LAO Analysis of the 1997-98 Budget Bill
Capital Outlay Crosscutting Issues

1. Financing Future Capital Outlay Costs
1. State's Physical Facilities
2. Projects Should Have
3. State Should Consider
2. Funding Higher Education Capital Outlay
1. Previously Approved Projects
2. New Projects
3. Analysis of Segments' Capital Outlay Programs
3. Capital Outlay Budgeting
1. Background
2. Administration of Projects
3. Concerns With Administration Actions
4. University of California,
5. Department of Forestry, Telecommunications Project
6. Administration Position
7. Recommendation
4. Federal Crime Bill Grants

1. Background
2. The Prison Construction Grant Program
3. How Much Federal Funding Will the State Receive?
4. Administration's Funding Plan
5. Analysts's Recommendations
6. Legislature Should Appropriate Funds Each Year
7. Allocation Plan for Federal Grants

As discussed in the Overview section of this chapter, the Governor proposes $1.2 billion in the budget year for capital outlay. Almost all of this amount would be for projects of General Fund-supported agencies, such as higher education ($520 million), youth and adult corrections ($610 million), and the Department of Health Services ($93 million).

In addition to the budget-year cost of $1.2 billion, the proposed projects would cost an additional estimated $1.3 billion to complete. Currently authorized general obligation bonds that are earmarked for state capital outlay--in higher education, corrections, and parks--are virtually depleted. With the exception of a proposal to fund the future construction costs of two new state prisons (using $511 million in lease-payment bonds), however, the Governor has not provided a financing plan for these remaining future costs. The Governor has indicated his support for two general obligation bonds, but these bonds will be for local government facilities (K-12 schools and an infrastructure bank), not for state facilities.

State's Physical Facilities

The state faces similar demands with regard to many other areas--such as correctional facilities, state hospitals, parks, and office facilities. As a result, for the foreseeable future the state will have to commit a portion of its annual resources--on a pay-as-you-go basis and/or through debt financing--for capital improvements to a wide variety of state facilities.

The level of state spending on capital outlay should be based on a thorough statewide needs assessment, a determination of priorities, and a financing plan to fund the highest priorities. With regard to a needs assessment, state departments currently prepare five-year capital outlay plans. These individual five-year plans, however, are not consolidated into a single statewide plan that would provide the Legislature with an overall picture of the state's capital outlay needs and priorities and associated costs.

The Legislature has adopted, and sent to the Governor numerous times, legislation requiring the administration to (1) provide an integrated five-year state capital outlay plan, including priorities and a financing plan; and (2) present this plan as part of the annual budget. This legislation has repeatedly been vetoed--the most recent example being AB 907 (Vasconcellos) in 1996. Lacking such a plan, the Legislature is again presented with a series of funding proposals for 1997-98 absent any statewide context of needs and priorities or a financing plan to complete all proposed projects.

Projects Should Have

Because state facilities are used over a long period of time, decisions about building or renovating facilities should be considered with a long-term perspective. We believe that, if the state is to get the "biggest-bang-for-its-buck" in addressing state facilities needs, the administration and the Legislature must adopt a more deliberate capital outlay planning process. We believe that the Legislature can take a first step along this path by holding the administration accountable for the plan it has put forward for 1997-98. To do this, we recommend that the Legislature not approve any project unless there is a specific plan for funding its future cost.

Funding Options. There are several options for funding the state capital outlay program:

• Pay-As-You-Go. Direct appropriations--either from the General Fund or special funds--are the least costly financing method. This approach, however, requires an up-front commitment of current resources. One potential funding source for capital outlay would be to dedicate tidelands oil revenues for this purpose. In previous years, a large portion of these monies were deposited in the Special Account for Capital Outlay, but in the last three years they have been transferred to the General Fund. The administration again proposes to transfer tidelands revenues ($59 million) to the General Fund in 1997-98. The administration has also proposed $137 million in General Fund monies for capital outlay in 1997-98. Although this amount is only 0.3 percent of total proposed General Fund spending for 1997-98, it represents a large increase when compared to recent fiscal years.
• Lease-Purchase or Lease With Purchase Option. This method has been used most often for state office buildings and for field offices of the California Highway Patrol and the Department of Motor Vehicles.
• General Obligation Bonds. Because these bonds are backed by the full faith and credit of the state, they sell at the lowest possible interest rates, thus minimizing the state's debt financing costs.
• Lease-Payment Bonds. Unlike general obligation bonds, these bonds do not require voter approval. Thus, the Legislature can authorize any amount of lease-payment bonds it wishes with a simple majority vote and approval by the Governor. These bonds are more costly than general obligation bonds because they require the issuance of more debt and sell at higher interest rates.

