(a) The Board of Governors, pursuant to direction included in the annual state budget act, has adopted criteria for the allocation of funds to assure that priorities identified in the budget act are implemented.

(b) A cap of two percent (2%) shall be established on district credit full-time equivalent student (FTES) activity that is not related to student needs within the three priority categories (transfer, basic skills, and vocational/workforce training).

(c) Districts shall limit their credit FTES in nonpriority areas to two percent (2%) of total credit FTES.

(d) If the Chancellor determines that a district has generated more than two percent (2%) of its credit FTES in areas outside the priority areas identified in subdivision (b), he or she shall notify the district that it will be subject to a reduction in its general apportionment (including growth for apportionment) to the extent that its full-time equivalent students exceeds the two percent (2%) cap.

(e) The reduction of a district's apportionment pursuant to subdivision (d) of this section, shall be held in abeyance if, within thirty (30) days of receiving notice of the proposed reduction, the district elects to submit to the Chancellor an explanation of how it is complying with the priorities established by this section.

(f) If the explanation is unsatisfactory, the Chancellor shall request the district to prepare a compliance plan within ninety (90) days of the request for the plan. If no plan is submitted, the plan is unsatisfactory or the district fails to adhere to the plan, the Chancellor shall proceed to make the reduction in apportionment to subdivision (d).

(g) For purposes of this section, degree applicable and ESL courses will be presumed to be related to student needs in the priority categories unless the Chancellor receives evidence to the contrary.

(h) This regulation shall be effective beginning with the 2004-05 academic year.

(i) This regulation shall not be effective in any year in which compliance with the priorities set forth in subdivision (b) is not required by the annual state budget act or some other statute.