Are 1960s-era state-agency budgeting practices hobbling smarter decisions that could make room for California’s next generation of students?

Higher education finance in California needs to be reformed, and reforming the way budgets are built is a good place to start. Despite huge changes in revenues, student populations, and demand since the Master Plan for Higher Education was put into place in 1960, California still uses a “state-agency” year-to-year budget approach for both the University of California and the California State University. The habits of work that have grown up around that need to change.

As an example:  back when the University of California and the California State University systems were 100% state funded, the state budget appropriated all of the funds needed for each system, based on enrollment-based program budgets that tied allocations to spending. At the end of the year, any unspent dollars reverted to the state general fund. As in other state agencies, this spurred university administrators and faculty to spend or encumber every cent they could, rather than conserve and carry over resources to subsequent years. Reserves meant there were “extra” funds that were supposed to go back to the state.  Similarly, every state general-funded university position was authorized through the state budget—and if retirements or resignations resulted in a vacancy, the position and its dollars returned to the government-wide state budget.

Today, those position-control/bean-counting policies have been abandoned in favor of greater flexibility—general fund dollars and positions can be carried over to subsequent years without forcing a base reduction—but the associated organizational behaviors have not evolved. University administrators are still loath to use savings to build up reserves, for fear that someone up the budgetary food chain (the Dean, the Chancellor, the Department of Finance) will swoop in to clear out those accounts.

The recent imbroglio between the State Auditor General and the University of California Office of the President is a case in point. To be sure, in that example the foundation of trust needed for open and effective communication seems to have broken down, so budget management isn’t the whole problem.  Still, there is an implicit critique in the Auditor’s report that a reserve fund of 10% is “excessive” and should be returned to the campuses. In this environment, where an economic downturn can lead to one-year cuts in general funds of 20% and more, even a 10% reserve probably isn’t enough.

Similar changes are needed in budget allocation and management practices internal to the university systems. Both systems have received state funds through large block grants for more than two decades. They are free to allocate those resources wherever they want to, without regard to the old budget formulae that were designed to control expenditures as well as measure budgetary need.

But the universities’ accounting systems and workload and class size policies are still largely based on the old funding formulae, despite huge changes in student demand for courses and curricula. Fiscal information is collected by fund source, not use. The payroll systems are set up to generate paychecks, not to allow administrators to match payroll files to class files, so they could know (for instance) how much they are spending on English 101 as contrasted to Business 205. Even the most strategic campus leaders determined to get a better handle on costs can’t uncover the necessary data in these outdated systems.

What would a smarter approach look like?

• All parties—including state, system, and institutional leaders— need to recognize that the spending patterns and subsidy levels of the past no longer apply.

• Decision makers at all levels need to build a new, common language and fiscal benchmarks designed to evaluate spending and performance, and to improve public accountability and transparency for resource use.

• Both the state and the institutions need to move in the direction of multi-year budgeting, through better use of reserves to cushion against the zig-zag in general funds and tuitions that have characterized the last twenty years.