Legislative Analyst Identifies $6 Billion Budget Gap

In a report on the current year state spending plan, the Legislative Analyst’s Office (LAO) identified a $6 billion gap between revenues and expenditures for 2006-07. While the Legislature and the Governor made progress in reducing the structural budget gap with the 2005 Budget Act, ultimately the state spending plan continues a four-year practice of deficit spending.In the report titled California Spending Plan 2005-06, the LAO acknowledges that the budget gap has been reduced from about $9 billion to $6 billion, largely because of stronger revenue collections in 2004-05 and $2 billion in cuts contained in the budget. Nevertheless, the operating shortfall is far from being eliminated. One of the principal reasons for the persistence of the shortfall is the state’s reliance on one-time solutions to bridge the budget gap, which emerged in 2001-02 following the collapse of technology stocks.

In the report, he LAO identified $5.9 billion in 2005-06 budget solutions. These included program savings of $4.1 billion (of which the broken agreement on Proposition 98 accounted for $3 billion), funding shifts of almost $730 million, loans and borrowing totaling about $900 million, and revenues from tax compliance of just under $100 million.

It is important to note that the LAO, in identifying the actions taken to produce a State Budget for 2005-06, acknowledges that the amount owed to K-14 education under Proposition 98 should have increased with the growth in General Fund revenues. Thus, the nonpartisan Analyst counts as part of the budget solution the failure of the state to provide $3 billion in additional funds.

The LAO also identifies $2.9 billion in outstanding debts owed to K-12 schools as a result of payment deferrals imposed over the last four years. Referring to these amounts as “credit card” debts, the LAO acknowledges $1.1 billion in revenue limit and categorical deferrals, almost $1.5 billion in mandate deferrals, and $290 million in ongoing unfunded costs for the revenue limit deficit factor. The LAO report can be viewed on line at www.lao.ca.gov.

Good Showing for August Revenues, But Hurricane�s Aftermath Has Crippled Consumer Confidence

State General Fund revenue collections for August were 4.3% above the anticipated level for the month, providing an additional $268 million to the state treasury. This increase, combined with collections since the release of the May Revision (i.e., May, June and July), places total receipts $873 million over the budgeted level. Almost two-thirds of this increase will be credited to the 2004-05 fiscal year and the balance will be credited to the current fiscal year.

In the September Finance Bulletin, the Department of Finance noted that two of the three major taxes�the personal income tax (PIT) and the sales and use tax (SUT)�were particularly strong performers, with the PIT coming in 8.8% above estimate and the SUT yielding 6.6% more than expected. All of the other taxes when combined fell below the projected level by 15%, but these taxes constituted less than 15% of what was expected for August.

The gain in the personal income tax was shared between withholding and other receipts. Strength in withholding suggests that job-related income is exceeding expectations. Capital gains income for the month also performed well.

The Finance Bulletin also noted that the real estate market softened slightly in July, after setting a blistering pace for the first seven months of the year. The median price of an existing single-family home in California fell 0.4% to $540,900 in July from the June median. Nevertheless, for the seven-month period, this translated into a 16% run up in prices over the same period in 2004.

The effects of hurricane Katrina are not incorporated in any of the economic and revenue data presented in this month�s Finance Bulletin and it may be several months before this information becomes available. However, what is of immediate concern is the effect of the hurricane on consumer confidence. In a separate report, the University of Michigan reported that consumer sentiment in August has fallen more steeply than at any time since 1980, exceeding the plunge that followed the September 2001 terrorist attack. The Michigan survey raises concerns that high gas prices may slow consumer spending and hurt retail sales. Such an outcome could dampen the economic expansion and slow state revenue growth.

Community College Legislation Signed Into Law by Governor Schwarzenegger

Governor Schwarzenegger has started putting a dent in the more than 960 bills that were sent to his desk before the Legislature adjourned on September 9. Last week, he took action on approximately 200 bills by either signing or vetoing them. To date, the Governor has signed 523 bills and vetoed 421.

As of this date, the Governor has not taken action on AB 1646 (Assembly Committee on Higher Education), legislation that would authorize local community college districts to waive the nonresident tuition fee for students who live in the Gulf Region who are displaced as a result of Hurricane Katrina. The Governor has until October 9 to sign or veto legislation.

