June 10, TOPIC: Budget Environment for Colorado Community Colleges thru FY

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1 Page 1 of 8 STATE BOARD FOR COMMUNITY COLLEGE AND OCCUPATIONAL EDUCATION June 10, 2009 TOPIC: Budget Environment for Colorado Community Colleges thru FY PRESENTED BY: Cliff Richardson, VP of Finance and Administration Mark Superka, Budget Director EXPLANATION: National and State Fiscal Environment Recent economic news from the national and state economy has been relatively grim. Nationally, the Blue Chip Consensus April forecast (an average of 50 private-sector economic forecasts) predicts nominal GDP down 1.1 percent in calendar year 2009 and unemployment rates rising from 5.8 percent in 2008 to 8.9 percent in 2009 and peaking at 9.5 percent in In Colorado, legislative economists are forecasting that non-exempt and exempt General Fund revenue will drop in FY by 10.5 percent and fall an additional 1.4 percent in FY from $7.74 billion to $6.83 billion. The Colorado unemployment rate is forecast to rise from 4.9 percent in calendar year 2008 and peak at 7.3 percent in calendar year While the future is murky, both the national and Colorado forecasters are predicting a bottom sometime near the end of 2009 to the beginning of 2010 from an economic decline perspective and a peak to unemployment near the middle to end of The even murkier issue is: how fast will the economy recover? The national Blue Chip Consensus April forecast does have nominal GDP turning around and rising by 3.2 percent in calendar year 2010 and 5.4 percent in calendar year Colorado s legislative economists are forecasting that exempt and non-exempt General Fund revenue will rise from $6.83 billion in FY to $7.32 billion in FY and $8.03 billion in FY a 17.5 percent increase from the low point. State Budget Environment While these seem like signs of good news and a robust recovery, please note that, in the case of General Fund revenue, the $8.03 billion figure forecast for FY is only 3.7 percent above the FY peak figure of $7.74 billion and still below an inflation-adjusted FY figure of $8.49 billion. Moreover, in FY and FY , the General Assembly transferred a total of $547.8 million in one-time cash funds to the General Fund to plug revenue gaps. And, the AARA federal stimulus funds for Medicaid FMAP and Higher Education added an additional $635.3 million in non-state funds to the budget during FY and FY , which allowed the General Assembly to reduce state expenditures in these areas. As a result, in the FY budget alone, there is approximately $668 million in one-time revenue from cash fund transfers and AARA federal stimulus monies supporting budgeted state 1

2 Page 2 of 8 expenditures. And this does not account for other one-time General Fund savings in the budget, like state employee furloughs, that are likely not permanent reductions. Colorado Community College System Environment Traditionally, our community colleges have had two primary E&G revenue streams: state General Fund support via stipends and fee-for-service and resident/non-resident tuition and fees. With the reduction of state General Fund support beginning in FY and the passage of Amendment 50 and its enabling legislation, two additional revenue streams were added to this mix: the AARA federal stimulus funds and limited gaming revenues. General Fund Table 1 below outlines CCCS s historical State General Fund appropriations, resident FTE and State General Fund per resident FTE. Table 1 Historical State General Fund Appropriations for CCCS Community Colleges' State Appropriations State Appropriations per Resident FTE* Community Colleges' Resident Student FTE* Fiscal Year FY $124,464,488 $3,509 35,475 FY $125,719,635 $3,498 35,938 FY $117,315,311 $3,103 37,805 FY $106,279,979 $2,536 41,914 FY $106,279,979 $2,384 44,573 FY $116,851,363 $2,622 44,564 FY $121,912,589 $2,872 42,454 FY $132,329,693 $3,237 40,876 FY (orig) $142,318,023 $3,394 41,928 FY (final) $117,018,778 $2,791 41,928 FY $117,018,778 $2,608 44,874 *The State appropriation per resident FTE calculation uses actual year funding compared to previous year resident enrollment The State s spending requirements in areas like K-12 Education and Medicaid coupled with the significant amount of cash and federal stimulus funds embedded in the FY budget make it very difficult to forecast material amounts of General Fund flowing to State higher education institutions over the next several fiscal years. Without changes to either the State s revenue generation capacity and/or reductions in the provision of state services during FY and FY , the General Assembly will likely be using any growth in state tax revenues to replace one-time funds currently balancing the budget and funding required state expenses. As a result, for FY , no additional state General Fund support is forecast. And, for FY , a modest 4.0 percent increase is forecast raising General Fund support from $

