2006/07 Support Budget

Marginal Cost Calculation Review

Supplemental Report Language of the 2005 Budget Act required:

The Department of Finance (DOF) and the Legislature Analyst’s Office (LAO) shall convene a working group including the University of California and the California State University (CSU) to (1) review the current process of determining the marginal cost of each additional full-time equivalent student and (2) examine possible modifications to that methodology for the 2006-07 budget.

As a result of the above, the CSU submitted the following proposal to revise the funding methodology for higher education enrollment growth to the DOF and the LAO.

CSU Higher Education Enrollment Funding Proposal

Following 10 years of funding under the marginal cost methodology for higher education adopted by the governor and the legislature in 1995, the CSU finds changes in the state’s enrollment funding process are needed for the following reasons:

  • The salary rate identified in the marginal cost methodology for new hires (Assistant Professor, Step III) is (1) no longer applicable based on collective bargaining contracts negotiated with CSU faculty—the CSU currently hires under a salary range, not step; (2) cannot be adjusted to reflect the cost of hiring new faculty because change in the CSU salary schedule is linked to change in CSU compensation; and (3) does not recognize the actual cost to hire new faculty.


  • The Student to Faculty Ratio (SFR) used in the methodology does not reflect the optimal level of instructional support students require, but rather is a reflection of average SFR the CSU and the University of California (UC) had to impose to counter higher education funding reductions in the early 1990s.


  • The graduate unit load under the methodology is set at 15 units for a full-time graduate student whereas the unit load associated with full-time graduate study is set at 12 units for the UC and generally all of the CSU public comparison institutions, as well as graduate schools nationally.


  • Average cost discounting to determine the marginal cost of instruction for new students was arbitrarily set to achieve a pre-established funding threshold.These arbitrary discounts were premised on the assumption that average program costs identified in the methodology would reflect full-funding need identified by the universities for the current year. However, both the CSU and the UC have experienced substantial reductions in General Fund support between 2002/03 and 2005/06 that were only marginally offset by large increases in student fee rates. Further, critical shortfalls in funding areas essential to the instructional program (instructional equipment replacement and libraries, for example) have eroded average cost funding by amounts that duplicate discounting used to determine marginal funding support for enrollment growth.


  • No cost component is currently authorized to fund the marginal increase in facilities maintenance and operations required as student enrollment increases.

RECOMMENDED ACTIONS: The following actions are recommended to address deficiencies in California’s marginal funding methodology for enrollment growth at the CSU and the UC:

  1. Use Average Cost per Student to Fund Enrollment Growth

    Additional Cost to State - $14.4 Million
    • Use average new hire faculty salary rate


    • Use 12 units to define full-time graduate student


    • Eliminate current discounts for fixed costs


    • Include funding component for plant maintenance


  2. Base Student-to-Faculty Ratio on Historically Budgeted Standard

    Additional Cost to State to Lower SFR - $2.3 Million


  3. Fund Graduate FTES at 12 Units

    Fund Graduate FTES at 12 Units

    Additional Cost to State for Base Graduate Enrollment - $24.2 Million

    Total Additional Cost to the State - $40.9 Million

    Total Additional Cost to State

Because the marginal cost methodology is being reviewed in consultation with the UC, the Legislative Analyst’s Office and the Department of Finance, the CSU recognizes that negotiations may result in findings and recommendations to the legislature that differ from these recommended actions.The CSU welcomes this opportunity to discuss recognized deficiencies in the current marginal cost funding methodology and intends to work cooperatively with all parties to ensure a reasonable and effective funding model is developed to address the instructional needs of students attending the CSU and the UC.

CSU Enrollment Funding Recommendation

CSU Enrollment Funding Recommendation

Due to the state budget reductions that resulted in the loss of more than $500 million in operating support from 2002/03 to 2004/05, as well as structural deficiencies that resulted from the budget shortfalls of the early 1990s, the average cost expenditures for the instructional program areas currently used to determine marginal cost funding at the CSU already reflect significant discounting in general operating costs as well as for fixed-cost components typically associated with marginal discounting (e.g., equipment, administrative services).

Further, discounts currently used in the methodology are arbitrary and cannot be justified by any funding standard or established definition for what constitutes a fixed-cost for instructional programs. In addition, it can be argued that although fixed costs—however defined—would not grow proportionally with enrollment growth, there are enrollment thresholds that trigger increased expenditures for fixed costs. These thresholds are not recognized in the current marginal funding methodology.