The following bills affecting community colleges were signed into law, and become effective January 1, 2006:

AB 967 (Canciamilla, D-Pittsburg) would exempt from an enrollment cap on concurrent enrollment at community colleges a student recommended by his or her principal for enrollment in a college-level advanced scholastic summer session course or in a vocational community college summer session course. The bill provides flexibility for students enrolled in middle and early college high school programs.

In the Governor�s signing message, he expressed concern that the accountability and reporting requirements in the bill are insufficient. The bill calls for the Chancellor�s Office to report the total number of students enrolled; the Governor also wants the type of course reported. Thus, he signed the bill with the understanding that the author will pursue clean-up legislation.

AB 1366 (Lieber, D-Mountain View) enhances fiscal accountability in higher education by authorizing the Board of Governors (BOG) of the California Community Colleges or a community college district to request the Fiscal Crisis and Management Assistance Team (FCMAT) to assist a community college in need of fiscal management review.

AB 1480 (Maze, R-Visalia) improves agricultural curriculum by requiring the California Community College Statewide Agricultural and Natural Resources Advisory Committee to identify and develop program quality criteria to evaluate the effectiveness of community college agricultural education programs.

AB 1492 (Evans, D-Santa Rosa) lowers costs for community college districts and improves energy use by authorizing community colleges to pursue alternative financing options for facilities projects that improve energy efficiency.

SB 70 (Scott, D-Altadena) provides $20 million to community colleges for support of career technical education programs. Specifically, this one-time funding is appropriated to the Board of Governors to assist economic and workforce regional development centers consortia to improve career technical education pathways between high schools and community colleges.

SB 724 (Scott, D-Altadena) authorizes the California State University to award the Doctor of Education Degree. This legislation is viewed as being of assistance in the training of community college administrators.

Vetoed Measures:

AB 1070 (Cogdill, R-Modesto) would have authorized community college districts to charge any enrolled student a fee to recover the costs of replacing or repairing instructional equipment that has been lost or damaged by the student.

The Governor�s veto message indicated support for the concept of the bill; however, this bill would allow community colleges to assess fees as a condition of enrollment in a course or courses, with no limit on the amount that could be charged. The Governor believes that, depending on the level of fees and the number of courses in which they are charged, this bill could deter students of limited means from choosing to pursue a course of study that requires the use of costly instructional equipment. He encourages the Legislature to work with the Administration in crafting legislation that avoids the unintended consequences.

SB 672 (Cox, R-Fair Oaks) would have authorized any governing board of a community college district that provides classes for inmates, including inmates of state correctional facilities, to include the units of full time equivalent students generated in those classes for purposes of state apportionments.

The Governor�s veto message indicated that the bill would inappropriately authorize community college districts to receive reimbursement at the �full-credit� reimbursement rate, rather than the lower �non-credit� rate, for hours generated teaching credit classes at state prisons. The higher rate results in an excessive reimbursement given that, when providing instruction in a correctional setting, community colleges do not incur facility or other student services costs. For those reasons, the Governor was unable to sign the bill.

SB 361 Community Colleges Funding Formula

Robert Turnage, Vice Chancellor for Fiscal Policy in the Chancellor�s Office, prepared the following overview and talking points on SB 361 (Scott, D-Altadena) for the Board of Governors. As you may be aware, SB 361 is a �two-year� bill and will not be heard by the Legislature until January 2006. The talking points are intended to assist districts and other community college interests wishing to speak for the bill.

 This is a comprehensive reform to the formulas that allocate general purpose apportionments to the 72 districts, based on extensive work by a group of chief financial officers from 12 of the districts, and further work by the Chancellor�s Office in consultation with college representatives around the state.

 A �hold harmless� feature assures that no district will receive less equalization aid than under the current-law formula.

 This bill improves the calculation of district-specific enrollment growth caps, introduces local unemployment rates as a factor, adjusts caps that are persistently below real enrollment demand, and provides for long-range �smoothing� of erratic year-to-year changes in growth factors.

 This bill also brings the funding of noncredit programs/courses of compelling state need to parity with the funding of credit courses. Specific programs/courses would be recommended for enhanced funding by a task force of chief instructional officers and members of the academic senate, choosing from programs that address high-need areas, such as basic skills, high school equivalency, short-term occupational training, and English-as-a-second language (ESL).

