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WORKING GROUP RECOMMENDATIONS


Recommendation 1: Adopt policies to provide more stability for finance and dampen the “Boom and Bust” swings of state appropriations for higher education.

The Current Approach to Financing Higher Education

In good times, state government funds the “base budgets” of public institutions according to certain agreements or annual negotiations, plus costs associated with projected enrollment growth. The state also provides large amounts of additional support beyond this funding.

In bad times, state government cuts base budgets by some arbitrary amount and may reduce funds for additional enrollments regardless of demand.

The working group is under no illusion that some policy or legal device will magically eliminate the effects of rises and falls in state revenues on colleges and universities. We do not expect, in the words of one group member, to “insulate higher education from the natural contractions of the business cycle that provide strong impetus to look for efficiencies.”[15]

Still, certain policies would go a long way toward achieving a stability and predictability that would have great benefit to students and institutions.

  1. The state government should fund the “core” support promised in the Partnership Agreements for UC and CSU. Currently, this support includes a 4% annual increase in operations budgets, appropriations for additional enrollments, and income from an increase in student charges equal to the rise in the personal income of Californians. When state revenues are flush, government should also continue providing funds for new or expanded programs beyond this “core” support. We would recommend, however, that additional allocations in good times be directed toward one-time expenditures that can, if necessary, be more easily reduced in times of financial stress. In addition, we would note the legitimate concern that maintaining a “marginal cost” approach for funding all additional enrollments of “Tidal Wave II” will seriously dilute the funding base of the institutions.[16] Marginal cost formulas are adequate only for funding enrollment fluctuations around a fairly stable level and do not take into account the adequacy of overall funding. We recommend that state government initiate a review of marginal cost funding to assess its adequacy and its limitations, with the goal of improving its usefulness in budgeting.

  2. The state should adopt a consistent student fee policy and resist the temptation of continuously “buying out” student fee increases at UC and CSU during good economic times. This will reduce the upward “swing” of general fund support during good times,[17] support that is cut dramatically during downturns. The policy should also limit the downward “swing” of state funds during bad economic times, when the past practice has been to raise student fees precipitously and use them to replace the state’s funding responsibilities.

  3. The state should establish the Community Colleges’ share of overall revenues guaranteed by Proposition 98 to K-14 at 10.93%. This percent is the amount currently defined in statute but not reached in more than a decade.[18] The present practice is to determine annual appropriations for K-12 initially and set the colleges’ appropriation thereafter, effectively letting the proportion “float.”

Recommendation 2: Improve the state’s accountability framework by modifying and expanding the “partnership” budget approach, currently applied to UC and CSU, to (1) include all higher education, (2) clarify the link between performance and funding, and (3) adopt realistic alternatives for times of revenue downturns.

State governments, including California, have traditionally provided appropriations to public institutions based on credit units generated, seat-time, headcount enrollment, or square feet of facilities to be maintained. Under this approach, the beneficial results of such funding were either taken for granted or discussed only generally during budget hearings. Serious or quantitative consideration of the performance of institutions, or the “outcomes” of the educational process itself, rarely found their way into the appropriations process.

Over the past ten years, many states have expanded their traditional approach to financing higher education by linking some appropriations to specific measures of institutional performance. Examples include successful transfers from community colleges to four-year institutions, the number of accredited special programs on a campus, improved graduation rates, the use of standardized tests to measure learning, employment placement or enrollment in post-baccalaureate education, and the results of alumni/employer surveys.

States have recognized institutional performance in the appropriations process through one of two ways, or sometimes both.[19]

Performance funding (19 states) ties some part of the appropriation directly and tightly to the performance of public campuses on individual indicators. Performance funding focuses on the way funds are distributed and the relationship between funding and performance is “tight, automatic, and formulaic.”[20]

Performance budgeting (27 states) allows state officials, including legislators, to consider institutional achievement on performance indicators as one factor in determining appropriations. Performance budgeting focuses on budget preparation and presentation. California presently uses performance budgeting in its “Partnership” agreement with the UC and CSU.[21]

Since 1995 at the Governor’s initiative, state government has maintained a “compact” or “partnership” with these four-year, public segments. The working group concludes that this “partnership” approach is beneficial in bringing more clarity of expectations and consistency in finance. As shown in Appendix C, there are more numerical goals than ever before in the history of California finance, and several are specific enough to qualify as “accountability measures” (described above under the accountability goal). The approach, however, contains three serious defects:

The Community Colleges and the independent institutions do not have partnership agreements. State government has not addressed expectations at all for independent institutions,[22] and, while there exists a “Partnership for Excellence Program” among the Community Colleges, the approach falls short of an appropriate accountability framework.

