The 2020-21 Budget:

Analyzing UC and CSU Cost Pressures

GABRIEL PETEK
L E G I S L A T I V E A N A LY S T
DECEMBER 18, 2019

 momo-m._ 

O_n_u_0m

2020-21 BUDGET

EXECUTIVE SUMMARY
Report Analyzes Cost Pressures at UC and CSU. California operates two public university
systems: (1) the University of California (UC), consisting of 10 campuses, and (2) the California
State University (CSU), consisting of 23 campuses. Compared with many other areas of the state
budget, the Legislature has considerable flexibility through the annual budget process to decide
which university costs to support. Despite this greater flexibility, the Legislature faces many
pressures to increase funding for UC and CSU in 2020-21. This report examines these university
cost pressures, assesses the state’s capacity to fund some of them, and identifies options for
expanding budget capacity to fund additional cost pressures.

Cost Pressures
Employee Salary Increases Likely to Remain Key Cost Pressure. Existing law grants
both university systems authority to negotiate compensation levels for their employees. Since
2013-14, both systems have provided annual salary increases, generally ranging from 2 percent
to 5 percent depending on the employee group. Because contracts are not in place for most
university employee groups in 2020-21, salary increases will likely be a key issue facing the
Legislature in the upcoming budget. We estimate the cost of a 1 percent salary increase to be
around $45 million at each segment in 2020-21.
Employee Benefit Costs Continue to Rise, Universities Have Notable Unfunded
Liabilities. Like most government employees in California, university employees receive
subsidized health care while they are employed, and they receive both pensions and subsidized
health care when they retire. These benefit costs are among the fastest growing cost pressures at
UC and CSU. We estimate benefit costs across both university segments will increase by around
$195 million in 2020-21. In addition, both university systems have billions of dollars in unfunded
pension and retiree health liabilities resulting from underfunding earned benefits in previous years.
Universities Have Large Facility Maintenance Backlogs. Like most state agencies, UC and
CSU dedicate a portion of their core budgets for facility maintenance, such as keeping electrical
and plumbing systems in working order. As their spending on maintenance has tended to be
insufficient over the years, campuses have accrued billions of dollars in unaddressed facility
maintenance and seismic renovation projects. These backlogs create significant cost pressure
for the Legislature in the budget year and future years. To better guide state funding decisions,
the Legislature recently directed the universities to develop long-term plans to address their
backlogs. The Legislature is to receive CSU’s report by January 2020 and UC’s report by January
2021.
Some Pressure to Expand Enrollment but No Underlying Demographic Growth. When
weighing enrollment growth decisions in the upcoming budget, the Legislature faces a number
of key factors. First, the number of high school graduates is projected to decline slightly in
the upcoming year. Both segments are also drawing from larger pools of high school students
than expected under state policy. These factors potentially suggest further enrollment growth is
not warranted in 2020-21. On the other hand, the Legislature may wish to grow enrollment to
improve access at high demand campuses. Based on the state’s existing per-student funding

www.lao.ca.gov

1

 2020-21 BUDGET

rates, we estimate growing enrollment by an additional 1 percent would cost the state around
$40 million at UC and $45 million at CSU.
Legislature Likely to Face Many Other University Cost Pressures. In recent years, the
Legislature has considered various initiatives that change the level or scope of university services.
These initiatives have included: (1) increasing the number of tenured/tenure-track faculty;
(2) improving graduation rates at CSU; (3) limiting nonresident enrollment at UC; (4) expanding
student food, housing, and mental health programs; and (5) establishing new academic programs
and campuses. In 2020-21, the Legislature very likely will continue to face pressure for additional
spending in each of these areas.

Planning Issues
State Budget Has Capacity to Fund Some University Cost Pressures. In The 2020-21
Budget: California’s Fiscal Outlook (fiscal outlook), we calculate the state’s budget capacity
for the coming year. In making our calculations, we first assume the state maintains existing
services, as adjusted for inflation. For the universities specifically, we assume the state covers
salary, pension, health benefits, and debt service cost increases. After accounting for these types
of cost pressures, we estimate the state would have a $7 billion surplus. Given certain risks to
the General Fund, we recommend the Legislature limit new ongoing spending commitments
across all areas of the state budget to around $1 billion. In the case of the universities, any
remaining ongoing pressures (such as enrollment growth, expansion of services, and new
programs or campuses) likely would be up for legislative consideration for a portion of this
$1 billion. After making new ongoing commitments, the remainder of the state surplus would be
available for one-time commitments, accelerated debt payments, or larger state reserves. If the
Legislature would like to direct some of the remaining surplus to the universities, we encourage
it to give high priority to addressing the universities’ unfunded liabilities and facility maintenance
backlogs (including seismic renovations). Addressing these liabilities now would reduce the
burden on future generations and improve the fiscal health of the state and universities.
Legislature Has Some University Options for Expanding Budget Capacity. Our fiscal
outlook assumes the state covers inflationary cost increases, with no increases in tuition for
resident students. However, one key option available to the Legislature for covering additional
cost pressures is to share ongoing university cost increases with students through a tuition
increase. We estimate that every 1 percent increase in tuition raises associated net revenue
by about $15 million at UC and $10 million at CSU. Another option would be to work with
the universities to pursue efficiencies in their operations and facility utilization. The amount of
freed-up funding that could be redirected would depend upon the specific efficiencies pursued,
with some options creating budget-year savings but others not yielding savings until later
years. Another option would be to factor campuses’ reserves into state budget decisions. The
Legislature could be strategic in the use of these reserves—using them to protect ongoing
university operations during an economic downturn or using them to address key one-time
priorities, such as deferred maintenance, in the budget year. Each of the university systems
potentially has hundreds of millions of dollars in reserves that are available for such spending
purposes.