The current methodology also does not recognize additional costs for plant operations and maintenance associated with enrollment growth.The average cost per student budgeted in 2005/06 for plant operations and maintenance is $1,193 per full-time equivalent student (excluding debt-service costs and using the proposed revision in unit load for CSU graduate enrollments). These costs do increase proportionally with student enrollment growth, and if not recognized on a full-time equivalent basis for enrollment growth funding, these costs should otherwise be funded for each additional student enrolled.

Removing current discounts for determining marginal cost funding would allow the CSU to address the exacerbation of structural deficiencies as enrollments grow.

 

The CSU would also revise the teaching assistant cost component to reflect the actual costs of hiring and student-to-teaching-assistant ratios. The current methodology is based on a percentage of total faculty salary and benefits costs.

Changing the graduate unit load for a full-time student to 12 units would be consistent with the way the state funds graduate enrollment at the University of California and would be consistent with the graduate unit load for full-time students at the majority of the CSU’s public comparison institutions. The impact of the change would be to lower the average costs per student, while increasing the number of students that would require funding support.

The CSU assumes the state will continue to recognize the actual cost of new hires adopted in the 2005/06 budget process for enrollment growth. Using the CSU salary schedule to identify new hire costs has proven to be inherently flawed, as explained in the section that follows.

CSU Recommended Changes In Current Marginal Cost Methodology

Use the Average New Hire Faculty Salary Rate for the Previous Fall Term

The average hiring cost for new faculty at the CSU since 2001, by rank, at the start of the fall term is presented below:

Average New Hire Faculty Salary Rate

By comparison, the annual cost of CSU average new hires significantly exceeds the Assistant Professor, Step III salary rate in the CSU Salary Schedule, which was $44,796 in fall 2001 and has been $45,696 from fall 2002 to the present. Even if the entire average compensation pool increase of 3.5 percent the CSU has budgeted for 2005/06 was applied to the current salary schedule rate for Assistant Professor, Step III, the marginal cost rate for new faculty hires under the current funding methodology would only be $47,295 —more than $12,000 less than it actually costs the CSU to hire new faculty, on average.

Since the start of the 1999/2000 fiscal year, the CSU eliminated step hires for new faculty and negotiated salary ranges by faculty rank as part of the faculty collective bargaining agreement. Currently, the range for hiring assistant professors at the CSU (since 2002/03) is $43,600 to $82,000 per academic year. Within this range, the average cost of new hires is as shown on the previous page. However, there was no mechanism to recognize this change formally in the marginal cost methodology.

The CSU recognizes the state’s interest in separating CSU collective bargaining from the state budget process. The CSU supports this separation and has consistently requested that authority granted under the Higher Education Employee-Employer Relations Act (HEERA) to engage in collective bargaining with its represented employee groups be recognized by the state as budget plans and decisions are developed each year. However, the issue of faculty salary costs for new hires has little to do with collective bargaining and everything to do with market-driven hiring costs in a competitive national faculty market, the cost of living in California’s university communities, and resource availability under the state’s revenue-driven funding process for higher education.

Consequently, if the state’s commitment to hire new faculty in accordance with tenure-track guidelines that have been established through policy and/or intent is to be achieved, the CSU recommends that the actual cost of new hires in the previous budget year be used to reflect the marginal cost need to fund enrollment growth. Marginal cost funding has to address the needs for both undergraduate and graduate instruction, and a funding rate tied to the Step III salary rate for assistant professors constrains the CSU’s ability to respond to and manage effectively enrollment demand.

Adjust Student-to-Faculty Ratio to Recognize Historical Funding for the Mode and Level of Instruction

During the 27 years the CSU received mode and level funding for enrollment, which recognized faculty need weighted for the type of instruction provided (lecture, laboratory, etc.) by level of student served (lower division, upper division, graduate), the average student-to-faculty ratio (SFR) was 17.4 full-time equivalent students for each full-time instructional faculty member. When the marginal cost methodology currently used to fund enrollment growth was negotiated, the SFR funding component was developed based on the average of reported SFRs for the 10 years preceding fiscal year 1995/96.

CSU Student-to-Faculty Ratio Averages

The decision to ignore a standard level of faculty support tied to the mode of instruction and level of students served (as recognized in previous state funding formulas for enrollment) created a structural deficiency that impacted the CSU’s ability to manage enrollment growth to meet the demands of California’s workplace and student’s educational goals. Demand for academic programs that require lower SFRs and that are critical to California’s economy—such as nursing, agriculture, education, engineering, and health professions—either could not be met or had to be managed down to levels that could be supported at the higher SFR required by the marginal funding methodology.