The Legislature of course is not restricted to using the options discussed above. Nor is the Legislature restricted to these options if other cost-effective financing options become available. In order to make an informed financing decision, however, the Legislature needs clear information on the state's capital outlay needs, priorities, and total cost over at least a five-year period. With this information the Legislature can then determine the most cost-effective means of financing and assess the trade-offs of these costs with other statewide program needs.

State Should Consider

A viable capital outlay plan would also help the Legislature more effectively use bonds in financing its future capital costs. In recent years, the state has placed before the voters single-purpose bond issues, the proceeds of which can only be used for a given program (for example, higher education). There are valid reasons to use single-purpose bonds (for instance, it may be easier to obtain voters' approval for a particular program area). In most cases, however, the state's high-priority projects span across program areas. It may be, for example, that the state's highest priorities for the next $500 million in capital outlay funds would be a prison, two higher education instructional buildings, a water resources project, and a state hospital modernization project. The placement of a few single-purpose bonds on the ballot would not address the state's varied needs.

Accordingly, we recommend that the Legislature consider placing an appropriately sized "State Facilities Bond Act" on the June 1998 ballot for voter approval. The proceeds from this measure would be available for appropriation by the Legislature for any state agency based on the Legislature's evaluation of statewide needs and priorities. Between 1955 and 1964, the voters approved four such multipurpose bond measures, which provided a total of $1.05 billion to address a variety of the state's capital outlay needs at that time. We believe that, if the Legislature were to first develop a capital outlay plan that identified the state's most critical current facilities needs across all programs, the voters could have some degree of confidence in a bond measure that would propose to fund those needs.

Over the last ten years, capital outlay programs for the three segments of higher education have been financed with $2.8 billion in voter-approved general obligation bonds and $2.2 billion in lease-payment bonds authorized by the Legislature. In March 1996, the voters approved a $3 billion general obligation bond for education that earmarked $975 million for higher education facilities. In the 1996-97 Budget Act, the Legislature appropriated about $438 million of these monies for the three segments and for Hastings College of the Law. Thus, about $537 million remain available for appropriation in 1997-98.

The available bond funds fall far short of the estimated cost to complete all higher education projects that (1) have been previously approved by the Legislature (that is, funded for preliminary plans and/or working drawings) or (2) are new projects that are being submitted to the Legislature in 1997-98 for initial funding. Figure 7 shows that it would cost over $1.4 billion to complete all previously approved projects and all new projects. This amount exceeds the available bond funds by almost $850 million. As discussed in the previous Crosscutting Issue, "Financing Future Capital Outlay Costs," the administration has presented no plan to address these future funding needs for higher education or for most other state capital outlay programs.

Figure 7
Higher Education Capital Outlay Funding Shortfall
(In Millions)
	Amount
Costs to complete previously approved projects
Projects in 1997-98 Governor's Budget	$404.0
Projects not in Governor's budget	393.0
Subtotal	($797.0)
Costs to complete new projects	$587.0
Total cost of all projects	$1,384.0
Available bond funds	$537.5
Funding shortfall	$846.5

The situation described above is similar to, though greater in magnitude than, previous capital outlay budgeting for higher education. In recent years, many projects have been initially funded (for preliminary plans and/or working drawings) from a particular general obligation bond. Due to the cost of all projects funded from that bond, however, the ability to fund the construction and equipment phases of many projects is often dependent on voter approval of additional general obligation bonds or legislative authorization of lease-payment bonds. In both 1990 and 1994, the voters rejected general obligation bond measures for higher education, which in both instances caused at least a one-year deferral of those projects (or project phases) that were to be funded from the failed measures. Likewise, the proposed 1997-98 capital outlay program for higher education includes almost $38 million of 1996 bond funds for designing projects (in essence, to produce renditions on paper), but unless another bond measure is approved in 1998, there will be no funds available to translate the design documents into bricks and mortar.