2

L E G I S L AT I V E A N A LY S T ’ S O F F I C E

 2020-21 BUDGET

INTRODUCTION
The Universities Are a Key Part of State’s
Discretionary Budget. California operates two
public university systems: (1) the University of
California (UC), consisting of 10 campuses, and
(2) the California State University (CSU), consisting
of 23 campuses. Neither the State Constitution
nor federal law requires the state to spend a
certain amount on UC and CSU. Furthermore, the
Legislature has enacted few statutes to guide its
decisions on how much General Fund to allocate
annually to the universities. Because of the lack
of constitutional or statutory requirements, the
Legislature has considerable flexibility through
the annual budget process to decide which
university costs to support. For few other major
state programs (most notably, the court system)
does the Legislature have a comparable amount of
flexibility. Budgeting for the universities also differs
from many other areas in that UC and CSU have a
considerable amount of nongovernmental funding
available to them—most notably through the levying
of student tuition charges.
Report Examines Key UC and CSU Cost
Pressures. As the Legislature begins to develop

its 2020-21 budget, it faces many pressures
to increase General Fund support for UC and
CSU. These cost pressures range from covering
rising health care costs (somewhat outside the
universities’ control) to raising employee salaries
(largely within the universities’ control). The
pressures also range from addressing existing
obligations (including unfunded pension liabilities
and facility maintenance backlogs) to creating new
ones (by funding enrollment growth, expanding
services, offering new types of services, or building
new campuses). Over the coming months, many
groups—from faculty and student groups to
groups with regional or other specific interests—
likely will encourage the Legislature to increase
state support in one or more of these areas. To
aid the Legislature in considering these requests
and building an overall budget plan, this report
describes and analyzes these cost pressures. The
report begins with background on UC’s and CSU’s
budgets, then examines key cost pressures. It
concludes by discussing several university-related
planning issues the Legislature will face in the
coming budget session.

OVERVIEW OF UNIVERSITY BUDGETS
In this part of the report, we provide background
on each segment’s core funding, spending, and
reserves.

Funding
Core Funds Support Each Segment’s
Academic Mission. Core funding consists of
state General Fund, student tuition revenue, and
several other smaller fund sources. Core funding
supports the universities’ academic functions,
including undergraduate and graduate instruction,
academic support services (such as tutoring), and
related administrative costs. Core funding also
supports various research and outreach initiatives.
In 2019-20, core funding represents around
70 percent of all funding at CSU and 25 percent
of funding at UC. The universities’ remaining fund

www.lao.ca.gov

sources support various nonacademic purposes,
such as on-campus housing and UC’s medical
centers. Throughout the remainder of this report,
we focus on core funds and associated spending.
State Is the Largest Source of Core Funding.
State General Fund comprises about 60 percent
of core funding for UC and 75 percent for
CSU (Figure 1, on next page). These amounts
include direct General Fund appropriations to
the universities to cover operating costs. They
also include support for the Cal Grant program,
which covers the cost of tuition at UC and CSU
for eligible students with financial need. (Students
are considered to have financial need when the
cost to attend college exceeds the amount their
households can contribute, as calculated by certain
federal formulas.) The remaining core funding

3

 2020-21 BUDGET

Figure 1

State Is Largest Source of Core Funding at Each Segment
2019-20
Nonresident
Tuition

Other

Resident
Tuition

Nonresident
Tuition

UC

Direct State
General Fund

CSU
State
Financial
Aid

Resident
Tuition

Direct State
General Fund

State
Financial
Aid

comes from student tuition charges and, at UC,
a few smaller fund sources (such as overhead
allowances on federal research grants). Around
40 percent of resident students—generally those
without financial need—pay tuition. Nonresident
students, who are generally not eligible for state
financial aid, also pay tuition (at a higher rate than
resident students). The share of core funding
coming from nonresident tuition is larger at UC than
at CSU, as nonresidents comprise a larger share
of overall enrollment at UC and pay higher tuition
charges.
State and Segments Determine Level of Core
Funding. Each year, the Legislature appropriates
direct General Fund support to UC and CSU as
part of the annual budget act. The Legislature
does not directly set student tuition charges.
Existing law grants this authority to the systems’
governing boards—the UC Board of Regents
and the CSU Board of Trustees. Despite different
entities controlling state General Fund and student
tuition decisions, in practice these decisions are
often connected. For example, in many years the
governing boards have held tuition flat in response
to increases in state funding and other signals from
the Legislature. In other years, the boards have

4

adopted tuition hikes in response to reductions in
state funding.

Spending
Majority of Core Spending Is on Employee
Compensation. As Figure 2 shows, 76 percent
of CSU spending and 64 percent of UC spending
is for employee salaries and benefits. At both
segments, benefits include pension contributions,
employee health care, and retiree health care.
The next largest component of spending at both
segments is on their respective financial aid
programs. (Both UC and CSU fund financial aid
programs that help financially needy students not
receiving state Cal Grants or, in the case of UC,
supplement Cal Grant aid.) Another portion of core
spending is on various other operating expenses,
including facility maintenance, annual facility debt
service payments, equipment, and utilities.
Universities Have Considerable Control
Over Spending. For employee salaries—almost
half of each segment’s core spending—state law
grants the governing boards authority to determine
salary levels, set staffing levels, and approve
collective bargaining agreements with unions. For
benefits, UC has somewhat greater control over

L E G I S L AT I V E A N A LY S T ’ S O F F I C E

 2020-21 BUDGET

Figure 2

Majority of University Spending Is on Compensation-Related Costs
2017-18

Other
Operating
Expenses

Other
Operating
Expenses

Faculty Salaries

Faculty Salaries
Financial Aid

UC

CSU

Financial Aid

Staff Salaries
Benefits

Staff Salaries

Benefits

costs than CSU. UC operates its own pension,
employee health, and retiree health programs,
with benefits in each of these areas determined
by the Board of Regents. CSU, by contrast,
participates in state-administrated pension and
health care programs and provides benefits that
are established in state law. The California Public
Employees’ Retirement System (CalPERS) makes
decisions that affect CSU spending in these areas.