3 Page 3 of 8 million to $121.7 million. Table 2 outlines this forecast and compared it against projected resident enrollment (see tuition and fee section for enrollment forecast explanation). Table 2 Projected State General Appropriations for CCCS Community Colleges' State Appropriations State Appropriations per Resident FTE* Community Colleges' Resident Student FTE* Fiscal Year FY (orig) $142,318,023 $3,394 41,928 FY $117,018,778 $2,608 44,874 FY $117,018,778 $2,511 46,607 FY $121,701,610 $2,535 48,005 Federal Stimulus Funds The AARA federal stimulus funds revenue stream is expected to fill the gap left by the reductions in state General Fund support through FY However, beginning in FY , these funds are no longer available. The AARA federal stimulus funds total $25.3 million in FY and FY However, it should be noted that the FY AARA funds have not been appropriated to CCCS (that would occur during next year s budget development cycle), so it is possible that less could be made available to higher education relative to K-12 education and, in turn, less to CCCS. FY has the added uncertainty of whether, when limited gaming funds begin flowing to CCCS (see discussion on limited gaming forecasts below), federal stimulus funds would be reallocated away from CCCS to account for gaming funds. H.B clearly states that State General Fund cannot be supplanted with gaming funds; it is not entirely clear, given the everchanging federal stimulus guidelines, whether this will be true for these federal funds as well. For purposes of this forecast, we are assuming that no supplantation of federal stimulus funds occurs in FY Tuition and Fees Tuition and fee revenues are driven by two main components: enrollment and changes in tuition and fee rates. And while fees and non-resident tuition are important to the revenue of the colleges, resident tuition revenue accounts for over three-quarters of the revenue generated in this stream. Enrollment. CCCS enrollment, especially resident enrollment, is highly sensitive to changes in the economy, particularly sharp declines and upswings. In times of economic distress, particularly ones marked by spikes in the unemployment rate, CCCS enrollment increases. In times of robust economic growth, particularly one marked by low unemployment, CCCS enrollment flattens out and declines. 3

4 Page 4 of 8 Over the last 10 fiscal years, resident enrollment has increased on average by 2.85 percent annually. However, that 10 year period is marked by increases and declines that mirror changes in economic conditions. The following examples illustrate this volatility: From FY to FY , (which was a period of stable economic growth) resident enrollment increased 2.9 percent annually, while the average unemployment rate during that same time period hovered around 3.2 percent. From FY to FY (which was during the last recession), resident enrollment increased by 8.0 percent annually, with the following trajectory over the time period: 5.2 percent, 10.9 percent, and 6.3 percent. During the same time period, the average unemployment rate spiked up to 5.8 percent, peaking at 6.1 percent in From FY to FY (which saw a significant and quick rebound in economic activity), resident enrollment declined by 2.8 percent annually, while the average unemployment rate fell to 3.9 percent by From FY to FY (during the current recession), resident enrollment increased by 4.9 percent annually, with 2.6 percent in FY and 7.0 percent estimated for FY Given this history and an emerging economic consensus regarding a late 2009 economic turnaround, Table 3 outlines a forecast for CCCS enrollment over the next several fiscal years. Table 3 Forecast for CCCS Enrollment CCCS Enrollment FY % Chng FY % Chng FY % Chng FY % Chng Resident FTE 44, % 46, % 48, % 48, % Non-resident FTE 3, % 3, % % % Total Student FTE 47, % 49, % 51, % 52, % Tuition and Fee Increases. Table 4 outlines the historical resident tuition rate increases since FY Table 4 CCCS Resident Tuition Rate Increases and Inflation Fiscal Year Resident Tuition Rate (per credit hour) Percent Change Denver-Boulder- Greeley CPI* FY $ % 3.5% FY $ % 3.3% FY $ % 2.4% FY $ % 2.9% FY $ % 4.0% FY $ % 4.7% FY $ % 1.9% FY $ % 1.1% FY $ % 0.1% FY $ % 2.1% FY $ % 3.6% FY $ % 2.2% 4

