As you walk into the California Institute of Technology (Caltech), it is hard to believe you are visiting one of the world's top universities. Overlooked by the San Gabriel Mountains and the Nasa Jet Propulsion Laboratory in Pasadena, just north of Los Angeles, the institution almost merges into its surrounding residential neighbourhood. Quaint, pretty and tranquil, it feels more like a retirement home than a private university, save perhaps for the 1930s glamour of the faculty dining club, the Athenaeum.

Yet pop your head inside any department of this technology-focused institution and you will discover a nerd nirvana. In the Cahill Center for Astronomy and Astrophysics, Caltech faculty member Richard Ellis - who has observed some of the most distant (and by extension, oldest) objects in the Universe - is in deep discussion with a student while squiggling symbols on his office whiteboard. In the older physics building, the Feynman Room is being prepared for class. It remains virtually unchanged from the days when Richard Feynman, perhaps the most famous of Caltech's pantheon of scientists, lectured there.

"Just about every scientist of note has been in this room, either as a student, an instructor or a speaker," explains a friendly laboratory technician.

Stephen Hawking is scheduled to visit soon; he comes most years for a six-week stint.

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But Caltech, which ranks only just behind Harvard University in the 2010-11 Times Higher Education World University Rankings, is not just world-renowned: it is also very Californian. Hollywood is nearby; scenes from the films Legally Blonde, Beverly Hills Cop 2 and The Wedding Planner have been shot here (Caltech charges $10,000 (?6,450) a day for the privilege). The state - situated on an earthquake zone - experiences about 300 tiny tremors a day. In the basement of the Seeley G. Mudd Building of Geophysics and Planetary Sciences, a supercomputer processes data from hundreds of earthquake-monitoring stations.

Caltech's success story is repeated across the state. A glance at the THE table of the world's top 200 universities in 2010 shows that an impressive collection of world-beating institutions is based here (see related file, right). California is home to three of the THE top 10, on a par with the UK.

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Besides Caltech, there is Stanford University, the prestigious Palo Alto-based private institution intimately linked to Silicon Valley. The other is the University of California, Berkeley, the jewel in the crown of the UC system's 10-strong network of public research-intensive campuses. Like Stanford, its home is the San Francisco Bay Area.

The University of California, Los Angeles (UCLA) sits only just outside the THE top 10. Three more UC campuses fall within the top 50. The state's third-strongest private institution, the University of Southern California (USC), is in the top 75. Plus there is the University of California, San Francisco - a world-renowned medical facility that THE does not rank because it is a graduate school.

Mark Yudof, president of the UC system, notes that six of its campuses are members of the Association of American Universities, an organisation that represents 63 leading institutions in the US and Canada. "Most states only have one public university (in the association) at most, sometimes two."

When it comes to educational exceptionalism, it seems Californians really do have something to brag about.

Simon Pratt, project manager for institutional research at Thomson Reuters, which compiled the 2010-11 THE rankings, says California's top institutions have been "very well funded" - capable of attracting competitive grant money at the highest levels - and generally have a "very high" citation impact. But what is it that has made them so strong? Weather aside, does the state's academic sector have a coherent identity? And what does the future hold?

Robert Birgeneau is chancellor of Berkeley. As he sees it, California's uniqueness lies in its healthy balance of very good private and public institutions. He compares it both with his native Canada - which has very few private universities - and with the strong conglomeration of top private universities on the US East Coast.

"Canada is disadvantaged because there is no foil with which to measure yourself," he says. "On the East Coast, the problem is that the private universities entirely dominate. In Massachusetts, for example, there are too many private institutions relative to the population and they are too outstanding, so the power structure comes completely from them."

The UC's public mission to serve the state is clearly evident in the make-up of its undergraduate body. Most are Californian; about 40 per cent hail from low-income backgrounds; and the same percentage again are the first in their families to go to college.

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About 40 per cent of Stanford's undergraduates come from California, a larger proportion than is found among its East Coast rivals. At Caltech, the figure is 30 per cent.

"We are taking the best students, but clearly we attract more from California than any place else. Some don't want to go so far from home," explains Melany Hunt, Caltech's vice-provost.

John Etchemendy, Stanford's provost, notes that such an intake gives the private institutions a big stake in the state's public education system. "All of California's top high school students apply to Stanford and that is not necessarily true of Massachusetts' (brightest)."

Perhaps the foremost expert on California's public institutions is John Douglass, senior research Fellow at Berkeley's Center for Studies in Higher Education and author of The California Idea and American Higher Education: 1850 to the 1960 Master Plan (2000).

His contention is simple: these world-beating institutions have all shared in and contributed to the economic growth and wealth of California, one of the top 10 economies in the world and host to the US' highest concentration of high-tech companies. However, to really understand the universities' successes, the public and private stories have to be considered separately, he says.

