State Revenues Continue to Outpace Projections

For the seventh straight month, state General Fund revenues have outperformed the projections upon which the current year budget is based. Through November, collections total $2.4 billion more than expected ($550 million in 2004-05 and $1.9 billion in 2005-06). For the month of November alone, collections exceeded the monthly projection by $145 million, or 2.8%.The Department of Finance reports that current-year collections are running 6.3% above estimate, with the greatest strength coming from the corporation tax (up almost 25%), followed by the personal income tax (up 6.2%) and the sales and use tax (up 2.6%). A strong showing in corporate profits related to the summer�s high fuel prices has been identified as one of the principal reasons for the strength in the corporate tax.

To put the latest information into context, the Legislative Analyst recently projected that total state General Fund revenues for 2004-05 and 2005-06 would exceed the 2005 Budget Act forecast by $3.9 billion. Thus, the state has already collected 60% of the Legislative Analyst�s projected increase, with seven months of the fiscal year remaining, including the major collection months of December, January, and April.

If the state economy continues to produce revenues at a pace that exceeds expectations, the state�s structural budget problem would be reduced, although not completely eliminated. We hope that this development, coupled with the Administration�s interpretation of the results of the special election, will produce a January Governor�s Budget that treats education more favorably than last year.

Chancellor’s Office Reports on Impact of Fee Increases and System Budget on Enrollment

In a just released report, the Chancellor’s Office concludes that recent fee increases and system funding reductions have a direct and significant affect on enrollment levels. The 2003-04 State Budget included an enrollment fee increase of $7 per unit (from $11/unit to $18/unit), and the 2004-05 State Budget included an additional increase of $8/unit (from $18/unit to $26/unit). This latest fee increase included a requirement for the Chancellor�s Office to provide a report to the Legislature on the impact of the student fee increase on enrollment.

The report addresses the impacts of both of the recent fee increases as well as the level of state funding provided the system because, as the report concludes, both factors affect the number of students who access the system. For example, the fee increase to $18 per unit occurred when state support for the system was either flat or declining, resulting in a significant drop in student enrollment.

The fee increase to $26 per unit occurred during a year when the system�s budget was increased. Because the increases in fees and the level of system funding have not occurred independently, it is difficult to assess their individual impact on student access.

Some of the major conclusions of the report are:

� Student headcount and full-time equivalent students (FTES) continued to fall even with the system budget increase for 2004-05

� Student headcount is significantly below what was projected before the fee increases

� The curricular areas suffering the greatest losses in FTES were:
physical education
information technology and related
art
music

� The drop in physical education enrollment from special admit (K-12) students accounts for over 100,000 of the 314,000 lost headcount

� The curricular areas showing the greatest increases in FTES during the same time period included:
 real estate
 industrial technology
 fire technology
 culinary arts
 radiologic technology
 prerequisites to allied health sciences

� Over the same period the gender distribution of the student population changed very little, and the distribution of student ethnicity changed in a similar pattern to prior terms

� There has been a marked increase in the percentage of younger students (ages 18-24) and a significant decrease in students of age 30 and over, as well as an increase in the percentage of students with �degree, certificate, or transfer-seeking� as their stated goal. Of the first-time and returning students, the system has seen a significant drop in the percentage that are of age 25 and over.

� For the last two years, there has been a significant decline in the number of first-time students, and a smaller but related decrease in the number of continuing students.

� Over the same time period, there has been an increase in the number of returning students

� Student retention rates have increased, but no associated increase in student success rates is shown

To view the contents of the full report, go to the Chancellor�s Office web site: http://www.cccco.edu/divisions/tris/rp/reports.htm

Community College Transfer Students May Lose Their Financial Aid Entitlement

The California Student Aid Commission, which administers the state�s financial aid program for higher education students, has sent letters to 1,000 students telling them their Cal Grant award has been withdrawn because they were not residents of California when they graduated from high school. These students could have their education placed on hold or be saddled with debt because the state apparently made a mistake in awarding them financial aid.

The affected students are largely students from community colleges who transferred to four-year higher education institutions under the California Community College Transfer Entitlement Program.

According to Diana Fuentes-Michel, executive director of the Student Aid Commission, approximately 300 of the 1,000 students are currently enrolled in colleges and universities around the state and will lose their Cal Grants if they cannot verify that they resided in California at the time of their high school graduation. The remaining 700, who have either graduated, dropped out, or otherwise moved on, might have to repay the state, she said.