Reserves
Both Systems Maintain Reserves. State
law is silent on whether the universities should
build reserves, the purpose of those reserves,
or the appropriate levels of those reserves. The
universities, however, have developed reserve
policies, which generally designate reserves for a

couple of main purposes. The systems maintain
reserves intended to cover large, planned future
costs, such as renovating a building, purchasing
equipment, or launching a new academic program.
The systems also maintain reserves to help them
respond to unforeseen events, such an economic
recession or natural catastrophe.
Universities Each Have Over $1 Billion in
Core Reserves. At the end of 2017-18, CSU held
$1.5 billion in core reserves whereas UC held
$1.1 billion. CSU’s core reserve level was equivalent
to about 3 months of operating expenses, whereas
UC’s level was equivalent to about 1.5 months.
As Figure 3 (on next page) shows, the universities
have designated most reserve funds for planned
future costs. They have each kept about 30 percent
of their reserves available to respond to future risks
and uncertainties.

KEY COST PRESSURES
In this part of the report, we analyze four key
cost drivers affecting the universities’ core budgets:
(1) compensation, (2) academic facilities and
infrastructure, (3) student enrollment growth, and

www.lao.ca.gov

(4) various other recent priorities of the Legislature
and universities. The first two of these pressures
generally are costs the state faces to maintain the
existing level of services at campuses and address

5

 2020-21 BUDGET

long-term liabilities. The latter two cost pressures
are costs the state faces to expand the level or
scope of university services. For each cost driver,
we provide background; discuss past spending
trend; and, where possible, estimate costs for
2020-21.

COMPENSATION
In this section, we analyze three key
compensation-related costs pressures:
(1) employee salaries, (2) pension contributions,
and (3) health benefits for employees and retirees.

Employee Salaries
Collective Bargaining More Notable Factor
Driving Salaries at CSU Than UC. CSU
employs about 50,000 faculty and staff. Of these
employees, 90 percent—including all faculty and
most staff—are represented by 1 of 13 bargaining
units. Represented employees receive salary
increases according to collective bargaining
agreements negotiated with the Chancellor’s Office
and approved by the Board of Trustees. These
bargaining agreements often indirectly drive salary
increases for the remaining 10 percent of CSU
employees (primarily consisting of managers and
Figure 3

executives) who are not represented by a union.
This is because the CSU Chancellor’s Office
typically chooses to keep salary growth for these
employees at pace with represented employee
groups. Compared to CSU, collective bargaining
is a less salient factor for UC salaries, as only
one-third of its more than 40,000 core-funded
employees are represented by a union. For the
remaining two-thirds of employees—which includes
all tenured and tenure-track faculty and most
staff—the UC President usually makes decisions
regarding salary increases.
Universities Have Provided Salary Increases
the Past Several Years. After not providing
general salary increases for most employee groups
from 2008-09 through 2012-13, both systems
have approved salary increases every year since
2013-14 (Figure 4). Within each system, salary
increases have tended to be similar across
employee groups, especially when viewed across
the entire seven-year period (with some groups
getting larger increases one year but then smaller
increases the next year). The salary increases
have tended to be somewhat larger at CSU than
UC. At both segments, salary increases have
tended to roughly equal or outpace inflation. (From
2013-14 through 2019-20, consumer prices in
California grew an average annual
rate of 2.8 percent.)

CSU Has Larger Reserves Than UC
Core Fund Reserves at End of 2017-18 Fiscal Year (In Millions)
$1,600
1,400
Saved for Future
Unforeseen Costs

1,200
1,000

$459

$323

800
600
400

$826

Designated for Future
Planned Costs

$1,053

200

UC

6

CSU

Likely Pressure to Increase
Salaries in 2020-21. At both
systems, employee salary
increases in 2020-21 are
uncertain. At CSU, virtually all
bargaining contracts expire at the
end of 2019-20. The Chancellor’s
Office is currently negotiating
contracts for the budget year. At
UC, the UC President has not
yet determined salary increases
for faculty and most staff. For
the small share of UC employees
who are represented, most units
already have negotiated 3 percent
salary increases in 2020-21.
Four remaining units have open
contracts. Every 1 percent
increase in salaries—across all

L E G I S L AT I V E A N A LY S T ’ S O F F I C E

 2020-21 BUDGET

Figure 4

University Employees Have Had Salary Increases in Recent Years
General Salary Increases by Employee Group
2013‑14

2014‑15

2015‑16

2016‑17

2017‑18

UC
Faculty
Nonrepresented staff
Represented employees

2%
3
0‑4.5

CSU
Faculty
Represented support staff
Other staffc

1.3%
1.3
0‑4.6

2018‑19

2019‑20

3%
3
2‑4.8

3% a
3a
2‑4

3% a
3a
2‑8.4

3% a
3a
0‑3

3% a
3a
0‑7b

3% a
3a
0‑3b

3%
3
2‑3

5%
2
2‑2.9

2%
5
2‑5

4.5%
3
2.2‑4

3.5%
3
3‑4

2.5%
3
3‑4

a Increases were distributed based on merit.
b Contracts for two bargaining units are still under negotiation.
c Consists of other represented and nonrepresented staff.

represented and nonrepresented employees at
both segments—would cost about $90 million
($45 million at each segment).

