Mandatory Costs

• Compensation, $9,500,000
• 2004/05 Health Care Premium Increase, $25,980,000
• New Space, $3,101,000
• 2004/05 Insurance Premium Increases, $14,958,000
• 2004/05 Energy Cost Increases, $3,936,000

Compensation, $9,500,000

The 2004/05 Support Budget request includes $9.5 million to cover the faculty service salary increase (SSI) effective June 30, 2004. As indicated below, this SSI represents the final fiscal impact of the faculty 2001/02 through 2003/04 collective bargaining agreement (CBA) that was approved by the CSU Board of Trustees in May 2002.

When mandatory compensation costs are not funded, CSU’s ongoing operational budget is negatively impacted, and the budget base is further eroded. In 2003/04, $32.8 million unfunded mandatory compensation costs were absorbed. This included $29.9 million unfunded mandatory compensation costs associated with the faculty three-year CBA, and $2.9 million unfunded mandatory compensation costs for non-faculty. The 2004/05 mandatory compensation funding request is needed to avoid further erosion to the CSU operational budget.

2004/05 Health Care Premium Increase, $25,980,000

CSU employee health care benefits are administered by the California Public Employees’ Retirement System (CalPERS). CalPERS offers a selection of Health Maintenance Organizations (HMOs) and fee-forservice plans to its enrollees. Health care premiums are shared between the CSU and employees with the CSU funding a significant portion of the premium costs. The 2004/05 CSU budget plan includes a $25.9 million increase in employer health care costs. Health care cost increases are based on the difference between the old and new employer paid contribution rates for enrolled employee participants with health benefit coverage for one party, two party, or a family. While the 2004 CSU employer paid health care contribution rate (based on the Government Code) of increase has declined from the 2003 rate of increase, the CSU will again incur a significant increase in health care costs in 2004. As the following table indicates increases in CSU health care costs due to premium changes since 2000 is approximately $87.4 million.

Government Code Section 22825.1 defines how health care premium rates are calculated. Rates are based on the weighted average cost of the four largest health benefits plans. CSU collective bargaining unit agreements designate Government Code premiums as the CSU employer health contribution rate with the exception of Unit R06, which has coverage above Government Code rates of $5 for one party, $10 for two party, and $20 for family. The following tables provide the Government Code health care premium rates over the past five-year period and the total increase in rates since the year 2000.

The current CSU employee health care provider choices include HMO’s Blue Shield of California, Kaiser Permanente, and Western Health Advantage, as well as fee-for-service plans (PERSCare and PERS Choice Preferred Provider plans with associated plans). While employer paid health care contribution rates will increase considerably in January 2004, most employee participants will not realize an increase in contribution rates. For many, employee contribution rates for most health care provider selections will remain near constant or may decline, whereas the fee-for-service PERSCare plan employee contribution rates will likely increase.

In addition to not receiving compensation funding in 2003/04, CSU also did not receive mandatory health care funding. In 2003/04, $37.1 million unfunded mandatory health care costs were absorbed by the CSU, which negatively impacted CSU’s operational budget. The 2004/05 mandatory health care funding request for $26 million is needed to avoid further erosion.

This 2004/05 budget request includes additional CSU health care funding to cover increases for the fiscal year beginning July 1, 2004; however, the new health care rates are effective January 1, 2004. Therefore, the CSU will also incur unfunded, one-time mandatory costs during the first half of the 2004 calendar year in the amount of $13 million.

New Space, $3,101,000

CSU is scheduled to open approximately 430,685 square feet of new space in 2004/05. Funding for this new space will be provided at $7.20 per square foot. This equates to $3,101,000 in permanent base budget support for regular maintenance. Regular maintenance includes the cost for utilities, building maintenance, custodial, landscape and administrative support.

As reported in previous Support Budget documents, the CSU has been reviewing industry standards to increase the current rate of funding for new space. A final methodology has not been established. Beginning in fiscal year 2003/04, the CSU adjusted the old rate of $6.45 per square foot to $7.20 per square foot based on the cumulative change in the California Consumer Price Index (CA-CPI). CSU used the inflationary index absent a new standard based on current industry norms and projections.

