Funding by Source

(Dollars in Millions)

2015‑16 Actual	2016‑17 Revised	2017‑18 Proposed	Change From 2016‑17
			Amount	Percent
Core Funds
General Fund
Ongoing a	$3,271	$3,479	$3,714	$235	6.8%
One time	5	110	1	‑109	‑99
Subtotals	($3,276)	($3,589)	($3,715)	($126)	(3.5%)
Lottery	$58	$55	$55	—	—
Tuition and feesb	3,022	2,963	2,963	—	—
Subtotals, Core Funds	($6,357)	($6,607)	($6,733)	($126)	(1.9%)
Other Funds
Federal funds	$1,256	$1,385	$1,385	—	—
Other CSU fundsc	2,104	1,844	1,899	$55	3.0%
Subtotals	($3,360)	($3,228)	($3,284)	($55)	(1.7%)
Totals	$9,717	$9,835	$10,017	$182	1.8%
a Includes CSU debt service on general obligation and lease‑revenue bonds and funds for pensions and retiree health benefits. bIncludes funds that CSU uses to provide tuition discounts and waivers to certain students. In 2017‑18, CSU plans to provide $662 million in such aid. cIncludes funds such as housing fees, parking fees, and extended education charges.

Governor’s Budget Proposes $3.7 Billion in General Fund Support for CSU. Under the Governor’s budget, ongoing General Fund support for CSU would increase by $235 million (6.8 percent) over 2016‑17 levels. This increase is offset by $109 million in expiring one‑time funds provided to CSU in 2016‑17. Altogether, General Fund support for CSU would increase a net of $126 million (3.5 percent).

Most of CSU’s General Fund Augmentation Unrestricted. Figure 16 details General Fund changes for CSU under the Governor’s budget. As the figure shows, the Governor proposes a $157 million ongoing unrestricted increase. This funding is a continuation of the Governor’s original long‑term plan for the universities, which since 2013‑14 has sought to provide annual unallocated base increases. In addition, the Governor’s budget provides a total of $78 million in earmarked augmentations. Specifically, the budget proposes (1) $50 million for increased pension costs, (2) $23 million for higher retiree health care costs, and (3) $5 million for higher lease‑revenue debt service for previously approved capital projects. (In an effort to encourage CSU to consider pension costs as part of its new hiring and salary decisions, the state changed how it budgeted for CSU pension costs a few years ago. Under the new policy, the state provides direct funding for CSU’s pension costs attributed to its 2013‑14 payroll level, but CSU is responsible for funding any additional pension costs using its unrestricted funds.) The Governor’s budget does not directly fund enrollment growth.

Figure 16

2017‑18 California State University General Fund Changes

(In Millions)

2016‑17 Revised Funding	$3,589
Unrestricted base increases:
Funding per Governor’s original long‑term plan	$131
Redirected savings from Middle Class Scholarship modifications	26
Subtotal	($157)a
Pension adjustment	$50
Retiree health benefits adjustment	23
Lease‑revenue bond debt service adjustment	5
Remove one‑time funding provided in prior year	‑87
Other adjustments	‑21
Total Changes	$126
2017‑18 Proposed Funding	$3,715
aCSU indicates that it would use these funds to cover recently ratified bargaining agreements ($139 million) and various other cost increases ($18 million).

Governor’s Budget Does Not Assume Tuition Revenue Increases. The Governor’s budget assumes that CSU does not raise its tuition charges. Unlike recent years, however, the Governor does not condition his proposed General Fund increases on CSU holding resident tuition levels flat.

CSU’s Spending Plan

CSU Proposes to Spend the Vast Majority of Its Unrestricted Base Increase on Compensation Commitments. Of the $157 million unrestricted base increase proposed by the Governor for 2017‑18, CSU indicates that it intends to spend $139 million (88 percent) for collective bargaining agreements ratified by the CSU Board of Trustees in spring 2016. CSU indicates that the remaining $18 million would fund basic cost increases, such as higher medical and dental premiums for current employees and additional pension costs (on payroll exceeding the 2013‑14 level).