Pensions
Both Segments Have Unfunded Pension
Liabilities. Similar to most government agencies,
UC and CalPERS (on behalf of CSU) fund pension
benefits by setting aside and investing contributions
made by the employer and employee during an
employee’s career. In past years, these systems
did not fully fund pension benefits earned by
employees. While this underfunding does not affect
the pensions of existing retirees, the state and
universities currently lack adequate funds to fully
pay for pension benefits that today’s employees will
be owed when they retire. Currently, 80 percent of
UC pension liabilities and 70 percent of CalPERS
pension liabilities (including CSU employees) are
funded. In dollar terms, UC’s unfunded pension
liability is $16.6 billion (of which around 30 percent
is associated with core funding) and the state’s
unfunded CalPERS liability is $59.7 billion (with no
CSU-specific breakout available).
State and Segments Have Long-Term Plans
to Address Unfunded Liabilities. The UC Board
of Regents and the CalPERS board have both
developed plans to pay down their respective
pension system’s unfunded liabilities gradually over
time. The plans entail increasing contribution rates
each year. Whereas CalPERS’ long-term funding

www.lao.ca.gov

plan remains on track, UC’s plan has fallen short.
To address the shortfall, UC has borrowed money
(mostly from internal sources), which it is paying
back from its operating budget. To help accelerate
the pay down of unfunded liabilities, the Legislature
in recent years has provided supplemental funding
both for CalPERS and UC’s retirement program.
Pension Costs Set to Increase in 2020-21.
As Figure 5 (on next page) shows, UC and CSU
employer pension costs have grown notably
over the last several years—more than doubling
since 2012-13. The higher pension costs are the
result of (1) salary growth over the period, (2) the
plans developed by UC and CalPERS to address
unfunded pension liabilities, and (3) changes in the
assumptions used to calculate liabilities. (Notably,
both UC and CalPERS have adopted more
conservative investment earnings expectations,
which have led to larger contributions now and
improved the likelihood the funding plans remain
on track.) Based on planned employer contribution
rate increases in 2020-21, we estimate university
pension costs to increase about $105 million
($60 million at CSU and $45 million at UC).

Health Benefits
Universities Subsidize a Portion of Health
Costs for Employees and Retirees. At both
universities, employees receive a subsidy to cover
a portion of health premium costs, with remaining
costs paid out of pocket by the employee or retiree.

7

 2020-21 BUDGET

attributable to core-funded
retirees.

Figure 5

University Pension Costs Expected to Continue Growing
(In Millions)
$1,200
1,000
800

CSU
600
400

UC

200

2012-13

2014-15

2016-17

2018-19

The subsidy is generally calculated by averaging
the cost of the most popular plans among
employees. At UC, lower-income employees receive
a larger subsidy than higher-income employees. For
example, UC covers 94 percent of the average cost
for employees earning $56,000 or less per year
compared to 75 percent for employees earning
more than $167,000. For CSU, which participates
in CalPERS’ health benefit program, employees
generally receive the same subsidy regardless
of salary. Known as the “100/90” formula, CSU
generally pays 100 percent of the average
premium cost for active and retired employees
and 90 percent of the average additional premium
costs for dependents.
Due to Pay-As-You-Go Funding Approach,
Both Segments Have Large Unfunded Retiree
Health Liabilities. In contrast to pension benefits,
the state and the universities do not set aside and
invest funds during an employee’s career for retiree
health benefits. Instead, the costs of these benefits
are funded on a “pay-as-you-go” basis after the
employee retires. Because of this pay-as-you-go
approach, virtually all of the universities’ retiree
health liabilities are unfunded. As of July 2018,
CSU’s unfunded retiree health liability is estimated
to be $13.1 billion. UC’s unfunded liability is
$18.9 billion, of which around 30 percent is

8

2020-21

Health Spending Expected
to Increase in 2020-21. In
2019-20, the state is spending
around $900 million on CSU
employee and retiree health care
costs. UC is spending around
$680 million on health benefit
costs for core-funded employees
and retirees. Based on projected
premium cost increases, as well
as increases in the number of
CSU and UC retirees, we estimate
health benefit costs in 2020-21
will increase around 6 percent
at each segment, resulting in a
combined cost increase of around
$90 million ($55 million at CSU
and $35 million at UC).

FACILITIES AND INFRASTRUCTURE
In this section, we describe two key
facility-related cost pressures: (1) maintenance
and (2) debt service on approved construction and
renovation projects.

Maintenance
Both Segments Have Sizable Maintenance
Backlogs. Like most state agencies, UC and
CSU are expected to dedicate a portion of their
core budgets for facility maintenance, such
as keeping electrical and plumbing systems in
working order. Due to many years of underfunding
maintenance, however, the systems have accrued
billions of dollars in maintenance backlogs.
According to university leadership, the systems
have underfunded maintenance to manage past
budget reductions and ensure operating funds
are available for other budget purposes. CSU
estimates its backlog for maintenance on its
academic facilities and related infrastructure totals
$4.5 billion across its 23 campuses. UC currently
estimates its backlog at $6.2 billion across all ten
campuses, but staff at the Office of the President
believe the estimate is incomplete. UC is currently
in the process of developing a more consistent

L E G I S L AT I V E A N A LY S T ’ S O F F I C E

 2020-21 BUDGET

systemwide estimate, which the Office of the
President expects to release by November 2020.
Segments Are Developing Long-Term Plans
to Address Backlogs. Since 2015-16, the state
has provided a total of $573 million in one-time
funding to help address the systems’ maintenance
backlogs. Despite these recent appropriations,
neither the state nor the universities have long-term
plans to address these backlogs. To better guide
state funding decisions, the Legislature directed
the universities as part of the 2019-20 budget to
develop such plans. CSU is expected to submit its
plan to the Legislature by January 2020. UC has
until January 2021, shortly after it completes its
systemwide facility condition assessment, to submit
its plan.
Deferred Maintenance Is Another Significant
Cost Pressure. Without a long-term plan in
place to address maintenance issues, the state
does not yet have explicit expectations as to
how much the systems should spend in 2020-21
and beyond. Though plans are not yet in place,
addressing maintenance backlogs will continue
to be a significant cost pressure. For example,
CSU estimates it would have to spend about
$360 million more in 2020-21 just to keep its
backlog from growing. While comparable estimates

do not exist for UC, the magnitude of these costs
likely are similar to CSU.