The State’s Current “Partnership” With UC and CSU:

Examples of State Funding Commitments

An annual average increase of 4% and an additional 1% for on-going building maintenance, instructional equipment, instructional technology, and libraries.

Funding for “unavoidable” costs such as debt service related to capital outlay and annuitant health benefits.

Funds for additional enrollments based on projections and the negotiated “marginal cost” rate.

Funding for new or expanded initiatives such as development of new campuses, off-campus centers, state-supported summer sessions, research projects, etc.

At least $210 million a year for each segment, funded with voter-approved, general obligation bonds.

Revenue equivalent to that which would be generated from increases in student fees.

The State’s Current “Partnership” with UC and CSU

Examples of Segmental Commitments

Continue to admit all eligible high school graduates.

Improve graduation and retention rates.

Continue current approach to maintaining competitive faculty salaries and merit-based pay.

Increase partnering with K-12 schools to reduce the need for remedial education.

Increase the number of teacher credentials.

Expand the number of joint doctoral programs.

Improve productivity and utilization of existing activities.

Increase the number of community college students transferring beyond the growth projected for overall enrollments.

Increase the number of graduates in engineering and computer science by at least 50% (UC).

Reduce percentage of incoming freshmen requiring remedial instruction in English and math to 10% by 2007 (CSU).

Increase campus passage rates of CSU graduates on Reading Instruction Competency Assessment exam to at least 90% by 2003 (CSU)

Increase opportunities for students to participate in community service activities.

Currently funded at $300 million beyond the normal appropriations formula, this “Excellence Program” was created as “a mutual commitment by the State of California and the California Community Colleges...for a credible commitment from the System to specific student and performance outcomes.”[23] The specific outcomes, as adopted, represent a limited set of numerical targets for increased transfers, a higher percentage of course completions, and more students completing their educational objectives. The excellence program has become more a method for increasing appropriations generally through the FTES approach rather than distributing the funds to recognize differential results among the districts or colleges. As a more effective strategy for accountability, our working group recommends a “partnership” approach for the Community Colleges along the lines established for the other public segments.

The current partnership agreements are unclear about what happens if one side or the other fails to live up to them. For example, the state did not appropriate the amount of funds identified in the agreement during FY 2002. Are the segments released from their commitments or at least from a portion of them? If so, which ones? Or, are the segments expected to continue progress and the agreements are merely suspended until state revenues recover? If so, is a “catch up” expected? An effective partnership should be clear about consequences.

The agreements need specific alternatives if the partnership approach is to be a realistic framework for financing higher education over the long-term. As shown by the list of state funding commitments on page 11, the annual increases are ambitious. The state commits to funding base increases above the rate of inflation, to “catch up” dollars for maintenance and equipment, to fund new enrollments, and to buy-out the cost of student fee increases.

The full range of partnership commitments would seem financially and politically realistic only when state coffers are full. This suggests that the agreements should contain at least one other set of policies for times when they are not. For example, as recommended above, the state could formalize its commitment to core funding and enrollment growth at all times, with additional revenues in good years allocated for priority, one-time purposes. Such one-time funding should be the first resource adjusted in response to slow or no revenue growth.

Recommendation 3: Change the way state government funds electronic technology to provide more access and choice for students.

Electronic technology is making a significant difference in higher education and holds even greater potential for the future. The use of computers, mass data storage and retrieval, and high speed and satellite communications allow institutions to offer instruction and services electronically, as well as at a distance from campus. An increasing number of programs are structured around “anytime, anyplace” learning rather than classroom settings. This trend has also encouraged more attention to evaluations that are learner outcome based, since “seat time” in an environment where lessons are delivered electronically is no viable proxy for learning.

So far, though, the adoption of electronic means for creating courses has not offered a simple way to reduce costs. In fact, the result is just the opposite: it has added significant costs. The initial high outlay for equipment and course development, the substantial expense of keeping up-to-date, the need for numerous technical and training personnel, and the advanced level of sophistication to use technology effectively—all are factors that make “electronic instruction” an expensive proposition. Even if costs are not reduced, however, technology can be used to expand access and to enhance learner outcomes.[24]

The fact is that the expansion of educational technology has had little impact on the way state government funds institutions. Expenditures for this growing area have come from either regular credit enrollments (that is, taken from the general appropriations support provided for FTES) or as an “add on” to the enrollment-generated budget for each public segment.

