Cal State’s revenue only covers 86% of costs — and the gap is widening

Dive Brief:

• California State University is facing budgetary shortfalls that need to be addressed partly through tuition increases, according to a report released this week by the system’s leaders.
• In the 2021-2022 academic year, Cal State’s revenue only covered 86% of its costs, the report said. That year, the system operated with a budget of $12.4 billion, according to the California legislature’s nonpartisan fiscal office. This gap is expected to widen as Cal State faces aging infrastructure, growing salary costs and inflation.
• The system’s board of trustees should adopt a tuition increase plan by September that is “moderate, gradual, and predictable” and goes into effect fall 2024. There have been no tuition hikes at Cal State in 11 of the past 12 years. 

Dive Insight:

Cal State has been relying on enrollment growth to counteract increasing expenses and cover part of its ongoing operational costs, the report said. But declining enrollment during the COVID-19 pandemic and the challenging demographic trends ahead make this method no longer sustainable.

In July, Cal State Interim Chancellor Jolene Koester established a work group to seek “stable and predictable” revenue sources. The group, composed of trustees, campus leaders and consultants, presented their report to the board Wednesday.

“It was evident to the Workgroup that the gaps between revenues and costs cannot be closed with existing revenue trends,” the report said. 

That was true even before the group accounted for a $5.8 billion facilities upkeep backlog and numerous unfunded mandates, such as salary increases and growing retirement funding costs, according to the work group. 

Like many higher ed institutions, Cal State faces aging infrastructure. Over half of the system’s facilities are 40-plus years old, and the cost of capital renewal is growing by $284 million each year, the report said.

Cal State has two primary revenue sources — state funding and student tuition. State funding, which has grown over the past decade, covers 55% of the system’s operating costs. 

Since 2017-2018, the last time tuition was raised, state appropriations to Cal State’s general fund have risen 34%, the report said. The fund is projected to grow by 5% annually until the 2026-2027 academic year. 

But the work group also noted that state funding is volatile and wholly dependent on California’s economy.

“Recessions, even mild ones, often result in state funding shortfalls, which in turn translate into budget cuts or recissions,” the report said. And even the 5% yearly increase is not enough to cover Cal State’s predicted operating costs, it said.

Cal State’s leadership should advocate to legislators and the governor for state funding that will “realistically consider” the system’s needs, according to the report. 

Increases to state funding and tuition alone won’t save the system’s budget, though, the work group said.

“Extensive modeling of revenues showed that, even with aggressive assumptions about increases in state General Fund and tuition, the gap between revenues and costs cannot be totally closed,” the report said.

The work group recommended Cal State diversify its revenue by securing nonstate funds, like from the federal government and donors. Their report specifically highlighted naming opportunities to help offset facility costs. The group also advised the system to find ways to cut costs, such as by consolidating administrative positions.