 This legislation addresses the particular demographic and financial challenges of colleges serving rural areas of the state by providing a targeted institutional �rural access grant.�

Estimated annual costs over current law are as follows, assuming that future budgets fully fund the proposed formulas:

 $115 million for added costs of a more comprehensive form of equalization. (Current law calls for another $130 million above current budgeted levels for equalization. Thus, the total cost of the bill above budgeted levels is $245 million.)

 $120 million for improved per-student funding of selected noncredit programs.

 $96 million for restoration of COLA that was not provided in the 2003-04 fiscal year. (Under current law, K-12 education is already receiving some restoration of the foregone COLA.)

 $47 million for annual 1% augmentation for operational and institutional needs.

 $5 million for annual �rural access grant� of $500,000 per qualifying college.

 $40 million to assure that funds budgeted for enrollment growth are based on the sum of annual district growth caps.

 $50 million to increase district growth caps to reflect (1) local unemployment and (2) persistent over-cap enrollment.

 $20 million for a �banking� mechanism that compensates districts on a going-forward basis for prior-year deficits in appropriated enrollment growth.

Total estimated cost over current law is roughly $493 million. The bill itself does not require the appropriation of additional funds. The Legislature and Governor would determine the amount to be appropriated through the annual State Budget process. It is the intent of the System to request that any additional funds be phased in over the next several years. It is expected that natural growth in the Proposition 98 guarantee, combined with a gradually rising percentage share of the guarantee for the community colleges that is justified by higher enrollment growth in the colleges, would accommodate the phase-in of additional funds.

Loss of Millions In Retirement Funds Prompts STRS to Audit More K-14 School Districts

According to a Sacramento Bee newspaper article, K-14 school districts across the state are making errors costing thousands of dollars to the California State Teachers� Retirement System (STRS). Auditors say the potential long-term losses could easily be in the range of a million dollars.

STRS routinely audits community college and K-12 school districts, but over the past 18 months has found errors in 50% of the districts audited, prompting STRS to try to perform more district audits than it traditionally has done each year. STRS has one of the most complicated sets of pension reporting rules, which helps to cause mistakes made by local districts. Auditors have found a pattern of income reporting miscalculations, mistakes, and misinterpretations that in the end could either shortchange teachers of their monthly retirement benefits or incorrectly boost their pensions.

Audits also have discovered that part-time teachers and substitutes often aren�t told they can join the retirement program�an omission that could save districts thousands in pension contributions every year. Other common problems include incorrect reporting of unused sick leave, retroactive pay raises, and compensation for extra duties, as well as underreporting of outside income earned after retirement.

For 2005-06, STRS plans to audit 65 districts, up from 27 last year, and is targeting districts with potential irregularities in their financial reports. The pension fund has expanded its audit department and is training more auditors at the State Controller�s Office.

School districts can appeal the audit findings and seek an administrative hearing. As STRS has increased the number of its audits, more districts have begun questioning the audit results and filing voluminous responses. Currently, six audits are being challenged. STRS is also looking into ways to penalize districts for their mistakes.

Everyone recognizes that the laws concerning STRS are complex. State law has established two separate retirement benefits for teachers: a defined benefit program that pays a guaranteed monthly pension allowance based on final pay, age, and years of service; and a supplement program that pays lump-sum cash or a monthly annuity benefit. Rules spell out what pay, such as stipends and overtime, should be credited to each account.

Other pension funds, like the California Public Employees� Retirement System (PERS) credit employee compensation toward a single retirement benefit. For STRS members, a mistake ultimately could reduce the actual monthly retirement benefit or lead to an overpayment. When errors are discovered, the retiree must refund any overpayments, which could amount to thousands of dollars.

How Do Student Enrollment Fees in California Compare to Those in Other States?

The Chancellor�s Office staff has prepared a report on student enrollment fees as background to assist the Board of Governors (BOG) in formulating a future student fee policy for the California Community Colleges.

Current Student Enrollment Fees

 State law requires an enrollment fee for credit courses, set by law at $26 per unit. A typical course is three units, or $78.

 The enrollment fee may be waived for students with financial need (known as a BOG fee waiver).

 Districts are required by law to charge nonresident tuition to nonresident credit students. The statewide average change is $151 per unit.