Although the CSU does not intend to increase the new space funding rate by the change in California’s inflation each year, there is consensus that the $6.45 per square foot rate iÍs no longer providing an adequate base for opening and operating a new building or for mitigating growth in the CSU deferred maintenance backlog. Although CSU efforts to maintain its funded ongoing maintenance budget has been successful, the CSU deferred maintenance need continues to grow because the cost of critical repairs in older buildings exceeds the average funding available for on-going maintenance. Consequently, delays in the scheduled repair of building space five years old or less offset some of the gains that are made as critical repairs occur in older buildings. Current information provided by the campuses indicates the $7.38 per square foot cost standard CSU currently expends for ongoing maintenance should be more appropriately budgeted at $8.39 square foot. Campuses use productivity and efficient management of available resources to satisfy this unfunded need.

2004/05 Insurance Premium Increases, $14,958,000

The CSU Risk Management Authority (CSURMA) risk pool program includes liability insurance, industrial disability leave/non-industrial leave/unemployment insurance (IDL/NDI/UI), workers’ compensation insurance, and property insurance. Prior to 1995/96, the CSU systemwide office paid all related claims and expenses. Beginning in 1995/96, the CSU Risk Management Authority risk pool was established and campuses assumed accountability for liabilities. The risk pool was developed to encourage participatory campus risk management while sharing liability costs. CSU systemwide funds ($14.2 million) were permanently allocated to campuses to establish the risk pool. Since that time campuses have assumed total responsibility for increased liability insurance costs. In 2001/02 and 2002/03, additional subsidies ($2.2 million) were provided to campuses to offset rising property insurance costs.

The cost to fund the 2004/05 CSURMA risk pool program is $70.8 million, an increase of $14.9 million from the prior year. The risk pool cost components include claims paid and incurred, claims’ administration, litigation expenses, program administration and reinsurance. The CSURMA risk pool funding in 2004/05 for workers’ compensation ($47.6 million) is 41 percent above projected 2003/04 costs. While the number of workers’ compensation claims has increased slightly (2,027 in 2002/03 versus 1,887 in 2001/02), the cost per claim has increased substantially. Workers’ compensation insurance costs are escalating due to litigation, inflation of medical costs, and increased benefits. The increase in benefits costs is attributable to recent legislation (AB 749) effective January 1, 2003. Increased benefit costs incurred will include higher benefit minimums in 2003, 2004, and 2006, greater death benefits, and annual cost-of-living adjustments.

Although CSU workers’ compensation costs are increasing significantly, CSU rates have not risen as quickly as rates on a Statewide basis and CSU has benefited from self-insuring. Rates produced by the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) and approved by the State insurance commissioner represent a 53 percent increase in pure premium (claim and legal costs) from January 2002 through January 2003 (compared to CSU’s 21 percent increase). CSU’s pure loss cost rate for 2003/2004 is projected by the independent actuary at $1.23 per $100 of payroll compared to the WCIRB’s rate of $3.03 for colleges and universities.

The CSU 2004/05 Support Budget includes $14.9 million to increase campus base budgets to offset increased self-insurance costs.

2004/05 Energy Cost Increases, $3,936,000

Energy costs associated with electricity, natural gas, and water/sewer are projected to increase in 2004/05. The total increase of $3.9 million is broken down by utility type below:

CSU systemwide electricity consumption has declined due to effective energy conservation efforts and the direct benefit of campuses having cogeneration plants. The increase of $750,000 is related to the higher cost being charged for the transmission of electricity to the campuses.

The majority of the natural gas cost is related to a projected increase in consumption of 12 percent. The consumption increase can be attributed to cogeneration plants coming on line. In addition there is a 1.5 percent rate increase projected for 2004/05.

The water/sewage increase of $700,000 is related to a forecasted 1.5 percent increase in rates.