The working group devoted considerable attention to the issue of educational technology. While all agreed that its impact was substantial, we disagreed about the wisdom of expansion. Proponents contend that advanced technologies enable higher education to cut costs and expand access to remote locations or areas far from campus. They believe that technology enhances educational quality because instruction can be tailored to individual needs and circumstances of learners—for instance, by offering the repetitive drills required in remedial English language instruction, or basic mathematics courses.

On the other side, the critics of extending access through “high technology” insist that such devices tend toward glitziness rather than substance, toward rapid motion rather than in-depth thought, and toward impersonality in place of the face-to-face give and take in a classroom. They point out that fifty-four percent of community college faculty, much experienced with instruction, “felt the classroom was better in terms of the quality of student-teacher interaction, compared to 16.8% who felt distance learning [through electronics] was better.”[25] A five-year study among the California Community Colleges showed far higher course completions rates among those offered as traditional classes than those delivered at a distance.[26]

Regardless of where one stands in this debate, we agreed that if educational technology is going to be a major force for changing instructional delivery, the state should reconsider the finance mechanism for supporting it. First, we agreed that the state’s current finance approach does not take into adequate account the large course development and equipment needs required “up front” for the creation of effective instructional materials. Second, we accepted the reality that the electronic creation and delivery of courses allows, in fact strongly encourages, collaboration among many institutions. This collaboration is fostered by the need to amortize high initial costs across a larger student base, and the opportunity technology provides to “unbundle” instructional services. In this case, program development, course creation, instructional delivery, and student evaluation can be related in more flexible ways. Each can be provided not only by different staff or faculty, but also by different institutions altogether. The best examples of successful electronic education programs around the country represent collaborations across these areas of service. Finally, we agreed that all state-constructed, instructional facilities for higher education should include advanced technology throughout, with flexibility to upgrade easily when new transmission devices become available.

Accordingly, the working group urges the Joint Committee to consider a new approach to expanding electronic instruction in a collaborative manner. We propose that the state government provide grants to regional learning centers that would collaborate with California institutions in bearing the cost of creating educational packages for electronic use, marketing these to other California institution and promoting training for faculty and staff in electronic instruction. An example of one possible structure is the use of multi-institutional centers, especially those serving specific regions within the state, that contract with educational providers to meet the needs of local groups[27]. This would include both public and private institutions, which would promote student choice.

Recommendation 4: Reform the state’s approach to student charges in the public segments and maintain the Cal Grant need-based financial aid entitlement.

This issue proved thorniest of all for the working group.[28] Complicated by interactions between student fees and student financial aid, by the different missions of the public segments, and by concerns for increasing student debt, the policy for setting and adjusting student fees has long been debated in California. Having reviewed this debate and considered the research on the subject, the working group considers these to be the most relevant findings for state policy:

California’s policy of “low fees” at all costs needs to be re-examined in light of modern realities. The original Master Plan came down squarely on the side of low student charges, prohibiting “tuition” (direct payment for instruction) and assuming that the posted price of admission was the most important factor in steering young adults toward or away from college. This was likely true before the rise of mass higher education and the expansion of student financial aid. Today, though, “research shows that college pricing and financial aid factors play a relatively small part of the decisions made by most students about enrolling in college. Other factors, taken together, tend to play a much more important role...the student’s academic aptitude and achievement, course-taking patterns in high school and earlier grades, the role of parents, siblings, peers, and others in promoting college, and [proximity].”[29]

There exists a large amount of student financial aid and other resources to assist in paying for college, which reduces the net price to students. Today, more financial resources are available than ever before to pay for the cost of fees, tuition, room and board, and books, depending on one’s financial circumstances and the kind of institution attended. These include federal and state, need-based grants (Pell and Cal Grants), middle income tuition tax credits (federal), subsidized and unsubsidized loans to students or parents, and “institution-based aid” given by each college or university, usually as a reduction in the “posted price.”

