Sunday, January 11, 2004

The Devils in the Details:
A Closer Look at the Governor’s Budget
Plan for the California State Universities

It looks bad enough on the surface. According to the press release from system headquarters: “Governor Arnold Schwarzenegger proposed cutting $240 million or 9 percent from the California State University system for the 2004-05 fiscal year, potentially limiting student access by approximately 20,000 students if the cuts are implemented as proposed.”

But a careful reading of the budget documents shows that this cut is only the first step in a multi-year plan to trash the nation’s largest university system. The 23 campuses of the CSU make up the second tier of California’s uniquely fragmented Master Plan for public higher education: the more prestigious University of California draws the top one-eighth of the state’s high school graduates, while the CSU admits students who are in the top one-third. The numbers are colossal: 23,000 faculty (11,700 full-time professors, and almost as many part-time instructors) teach more than 400,000 students (335,000 “full time equivalents”, if part-time students are counted as fractions), supported by a staff of 20,000 and 1,400 administrators. The CSU campuses award more than 75,000 diplomas every year, including 14,000 masters’ degrees, and prepares over half of California’s teachers, 40% of its engineers and almost half of its business graduates.

The cost for all this? Setting aside self-supporting operations such as student housing, parking, bookstores, contract research and the like, the CSU cost California’s general fund $2.697 billion in budget year 2002-03, while a further $818 million came from student fees. The general fund money pays 75% of the cost, because the CSU schools lack capital endowments: investment earnings and alumni giving each cover less than 1% of the operating budget. The annual cost per student has recently averaged about $11,000, but the price charged to students has only been 20% of the cost. Indeed, half the students receive financial aid grants or loans, and the total amount of grants and loans exceeds the total fees paid. The real cost of being a student is not fees or room and board – it is the current income forgone when time is spent studying and learning for the future rather than working for pay in the present.

This pattern – where the cost to the college is greater than the price to the student, and the price to the student is less than the real cost to the student – is typical in US higher education. The economics of higher education are different from those of a soybean market. These subsidies are not a wasteful tampering with market mechanisms, but an investment in the general social benefit of an educated workforce and citizenry. Because an individual student does not capture all the economic benefit of college – a classic example of “market externalities” -- investment in higher education would be inefficiently low in the absence of subsidies.

Governor Schwarzenegger, it is safe to say, understands none of this. His benign ignorance lets his appointees push their own notions of policy in the belief they are "working towards the Governor." This has permitted Donna Arduin, the new Director of Finance imported from Jeb Bush’s Florida, to construct a budget plan based on an ideological distaste for public spending on higher education. In November, Arduin conducted an “audit” (any CPA would blanch at this misuse of the term) so as to appear to follow through on Arnold's campaign promise to solve California’s budget problems in a painless way by uncovering “fraud and abuse”. The ‘audit’ findings are included in the new Budget Summary, and guess what? There’s no finding of fraud or abuse at UC or the CSU. The findings are : “that university fees are generally low compared to their value to students and by comparison with other states” and that “subsidies for graduate and professional students are currently too high.” The ‘audit’ has uncovered the obvious: California subsidizes higher education, has done so for over a century, and has done so for good reasons of public policy. The claim that these subsidies are too high is a personal value judgment masquerading as an audit finding. “Too high” -- compared to what? What is it worth to California to have an educated workforce and citizenry in a competitive world? Ms. Arduin does not say.

This is the cynic’s approach to budgeting: measure all the prices and leave out all the values. The budget analysis never compares costs with results, but instead offers a laundry list of cuts aimed at making the CSU poorer, more crowded, more costly, more restrictive, more chaotic and permanently crummy. Or, in budget-speak, “applicable policy solutions that will help the state achieve significant cost reductions in these institutions.”

Big picture: the Budget cuts general fund support for the CSU by $212,000,000. That equals the amount it costs to run a university the size of San Jose State – with Sonoma State tossed in as small change. The Budget raises student fees by $101 million – or $150 million, depending on whether we believe page 70 or page 73 – and the state won’t increase financial aid to compensate. Next year’s freshman class will be 10% smaller, because 4,000 eligible students will be “diverted” into the community colleges. CSU will have to scratch on its own to find $40 million needed to cover an increase in the cost of health and liability insurance. Faculty and staff may have 1% of their pay nibbled away so the state can reduce its contribution to their pension plan. And get ready for more of the same for the next year, too.

Governor Schwarzenegger is a man of good intentions. It looks like his little helpers are paving the way for an interesting ride.

Marshmallows, anyone?

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