CSU Proposes to Support 12 Previously Approved Capital Projects. CSU’s 2017‑18 capital outlay request includes 27 projects totaling $1.6 billion. Of these 27 projects, 17 were previously approved by the state (virtually all of them as part of the 2016‑17 budget process) but have not yet been funded by CSU. The other ten requests are new submissions. At its November 2016 meeting, the Board of Trustees approved a multi‑year plan for CSU to finance up to $1 billion of the $1.6 billion in submitted capital projects using university revenue bonds. Using this bond authority, the Chancellor’s Office would fund 12 of the previously approved capital projects. The associated annual debt service is estimated to be about $50 million.

CSU Proposes Using Existing Funds for Projects. CSU indicates it would support this associated debt service using existing core funds. This is possible because a like amount of monies were “freed up” from expiring debt from former projects as well as restructuring of outstanding State Public Works Board debt. (Under recent changes in state law, CSU is permitted to pledge its General Fund main appropriation—excluding the amounts necessary to repay existing debt service—to issue its own debt for capital outlay projects involving academic facilities.) The CSU estimates that the first $200 million in CSU revenue bond proceeds would provide $35 million for new facility space at CSU Monterey Bay as well as $165 million for building replacements and renovations to facilities and infrastructure at most campuses in the system.

CSU Indicates It Would Not Be Able to Fund Several Other Priorities Under Governor’s Budget. Due to the size of the employee contract costs that CSU is committed to funding in 2017‑18, CSU indicates that the augmentation provided in the Governor’s budget is insufficient to address other budget priorities. These priorities include enrollment growth, additional targeted funding for the segment’s Graduation Initiative, and a compensation pool for represented employee groups that have open contracts in 2017‑18 (as well as nonrepresented employees, such as administrative managers).

CSU Considering a Tuition Hike to Boost Funding Primarily for Graduation Initiative. Given that CSU believes the funding included in the Governor’s Budget is insufficient to address all of its budget priorities, CSU is considering a tuition increase. Under the proposal discussed by the Board of Trustees at its January meeting, tuition for resident undergraduates would increase by 4.9 percent. Tuition for nonresidents and resident graduate students would increase by about 6.5 percent. The proposed increase would generate $78 million in additional net revenue, which CSU officials have indicated would be used primarily to augment funding for the Graduation Initiative. The Board of Trustees likely will vote on the tuition proposal at its March 2017 meeting.

Assessment

CSU’s Spending Plan Raises Several Issues for the Legislature. We think the Governor’s funding plan and CSU’s spending plan is a mixed bag, with some components more warranted than other components. Below, we provide our assessment of several key budget components—compensation, enrollment growth, and the Graduation Initiative. In the final part of this section, we consider the trade‑offs between additional state funding increases and student tuition increases.

Compensation

Compensation Is the Largest Component of CSU’s Core Budget. Like other departments and agencies, salaries and benefits make up a significant share of CSU’s core budget (more than 80 percent). As noted earlier, compensation also accounts for the largest augmentation in CSU’s spending plan, with almost all unrestricted state General Fund allocated for compensation increases. The Legislature has several compensation‑related issues to consider.

Board of Trustees, Not the Legislature, Approves CSU Collective Bargaining Agreements. For most departments and agencies in the state, the California Department of Human Resources represents the Governor in labor negotiations between the state and its employees. The resulting agreements must be ratified by the Legislature before going into effect and the state directly funds the associated costs of the agreements. In the case of CSU, state law gives the Board of Trustees authority to negotiate collective bargaining agreements. The Chancellor’s Office represents the Trustees during these negotiations and the resulting agreements must be ratified by the Trustees before going into effect. The Trustees are expected to manage these agreements within CSU’s overall budget.

Trustees Recently Approved Sizeable Collective Bargaining Agreements. The CSU system has 13 represented employee groups. The largest group is the California Faculty Association (CFA), which represents more than 25,000 CSU faculty, librarians, counselors, and coaches. After extensive negotiations with CFA (and a near‑strike by union members), in spring 2016 the Trustees ratified a multiyear contract. Under the agreement, all faculty unit employees receive a cumulative 10.8 percent general salary increase effectively over a two‑year period and eligible faculty unit employees receive an additional 2.7 percent increase in 2017‑18. Ratification of the CFA contract triggered revised agreements with several other CSU bargaining units, which resulted in general salary increases for those members. Altogether, the Chancellor’s Office estimates these new contracts will cost CSU an additional $139 million in 2017‑18.

