The Old State Funding Model is Dead: What Will Replace It?

In her remarks at the UC Regents' meeting on Wednesday, UC President Janet Napolitano accepted Gov. Jerry Brown's proposal for a tuition freeze in 2014-15, and in effect promised to continue current UC Office of the President budget strategy.  The outcome of that strategy can be seen in the update of our traditional (simplified) chart of state general funds.

The chart compares the growth in state personal income to the growth or lack thereof in UC's general fund share. The idea is that were UC to have "grown with the state" -- and no faster --the University would be up about $2.2 billion above the $2.9 billion the Regents would like to receive in 2014-15.

What has this gap meant in practice? A tripling of undergraduate tuition, most obviously, and large fee hikes in professional schools.  According to the Finance Committee item on the 2014-15 budget proposal, UC will collect about $3 billion in tuition in 2013-14 (p 3), and about the same next year, given the tuition freeze. The missing $2.2 billion could have covered about 75% of that tuition bill.

Last February, Stan Glantz and I endorsed the principles we found in Gov. Brown's budget proposal--that the state must reinvest in public higher ed, that public universities should not charge high tuition, and that state personal income is a good metric for measuring this reinvestment.  But we noted the "huge gap between 'normal' general fund growth and UC's actual public funding level." The question UC has been facing again and again for years is what revenues could fill the gap and allow UC to "reinvest in academic quality"?

These new revenues will not soon consist of tuition. The Governor, along with the legislature's Democrat leadership have taken away the gap-filling option of tuition hikes.  But at the same time, Sacramento has now locked UC into a state fund trading range of 4-5% increases per year.   UCOP recently estimated that after the massive Schwarzenegger and Brown cuts visualized above, it needs 12% state funding increments year in year out (or 16% in a state-tuition mix) to avoid a massive structural deficit of $2.9 billion by around 2016. So once again, UC is facing permanent austerity and permanently lower academic quality as the result of this annual increment gap. Does the new budget proposal address this problem?

Yes, in that it takes the 5% base increase ($142.2 million) and adds in enough other targeted increases to get an increase of $263.4 million.  (The rest of the $383.1 million in additional funds comes from non-resident student tuition or from various university sources.   UCOP is counting savings from contracts and asset management as income, which strikes me as political outreach rather than accounting.)   So in fact UCOP is requesting a 10% increase in state general funds for 2014-15.

Obviously I hope they get it. This 10% is the minimum that would make a tuition freeze sustainable.

A major glitch is that much of Sacramento thinks that UC is the opposite of a hardship case--that it has used the crisis to raise more tuition money than it lost in the cuts. Assembly Speaker John Pérez said this loud and clear last January, and last month the Legislative Analyst's Office generated data showing UC's total state-related revenues going up steadily (figure 7).  If you look at the Budget for Current Operations 2014-15, you see the same relentless growth in UC total revenue (now closing in on $26 billion) that makes much of state government think UC should fend for itself--without further tuition gouging of students.

This framework douses the state's interest in reinvesting on the same huge scale on which it cut.  The result is that the state is now in effect deducting payments to specific university items from its general fund share.

For example, UCOP wants $64.1 million in additional funding for the state share of the pension fund, but the budget item reports that bond debt service savings of $100 million year "be used to address the University of California Retirement Plan (UCRP)'s unfunded liability" (page 4).

A bigger problem is that state leaders seem now to deduct Cal Grant increases and other financial aid against UC general funds. Gov. Brown spelled this out at the Regents' meeting in September:

Through the Cal grant program the state is adding $750 million. So the state is paying 39% of core teaching expenses. Every time you increase teaching you increase Cal grant. . . .  And now the legislature, under the leadership, or pressure, depending on how you want to look at it, of the speakers, is now going to add a middle class scholarship. That’s going to be several hundred million dollars.  That, on a yearly basis, is more than our increase to the university.  Maybe had you been lobbying a little more powerfully you would have turned that into a direct investment in the university.  But it’s not going to turn out that way. It’s going to turn out to be something called the middle class scholarship.

The California Democrat super-majority has terminated the traditional funding model of tuition hikes + state increases. This reflects a nationwide trend, in which politicians are saying no state funding restoration and no tuition hikes. Michigan-Ann Arbor is looking at 1.1% and Penn State at 2.76% for next year, and even the larger number barely breaks even with the Higher Education Price Index increase for the current year.

So rather than 6% + 6%, the state is offering UC 5% + 0%.  And when UC says 10% + 0%, the state will say OK, (10% - 5%) + 0% = 5% and you're lucky to get that, with the minus 5% being what we the state pay in financial aid to support the current frozen level of tuition.   In this Democrat model, future state increases will be held down by past tuition hikes.

Staying in this place will permanently change the University of California.  The same is true for the other segments.  But there will now be no state reinvestment unless the university can make some long-term commitment to real affordability, which will need to include tuition deflation or rollbacks.