Debt Service Costs
Since 2013-14, Universities Pay Debt Service
Out of Operating Budgets. Prior to 2013-14, the
state sold bonds to pay for larger facility renovation
and construction projects on behalf of the
universities. The state then made the associated
annual debt payments (from the General Fund). The
state changed this approach for UC in 2013-14,
and took a similar action for CSU the following year.
Under the new approach, the universities issue
their own bonds for facility projects and pay back
the debt from their operating budgets. In a related
action, the state shifted a General Fund amount to
the universities’ operating budgets to reflect the
debt service the state had previously paid directly
(around $300 million at CSU and $400 million at
UC). Moving forward, the universities are expected
to pay off all debt—for both previous state bonds
and new university bonds—from their operating
budgets. The universities must receive approval
from the state to fund new projects under this new
process.
Debt Service Costs on Existing Projects Set
to Increase in 2020-21. As Figure 6 shows, debt
service on previously approved state and university

Figure 6

UC and CSU Debt Service Costs Rising in Budget Year
(In Millions)
$350

$350

UC

CSU

300

300

250

250

200

200

150

150

State Bonds

State Bonds
100

100
50

50

UC Bonds
2015-16

www.lao.ca.gov

2016-17

2017-18

2018-19

2019-20

2020-21

2015-16

CSU Bonds

2016-17

2017-18

2018-19

2019-20

2020-21

9

 2020-21 BUDGET

bonds is expected to rise in 2020-21 by about
$100 million ($60 million at UC and $40 million
at CSU). The rising costs are the result of
decisions by the state and universities on what
projects to approve, when to issue bonds, and
how to structure debt payments. The systems
have prepared for these rising costs somewhat
differently. CSU staff indicate that university
leadership anticipated these cost increases in
previous years and set aside funding in reserves
to cover them. UC staff, by contrast, indicate that
the university did not set aside funds for the cost
increase. UC staff suggest the university will cover
costs through one-time internal borrowing.
Segments Proposing a Total of 29 Projects for
2020-21. UC is proposing a total of $551 million
in bond authority for six new projects. Most of
these projects would address seismic deficiencies
and deferred maintenance throughout the system.
Also included in UC’s package of proposals
is $100 million to construct a new building
at UC Riverside’s school of medicine. CSU is
proposing a total of $2.6 billion in bond authority
for 23 new projects. Like UC, many CSU projects
would address seismic deficiencies and deferred
maintenance throughout the system. CSU’s
package of proposals also includes several new
instructional buildings. Though better estimates
likely will be available in the coming months, our
preliminary estimate is that annual debt service
to finance all 29 projects across the two systems
would be about $210 million ($40 million for UC
projects and $170 million for CSU projects).
Seismic Renovation Projects Likely Are
Significant Long-Term Cost Pressure. Seismic
renovation projects focus on upgrading building
support structures and mitigating life-safety risks
from earthquakes. When discussing cost pressures
with our office, staff at both university systems
stated that campuses have substantial backlogs
of seismic renovation projects. To date, though,
neither segment has completed comprehensive
assessments of its buildings’ seismic risks nor
estimated the cost to correct deficiencies. As part
of the 2019-20 budget, the Legislature directed
the segments to undertake these assessments and
develop plans to address their seismic renovation
backlogs. Based upon the limited information

10

currently available, seismic-related costs likely
are significant. For example, UC officials recently
reported that an initial systemwide review identified
around 70 large, high-use classroom buildings that
pose life-safety risks. The total cost of renovating
these 70 facilities likely would range from the high
hundreds of millions of dollars to low billions of
dollars. According to UC, the associated increase
in annual debt service costs likely would range from
the mid-to-high tens of millions of dollars.

ENROLLMENT
In this section, we discuss cost pressures
relating to undergraduate and graduate enrollment.
Enrollment Growth Can Increase Costs
in Three Ways. Enrollment growth is another
significant cost pressure for the universities. UC
and CSU typically respond to enrollment growth by
hiring more faculty, teaching assistants, academic
advisors, and other support staff. Historically
the state has funded these costs by providing
the systems with a General Fund subsidy for
each additional student. Enrollment growth also
increases costs because a sizable portion of new
UC and CSU students qualify for Cal Grants.
Adding more students and faculty also can
increase pressure on the state and systems to
construct new classrooms, teaching laboratories,
faculty offices, and other academic spaces.
These construction projects increase debt service
costs, and the new facilities ultimately increase
the amount of funding needed for operations and
maintenance.
Certain Factors Influence Undergraduate
Enrollment Decisions. Historically, the state’s
freshman eligibility policies have influenced the
Legislature’s decisions about undergraduate
enrollment levels. Under these policies, the top
one-eighth (12.5 percent) of high school graduates
in California are eligible to attend UC and the
top one-third (33 percent) are eligible to attend
CSU. (Those not eligible as freshmen can enroll
in community colleges and then transfer to the
universities as upper-division students.) To ensure
access under these policies, the state has sought
to fund enrollment growth in years when the
number of high school graduates increased. The

L E G I S L AT I V E A N A LY S T ’ S O F F I C E

 2020-21 BUDGET

Legislature also has expected the universities to
adjust their freshman admission requirements such
that they continue drawing from their designated
eligibility pools.

whether funds are to be used for undergraduate
or graduate enrollment. In most of these years,
funds were restricted for undergraduate enrollment
growth.

State Has No Explicit Policy on Graduate
Enrollment. In contrast to undergraduate
enrollment, the state does not have a longstanding
policy that guarantees California students access to
graduate education. In past years, the state has not
specified how enrollment growth was to be divided
between undergraduate and graduate enrollment,
effectively giving the systems flexibility to make
this decision. The systems typically considered
the state’s workforce needs (such as for teachers,
engineers, physicians, and lawyers) when planning
for graduate enrollment. In addition, the systems
have tended to grow graduate enrollment along
with undergraduate enrollment. This is because
campuses rely on graduate students to serve as
teaching assistants in undergraduate courses
and research assistants to new faculty. In recent
years, the state has reversed course by specifying