We believe that it would be preferable for the Legislature to begin budgeting higher education capital outlay so that projects are not initiated until a funding source has been identified to complete them. This could occur in several ways. For example, the Legislature could authorize only those projects that could be initiated and completed within the funding available from a particular bond measure. Alternatively, as discussed later, the Legislature could initiate projects which were identified in a state multiyear capital outlay plan in accordance with the plan's financing strategy--which might be from multiple funding sources.

Given that only $537 million remains available from the 1996 bond to address projects totaling almost $1.4 billion, the Legislature will have to be selective if it is to complete projects within these funding limits. Below, we outline our approach to allocating the remaining 1996 bond monies. Our recommendations are summarized in Figure 8. In general, we recommend that sufficient bond monies be made available for previously approved projects that (1) are included in the Governor's budget, (2) require equipment in order to serve students, and (3) fulfill a prior commitment to match federal funds. Any remaining funds should be allocated for those new projects related to health and safety improvements or infrastructure improvements.

Figure 8
1996 Higher Education Bond Funds Analyst's Recommendations for Allocating Funds Available
(In Millions)
	Amount
Available bond funds	$537.5
Funding recommendations
Previously approved projects in Governor's budget	$391.1
Previously approved projects not in Governor's budget	24.7
New projects	95.9
Total recommended allocation	$511.7
Balance of funds available	$25.8

Previously Approved Projects

Projects Not Included in the Governor's Budget. There are 25 projects with an estimated completion cost of $393 million that have been previously funded by the Legislature but are not included in the Governor's budget. The total includes eight projects for UC ($64 million) that were funded in the 1993-94 Budget Act and 17 projects for CSU ($329 million) that were funded in the 1992-93 Budget Act. Most of these projects have been deferred by the segments for several years because other projects have been determined to be higher priority for state funding. We recommend that the Legislature reserve $24.6 million out of the 1996 bond monies to complete five of these projects. (Four of the five projects involve providing equipment for buildings currently under construction. The other project is the Alternative Pest Control Quarantine and Containment Facility at the UC Davis campus, for which a commitment of state funds is needed to match previously provided federal funds.) The remaining 20 projects that the segments have deferred, are listed in Figure 10. For these projects, we recommend that the segments reevaluate the need for and priority of each project for funding consideration under a future bond issue. (We note that almost $15 million in general obligation bonds have been spent designing these 20 deferred projects.)

Figure 10
Previously Approved Projects Deferred by Segments
(In Thousands)
Campus/Project	Future Cost
University of California
Berkeley--Campus Sewer System Renewal	$1,925
Berkeley--Campus Water System Expansion, Step 2	2,794
Berkeley--Classroom Renovations, Step 1	1,100
Davis--Environmental Design Building C	17,566
Davis--South Campus Infrastructure	4,421
Santa Barbara--Environmental Sciences Building	21,267
Subtotal	($49,073)
California State University
Chico--Education/Classroom/Faculty Office Addition	$12,052
Dominguez Hills--Technology Center, Health, and Administrative Service	33,160
Fresno--Classroom Building	41,854
Fullerton--Auditorium/Fine Arts Instructional Facility	31,922
Fullerton--Physical Education Building Addition	13,670
Humboldt--Behavioral and Social Sciences, Phase 1	20,243
Long Beach--Renovate Fine Arts Building and Addition	14,555
Los Angeles--Remodel Music Building and Distance Learning Classroom	13,548
Sacramento--Classroom Building 2	14,079
San Bernardino--Social and Behavioral Sciences Building	30,742
San Jose--SPX Renovation	17,042
San Jose--Humanities Building	28,296
San Marcos--Academic 2, Buildings 26/27 and 37	25,303
Stanislaus--Educational Services Building	22,825
Subtotal	($319,291)
Total	$368,364

New Projects

We recommend that the Legislature use the $122 million balance of funds that would be available to fund meritorious projects related to health and safety improvements or infrastructure improvements. Such projects are intended to protect building occupants and to preserve the taxpayers' previous investments in specific higher education facilities. The 17 projects that we believe fit these criteria and thus recommend for approval are listed in Figure 11. The projects shown in Figure 11 have a total cost of $96 million, leaving a balance of almost $26 million in available 1996 bond funds. This amount could be used for other new projects or as a reserve in case augmentations are needed for those projects funded from the 1996 bonds.