Ms. Fuentes-Michel indicated that, unfortunately, the law is clear. The Commission must recover the money unless directed by the Governor�s Office or the Legislature to do otherwise. The questions that have been raised include: Do they want to offer forgiveness to these students? Do they want to treat these grants now like they are loans? The Commission has sent a form to the affected students asking them to verify�under penalty of perjury�whether they were state residents when they graduated from high school. They have until the end of December 2005 to respond.

State legislators have been informed about the mistake and are now considering urgency legislation that would hold the student harmless. If such legislation is drafted, it could not be acted upon until the Legislature returns to Sacramento in January 2006. According to legislative staff, it is not the fault of the students.

Research indicates that the students could not have known that residency at the time of high school graduation was required. The only place that such a requirement is spelled out is in the Education Code. Apparently the Cal Grant application forms do not stipulate residency requirements at the time of high school graduation.

It�s unclear why the Student Aid Commission did not verify on its own whether applicants met the residency requirement. The students were California residents at the time they applied for the Cal Grants and there�s no question that they were financially needy, according to Ms. Fuentes-Michel. The Commission requires that students complete the federal Free Application for Federal Student Aid (FAFSA) when they apply and provide verification of their community college grade point average. The FAFSA does not ask if students were California residents when they graduated from high school.

This appears to be the state�s mistake. The students should not be penalized as a result of that mistake. Hopefully the Legislature will move swiftly in January to amend the Education Code to hold these students harmless.

STRS Faces Fiscal and Policy Challenges

With a $24.2 billion pension fund shortage looming, trustees at the State Teachers� Retirement System (STRS) are facing some challenging choices aimed at cutting costs and raising revenue. In the next two months, STRS officials will meet with school districts, teachers� groups, and state representatives to flesh out the issues and begin zeroing in on a specific strategy.

The fund will have enough assets to cover benefits for some 60 years if nothing is done, and even if it doesn�t, the state guarantees that all obligations will be met. Trustees are calling for further analysis by actuaries and feedback from outside groups. Eighteen months ago, trustees learned a string of stock market losses and sub-par investment returns had left the fund billions of dollars short to cover benefits paid to retirees over the long run. A second actuarial study put the shortfall at $24.2 billion. As of June 30, 2004, STRS had enough assets to cover 83% of future benefits.

According to Ed Derman, STRS Deputy Chief Executive Officer, �This is a problem that dramatically escalates, if we do nothing, it�s going to get progressively worse.� If trustees don�t tackle the issue, the gap could soar to $212 billion in the next three decades. STRS isn�t alone with a shortfall. Nationwide, about 80% of major public pensions are underfunded, according to a survey by Wilshire Associates, a Los Angeles investment consulting firm.

To tackle funding gaps, some funds, such as the California Public Employees� Retirement System (PERS) have raised employer contributions. Others have issued pension obligation bonds. Some states, such as Colorado and South Dakota, have limited benefits. At STRS, one option is eliminating a 2% cost-of-living adjustment, a change that would affect all current and future retired teachers. The fund estimates the cut would wipe out a $93 boost in monthly pension checks for the average teacher. Major benefit changes, however, are likely to meet resistance from teachers� groups.

Unlike PERS, the teachers� retirement board has no authority to increase state or school district contributions or unilaterally slash most benefit programs. The Legislature must approve any changes. Currently, teachers contribute 8% of their pay to their pension, while K-14 school districts pay 8.25% of payroll and the state pays about 2%.

Options that STRS May Consider:

STRS trustees are considering a number of proposals to help meet a $24.2 billion unfunded liability in the future. Most benefit changes would apply to newly hired teachers and the effects are based upon an average per retired teacher. The options include:

� Pension obligation bonds. Trustees must figure out whether the state can sell these bonds without voter approval. Local school districts could issue the bonds and use the proceeds to cover any future increases in pension contributions.
� Increase the amortization period up to 40 years, from the current 30 years. While this reduces the annual costs, the overall bill to provide benefits would be larger.
� Base pensions on the highest compensation over three straight years, rather than 12 consecutive months. This would reduce monthly benefits by $134.
� Take out a career factor used to calculate benefits, which would result in a loss of $378 a month in benefits for each affected teacher.
� Reduce age calculations for teachers who are 60 years old and older, which would result in a loss of $504 a month in benefits for each affected teacher.
� No longer allow unused sick leave in the retirement formula, which would cut benefits by $146 a month for each teacher.
� Drop a 2% teacher contribution for the supplement benefit, which would drop benefits by $81 a month for each teacher.
� Reduce or drop the employer contribution to the supplemental benefit for teachers working extra duties, a cut of $54 month for each affected teacher.
� Don�t extend Medicare premium payments for teachers who retire after July 1, 2006. This would increase each teacher�s health costs by $393 a month.
� Impose an employer contribution for teachers who work after retirement. The total annual cost to districts would be $15 million.