In fiscal year 2003/04, 14 of the 25 reported CSU academic course disciplines (approximately 60 percent of all course disciplines offered) had an SFR that was lower than the marginal cost SFR provided for enrollment growth.

The CSU recommends that the state fund enrollment growth at a student-to-faculty ratio that reflects historical budgeted mode and level rates (17.4 to 1, on average). Funding enrollment at the lower SFR would increase the cost to the state by $2.3 million above the average cost funding proposal identified in Table 1 on page 34.

CSU Course Discipline

Change CSU Graduate Unit Load from 15 Units to 12 Units to Define a Full-Time Equivalent Student

State Cost to Recognize Unfunded 2003/04 Base Enrollment - $24.2 million

State Cost to Recognize Unit Load Differential for 2006/07 Enrollment Growth - $2.0 million

The current marginal cost calculation for enrollment growth does not recognize unit load for graduate study at the CSU.The formula assumes CSU enrollment for a full-time equivalent student is 15 units per academic term, the same unit load that defines a full-time undergraduate student. The national standard for graduate study and the standard used in the marginal cost calculation for the University of California is 12 units per academic term. The unit load standard for defining a full-time graduate student at the majority of the CSU’s public comparison universities used by the California Postsecondary Education Commission is 12 units.

The cost of this disparity in the CSU’s full-time graduate unit load has been $24.2 million since 1992/93, the last year mode and level funding was recognized by the state in the CSU budget process. The cost was calculated by taking the difference between the graduate enrollment recognized through mode and level funding in the 1992/93 budget process and the unrecognized increase in graduate level instruction in 2003/04 (college year enrollment by level for 2004/05 is not available at this time).

 

Cost to CSU of Graduate Unit Load Disparity

1992/93 Graduate FTES Enrollment recognized through Mode and Level Funding Calculation - 4,756
(23,778 FTES recognized at 12 units less 19,022 FTES reported at 15 units)

2003/04 Graduate FTES unrecognized cost based on 12-unit load - 7,554
(37,771 FTES recognized at 12 units less 30,217 FTES funded at 15 units)

7,554 FTES minus 4,756 FTES = 2,798
Unfunded FTES

2,798 Unfunded FTES times 150% of the $5,773 per FTES 2003/04 Marginal Cost Rate

($5,773 x 1.5 = $8,660 x 2,798) $24,231,000

To recognize the unit load differential for 2006/07 enrollment growth only, the additional enrollment funding cost to the state would be at least $2 million if only modest changes to the current methodology are approved.These changes include continuing to recognize the average new hire salary rate cost recognized in the 2005/06 budget process and making several revisions in the fixed costs discounts used in the current methodology, if such discounts are to be retained in the methodology.

Cost to Recognize 12-Unit Load for Graduate Students in 2006/07 Enrollment Funding

Marginal Cost Rate using current CSU methodology $6,340
Marginal Cost Rate with minimum changes in current methodology $6,439
FTES Enrollment Growth with 15-unit load for graduate students 8,306
FTES Enrollment Growth with 12-unit load for graduate students 8,491
$6,340 times 8,306 FTES $52.7 million
$6,439 times 8,491 FTES $54.7 million
$54.7 million minus $52.7 million $2.0 million

Include Enrollment Funding Component for Operations and Maintenance of Plant

The CSU currently provides funding through its general operations increase under the higher education funding agreement to address the maintenance and operations cost for opening new space based on increased square footage. However, there is no funding provided for the increased maintenance cost of enrollment growth in existing space.The current enrollment growth methodology does not recognize these costs.

The CSU recognizes that all costs for maintenance and operations of university facilities do not grow proportionally with enrollment growth. Determining how best to recognize the differential needs associated with enrollment growth in existing space can be approached in several ways. The CSU can support a fixed-cost discount of 20 percent in the average cost for operations and maintenance as proposed by the University of California.

Reviewing the program elements of Operations and Maintenance of Plant at the CSU, the proposed discount might be increased to reflect adjustments for major repairs and renovations, landscaping, and grounds and logistical services.At the CSU including these additional items would increase the fixed-cost discount for maintenance and operations to 35 percent.


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Last Updated: November 11, 2005