Figure 11
New Safety/Infrastructure Projects Recommended for Approval
(In Thousands)
Campus/Project	Budget Bill Request	Future Cost	Total
University of California
Berkeley--Seismic Safety Corrections, Barker Hall	$589	$12,815	$13,404
Irvine--Administration Building Seismic Corrections	1,611	--	1,611
Irvine--Humanities Office Building Seismic Improvements	4,479	--	4,479
Los Angeles--Campus Fire Alarm System Upgrade, Phase 2	1,815	--	1,815
Los Angeles--Kinsey Hall Seismic Correction, Phase 2	824	19,775	20,599
Riverside--Boyce Hall Seismic Upgrade	143	2,279	2,422
San Francisco--Chilled Water System, Phase 1	565	11,930	12,495
Santa Barbara--Seawater System Removal	8,787	--	8,787
Subtotals	($18,813)	($46,799)	($65,612)
California State University
Fullerton Seismic Upgrade, Langsdorf Hall	$257	$3,764	$4,021
Fullerton Seismic Upgrade, Library, Phase 2	3,153	--	3,153
Dominguez Hills--Seismic Upgrade, Educational Resources Complex	860	--	860
Maritime Academy--Seismic Upgrade, Campuswide	449	3,591	4,040
San Francisco--Seismic Upgrade, J. Paul Leonard Library	726	12,447	13,173
San Jose--Seismic Upgrade, Sweeney Hall	798	--	798
Subtotals	($6,243)	($19,802)	($26,045)
California Community Colleges
Compton Community College District (CCD), Compton College--Demolition, Phase 1	$1,136	--	$1,136
Long Beach CCD, Long Beach City College--Electrical System Replacement	907	--	907
Saddleback CCD, Irvine Valley College--Fire/Safety Access Road	155	$2,069	2,224
Subtotals	($2,198)	($2,069)	($4,267)
Totals	$27,254	$68,670	$95,924

Based on our recommendations, most new projects would be deferred at least until the voters approve additional bonds for higher education. Figure 12 (see page 26) lists the nine new UC projects (total cost of $98 million) and the seven new CSU projects (total cost of $93 million) that would not be funded in 1997-98 under this approach. In addition, 49 community college projects with a total cost of $300 million would not be funded.

Although many of these new projects may have merit, there simply are not funds available to complete them. We believe it makes little sense to spend millions of dollars to develop plans for projects that the state has no financing strategy to complete. The need for an overall plan and financing strategy is evidenced further by the huge inventory of existing higher education facilities (many of considerable age) and the demands for additional facilities to accommodate growing enrollments. Addressing these needs will require state-funding for capital improvements. This need should be communicated to the voters, particularly if they are going to be asked to approve bond measures for financing the improvements.