Still, the level of student charges, and especially the magnitude of their annual changes, do play a significant role in determining access and retention, but do so differentially. Credible research shows that increases in student charges have a more negative effect on community college students than on those enrolled in four-year institutions, on first-time freshmen compared to those who have attended for some time, and on African American, Hispanic, and low-income students compared to white and middle- and upper-income students.[30] The differential effect remains even when tuition increases are off-set with grants, as shown in the following table from research conducted by Donald Heller of the University of Michigan, a leading authority on this subject:

THE ENROLLMENT EFFECTS PROJECTED FOR
A 10% INCREASE IN TUITION
1999

Public Sector
Projected Enrollment Decline for a 10% Tuition Increase with no Increase in Grants
Projected Enrollment Decline for a 10% Tuition Increase Combined with a 10% Increase in Grants

Four-Year

-0.52%

-0.20%

Two-Year (CC)

-1.34%

-1.20%

Source: Heller, Effects, pp. 15-17.


While the differential impact of fee increases is undeniable, other factors such as student financial aid and fee stability even within the community colleges are quite important as well. In this regard, the CCC Chancellor’s office prepared two studies that extensively examined student behavior during the periods when fees most increased (1984-5 and 1992-4). Both studies found that budget cuts and course cancellations proved just as damaging to access as did fee increases and that enrollment would return to earlier levels even after rapid fee increases if fee waivers were provided over several years. The second study showed that differential charges did seem an equitable option if the state had to increase fee revenues by large amounts. Appendix A describes these points in detail.

California taxpayers provide a substantial subsidy for all students who attend public institutions, as shown in the following table.
Public
Segment
State General Funds per FTES[31]
2000-01
Total Undergraduate Fees Per Student
Student Fees as a Proportion of total State and Student Fee Funding[32]
State General Funds Compared to Student Fees
Per Student
UC
$18,794
$3,964
16.7%
4.74 Times More
CSU
$8,470
$1,839
6.2%
4.61 Times More
CCC
$4,404
$330
3.3%
13.35 Times More

Source: CPEC, Fiscal Profiles, 2000, Displays 13-15, 34, 36. The UC figures are estimates. Those for the CSU and the CCC are actuals.

The fact is that many middle and upper-income students, especially in the University of California, who could afford to pay higher fees, receive a large state subsidy because fees are charged without reference to income.

By almost any measure, California higher education is more “affordable” than other states. In 2001, UC undergraduate charges are one-third less than the four public comparison institutions, and were roughly 77% of the level charged at all public research universities around the country. CSU undergraduate charges were less than half the level among fifteen public comparison institutions and were roughly 55% of the national median. For 2001-02, CCC full-time students paid only 21% of the 1999-2000 national average for public two-year institutions.[33] The National Center for Public Policy and Higher Education gave California an “A” for affordability in its landmark survey of state policies, Measuring Up, 2000, with some qualifications.[34] Kent Halstead, an authority on state policies, issued a statistical Report Card on Finance in 1998 that indicated “state budget priority for higher education far exceeds family payment effort in [eleven states, including] California” whose undergraduate charges were 16% lower than the national average charge as a percent of median income of all households.[35] A recent report from the Lumina Foundation for Education placed California among the 11 states “most consistently accessible” and loan free for low- and median-income dependent students and also found that California private institutions were among only seven states where “as many as 20% of the private four-year institutions [are] generally affordable for low-income full-time students.”[36]

As currently implemented by state government, student fee policy takes little account of what a student’s “fair share” of educational costs should be, and little recognition of how best to align student charges with tax supported appropriations. Instead, state government holds fees down during good times for all students regardless of which segment they attend or their ability to pay, and in the past has raised charges substantially--sometimes catastrophically--for many students, during revenue shortfalls. Over the years, the public segments themselves have shown a greater understanding of the impact of charges on their own students and an appreciation of the balance necessary for a viable, long-term student fee policy.

In view of these findings, the working group recommends that state government take the following actions toward student fee and financial aid policy:

  1. Allow statewide student charges to increase in a gradual, moderate, and predictable fashion at the UC and CSU, under the approach in the current partnership agreement. The state should not automatically “buy out” these fees with taxpayer dollars.

  2. Allow the UC and CSU within certain ranges to charge differential fees, taking into account large differentials in instructional costs and the personal economic benefits available to graduates later in their careers.