 Noncredit courses are free.

 Under detailed parameters spelled out in state law, districts may charge limited fees for items such as parking, health services, and specified course materials.

Board of Governors Statement of Principles and Policies for Community College Fees

 Community college fees should be low, reflecting an overall policy that the state bears the primary responsibility for the cost of community college education.

 Community college fees should be predictable, changed in modest fashion in relation to the cost of education, and their burden should be equitably distributed among students.

 Financial aid should be sufficient to offset fees that may pose a barrier to the access of low-income students.

 Fee and financial aid policies should be consistent with fiscal and academic policies in supporting the dual objectives of access and excellence.

The above principles were incorporated into the 1987 review of the Master Plan for Higher Education and have remained substantially unchanged to the present time. The principles, however, are routinely ignored by the Legislature. The Board�s fee policy has not placed an emphasis in the setting of fees. The Legislature routinely sets fees based on short-term fiscal situations.

Impact of Student Fee Increases

Since 1984, when the first student enrollment fee ($5 per unit) was enacted by the Legislature, student access has been impacted each time the fees are increased. Generally, districts with lower-income populations experienced the largest enrollment losses following a fee increase. Students who normally carry heavier academic loads were also affected by fee increases. Another primary factor that has caused the decline in students was cuts in course sections resulting from state funding reductions.

Participation Rates and Average Student Fees

California ranks first in the participation rate of students between the ages of 18 to 44 and has the lowest enrollment fees in the country. The state of Wyoming has the second highest participation rate, while Arkansas has the lowest participation rate, North Carolina has the second lowest enrollment fees in the country ($1,269), and New Hampshire charges the highest tuition ($4,890).

Fee-Setting Authority

The California Community College system is in the minority nationwide in having fees set by the Legislature. Only five states�Florida, Louisiana, Oklahoma, Texas, and California�are under the authority of their respective state legislatures in establishing student enrollment fees.

The remaining states establish student fees in different ways:

 18 states have fees set by a state coordinating/governing agency

 12 states have fees set by the respective system boards

 16 states have individual institutions set the fees

California Community Colleges do not benefit from the collection of student enrollment fees. While the fees are collected at the local level, they offset state aid. The vast majority of states (31 of 44) reported that tuition revenues are controlled and retained by individual institutions or campuses.

Observations and Conclusions

The System is subject to cyclical volatility; State Budget crises often result in volatile revenue drops and steep fee increases. Fee increases:

 Have always been greater than the Consumer Price Index (CPI)
 Cause indiscriminate and non-uniform effects on student cohorts
 Cause effects that last years�it takes a long time to recover
 Cause volatility that kills�budget cuts and fee increases simultaneously are a deadly mix and bad policy.

Federal Update

Recently there have been some major developments at the federal level that affect California Community Colleges.

Reauthorization of the Higher Education Act

This month, the Senate Health, Education, Labor and Pensions Committee passed S. 1614, the Higher Education Amendments Act of 2005. Introduced by Senator Mike Enzi (R-Wyoming) and Senator Ted Kennedy (D-Massachusetts), this bill would reauthorize the Higher Education Act.

Provisions of interest to community colleges include: the repeal of tuition sensitivity provisions contained in current law that penalize students who attend low-cost schools; and raising the maximum Pell Grant award to $5,100 in 2006-07 and incrementally to $6,300 over five years, a $500 increase from current law that has been in effect since the 2003-04 academic year. The bill would also create two new grant programs for low-income students and those who pursue math, science, and foreign language degrees. The bill would also maintain separate definitions for nonprofit and for-profit institutions so that for-profit institutions have access to student aid funds consistent with current law, but not most other pools of grant money from the Department of Education.

The bill now goes to the floor of the U.S. Senate for consideration, which should occur in October.

Chancellor�s Office Requests Federal Funds

The Chancellor�s Office is pursuing four appropriations projects through fiscal year 2006.

First, the Chancellor�s Office is seeking funding through the Small Business Administration (SBA) to improve and expand its Applied Competitive Technology Centers Program. The program provides advanced technology, skills, and management training for employers statewide. The bill containing the SBA�s budget passed Congress in June and is currently being considered in the Senate. A conference committee will meet to work out disagreements between both versions and will add in appropriations projects. This will probably occur in mid-October.