Private institutions such as Caltech and Stanford started to become powerful forces after the Second World War. Caltech's ascent was fuelled by the huge demand for engineers to man Southern California's defence industry, and Stanford's is credited to the leadership of Frederick Terman, provost of the university from 1955 to 1965.

Dubbed the "Father of Silicon Valley" and regularly credited with making Stanford a top-tier university, he looked for ways to create innovative spin-off industries, initiating the Stanford Industrial Park (now known as Stanford Research Park) and funding two of his students - William Hewlett and David Packard - so that they could start their own business.

As to the origin of the UC's strength, Douglass says that a "big part" of the story was California's "Master Plan": the strategy, initiated in the 1920s and reinforced in the 1960s, to develop a three-tier system for public higher education, with each level having a different mission.

The system, little changed today, was a response to the huge number of people arriving in California for a new life on the West Coast, and the needs of a growing economy.

The first tier comprises the UC campuses, which are designated research-intensive universities that span undergraduate teaching to doctoral training. The 10 campuses are committed to a social contract that requires them to offer undergraduate places to the top 12.5 per cent of the state's high school students.

A second tier, known as the California State University (CSU) system, offers only undergraduate and master's programmes, save for a few exceptions. The 23-strong tier offers places to the top third of California's high school students.

A third tier of 110 community colleges offers two-year degrees and a second chance to students in the form of automatic transfers to either the UC or the CSU system on completion (UC currently takes about a third of its students from the community colleges).

Each tier can concentrate on its particular strengths, explains Douglass. That there is a second chance to enter the UC through the community college route has helped to justify to taxpayers why they should pay for it.

"It wasn't just for the elite," he explains.

The UC also adopted what is called its "one university model", beginning in earnest in the 1930s. The idea was that there would be multiple campuses within the system that shared the same mission and values, including policies on the hiring and advancement of faculty, admissions and a relatively level playing field for the distribution of state funding.

"It meant there were no weak sisters and was a crucial decision because it set the stage for UC's quality across the campuses," says Douglass. "How do you account, for example, for the rise of UC Santa Barbara - a teachers' college that became part of the UC in 1944? It integrated into this larger system."

Another key ingredient was a state that was prepared to invest large sums of money in the system, based on enrolment growth. The UC agreed to grow with California's population (a commitment it retains) and the state funded the places.

"It was this large-scale investment by past state governments - which, of course, we are not seeing now - that really (gave) an ability to recruit quality faculty," notes Douglass.

David Hollinger, professor of American history at Berkeley, summarises the move: "It was a commitment to education as a public good - and you needed it in California because we didn't have the Ivy League institutions - and the willingness of the taxpayers, through their elected representatives, to pay whatever it cost to create a first-class university."

Historically, being on the West Coast has had its disadvantages for universities, notes Etchemendy. The distance from the East Coast centres of civilisation and power once made it difficult to convince top scholars to move there. But it also forced Stanford to "develop in particular directions".

Terman's creation of a high-tech industry in the institution's vicinity was specifically designed to counter the problem that Stanford's most talented engineering graduates would up sticks to the East Coast for work or further study as soon as they qualified, he explains. Being so far from Broadway, Stanford couldn't compete with the Yale School of Drama in terms of performance - so it focused on scholarship.

In the modern era, the location has its advantages. Silicon Valley today is "a lot bigger than Stanford" and the state's universities benefit from their relative proximity to Asia, says Etchemendy. Stanford's largest overseas-student population is Chinese, and Asia generally sees Stanford as a "much more prominent institution".

"For Harvard it is easier to interact with Europe; being closer to Asia makes interactions with it easier for us," he says.

Rich Skrenta heads a Silicon Valley-based search engine start-up called Blekko that uses some of its ?24 million in venture-capital backing to employ local graduates (Caltech's are "killer", he says). He describes Stanford and Berkeley as providing an "anchor" for the region.

"It just seems like people there are really tuned in to the whole start-up culture and ecosystem," he explains. "Students come out and they want to start companies and work in start-ups."

Pittsburgh-based Carnegie Mellon University is one institution based outside the West Coast that aims to capitalise on the benefits of a foothold in Silicon Valley. In 2002, it opened a satellite campus in the region for research and to be "more connected" with its Californian alumni base (its largest after Pennsylvania). It also offers degrees in software-related fields aimed at working professionals.

"Being where innovation is happening, we get to put our finger on the pulse and be part of it," Martin Griss, director of Carnegie Mellon Silicon Valley, says.

Richard Walker, chair of the California Studies Center at Berkeley, points to the many other enormously innovative and creative industries that have developed in the state besides Silicon Valley, including film-making, agriculture, biotechnology, aeronautics and aerospace and the wine industry.

