Fitch believes California's proposed budget, which would increase state allocations to University of California and California State University by $125 million, will provide some funding stability following several years of declining appropriations.

The state expects the additional funding to improve course offerings and graduation rates at those systems and eliminate the need for UC or CSU to raise tuition and fees in academic year 2013-2014, the second year of flat second student charges.

This budget allocation is in addition to the $125 million both universities will receive in fiscal 2014 for not raising tuition in the 2012-2013 academic year.

The budget, proposed by Governor Brown on Jan. 10, also references shifting appropriations allocated for debt service costs on certain state GO, lease revenue bonds to the university systems' budgets, and tightening control of the systems' capital spending.

Fitch will review the final budget once adopted to determine the impact these budget proposals will have on UC (general revenue bonds rated AA-plus with a stable rating outlook by Fitch). It is important to note that UC's broad discretion, including over tuition and fee increases, remains an important source of fiscal flexibility and that just 9% of UC's fiscal 2012 operating revenues were derived from state appropriations.

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