STRS Board Votes to Oppose Dual Pension Plans

A divided State Teachers� Retirement Board went on record at its December board meeting to oppose legislation aimed at creating a hybrid retirement plan for government workers. For the second time this year, STRS trustees targeted an overhaul measure by Assembly Member Keith Richman (R-Northridge). His latest plan calls for creating a hybrid pension system that opponents argue could lead to administrative headaches for hundreds of school districts and create a divisive two-tier retirement program for teachers. Specifically, this measure, ACA 23, would establish the California Public Employee Defined Contribution and Hybrid Plans.

The measure would provide that, on and after July 1, 2007, any person hired by a public agency shall enroll only in a hybrid plan or in a defined contribution plan, and is prohibited from enrolling in a defined benefit plan. The measure would permit an active member of a defined benefit plan, during a specified period, to transfer a sum equal to the member�s interest in the defined benefit plan to a defined contribution plan or hybrid plan.

Six trustees voted to oppose ACA 23, while five abstained, including four appointees of Governor Schwarzenegger, who said they were not prepared to consider the issue. During the last legislative session, legislators and the Governor proposed replacing the current guaranteed pension plan with 401(k)-style private accounts. This proposal was opposed by labor unions, and, as a result, the Governor backed off and vowed to renew his plan this coming year.

The pension issue has wreaked havoc with the 12-member STRS board. After a similar vote earlier this year, the Governor removed four appointees who voted to oppose the initial pension proposal. In a political payback, the Democrat-led state Senate rejected the nomination of the Governor�s fifth STRS appointee.

Lawsuit Alleges Unfair Assessment of Nonresident Tuition by Higher Education

A former congressman has filed a class action lawsuit challenging the California state law that allows undocumented immigrants to pay resident tuition and fees at public colleges and universities in the state.

AB 540 (Chapter 814/2001) allows undocumented immigrants who meet certain criteria to be exempt from paying nonresident tuition at California�s public colleges and universities. These students must have attended high school in California for three or more years, graduated from a California high school or attained the equivalent, and filed an affidavit stating that they are in the process of legalizing their immigration status or will be filing an application to do so whenever they are eligible under federal law.

When his term ended in 2001, Former Representative Brian Bilbray (R-San Diego) moved back to California but allowed his two children to stay in Virginia to finish high school. When his children came back to California to attend college, they were required to pay nonresident rates for tuition and fees�as compared with an undocumented immigrant who meets the criteria and is exempt from nonresident tuition. Therefore, the lawsuit alleges that AB 540 violates a federal statute mandating that any state offering resident tuition to illegal immigrants must offer it to all out-of-state students as well.

Ralph Black, attorney from the Chancellor�s Office, has stated that AB 540 was reviewed by the Attorney General and Legislative Counsel before it became law, and no violation of federal law was found at that time.

The lawsuit was filed against the University of California, California State University, and California Community College systems on behalf of 42 nonresident students and their parents from 19 states, and could potentially affect 60,000 students. If the plaintiffs prevail, damages could be up to $70,000 to $305,000 per student, depending on which college system collected the nonresident tuition and fees.

Ask Arnold…
How Much Information is a College Required to Give Students and Staff Regarding Violence on Campus?

Q. Unfortunately, my college has experienced a number of assaults on students while on campus. I know that we are required to take precautions and keep students and staff informed about being safe. Are there any other legal requirements regarding campus safety that I should be aware of?

A. Thanks for the question. Over the past few years a number of new laws have been in place dealing with registered sex offenders attending institutions of higher education and the responsibility of colleges to keep students and staff informed.

This year, AB 1088 was signed into law, effective January 1, 2006 (Chapter 647/2005). The new law requires community college districts and other public postsecondary education institutions to provide written protocols to ensure that students, faculty, and staff who are victims of sexual assault on grounds maintained by the institution receive treatment and information. Additionally, colleges are required to provide educational preventive information about sexual violence to students at all campuses.

Each campus of the community colleges is required to post sexual violence prevention and education information on the campus website. In addition, colleges are requested to encourage students to report crimes of sexual violence to campus authorities and urge campuses to eliminate barriers for victims who come forward to report sexual assaults, including exempting the victim from campus sanctions for substance abuse.