The California State University system will seek a state loan of $144 million that it’ll have a year to repay at no interest, even though current projections show the system will have to add to its deficit to repay the debt.
Cal State’s chief financial officer says the loan will be used to offer one-year bonuses to faculty and staff. While salaries vary widely across the system, the extra $144 million is roughly a 3% increase in the total pay for Cal State’s workers, including executives. State law says the loan needs to be repaid by next July.
Despite months of hesitation, the system today took the first step to request the loan and will likely get the money in 60 days or less, said Cal State’s interim chief financial officer, Patrick Lenz, in an interview. The process involves approval from state lawmakers, who are likely to support the move.
State lawmakers made the loan available to Cal State after they cut state funding to the system by $144 million this year. Cal State has 22 campuses and enrolls 460,000 students.
The system’s largest union, the California Faculty Association of 29,000 workers, is cheering this decision but says more work is needed to bring back lecturers whose contracts were cancelled as many campuses contend with shrinking budgets. The union’s collective bargaining agreement is expiring but negotiators from the union and Cal State leadership haven’t met since April.
“We will take this as a win, but we have so much work to do, and I do hope that this provides an opening for the management to come to the table with us and negotiate fairly,” said Elaine Bernal, a lecturer at the Department of Chemistry and Biochemistry at Cal State Long Beach and senior member of the faculty association.
“The one-time investment, great, but we really got to focus on long-term investment,” she said.
The Legislature intends to increase state spending for Cal State in 2026-27 by just $101 million — far lower than previous promises from Gov. Gavin Newsom of about $250 million — so the system will effectively be $43 million short once it repays the loan, Lenz said. The decision to take the loan came “after careful deliberation, conversations with the chancellor, conversations with our Board of Trustees,” Lenz said.
Money is chronically tight at CSU. Since 2023 the system has battled ongoing deficits that have led to hundreds of degree and course cuts, fewer lecturers and hiring freezes. Back then, the system said it was spending $1.5 billion less than it should to adequately educate its students.
Over the past two years that figure has grown by several hundred million dollars as costs rise for campus utilities, insurance, health benefits and more. The deficits exist even as the system in 2024 began increasing tuition annually; the added costs outweigh the new revenue from charging students more. However, most students don’t pay tuition because of state and system financial aid.
Despite those fiscal pressures and likely new expenses to replace the Trump administration’s cuts to federal education grants, Lenz said system leaders want to spend the money on workers.
Unions wanted loan
The zero-interest loan has been the source of intrigue and scrutiny since July as unions representing Cal State workers have been pressuring the system to agree to borrow the money so campuses can offer pay increases for workers. Unions and some lawmakers argued that the the system was fully funded because the state budget gave CSU the option to borrow the loan, which should trigger collective bargaining contract language that stipulated that ongoing raises would kick in if the system received an increase in state funding.
But Cal State officials say that even if they take the loan, it’s not new or ongoing funding — it’s money they’d have to repay after a year — so the system isn’t obligated to increase wages like those contracts dictate.
Lenz reiterated that point during an interview, even after indicating the system will take out the loan.
“Clearly, anything that is one time is not ongoing,” he said of the loan. So any raise “would be only for the 12 months of the budget year.” But maybe the state will send more cash to the system than what lawmakers and Newsom signaled in the annual budget deal they solidified in June, Lenz said. He also suggested that CSU could negotiate more time to repay the loan.
“There's a long way to go in this process, and there's a lot of unknowns,” he said.
The loan is “an unusual financial strategy”, said Robert Kelchen, a professor of higher education budgets and finance at the University of Tennessee, Knoxville. Asked if this could be a model for other states, Kelchen said it might be for “other blue states that are heavily unionized” and are trying to secure labor peace with labor groups.
“That's really what this feels like,” he said.
How CSU got here
That the loan even exists is itself an example of curious budgeting tactics by lawmakers and Newsom. Last year they passed a state budget that gave Cal State a moderate increase in state funding with a warning of huge cuts of $375 million this July — equal to about 8% of what the state spends supporting the CSU.
After a half-year of fierce advocacy from Cal State officials, students and workers, the final 2025-26 budget approved in June applied just a 3% cut to CSU, with a promise that the cut — $144 million — would be restored in the 2026-27 budget year that begins next July. To help Cal State manage its finances this fiscal year, the state said the system could borrow $144 million this year and repay it by the end of June 2026.
The loan option was extended to multiple state agencies, including the University of California.
System budget leaders, including Lenz, in July expressed wariness over taking out the loan because if the state’s budget picture remains shaky — it’s already projecting billions of dollars in deficits — then lawmakers may decide to apply further cuts to the CSU. That means the system would be in a deeper deficit and be on the hook for a loan they couldn’t repay.
The fiscal malaise could have been worse. In 2022, Newsom promised the CSU and University of California five years of increasing budget support totaling more than $1 billion for each system in new, ongoing funding. But because of state budget constraints, that so-called “compact” has only been partially funded.
And new funding pain points are likely on the horizon. Congressional Republicans and President Donald Trump approved spending plans that Newsom says will kick millions of low-income Californians off public health insurance. If the state plans to pay for that care, budgets for other agencies, especially those that can raise tuition, may need to decrease.
This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.