Figure 12
New Projects in the Budget Bill Recommended for Deletion
(In Thousands)
Campus/Project	Budget Bill Request	Future Cost	Total
University of California
Davis--Walker Hall Seismic Replacement	$10,784	$1,075	$11,859
Los Angeles--Center for Health Sciences, Earthquake Reconstruction	21,637	--	21,637
Riverside--Fine Arts Seismic Facility	23,913	--	23,913
San Francisco--Health Sciences East Improvements, Phase 1	6,026	--	6,026
San Francisco--UC Hall, Seismic Replacement, Phase 1	299	7,941	8,240
San Diego--Scripps Utilities System Improvements	133	1,761	1,894
Santa Barbara--Broida Hall Building Renewal	449	10,524	10,973
Santa Cruz--Applied Sciences Building Alterations, Phase 1	2,115	1,227	3,342
Santa Cruz--Mount Hamilton Infrastructure Improvements	2,654	2,754	5,408
Subtotals	($68,010)	($25,282)	($93,292)
California State University
Fresno--Infrastructure Improvements	$271	$3,878	$4,149
Long Beach--Peterson Hall addition	1,428	29,983	31,411
Pomona--Engineering labs replacement	23,494	--	23,494
San Francisco--Renovate Hensill Hall (seismic)	1,032	20,102	21,134
Stanislaus--Stockton Regional Center	2,500	--	2,500
Minor capital outlay	14,958	--	14,958
Statewide seismic studies	250	--	250
Subtotals	($43,933)	($53,963)	($97,896)
California Community Colleges
49 projects	$20,169	$279,763	$299,932
Totals	$132,112	$359,008	$491,120

Voter confidence that bonds are addressing the state's most urgent capital outlay needs would be enhanced if the state developed a statewide multiyear capital outlay plan that includes higher education. The plan would identify the capital outlay needs and priorities--from a statewide perspective--and propose methods to finance those needs. With such a plan, the Legislature could determine which statewide projects should be funded from a future bond measure and thus what level of bonds should be placed on a statewide ballot for voter consideration. In the short-term, for example, the Legislature could determine which high priority projects should be funded from a June 1998 bond measure and then place an appropriately sized measure on the ballot to initiate and complete those projects. These projects could then be initiated in the 1998-99 budget. (See "Financing Future Capital Outlay Costs" in the Crosscutting Issues portion of this section for a detailed discussion of this issue.)

Analysis of Segments' Capital Outlay Programs

Background

• Preliminary Plans. Design documents that are approximately one-third complete. Upon completion of preliminary plans, a reasonably accurate estimate of a project's construction cost should be available.
• Working Drawings. Completed design documents and specifications used for the bidding of construction contracts.
• Construction. Includes the costs for construction contracts, a contingency allowance for changes during construction, and quality control through testing and inspection.
• Equipment. (Usually for higher education projects.) Movable equipment and furniture that is directly related to the capital outlay project.

The cost, complexity, and schedule of a project usually determines whether project phases are budgeted in one year or over a multiyear period. In general, all but the smallest projects are budgeted over a minimum of two years. In these cases, preliminary plans and working drawings have often been budgeted in the first year and construction in the second year, followed by equipment funding when the facility is ready to be occupied.

Scope Language. When the Legislature appropriates funds for projects in the annual budget, it also adopts scope language as part of the supplemental report of the budget act. For every major capital outlay project, this language describes the scope (details of what is to be constructed), schedule, and total project cost (by phases, including phases to be budgeted in the future). The language serves as a record of the Legislature's intent as to which facility was approved to be built for a specified total cost. When departments request funding for additional project phases (such as construction) in subsequent fiscal years, the scope language serves as a reference in order to determine whether the scope or cost, as previously approved by the Legislature, has changed.

Administration of Projects

The PWB is a three-person board consisting of the Directors of the Departments of Finance, General Services, and Transportation. The PWB's responsibilities include approval of (1) preliminary plans for all major capital outlay projects, (2) scope changes to projects, and (3) augmentations to the amounts appropriated for projects. Under current law, the PWB may approve augmentations to projects by up to 20 percent of the amount appropriated by the Legislature. (Augmentations above 20 percent require an additional appropriation by the Legislature.) For augmentations between 10 percent and 20 percent, the Director of Finance must provide notification of the proposed augmentation to the Chair of the Joint Legislative Budget Committee and the chairs of the fiscal committees in each house at least 20 days prior to PWB approval. This 20-day notification is also made when the DOF determines that there has been a change in project scope.

The Legislature has recognized that there are always elements of uncertainty in the designing and development of capital outlay projects. The intent of the augmentation and scope change authority discussed above is to allow for these uncertainties by giving the administration a considerable degree of flexibility so that projects can proceed, under specific circumstances, without awaiting legislative approval by the entire Legislature. However, administrative decisions regarding scope changes or cost increases should always be considered in relation to the project asapproved by the Legislature when it provided initial funding authority. To take administrative actions that disregard the scope and cost approved by the Legislature seriously compromises the integrity of both the budget process and existing law.