UC and CSU Enrollment Trends Vary
Somewhat. In 2019-20, CSU is expected to
enroll 394,000 resident students, and UC is
expecting to enroll 228,000 resident students
(Figure 7). These levels reflect all-time highs for
the universities. Enrollment at CSU has grown
steadily since 2010-11, with average annual growth
of 2.1 percent. By comparison, UC enrollment
was virtually flat from 2008-09 through 2015-16,
followed by notable increases the past few years.
The enrollment trends at CSU and UC generally
reflect the Legislature’s enrollment growth
decisions.
Legislature Faces Certain Enrollment
Decisions in Upcoming Budget Cycle. The
Legislature faces a decision about how many
CSU students to fund in 2020-21. For UC, the
Legislature faces a decision about how many

Figure 7

Enrollment Has Increased in Recent Years
Resident Full-Time Equivalent Students
400,000
380,000

CSU

360,000
340,000
320,000
300,000
280,000
260,000
240,000

UC

220,000
200,000
2007-08

www.lao.ca.gov

2009-10

2011-12

2013-14

2015-16

2017-18

2019-20

11

 2020-21 BUDGET

students to fund in 2021-22. The state tends to
set UC’s enrollment targets one year in advance,
as this allows the Legislature to better influence
UC fall admission decisions, which usually occur in
the spring before the state budget is enacted. (UC
will have made its 2021-22 admissions decisions
by spring 2021, before the 2021-22 budget has
been adopted.) We estimate growing enrollment
by an additional 1 percent would cost the state
around $40 million at UC and $45 million at CSU.
(These estimates include the cost to hire additional
faculty and staff and cover the cost of tuition for
students eligible to receive Cal Grants.) To assist
the Legislature in making its enrollment growth
decisions, we discuss four key enrollment drivers
below.
High School Graduates Are Projected to
Dip, Then Rise Slightly. Consistent with historical
practice, the Legislature may wish to consider
adjusting UC and CSU enrollment to keep pace
with changes in California’s high school graduates.
The Department of Finance projects that the
number of public high school graduates in 2019-20
(affecting the incoming fall 2020 freshman class) will
decrease by 0.4 percent, followed by a 1 percent
increase in 2020-21 (affecting the incoming fall
2021 freshman class).
Both Systems Are Drawing From Beyond
Their Freshman Eligibility Pools. According
to a study of the high school class of 2015, UC
was found to be drawing from 14 percent of high
school graduates, somewhat higher than the state’s
historical eligibility expectation of 12.5 percent.
The same report found that CSU was drawing
from 41 percent of high school graduates—
notably higher than the state’s historical eligibility
expectation of 33 percent. Updated information
since the release of this study suggests that the
universities likely are drawing from even larger
pools today. Neither UC nor CSU, however, has
correspondingly adjusted its freshman admission
criteria. To the extent that the Legislature wishes
the universities to draw from their historical pools of
high school graduates, additional enrollment growth
funding is not warranted.
Many Eligible Undergraduate Students Are
Referred to Less Selective Campuses. While
eligible students are guaranteed admission to UC

12

and CSU, they are not guaranteed admission to
a specific campus. Both systems refer eligible
students who are not admitted to their campus of
choice to a lower-demand campus with remaining
space. Historically, relatively few applicants choose
to enroll at a campus to which they have been
redirected. Supporting more enrollment growth
could enable both systems to accommodate
more applicants at their campus of choice. The
Legislature could weigh this benefit against the
other cost pressures described in this report.
More Undergraduate Enrollment Could
Increase Pressure for More Graduate
Enrollment. Were the Legislature interested
in funding more undergraduate students, the
universities would likely experience pressure to
fund more graduate student assistants to support
the additional undergraduate courses and faculty.
Currently, UC enrolls around six undergraduate
students for every graduate student. At CSU, the
ratio is around ten undergraduate students to every
graduate student.

OTHER COST PRESSURES
In this section, we analyze other major pressures
to expand the level and scope of university
services.
Recently, Pressure Has Mounted to Hire
More Faculty. As Figure 8 shows, UC’s and CSU’s
overall student-to-faculty ratio has increased
slightly since 2003-04—both rising from 21 to
22. At CSU, the mix of faculty has also changed
over the years, with the system relying less on
tenured/tenure-track faculty and more on lecturers
to deliver instruction. In 2003-04, CSU had 31
students for every tenured/tenure-track faculty.
By 2017-18, the number of students per tenured/
tenure-track faculty had risen to 40. The increase
in the ratio of tenured/tenure-track faculty at
UC has been much more gradual than at CSU.
In response to the trend at CSU, the 2018-19
and 2019-20 budget packages directed CSU to
prioritize hiring more tenure-track faculty with its
state funding augmentations. Though the UC Office
of the President has regularly requested funds to
hire more faculty and reduce its student-to-faculty

L E G I S L AT I V E A N A LY S T ’ S O F F I C E

 2020-21 BUDGET

ratio, the state has not directed UC to prioritize
state funding augmentations for this purpose.
State Continues to Focus on CSU’s
Graduation Initiative. In an effort to boost
historically low graduation rates at CSU campuses,
the state over the past several years has provided
ongoing and one-time augmentations for the
system’s Graduation Initiative. This initiative aims
to increase four- and six-year graduation rates
for freshmen to 40 percent and 70 percent,
respectively, by 2025. (For comparison, CSU’s
four-year rate historically has been below
15 percent and its six-year rate below 50 percent.)
While campuses have flexibility on how to spend
their funds, most use their funds to hire additional
faculty, offer more course sections in high-demand
areas, and provide more student support services.
Currently, CSU is spending $243 million annually
in ongoing funding on the initiative. As boosting
CSU student outcomes likely remains a statewide
priority, the Legislature may face pressure to
identify funding to further expand the initiative in
2020-21.
Legislature Likely to Remain Interested in
Reducing Nonresident Enrollment at UC. In
response to concerns that nonresident students are
displacing resident student at selective campuses,
the Legislature the past few years has sought to

