Headwinds buffet California's public university systems

The volatility in California's state tax and revenue structure has its two massive public university systems scrambling.

To close a budget gap, state lawmakers cut funding to the University of California and California State University systems in July as part of the fiscal 2025 budget process, and further cuts could be coming in next year's budget.

The CSU system ? the largest public university system in the United States with 23 campuses and seven off-campus centers ? has a projected budget deficit of $400 to $800 million for the 2025-2026 school year.

Cal State's finance staff presented the Board of Trustees with a gloomy outlook during a public meeting in late September.

The projected state deficit, which includes a delay of $250 million in money allocated to CSU, represents a significant portion of the system's estimated operating budget of $8.3 billion next year, according to the university system's financials.

Layoffs and other belt-tightening measures are expected to help close the gap.

"Cuts could particularly affect the most vulnerable students, limiting their access to academic support tools, advising, counseling and engagement programs," according to the agenda document.

The University of California, which has ten campuses spread across the state, along with numerous research centers and academic centers abroad, is faring a bit better.

Full-time equivalent enrollment at UC campuses was 289,696 in 2022-23, according to a recent UC investor presentation, an increase of more than 3% from 2018-2019 that included gains at eight campuses.

The CSU system reported FTE enrollment of 393,223 in the fall of 2023, down 6.6% from fall 2018.

"It's a gross understatement to say the past couple of years in higher ed have been disruptive," UC Executive Vice President and Chief Financial Officer Nathan Brostrom said during a keynote at The Bond Buyer's California Public Finance conference last week.

The two university systems are among the state's largest issuers.

The UC system was the eighth-biggest municipal bond issuer through the first three quarters of 2024 with nearly $4.17billion sold, according to LSEG data.

Lead managers BofA Securities and Wells Fargo (WFC) priced $670.9 million in tax-exempt and taxable revenue bonds for the Trustees of California State University in a negotiated deal that closed Aug. 29.

Moody's Ratings affirmed CSU's Aa2 issuer rating ahead of the bond sale and assigned a stable outlook.

" Credit quality is supported by effective and responsive financial leadership, driving good fiscal discipline as the university confronts near-term uncertainty around state appropriations and persistent expense pressures.," Moody's analysts wrote in the July 26 rating report.

S&P Global Ratings affirmed its AA-minus rating and stable outlook on CSU's systemwide revenue bonds.

"We assessed CSU's enterprise risk profile as very strong, characterized by large enrollment, a demand profile that draws students from across California, and a prudent management team," said S&P Global Ratings analyst Mary Ellen Wriedt. "We assessed CSU's financial risk profile as very strong, characterized by solid financial resources to operations, substantial state support, and generally positive historical operating performance, partially offset by a growing debt profile."

In addition to state budget cuts, the UC system saw a drop off in enrollment during the pandemic.

"The State of California is one of the more reliable [state] funders in terms of funding higher education, but the state budget fluctuates in a boom-and-bust cycle," Brostrom said.

"More than 70% of state revenues come from income taxes, and a large percentage of that is from high net taxpayers," he said.

"We have become part of an increasingly dwindling, discretionary part of the state budget: 20% to 25% of the state budget is discretionary," he said. "In the coming year, we are looking at budget cuts of almost 6% in our state funding."

In her own remarks at the conference, California State Treasurer Fiona Ma noted the state experienced two historic surpluses, and then a $45 billion deficit in fiscal 2024.

"We are doing better than expected, but face a deficit for the next few years," Ma said.

Gov. Gavin Newsom will introduce his first fiscal 2026 budget proposal on Jan. 10. Typically, the legislative analyst's office provides a financial analysis in November ahead of work in earnest on the budget.

The universities without medical centers in the UC system are dependent on the state for core funds, Brostrom said.

"Our campuses remain attractive. UCLA has more than 150,000 applicants a year applying as freshman or transfer students," he said.

But UC has experienced a 35% decrease in core funds per student since 2001, so UC administrators are working "to enhance other buckets of money," he said.

The UC system has worked to increase support from resources other than state funding, he said, in order to deal with state funding cuts.

"The state has been a reliable partner, but we can't count on it," he said. "We must draw from other revenue streams, which now constitute over 70% of our revenue," he said.

"As with the operating budget, we have had to look to other sources to support capital projects," he said. "One area we have seen a dramatic increase is philanthropy. That has mainly been for buildings, but maintenance and renovations are critical priorities."

Philanthropic donations to the university totaled $3.4 billion last year, Brostrom said. Some of that giving will be going to the system's medical centers, he said.

"We've seen a very, very strong year in fundraising across all 10 of the campuses," Brostrom said.

There has been a reduction in funding for capital spending as well, he said.

Proposition 2, the state school bond measure Nov. 5 ballot, would not fund the UC or CSU systems. Neither did Proposition 51 in 2016, the last statewide school bond measure to pass.

"We are not included in the education bond on the ballot," Brostrom said. "You are still welcome to vote for it."

In addition to paying for renovations, maintenance and new buildings, the capital projects the university has been focused on include providing housing for both students and staff. The need for housing is "most acute," Brostrom said.

"The cost of housing and access to housing remains the key barrier to recruiting undergraduate students," he said.

At UCLA, the university will get some help, because UC student housing will be the Olympic Village when the city hosts the Olympics in 2028, he said.

Campuses in some cities are also hearing increasing concerns from host cities that UC students are crowding out housing for others. The university has added over 35,000 beds since 2011, and plans to add over 20,000 more by 2030.

Despite skepticism about the value of ever-more-expensive college degrees, Brostrom says higher education still retains appeal.

He said 84% of new jobs require some college education, and an increasing number of UC campuses are offering certifications.

A four-year degree also still has the biggest impact in terms of changing the trajectory for social mobility.

"Over 44% of UC's students are first-generation college students," he said.

The UC system also benefits from its hospital operations. UC Health represents 50% of overall revenues, he said.

The UC system's hospital system is growing, and over the past nine months, three of the UC's health systems have purchased eight hospitals, increasing overall bed capacity, he said.

But its strength in the hospital sector also represents challenges, as the UC system, like other hospitals, has experienced pressures from Medicare and MediCal, and its hospitals are over capacity, he said.

"We are forced to turn away thousands of transfer patients," he said.