  3. Allow the Community College Board of Governors within certain ranges to set and annually adjust statewide fees and each district’s board of trustees to supplement these fees locally. All such funds should remain with the colleges and not be used to offset state-determined funds in the appropriations formula. The Board of Governors and the districts should be allowed to charge different levels of fees for different kinds of programs based on their public benefit. The Legislature and Governor should require regular evaluations of the impact of fee changes to gauge the effect of this policy on opportunity in that segment.

  4. Allow all segments to levy a surcharge on students beyond the regularly scheduled levels during emergencies caused by serious declines in state appropriations. We recommend that such a surcharge must be re-adopted each year during the emergency, and eliminated thereafter either by legislative appropriation or by reallocation within the segmental budgets.

  5. Leave the proceeds from all student charges with the institutions of higher education to benefit students and not serve as a replacement for a portion of the state’s appropriation.

  6. Continue to fund the Cal grant entitlement as defined in SB 1644 (2000). All increases in state assistance given directly to students should be limited to those with financial need. The undiluted continuation of this commitment should be a high priority for the state government, as it strives to meet the educational needs of Californians through both public and private institutions.


Recommendation 5: Review the state’s methodology for determining and funding facilities in California higher education, and, as appropriate for each segment, make changes to emphasize multiple use facilities, comprehensive space planning, sharing of space among institutions, and incentives to maximize other sources of capital outlay.

The renewal and repair costs of capital facilities in higher education are more than state government can afford, and the projected number of students in Tidal Wave II can be enrolled only with non-traditional approaches.[37] Widely accepted estimates suggest that the annual cost to maintain the existing higher education physical plant is almost $700 million per year and that an additional $821 million per year will be necessary to accommodate enrollment growth in the public institutions. The following table summarizes these costs by segment, which shows that the need is more than twice the amounts provided in the past from state sources alone.

FUTURE CAPITAL OUTLAY NEEDS IN HIGHER EDUCATION COMPARED TO THE AVERAGE OF STATE-SUPPORTED CAPITAL OUTLAY FUNDS IN THE PAST
Public Segment
Size
Cost to Maintain Existing Plant
(millions)
Cost to Provide for Enrollment Growth
(millions)
Total, Annual Capital Outlay Cost
(millions)
The Annual Average that State Sources Have Provided 1989/90 to 2000/01*
(millions)
UC
187,000 students
9 Campuses
53.2 million ASF
$284.6
$333.5
$618.1
$213.4
CSU
400,000 students
23 Campuses
27.8 million ASF
$164.6
$194.1
$358.7
$187.5
CCC
1.67 million students
107 Campuses
35.7 million ASF
$232.4
$293.8
$526.1
$204.0

*Includes proceeds from general obligation bonds, revenue bonds, and other state sources. Annual averages calculated using the number of years when the funds were received.
Source: CPEC, Providing for Progress, p. 98; CPEC, Fiscal Profiles, Displays 44-6.

Recently, state funding of capital outlay has relied mostly on the voters’ approval of general obligation bonds. Proposition 1A provided $2.5 billion over a four-year period beginning in November 1998, or $625 million for public higher education per year—far below the total needs projected.

The segments, of course, have other means of raising capital funds, chiefly through local elections for community college districts (the approval threshold is now 55%), legislatively approved “revenue bonds” that do not require voter approval but whose principal and interest payments come through the annual appropriations, along with all manner of grants, contracts, and donations.

It is unlikely that all of these means will be sufficient to both maintain the existing infrastructure, provide for special needs unrelated to enrollments (such as the University of California’s Centers for Science and Innovation),[38] and expand capacity enough to absorb “Tidal Wave II” and the demand from older adults.

To make the most efficient use possible of the capital resources available, the working group supports these measures:

Conclusion

The State’s Finance Policies should Implement these Goals for Higher Education:

Access
Affordability
Choice
Quality
Efficiency
Cooperation
Accountability
Shared Responsibility

California’s new Master Plan for Education should have clear goals that are implemented by the financing policies of state government. To do this, the state government should:

California’s social and economic progress depends on an educated citizenry, and state government should strive to ensure that ample access is provided to high quality programs. This is best achieved through a comprehensive, realistic approach to state finance of higher education that emphasizes more stability of financial expectations, incentives to use technology to expand access and improve quality, encouragement for private institutions to help achieve state goals, a reformed process for charging student fees that will be used for the benefit of education, and replacement of the outmoded approach for determining capital outlay needs.


Table of Contents
Summary Introduction Recommendations
Appendices References Members