limit nonresident enrollment at UC. Specifically,
in 2017-18, the Legislature directed the Board of
Regents to develop a policy limiting nonresident
enrollment at each campus, and, in 2018-19, the
Legislature directed UC to estimate the cost to
reduce nonresident enrollment. UC submitted its
plan in April 2019, which would start in 2020-21
and eventually reduce nonresident enrollment to
10 percent of entering freshmen by 2029-30 at
each campus. UC estimates the annual cost to
attain this reduction—resulting from replacing the
foregone nonresident supplement tuition revenue
and enrolling more resident students—would
increase from an initial $8 million in 2020-21 to
$455 million by 2029-30. The state did not formally
commit to funding this plan in the 2019-20 budget.
State Recently Has Signaled Interest in
Supporting Student Hunger, Homelessness,
and Mental Health Initiatives. In recent years, the
universities and the state have sought to address
a number of nonacademic issues facing students.
According to survey data, more than 40 percent
of undergraduate students at CSU and UC have
experienced food insecurity (defined as having
low food intake and/or lack of variability in diet).
A smaller share of students—about 10 percent
at CSU and 5 percent at UC—have experienced
homelessness. Campuses have also experienced

Figure 8

Overall Student‑to‑Faculty Ratios Have Increased Slightly
Ratio of Full-Time Equivalent Students to Full-Time Equivalent Faculty
UC

CSU

45

45

40

40

35
30

Tenured/Tenure-Track Faculty Only

25

35
30
25

20

20

All Faculty

15

10

5

5
2010-11

All Faculty

15

10

2003-04

Tenured/Tenure-Track Faculty Only

2017-18

2003-04

2010-11

2017-18

Notes: Due to availability of data, UC’s ratios reflect faculty and students over the fall through spring terms, whereas CSU’s ratios reflect instruction in the
fall term only. UC’s ratios exclude students and faculty in the health sciences.

www.lao.ca.gov

13

 2020-21 BUDGET

a notable rise in demand for on-campus student
mental health services. For example, UC reports
a 78 percent increase in students visiting a
campus counseling center between 2007-08
and 2017-18. During the same period, overall
enrollment increased by 27 percent. In 2019-20,
the Legislature provided a total of $30 million in
ongoing funding and $18 million in one-time funding
for hunger, homelessness, and mental health
initiatives at UC and CSU. Given the reported scale
of these issues among students, the Legislature
could face pressure to provide additional funding to
expand services in 2020-21.
State Exploring Possible New Campuses and
Medical Schools. At CSU, the 2019-20 budget
provided $4 million one-time General Fund for the
Chancellor’s Office to study whether to develop
new campuses in several specified areas of the

state. Provisional language requires CSU to submit
the results of the study to the Legislature by July
2020. At UC, the 2019-20 budget authorized
a new medical school project at or near the
Merced campus, presumably with the intention
of opening a medical school at that campus. The
budget did not set a deadline for UC to submit
a specific project proposal to the Legislature.
Because new campuses or medical schools will
require future authorization and implementation,
the Legislature does not face immediate costs in
2020-21. Nonetheless, the Legislature may wish to
keep these projects in mind as it sets its ongoing
budget priorities in 2020-21. Were new campuses
or medical schools to be approved over the next
few years, the resulting cost increases would
be substantial, with significant long-term fiscal
implications.

KEY PLANNING ISSUES
In this section, we examine the extent to which
the state General Fund budget has capacity to
cover UC and CSU cost pressures in the budget
year. We end the section by identifying three
options within the universities’ budgets to expand
this capacity.

Implications of State Fiscal Outlook
for Universities
In 2020-21, State Might Have a Sizable
Budget Surplus . . . In our recent report, The
2020-21 Budget: California’s Fiscal Outlook, we
assess the state’s General Fund condition for the
upcoming 2020-21 fiscal year. If economic growth
were to continue at our assumed levels, we
estimate the state in 2020-21 would have enough
funds to cover cost increases for its current level
of services. For the universities specifically, we
assume the state covers inflationary increases in
salaries, pensions, health care, facility debt service
costs, and other operating expenses (Figure 9).
After covering these increases and increases
to other state programs, we estimate the state
would have a $7 billion surplus. The surplus would
be available for addressing legislative priorities

14

across all areas of the budget. (As discussed
in the nearby box, we made certain inflationary
assumptions in projecting university costs. A
different set of assumptions would affect the size
of the state’s estimated operating surplus.)
. . . But Limited Capacity for New Ongoing
Spending Commitments. While $7 billion reflects
a sizable projected surplus, we have identified
numerous risks to the state’s budget condition.
For example, our growth scenario assumes the
federal government approves a state policy
intended to draw more federal funding for state
health programs. Were the state not to receive
federal approval, General Fund costs would
rise notably. Furthermore, state revenues would
fall were the state to experience an economic
recession. Given these risks, we strongly
encourage caution when making decisions about
new ongoing spending. As a rule of thumb, we
recommend the Legislature limit new ongoing
spending commitments across all areas of the
state budget to around $1 billion. The Legislature
likely would want to consider UC and CSU
enrollment growth, expansion of services, and
new programs within the context of all the other
possible calls on this $1 billion. A particularly

L E G I S L AT I V E A N A LY S T ’ S O F F I C E

 2020-21 BUDGET

Figure 9

Assumptions Underlying Our Fiscal Outlook for the Universities
LAO Assumptions for 2020-21
What Our Outlook Assumes:
Salary increases (around 3 percent).
Pension cost increases (assuming CalPERS and UC-adopted rate increases).
Employee and retiree health increases (premium increases of around 5 percent).
Debt service adjustments at UC.a
Other operating and equipment cost increases (around 3 percent).

What Our Outlook Does Not Assume:
Enrollment growth.b
Additional funds to address liabilities.
Programmatic enhancements and other policy changes.
Resident tuition increases.c
a C SU intends to cover these costs using existing funds.
b Assumes no enrollment growth beyond what was already authorized in the 2019-20 budget.
c For UC only, assumes 5 percent increases in the Student Services Fee and the nonresident supplemental tuition charge.