5 Fiscal Year Resident Tuition Rate (per credit hour) Percent Change Denver-Boulder- Greeley CPI* FY $ % 3.9% FY 08-09* $ % 1.0% FY 09-10* $ % 2.1% *CPI is calendar year and 2009 and 2010 are based on the March 2009 Legislative Council forecasts Work Session I.I. Page 5 of 8 From a tuition-setting perspective, there are three distinct periods during this time frame: FY through FY This period had strong, stable economic growth and state tax revenue collections, including the issuance of TABOR refunds. Throughout that period, there were years where the General Assembly would buy-down tuition rates by providing additional General Fund support to higher education institutions. This also was a period where tuition and fee revenues from higher education institution were subject to TABOR tuition and fee revenue generated above the TABOR revenue collection limits would have the potential to be refunded, in the form of General Fund, to Colorado citizens. FY through FY This period saw a recession, economic distress and higher unemployment, but very low inflation. During this period, higher education institution s tuition and fee revenue were still subject to TABOR, but up until FY , the drop in state tax revenue combined with the propping up of the TABOR spending limit with one-time funds, allowed higher education institutions (especially research institutions) to raise tuition revenue without triggering TABOR refunds. Due the ratcheting down of the TABOR limit, the stabilization of state revenues, and very low inflation forced the state to limit higher education institutions to a 1.1 percent tuition increase despite the fact that General Fund revenues were unchanged from FY levels. FY to the present. Beginning in FY , higher education institutions became enterprises under TABOR and tuition and fee revenue were no longer considered subject to TABOR restrictions. When General Fund increases were available (FY 06-07, FY and FY 08-09), resident tuition increases averaged 3.67 percent. In the years when General Fund revenue was anticipated to be flat (FY 05-06) or reduced (FY ), resident tuition increases were used to backfill the lack of General Fund. Since FY , the CCCS has had the following resident tuition caps set by the General Assembly (FY %; FY %; FY %; and FY %). Given that the next legislative session precedes an election and that CCCS will likely generate additional tax revenue from Amendment 50 (see below), lower tuition caps will likely be imposed by the General Assembly in FY and FY than in FY However, since there is not likely to be material General Fund support, these tuition caps will likely not be at the lowest levels, historically. As a result, we are using a 5.0 percent allowable resident tuition rate increase as the basis for forecasting FY and FY resident tuition revenues. Non-Resident Tuition and Fees For purposes of this forecast, we are assuming 5.0 percent increases in non-resident tuition in FY and FY and flat enrollment which would be in-line with projected resident tuition rate increases and in-line with non-resident 5

6 Page 6 of 8 enrollment from the colleges for FY For student fees, we are forecasting inflationary growth plus enrollment. Amendment 50 Limited Gaming Tax Revenues The revenues from limited gaming will begin to be collected in FY and then allocated in the next fiscal year, FY This revenue stream will continue into the future unless further constitutional action is taken. The intent of the funds is to supplement not supplant state General Fund revenues. Forecasting the amount of revenue generated from Amendment 50 is difficult given the state of the economy and the recent decline of limited gaming revenues. Table 5 outlines the changes in the limited gaming forecast pre-amendment 50. Table 5 Change in Limited Gaming Forecasts (in millions) (December 2007 to December 2008) FY FY FY FY FY LCS December 2007 Forecast $128.5 $133.9 $143.4 $152.3 $163.0 LCS March 2008 Forecast $119.4 $121.7 $128.8 $139.2 $149.5 LCS June 2008 Forecast $112.8 $111.5 $120.1 $129.8 $139.4 LCS September 2008 Forecast $113.6 $98.5 $105.3 $113.0 $120.2 LCD December 2008 Forecast $113.6 $94.3 $97.9 $102.9 $108.3 % Change in Forecast from Dec 2007 to Dec % -29.6% -31.7% -32.4% -33.6% Without any historical data and declining pre-amendment 50 limited gaming revenues, there is a significant amount of uncertainty in forecasting Amendment 50 monies. There are three recent forecasts and piece of anecdotal information available that one can draw upon to generate a range of possibilities over the next five years: Legislative council s blue book forecast, adjusted proportionally downward relative to the most recent pre-amendment 50 forecasts; The March OSPB forecast, which did forecast limited gaming growth including Amendment 50; The Division of Gaming s limited gaming revenue model; and The gaming industry s assertions that they anticipate percent annual growth in revenues over the next several years from Amendment 50. Table 6 outlines the four forecasts in terms of the net amount of funds that would flow directly to CCCS community colleges. Please note that revenue earned in one fiscal year is not appropriated until the next fiscal year. 6