Virtually All Other CSU Bargaining Units Have Open Contracts in 2017‑18. With a few exceptions, CSU’s contracts with its other represented employee groups expire at the end of 2016‑17. The Chancellor’s Office has expressed a desire to provide funds for 2017‑18 to support a compensation pool for these represented groups, as well as nonrepresented employees. The Chancellor’s Office calculates that every 1 percent increase for such a compensation pool would cost $18 million. Were the Legislature to want compensation to keep pace with inflation year over year, it might consider increases between 1 percent and 3 percent. (In 2017‑18, the state and local government price index is expected to increase 1.1 percent, whereas the California Consumer Price Index is expected to increase by 3 percent.) Were CSU to increase tuition levels in 2017‑18, some or all of the resulting revenue could be dedicated to the desired level of compensation increases.

Enrollment Growth

CSU on Track to Meet Enrollment Target for 2016‑17. The 2016‑17 Budget Act sets an expectation for CSU to increase resident enrollment by 1.4 percent (an additional 5,194 FTE students) over 2015‑16. Based on preliminary enrollment data provided by CSU, campuses appear to be on track to meeting this target, with fall 2016 FTE student enrollment about 1.3 percent higher than the previous fall.

Several Factors for Legislature to Consider in Deciding Whether to Grow Transfer Enrollment in 2017‑18. The past several years CSU has reported denying admission to some eligible transfer students. Given this development, together with statute that requires CSU campuses to prioritize eligible transfer applicants over freshman applicants, the Legislature may want to consider targeting enrollment growth funding for transfer students in 2017‑18. Every 1 percent growth in transfer enrollment would result in about 3,600 more FTE students—for a total cost of $38 million ($20 million state General Fund and $18 million in tuition revenue generated by the additional students).

Could Withhold Decision on Freshman Enrollment Growth Until May. Existing data suggests CSU is drawing from beyond its freshman eligibility pool. Given that a freshman eligibility study is currently underway and that CSU must report by March 2017 on recommended budget or policy changes to produce more bachelor’s degrees, the Legislature may wish to wait until the May Revision before deciding on enrollment growth funding for freshmen. Regarding potential changes to its policy on the size of CSU’s freshman eligibility pool, we encourage the Legislature to take time to explore the potential consequences of any specific proposal. Any change to this pool would have significant fiscal and programmatic implications moving forward not only for CSU but also CCC, UC, and the state.

Graduation Initiative

CSU Has Set Ambitious Performance Targets. As noted earlier, the state and CSU currently are funding a Graduation Initiative. The goals of this initiative, which was originally launched by the Chancellor’s Office in 2009, are to boost graduation rates for freshmen and transfer students as well as eliminate achievement gaps for low‑income and other traditionally underrepresented students. For example, CSU seeks to more than double its four‑year graduation rate (for all entering freshmen) between now and 2025, moving from its current rate of 19 percent to 40 percent.

CSU Implementing Various Improvement Strategies as Part of Graduation Initiative. These strategies include hiring more faculty and increasing the faculty‑to‑student ratio, encouraging faculty to adopt new instructional methods, and providing enhanced student support services such as tutoring and advising. CSU reports spending $48 million in base funds on these Graduation Initiative strategies. CSU maintains it will need additional resources to carry out campus plans and achieve the segment’s performance goals. CSU has not undertaken a systematic evaluation to assess the impact each of these strategies is having on its graduation rates.

CSU Has Much More Work to Do on Rethinking Assessment and Placement Policies. Though the above strategies may be helping more students graduate and graduate on time, we believe CSU could be doing more to promote better student outcomes. Specifically, we think CSU could improve its assessment and placement policies. Currently, CSU primarily uses placement tests to assess college readiness. Based on these test results, CSU deems more than 40 percent of its admitted freshmen as unprepared for college‑level math, English, or both. Students who do not demonstrate college‑level skills are required to enroll in remedial coursework. National research has shown that relying solely on placement tests routinely results in college‑ready students being misplaced into remedial courses, which, in turn, increases education costs for them and the state while also reducing their chances of graduating on time. (Data from the Community College Research Center and CCC system reinforce these findings, with their data indicating about 30 percent of incoming community college students are put into remedial courses based on placement test results when they could have succeeded in college‑level coursework.) A growing amount of research is finding that a better way to assess college readiness is to use multiple measures (including data from students’ high school records) to place students.