"It is 1,000 flowers blooming of bright, skilled, capable people...and both the public and the private institutions have fed enormous numbers of people into this," he says.

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Walker cites the large numbers of USC and UCLA film graduates who have moved into Hollywood and changed it irrevocably.

The universities have adapted to nearby industries: for example, UC Davis' department of viticulture and enology has had a "huge impact" on Californian wine production, Walker adds.

Although a lot of mythology surrounds California, some believe that its institutions do have an open, flexible culture that is less hidebound by tradition than their East Coast rivals, a culture that makes them stand apart.

"It is just a feeling, but it is different," notes Caltech's Hunt, adding that she finds West Coast institutions to be much more informal.

The social order in California has been very open since the state was founded. That kind of openness to new ideas and new people has survived into the 21st century, Walker notes.

Douglass believes that what California has is an ability to attract the best and the brightest: "It has drawn talent from throughout the world so perhaps it does create a slightly different feel and sense."

However, he adds, this can vary greatly between institutions: for example, Berkeley is often seen as much more "stodgy", "old school" and "East Coast" than some of the UC institutions that evolved later, he says.

So what does the future hold for California's top institutions? No one doubts the power of universities such as Caltech and Stanford to continue to shine, despite the drop in their endowment funding caused by the recession. Rather, the main concern relates to the Master Plan's viability in the midst of California's continuing budget crisis. The system's institutions have experienced sharp short-term cutbacks on top of long-term declining support (see box, below).

"Obviously the financial challenges are incredible," notes Birgeneau, although he is optimistic that at least the cream of UC's crop will continue to play a "leadership role nationally and internationally".

Berkeley, San Francisco and UCLA are probably the "least challenged" because of their ability to raise private funds and attract international students, Birgeneau says. He explains that for the first time in Berkeley's history, in the past year the money it has received from private philanthropy exceeded the funds it received from the state.

"Our alumni are refusing to let us deteriorate: they are stepping up to make sure that we remain an outstanding institution," he says.

But, he notes, this also means a changing character: "Our financial model is evolving and the state is becoming progressively less important."

The seriousness of the situation is evident in the fact that public budget cuts worry the private institutions, too, emphasising the interconnectedness of the system.

Etchemendy's biggest concern for the future is not any Stanford-specific issue but the state university system. A depleted Berkeley or San Francisco would weaken Stanford, too, he notes, outlining how all three are vital for innovation and the economy. Berkeley graduates flow to Stanford and vice versa, and there are many research collaborations.

"I don't think it would be useful to Caltech or California to see UC schools diminished," adds Hunt.

"Ten years from now, what will the list of top institutions look like?" asks Douglass. "It is hard to tell, but if the state of California continues on this route of disinvestment, the UC will struggle to have so many institutions in the top tier and this is a worry."

He posits that the UC system's coherence is threatened, manifesting itself in a creeping "dog eat dog" mentality between the campuses.

First, he notes, campuses are taking different approaches to the proportion of international and out-of-state students they will accept (see box, below). It is not, he explains, that he necessarily has a problem with the proportion rising, but rather that each campus is seeking its own level without much regard for the overall system.

He also sees an increasing interest from campuses in whether they could charge higher tuition fees than others (although nothing has been decided yet).

"You would be saying you were going to have financially weak sisters and this is not...why the UC is such a high performer across the board," he says.

Others such as Walker also raise concerns about rising fees. Inevitably, fee increases mean fewer poor people can attend, which diminishes educational opportunities for Californians and ultimately undermines the state's high-skills economy, which is good for no one.

At the root of the problem, he believes, are the anti-tax policies that have come to rule the roost in California during the past two or three decades. Because the state is bringing in less tax revenue, there is no money in the kitty for rainy days, so every time there is an economic crisis, the bottom falls out of the system.

"The regents respond with all they can think to do, which is to raise tuition fees," he says. "This makes sense in the short run because you don't want to start firing everybody, but it does mean that you end up with a semi-private system."

He also warns that raising tuition fees will alienate the faculty.

"There are lots of us here who like our mission, who like being at a public university serving ordinary kids and not just the privileged elite. I don't want to be at Stanford," he says, although he emphasises that it is a great university.

Yet others argue the opposite: that in constrained times, sacrificing some access so that quality can be maintained is a price worth paying. The balance between remaining "really good" and "really public" has to lie with the former, argues Hollinger, or everything is lost.

"I yield to no one in my respect for the Master Plan or in identifying with the Berkeley campus...I was able to come here (as an undergraduate) because it was really public. But that is not what changed me. Many places were really public. I was changed because Berkeley was really good...Real excellence pays off for California, and we should not trade it away," he says.