7 Page 7 of 8 Table 6 Post-Amendment 50 Limited Gaming Tax Revenue Forecasts for CCCS Community Colleges (in millions and for year-earned) FY FY FY FY FY OSPB $19.8 $29.7 $34.7 $40.1 $46.0 Leg Coun (Adj) $18.5 $20.3 $28.4 $31.4 $37.3 Div of Gaming $11.5 $21.5 $26.7 $30.4 $32.7 Gaming Industry $7.1 $13.7 $19.4 $25.9 $33.1 The difference in the forecasts revolves around two primary areas: overall growth in gaming revenue and the timing of when this growth occurs. Given the timing of when the economy is forecast to begin turning around, the OSPB and Leg Council Adjusted forecasts look optimistic in the early years at this point. The Division of Gaming, which has significant insight into the gaming industry and its recent revenue difficulties, as well as the anecdotal gaming industry comments about having realistic growth expectations in the current economic environment, seem to have more realistic forecasts at this point in time. As a result, for the CCCS-portion of the FY and FY Amendment 50 limited gaming revenue streams, the average of the Division of Gaming and Gaming Industry forecasts in Table 4 is probably the best guess that can be made among the significant uncertainty. In the Spring of 2010, we will have a much clearer picture than we do now. Expenses Table 7 outlines the historical Higher Education Price Index (HEPI) for public two-year institutions across the country. Table 7 Two-Year Public Institution HEPI Historical Increases Public Two-Year Year HEPI % Change % % % % % % % Average 4.0% Over the last several years, the two-year HEPI has averaged around 4.0 percent. This index can be viewed as a CPI for higher education institutions and the index includes different types of personnel costs as well as specific operating items like materials and utilities costs. Much like CPI, this index indicates what it cost the higher education institution for the same items (whether that is labor or materials) and does not account for additional costs due to enrollment changes or other factors. 7

8 Page 8 of 8 For CCCS institutions, the big question mark for FY and FY will be whether or not the General Assembly funds Salary Survey for state employees. There has only been one fiscal year (FY ) in recent history where (like in FY ) Salary Survey was not funded. For the purposes of this forecast, we are assuming that Salary Survey is funded in both fiscal years. If this is not the case, this would lower the expense forecast for both FY and FY Given the resident enrollment forecast above, coupled with a likely funding of Salary Survey and the typical HEPI index increases in costs, expenses are likely to grow by approximately 6.0 percent in FY and by 5.0 percent in FY Near-Term Outlook Table 8 outlines the above forecasts and translates them into a single view of the near-term fiscal and budget environment: Table 8 Near-Term Forecast for CCCS FY Final Estimate FY Projected FY Projected FY Projected General Fund Revenues College Opportunity Fund/ Fee for Service $117,020,777 $117,020,779 $117,020,779 $121,701,610 Federal Stimulus (AARA) Funds $25,300,004 $25,300,003 $25,300,003 Amendment 50-Gaming Funds $9,300,000 $17,600,000 Resident Tuition, Student Share $123,926,784 $140,285,134 $151,693,826 $162,461,306 Non-Resident Tuition $25,706,044 $26,877,481 $28,221,355 $29,632,423 Fees - Instructional/Student Activity $6,908,877 $7,272,235 $7,635,846 $7,941,280 Other GF (includes net transfers) $20,824,911 $22,133,636 $23,240,317 $24,169,930 Total General Fund Revenue $319,687,397 $338,889,268 $362,412,127 $363,506,550 General Fund Expenses $297,864,210 $334,742,029 $350,783,252 $368,322,414 8