Secondary Assessments Are Exacerbating Inefficiencies. Additionally, a number of CSU campuses currently have policies requiring even students who are deemed college ready in math to take a second diagnostic (department) test in order to enroll in many lower‑division math courses (such as calculus and college‑level algebra). Students who fail to obtain a specified cut score on these department exams may be required to enroll in precollegiate‑level courses (such as intermediate algebra), thereby delaying their progress toward a degree. These secondary diagnostic tests also are at odds with national research on effective ways to identify students who are capable of success in college‑level coursework.

CSU Also Continues to Have Problem With Students Taking Excess Units. CSU continues to have a problem with excess unit‑taking by both freshman entrants and transfer students. Students who accrue more units that their degree requires generally take longer to graduate, generate higher costs for the state and themselves, and crowd out other students. Based on the experience of other institutions, a number of causes may be contributing to CSU’s high rate of excess units, including unclear degree pathways for students and uneven articulation of lower‑division transfer courses between community colleges and CSU. Were CSU to reduce excess course‑taking, it could increase the availability of required courses within existing resources.

Recommend CSU Implement Other Strategies Before Augmenting Funding for Graduation Initiative. To date, CSU has made progress on improving student outcomes. We believe CSU would make even more progress were it to modify its assessment methods and placement policies as well as address the issue of excess units. To this end, we recommend the Legislature direct CSU to study these issues in more depth and, based on its findings, implement new policies using existing Graduation Initiative monies and other system resources. So that the Legislature is kept apprised of CSU’s activities, we recommend the Legislature require the segment to report by January 1, 2018 on (1) its plans to put in place research‑based methods for assessment and placement, as well as (2) opportunities for campuses to make available more course slots by reducing the number of excess units that students earn. Given these opportunities for further reform and given the many other competing cost pressures facing CSU in the budget year, the Legislature may wish to place a lower priority on providing additional funding for the Graduation Initiative in 2017‑18.

Weighing State Funding Increases With Tuition Increases

Legislature Has Key Choices to Make on CSU’s Budget. Each year, the Legislature fundamentally decides: (1) which costs to fund and (2) how these costs should be shared between students (and their families) and the state. In some years, the Legislature has decided to cover all CSU spending increases using state General Fund, holding student tuition levels flat. Other years, both General Fund support and tuition levels have increased to cover cost increases. (In still other years, state support has declined, with tuition levels rising to cover costs.)

CSU Facing Four Notable Cost Pressures. Most notably, CSU faces the pressure to fund the collective bargaining agreements already ratified by the Board of Trustees last spring. It also faces pressure to cover basic cost increases (for example, health care and pension cost increases). Given that CSU continues to report denying admission to eligible transfer students, another notable cost pressure is funding enrollment growth for transfer students. Given recent compensation increases for faculty, pressure also exists to provide some compensation increases for other employee groups with open contracts in 2017‑18.

Various Ways to Share Costs Between General Fund and Students. Were the Legislature to approve the General Fund level proposed by the Governor, CSU asserts that it would be able to cover the costs of the previously ratified collective bargaining agreements and basic cost increases (such as higher health care premiums). A tuition increase could provide funds for its other priorities. While CSU resident tuition charges have been flat for the past six years, a 5 percent increase might be considered high for one year. In addition, a 5 percent increase in 2017‑18 would be notably higher than anticipated inflation. If the Legislature were to consider tuition increases, we suggest it signal to CSU that a more modest rate increase would be acceptable. Based on our calculations, a 2.5 percent increase in tuition charges would generate net revenue of roughly $38 million. These funds, in turn, would be sufficient to support (1) 1 percent enrollment growth for eligible transfer students and (2) a 1 percent compensation pool for bargaining groups with expiring contracts in 2016‑17. If the Legislature wished to support even higher levels of enrollment growth or employee compensation (that is, more than 1 percent increases), the Legislature could increase General Fund appropriations for CSU above the Governor’s proposed level or permit CSU to raise tuition along the lines of what the Chancellor’s Office is proposing.