Following its loss of a class action lawsuit levied in response to improperly increased professional student fees, the University of California owes about $40 million in the midst of a severe budget crisis.

The California Supreme Court rejected the University’s final appeal Tuesday. A lower court had found that a promise to avoid raising fees was broken in 2003 and that thousands of previously enrolled students are owed refunds with interest.

The ruling comes at a bad time for the University, which is besieged with budgetary woes stemming from Gov. Arnold Schwarzenegger’s proposed 10 percent cut of the total UC budget. It was not immediately apparent where the money for the payouts would come from. UC spokesperson Ricardo Vazquez has stated that it is too early to know whether the university will need further student fee increases to offset the damage.

The promises to avoid raising fees were made through printed materials advertising the professional schools, and in some cases, students even received bills stating how much they owed before the fee increases. However, officials made the decision to raise fees anyways, leading to the lawsuit, which was filed by lead plaintiff Mohammad Kashmiri and seven others. In response to the suit, the UC has removed all written references to raising fees.

The first round of the trial concluded in March ’06, when the San Francisco County court found that the students were indeed owed the back pay. In light of that ruling’s reaffirmation some students who enrolled before 2003 could receive $10,000 or more. However, most of the refunds would go to students who studied in spring and summer of that year, and will come out to about $100.

Meanwhile, another group of 2,700 professional students has filed a suit – for which lawyers expect they will win between $15 and $20 million – alleging that the University raised fees illegally again in Fall 2004.