University Forecast Depends Upon Certain Assumptions
In developing our fiscal outlook each year, our office must decide how to project future cost
increases in existing operations. This year for the University of California and the California State
University, we projected growth in salaries and “other operating expenses” (such as supplies,
utilities, and contracts) using a composite inflationary index reflecting changes in consumer
prices and state economic output. Using this composite index, we assumed salary and other
operating expenses grow by 2.8 percent in 2020-21. For employee benefit cost increases, we
projected growth based upon recent state actuarial assumptions regarding pension contribution
rates and health premium increases.
Using different assumptions than we made would result in a different estimate of the state’s
operating surplus. For example, the state and universities could fund salary increases higher or
lower than 2.8 percent in 2020-21. The universities’ actual employee benefit costs in 2020-21
also could be higher or lower than we assume. Furthermore, the Legislature could decide not
to adjust other operating expenses for inflation. Historically, the state has not provided direct
adjustments for these operating costs, though it sometimes has provided indirect increases by
applying a percent increase to the universities’ total budgets.

challenging part of the upcoming budget season
could be deciding how to prioritize these
additional university cost pressures among all the
state’s other ongoing spending priorities.
Recommend Legislature Focus on
Addressing Unfunded Liabilities. After making

www.lao.ca.gov

ongoing spending decisions, the remaining surplus
would be available for larger state reserves,
accelerated debt payments, and other one-time
commitments. After making its decisions about
reserves, if the Legislature wishes to direct some
of the state’s remaining surplus to the universities,

15

 2020-21 BUDGET

we recommend it give high priority to addressing
existing unfunded liabilities, including the
universities’ unfunded pension and retiree health
care liabilities, facility maintenance backlogs, and
seismic renovation backlogs. The Legislature could
designate one-time funds for these purposes,
though ultimately the Legislature likely would need
to provide funding over many years, and in some
cases increase ongoing support, to eliminate
the liabilities and backlogs. Addressing existing
liabilities is essential to ensuring the state’s and
universities’ long-term fiscal health. As with
virtually all unfunded liabilities, addressing them
is costly and difficult in the short run, especially
as the state faces many other competing
cost pressures. In the long run, however, not
addressing liabilities results in even higher costs—
pushing even more difficult situations onto future
generations.

Other Options for Addressing Cost
Pressures
Three Other Options for Addressing Cost
Pressures. The Legislature has options within the
universities’ budgets that would allow it to expand
budget capacity and address additional cost
pressures or reduce the amount of state funding
required to address identified priorities. Below, we
discuss three such options—raising tuition levels,
pursuing efficiencies in university operations, and
using university reserves to meet strategic goals.
Raising Tuition Levels Would Help Address
Additional Cost Pressures. Recognizing the
private benefit from earning a college degree, the
state implicitly shares college costs with students
through their tuition charge. The state does not
have a formal policy, though, for what share of
cost nonfinancially needy students should be
expected to bear. Since emerging from the last
recession, the state generally has kept tuition flat
and elected to cover virtually all approved ongoing
cost increases from the state General Fund. For
the purposes of our fiscal outlook, we assume
the state continues this practice. That is, we
assume UC and CSU do not adopt increases to
resident tuition levels. (We did assume UC adopts

16

a 5 percent increase in the Student Services Fee
and the nonresident supplemental tuition charge,
also consistent with past actions.) While the state
budget appears to have the capacity to support
some university cost increases without a tuition
increase, raising tuition would allow for other
university cost pressures to be addressed. We
estimate that every 1 percent increase in tuition
generates associated revenue of about $15 million
at UC and $10 million at CSU. (These estimates
reflect the amount of funding available after
providing Cal Grants and university-administered
financial aid to financially needy students.)
Additional Efficiencies Would Help Address
Cost Pressures. In recent years, the state
has sought to find efficiencies in the university
systems that would help offset cost increases.
For example, the universities have been pursuing
changes in their procurement practices that have
reduced some of their ongoing operating costs,
freeing up funding for other ongoing purposes.
The state also could avoid certain long-term
capital costs by directing the universities to use
their existing facilities more intensively, offer more
online instruction, and expand the use of summer
term. The magnitude and timing of savings
resulting from these efficiencies would depend
upon which of these options were pursued.
Use of Campus Reserves Could Be Part
of Strategic Plan for Covering Costs. Another
approach to expanding budget capacity is
to factor UC and CSU campus reserves into
budget decisions. While campuses already have
committed a sizable portion of their reserves
for certain future costs, potentially hundreds of
millions of dollars remain available. In preparation
for a future economic recession, the Legislature
could allow campuses to maintain and expand
these reserves in 2020-21. Such an approach
would add to the state’s total level of reserves
and strengthen the state’s and campuses’ ability
to withstand a future downturn. Alternatively, the
Legislature could direct campuses to use some
of their reserves in the budget year to address
specified cost pressures (such as deferred
maintenance) on a one-time basis.

L E G I S L AT I V E A N A LY S T ’ S O F F I C E

 2020-21 BUDGET

CONCLUSION
This report has sought to identify university cost
pressures facing the Legislature in the budget
year. The report also has suggested a framework
for addressing some of these cost pressures
in light of the state’s overall fiscal outlook and
discussed risks to the General Fund. Moreover, the
report has identified a few options for expanding
budget capacity, including by raising tuition and

www.lao.ca.gov

pursuing operational efficiencies. Over the coming
months, the Legislature will be weighing in on all
these matters. Upon release of the Governor’s
budget in early January, we will turn to analyzing
the Governor’s specific budget proposals for UC
and CSU. Until that time, the Legislature can be
proactive in considering its highest budget priorities
for UC and CSU.

17

 2020-21 BUDGET

LAO PUBLICATIONS
This report was prepared by Jason Constantouros and Paul Steenhausen and reviewed by Jennifer Kuhn Pacella. The
Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the
Legislature.
To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are
available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento,
CA 95814.

18

L E G I S L AT I V E A N A LY S T ’ S O F F I C E