University of California Tuition Hikes: 5 Things You Must Know
By Adam Tatum | November 12, 2014
Last week, University of California (UC) leaders proposed an annual 5% tuition increase over the next five years. Here are 5 things that you should know:
1. UC tuition doubled over decade and now provides more revenue than state funding.
UC tuition for the 2014-15 school year is $12,192. Although UC tuition has remained at that level for the last four years, it is still twice the $6,141 annual tuition just a decade ago. During the period, tuition increased largely between 2009-10 and 2011-12, rising 71% from $7,126 to $12,192.
While smaller and less volatile, the proposed increases are still significant. Under the proposal, tuition would rise by as much as 5% annually over the next five years starting in 2015-16. In 2019-20 (assuming 5% annual increases), UC tuition would be $15,560, or more than two-and-a-half times it pre-recession level. Between 2005-06 and 2019-20, UC tuition would have averaged a 7% annual growth.
The UC’s revenue structure has undergone a fundamental shift. The UC system has become increasingly reliant on tuition to fund its operations. In 2003-04, state funding accounted for 18% of the system’s primary revenue, while student tuition accounted for only 6%. Today, student tuition accounts for more of the system’s primary revenue (14%) than state funding (10%).
2. University of California retirement debt translates into student burden.
There is no doubt that higher revenue generated from tuition or other means will necessarily help fund UC employee retirement benefits in coming years. As of 2013, the UC’s pension and retiree healthcare plans collectively had unfunded liabilities of nearly $27 billion ($13.8 and $13.0 billion, respectively) (Figure 3). To offset these significant funding shortfalls, the university must increase its contributions to the retirement systems. In just the last five years, the annual amounts required to fund its retirement plans have more than doubled from $1.4 billion to $3.7 billion. The UC system has already borrowed $2.7 billion to help pay down its pension debt.
The UC system is notorious for its two-decade long pension contribution holiday, during which it failed to contribute to its retirement systems. During the late 90’s and early 2000’s, the UC pension system had a surplus of assets, with a funding ratio that peaked at 156% in 2000. Rather than make regular annual contributions (called “normal costs”), the UC system assumed investments would grow by 7.5% annually and relied solely on those returns to fund its retirement systems.
However, returns averaged just 5.2% over the last 15 years. Consequently, the university’s pension system is only 76% funded. Had the UC made the regular (and much smaller) contributions over the last two decades, it is estimated that the pension system would be 120% funded today.
The UC also failed to set aside almost any assets to prefund its retiree healthcare plan, which has a funding ratio of just 0.3%. Instead, it funds retiree healthcare on a pay-as-you-go basis, meaning it begins to pay for benefits only as retirees come to collect them. This approach defers retiree healthcare contributions with interest, a costly decision as health premiums continue to grow and the number of retirees increases. The university’s retiree healthcare contributions are expected to more than double over the next decade, growing from $363 million in 2014 to $805 million in 2024, which would consume more of the university’s operating budget.
3. Greater state funding for the University of California was tied to tuition freezes.
The 2014-15 California budget includes a 20% increase in state funding for the UC between 2013-14 and 2016-17. In exchange for greater state funding, the budget assumes a freeze on UC resident tuition from 2013-14 to 2016-17. The proposed rate hikes starting in 2015-16 would seemingly violate this budget contingency. It is currently unclear how, if enacted, the proposed tuition increases would impact the state’s UC funding plan.
Higher education is among the hardest-hit budget areas during the recession. Due to volatile revenues and greater spending on other budget areas (such as Medicaid), state funding for the UC system declined considerably. Between 2007-08 and 2008-09, state funding for the UC declined by 32%. Although state funding for the university has increased in recent years, the state’s $3 billion spent in 2014-15 still falls short of the $3.7 billion it spent in 2007-08.
4. More UC students are graduating with debt…and more debt, at that.
The UC has made claims about student debt burden that are simply untrue. In 2014, a UC accountability report claimed, “The proportion of undergraduates leaving with debt is lower than a decade ago.” However, 2012-13 UC system data shows that 55% of seniors graduated with debt, which is the highest percentage in the last 14 years. Also, the average debt burden of graduating seniors grew nearly 15% from $17,900 in 1999-00 to $20,500 in 2012-13 (inflation adjusted).
5.UC system is becoming increasingly reliant on out-of-state student enrollment.
Student enrollment has increased steadily over the past several years, reaching an all-time high of 238,686 in 2013. However, the growth among out-of-state UC students has far outpaced that among in-state UC students. From 2003 to 2013, the number of out-of-state students grew 52%, while the number of in-state students grew by only 9%. There is a strong financial motivation for this trend: out-of-state student tuition ($35,070) is nearly three times the tuition for in-state students ($12,192).
Works Cited [+ Expand][- Shrink]
Ed Mendel. Calpensions. “UC Borrows $2.7 billion to fund pension debt.” http://calpensions.com/2014/07/21/uc-borrows-2-7-billion-to-fund-pension-debt/
State of California. 2014-15 Enacted Budget Summary. Page 17. http://www.ebudget.ca.gov/2014-15/pdf/Enacted/BudgetSummary/FullBudgetSummary.pdf
The California legislative Analyst’s office. State of California Expenditures, 1984 to 2014-15. www.lao.ca.gov/PolicyAreas/state-budget/historical-data
University of California. Office of the President. Student Budget Tables. Undergraduate 2005-06 to 2014-15. www.ucop.edu/student-affairs/data-and-reporting/student-budget-tables/index.html
University of California. Office of the President. Statistical Summary of Students and Staff. Fall 2004-Fall 2012. http://legacy-its.ucop.edu/uwnews/stat/
University of California. Actuarial Valuation for Retiree Health Benefit Program. July 1, 2008 to July 1, 2013. http:\\regents.universityofcalifornia.edu/regmeet/nov13/f11attach.pdf
University of California. Actuarial Valuation for Retirement Plan. July 1, 2008 to July 1, 2013. http://regents.universityofcalifornia.edu/regmeet/nov13/f10attach1.pdf
University of California. Long-Term Funding Plan. http://universityofcalifornia.edu/plan-summary.html
University of California. Accountability Report 2014. http://accountability.universityofcalifornia.edu/index/chapter/3
University of California. Office of the President. Annual Financial Reports. 2003-04 to 2012-13. www.ucop.edu/financial-accounting/financial-reports/annual-financial-reports.html
University of California. Meeting of September 16, 2010. Page 7. http://regents.universityofcalifornia.edu/regmeet/sept10/j4.pdf.