Second, the Chancellor�s Office, through the Department of Education is requesting an appropriation to support the California Community College Collaborative Project, which will create a policy center that will provide information and ideas on the specific needs of California Community Colleges.

Third, the Chancellor�s Office is seeking assistance through the Department of Education for the Cooperative Statewide Bachelor�s Degree Completion Project, which will allow students in California Community Colleges who have completed an associate�s degree in a technical field to obtain a bachelor�s degree over satellite and cable television.

Finally, a request has been made through the Department of Education to expand the Fast Track to Online Distance Education Programs, which provides training and mentoring faculty to offer online courses to students. The bill containing the Department of Education�s budget passed Congress in July and is slated to be considered by the Senate in October. Once passed by the Senate, a conference committee will meet to work out differences between both versions and will add in appropriations projects. This will probably occur in late October.

Education Statistics Projections�More Students, a Few More Dollars

[Editor�s Note: This article focuses primarily on K-12 enrollments, however, K-12 graduation rates have an impact on community college enrollment. Thus, this article is for your information.]

The past decade has included many significant changes in enrollment, funding, and college preparation for K-12 education. A recent report by the National Center for Education Statistics (NCES), �Projections of Education Statistics to 2014� (http://nces.ed.gov), provides a snapshot of past trends and projections for the future.

Elementary and Secondary Enrollment

Nationally, enrollment in public schools increased 19% from 1989 to 2002. The NCES projects that, between 2002 and 2014, the pace of enrollment growth nationally will slow to 4% over the period. From 1989 to 2002, California experienced far-above-average growth with the addition of 33% more students. The NCES projects that California�s student population will continue to experience above-average growth (by approximately 14%) from 2002 to 2014.

While we can look forward to ongoing growth in student numbers, NCES does not address the regional variations in enrollment growth and decline that are observed. As the Legislative Analyst�s Office has noted, nearly half of the state�s districts are declining or not growing, which has substantial fiscal implications for affected districts.

Expenditures

Nationally, total expenditures for education in constant 2002-03 dollars increased by approximately 45% between 1988 89 and 2001 02. On a per-student basis, expenditures grew by 22% during this period. By comparison, from 1988-89 to 2001-02 California�s expenditures per student grew by 18%, slightly below the national rate of growth, which is evidenced by drops in California�s rankings in spending on education relative to other states.

The NCES projects that spending between 2001-02 and 2013-14 will continue to increase, but at a slightly slower rate than that experienced in the prior 12 years. It projects that spending per student will rise somewhere from 21% to 34%. NCES did not provide individual state projections and, with many factors in flux with California�s system of financing schools (the big factor being the upcoming �California Live Within Our Means� initiative), it�s impossible to provide accurate projections for California.

Other Interesting Items

The study also found that, nationally, average teacher salaries, when measured in constant 2002 03 dollars, increased by 3% between 1988-89 and 2003-04. This means that, after taking inflation into account, there was an overall upward growth in earnings. The study does not quantify the impact to total compensation attributable to rapid growth in benefit costs, which would undoubtedly dramatically increase the overall increase in compensation during the period. The study projects that average salaries nationally will continue to rise from 2003-04 to 2013-14 by approximately 6% (constant dollars).

We can expect more students to graduate from high school and go on to receive postsecondary degrees. The study estimates that, between 2001-02 and 2013-14, California will experience a 22% increase in high school graduates, which outpaces the anticipated growth in student enrollment. In addition, more students will be attending postsecondary institutions and receiving postsecondary degrees of all types. NCES estimates that, between 2002-03 and 2013-14, the number of degrees issued will increase�16% more associate�s degrees, 17% more bachelor�s degrees, 35% more master�s degrees, and 19% more doctorate degrees.

Final Thoughts

The timeframe for the NCES projections coincides with the point where No Child Left Behind (NCLB) expects that 100% of students will meet proficiency standards across the country. If NCES�s projections are accurate, we should expect that meeting the goals of NCLB will need to be done with more modest growth in resources than in pre-NCLB times and with more students and higher standards of achievement. However, as NCES acknowledges, the projections are based on assumptions regarding the population and economy; assumptions are best guesses and can change without notice.

Ask Arnold . . .

What Do College Bookstores Have to Do to Meet the Requirements of AB 2477?

