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The Legislative Analyst's Office raised concerns with Gov. Jerry Brown's higher education budget in a new report today, including his plans to tighten Cal Grant requirements and automatically increase funding if his tax plan passes.

After the state slashed its higher education spending by 21 percent during the recession, the Democratic governor has proposed 4 percent annual increases to the University of California, California State University and California Community Colleges for three fiscal years starting in 2013-14 -- but only if voters approve his plan to hike taxes on sales and wealthy earners. If voters reject the plan, the systems would lose state funding in 2012-13.

Brown made the 4 percent promise as a sweetener to his tax proposal, which he's trying to bill as a plan for funding education and public safety. The analyst's office recommended that lawmakers reject the 4 percent promise. Pledging to give automatic increases presents problems, the LAO said, because other parts of the budget could suffer, lawmakers would have little discretion if one higher education system needed more money than another, and the pledge ignores enrollment and inflation, among other reasons.

Department of Finance spokesman H.D. Palmer said the governor wants to give the education systems "a level of stability and predictability."

The analyst's office also raised questions with Brown's plan to increase grade-point average requirements to receive Cal Grant awards.

Low-income students would need to graduate from high school with a 3.25 GPA instead of a 3.0 to receive either full tuition at CSU and UC or nearly $10,000 in help at private schools. Students would have to have a 2.75 instead of a 2.0 to receive a lesser Cal Grant award. Students who transfer from community colleges to four-year schools would also face stricter requirements.

This proposal would affect an estimated 26,000 students, one third of those receiving such aid. The analyst's office said there is some merit to increasing GPA requirements, but warned that it "would have disproportionate impact on students with the greatest financial need." It suggested that a phase-in with less severe GPA increases, such as 2.0 to 2.25, would be more reasonable.

Palmer said the governor's intention is direct limited resources to students who are most likely to earn degrees.

"Our goal in this proposal is to focus on those students that have a good chance of being able to (graduate) in a timely manner," Palmer said.

The office recommended that lawmakers largely reject many of the governor's financial aid cutbacks and instead tighten other requirements, such as financial eligibility and award amounts. It also suggested finding funds elsewhere, such as eliminating aid for spouses and children of deceased veterans and public safety personnel if they also qualify for federal programs.

Since 2007-08, the state's pre-recession high-water year, UC has increased net tuition by 79 percent after accounting for redistributing money for aid. CSU has increased net tuition by 55 percent. And community colleges have increased fees by 28 percent.

Assembly Speaker John A. Pérez unveiled legislation today to raise corporate income taxes and reduce UC and CSU for families making up to $150,000. The "Middle Class Scholarship" would reduce UC tuition and fees from about $12,000 to $4,000 and CSU tuition and fees from about $6,000 to $2,000.

But GOP lawmakers have generally opposed the tax change in the past. The most support Democrats found last year came from two Assembly Republicans who agreed to $1 billion in new revenues going toward California business tax credits.

Pérez's proposal would tighten the state's corporate tax formula by requiring all firms to calculate their California income tax based on their share of sales in the state. Current law allows companies to choose the less costly of two formulas, and firms based out of state can save when they have fewer property holdings and employees in California.

The state's biotechnology firms are proponents because the change would raise costs for out-of-state competitors. Past opponents have included Virginia-based Altria Group, a major cigarette maker that also owns California wineries such as Stag's Leap. Republicans said last year such a change would violate terms of a 2009 budget deal, in addition to raising taxes on employers in California.

Assembly Democrats hope to frame the debate as a choice between out-of-state corporations and college students, possibly generating ammunition to use against Republicans who oppose the tax change.

"That's absolutely a false way to characterize this," Pérez said, adding later, "Closing this loophole puts us in the mainstream of other states that have a single sales factor. Similar to New Jersey. Similar to Texas, similar to other states that Republicans hold out as the beacons for how to deal with taxation and businesses."

Updated at 2:10 p.m. with comments from the Department of Finance and additional note about LAO recommending phased-in GPA changes.



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