Q. In January 2005, AB 2477 added Section 66406 of the Education Code. Under this law, college bookstores on the campuses of community colleges are required to work closely with faculty and publishers, or both, to create bundles and packages that are economically sound and deliver cost savings to students. There are other requirements in the legislation, too. How far is our bookstore required to go to implement the law, and what do we need to be able to demonstrate compliance?

A. AB 2477 (Chapter 556/2004) became effective on January 1, 2005. This bill is largely an expression of legislative intent�encouraging boards of trustees, faculty, publishers, and bookstores to accomplish specified objectives. The bill does not contain any penalties if these objectives are not carried out, nor does the bill indicate who is going to monitor the provisions of the bill. One would assume that the Board of Governors is responsible for monitoring this, but I doubt that the provisions will be that closely monitored due to staffing shortages in the Chancellor�s Office.

The bill places most of the requirements on faculty and publishers by encouraging them to accomplish most of the provisions contained in the bill. The bill contains the following provisions pertaining specifically to bookstores:

1. Should work with faculty to review timelines and processes involved in ordering and stocking selected books, disclose textbooks and costs to faculty and students, and actively promote and publicize book buyback programs.

2. Work closely with faculty and publishers, or both, to create bundles and packages that are economically sound and deliver cost savings to students.

3. Disclose retail textbook costs, on a per-course basis, to faculty, and make this information otherwise publicly available.

4. Encourage bookstores that offer book buyback programs to actively promote and publicize these programs.

If your bookstore administrator can document that a good faith effort has been made to accomplish the above he/she should have no problem. We will be checking with the Chancellor�s Office and will alert you if regulations are being developed as guidelines for local districts.

How Does Sick Leave Increase Retirement Benefits?

Q. I just started working for a community college in a full-time position as a clerk typist. I am new to the education field, so when I was hired I was told that if I save up my sick leave it can help my retirement benefits. Can you explain how this works?

A. Since you work in a position that is covered by the Public Employees� Retirement System (PERS), you accumulate what�s known as �service credit,� which is the number of years of service that you are credited with up until you retire or exit from school employment. Generally, each year worked full time translates to one year�s worth of service credit. Your retirement benefits are computed by using several factors, one of which is the amount of service credit that you have earned. By the way, the State Teachers� Retirement System (STRS) for certificated employees has similar provisions.

When you retire after being fully vested in the system, any unused sick leave that you have accumulated throughout the years can be added to your service credit in order to arrive at the total amount of service credit that will be used to calculate the amount of your retirement benefits. For PERS members, each day of accumulated sick leave translates to .004 year of service credit (250 days comprise a full year). There are many details and exceptions that might apply to this, but generally this is how the accumulation of sick leave days can increase your retirement benefits.

What may be confusing to some school employees who have been in the system for several years is that, for a time, this benefit using accumulated sick leave was limited to only certain members based upon the date of hire. The law was changed, effective January 1, 1999, to provide this benefit to all school members (through both PERS and STRS) who retire after that date.

By the Way . . .

U.S. Education Secretary Plans to Announce Higher Education Initiative.
U.S. Education Secretary Margaret Spellings plans to announce a major initiative to address the issues of access to and affordability of our nation�s system of colleges and universities. Secretary Spelling is proposing that a commission be formed to develop a comprehensive national strategy for postsecondary education. The commission will be led by Charles Miller, former chairman of the board of regents of the University of Texas system.

Spellings indicated that she was not advocating a bigger role for the federal government in higher education, but a more coordinated approach to meet the rising enrollment numbers and new economic demands. The commission will tackle issues like affordability, how well colleges prepare students for the global economy, and what colleges are and are not doing well. The commission is expected to make recommendations by August 1, 2006.

Recall Campaign to Oust Governor Schwarzenegger.

You knew it was bound to happen. A Berkeley physician has announced his plans to launch a recall campaign to oust Governor Schwarzenegger. Dr. Kenneth Matsumura, founder and director of the Alin Foundation and the Berkeley Institute for Advanced Medical Research, intends to deliver a proposed petition to the Secretary of State�s Office early next week. Once cleared for circulation, he will have 160 days to collect a minimum of 1.04 million signatures of registered voters. He hopes to make the June 2006 primary ballot.