Concerns With Administration Actions

University of California,

In the 1996-97 Budget Act, the Legislature appropriated $215,000 to prepare working drawings for this building renovation project. (The University of California [UC] had previously funded $204,000 for preliminary plans from nonstate funds.) The adopted scope language in the Supplemental Report of the 1996 Budget Act specified, based on a UC estimate, that the future construction cost of this project would be $4,413,000. The UC completed preliminary plans and the estimated construction cost is now $5,423,000--an increase of 23 percent over the amount approved by the Legislature. This amount for construction is proposed in the 1997-98 Governor's Budget.

At its January 16, 1997 meeting, the PWB approved the preliminary plans for this project as part of its consent agenda. This action allowed the UC to proceed with the preparation of working drawings for the project even though the Legislature has not had an opportunity, through the 1997-98 budget process, to decide whether or not it agrees that the project should be funded at the higher cost or whether the cost can be reduced to maintain the original budget. Alteration of the project scope or cost by the Legislature during the budget process could require subsequent alterations to the working drawings, which would be both more costly and time consuming than if changes were made at the completion of preliminary plans.

Department of Forestry, Telecommunications Project

Administration Position

Recommendation

We therefore recommend that for all new projects proposed in the 1997-98 budget--those without a previous appropriation--the Legislature only appropriate funds for the preliminary plan phase.

Background

The actual grant monies available will depend on annual appropriations by the Congress. Based on actual federal appropriations in federal fiscal year (FFY) 1995-96 and 1996-97, the total five-year appropriations are likely to be much less than the authorized amounts. Figure 13 shows that, while the authorizations in the crime bill increased by 33 percent between 1995-96 and 1996-97, the actual appropriation increased by only 9 percent. The authorization for FFY 1997-98 is almost twice the 1996-97 authorization level, and the remaining two years are slightly higher than the 1997-98 level.

The Prison Construction Grant Program

Uses of the Grant Funds. The purpose of the federal grants is to increase a state's capacity to house violent offenders. The funds may be used to build or expand permanent or temporary correctional facilities to increase bed space for violent offenders. Alternatively, space can be built to house nonviolent offenders to free up existing space for violent offenders. Other features of the grants include:

• As amended in 1995, a 10 percent match by grant recipients is required. (The 1994 law required a 25 percent match.)
• Federal funds cannot be used to acquire land or to supplant state or local funds.
• Up to 15 percent of the state's award can be distributed to local governments for expanding or improving jails or juvenile facilities.



• Grant funds may be used to build or expand facilities to increase capacity for housing violent juvenile offenders. However, if urgent circumstances can be demonstrated, such as an overcrowding of juvenile correctional facilities, funds can be used to increase capacity for confining nonviolent juvenile offenders.
• The FFY 1996-97 appropriation contained language that specifically allowed California alone to use its grant award for reimbursement of the costs for incarcerating criminal aliens.

Grant Funding for California. For FFY 1995-96, a total of $376 million in grants were awarded nationwide under the two programs. California was eligible for grant monies under both programs and received a total of $60.5 million. The state received the maximum allowable VOI grant (9 percent of all funds) and 23 percent of the TIS awards. Grant monies related to the FFY 1996-97 appropriation should be distributed by fall 1997.

How Much Federal Funding Will the State Receive?

The $420 million estimate is therefore subject to considerable uncertainty because it depends on future actions by the Congress and federal allocation of the amount appropriated annually by the Congress. As discussed above, the federal crime bill authorization increases from $1.3 billion in FFY 1996-97 to $2.5 billion in 1997-98. As the President and the Congress attempt to balance the federal budget by 2001-02, it seems unlikely that the appropriations under the federal crime bill will increase from the $670 million provided in FFY 1996-97 to almost $1.3 billion in 1997-98, as assumed by the administration. On the other hand, since the state received 23 percent of total TIS grant funds in FFY 1995-96, it is likely that future allocations to the state will exceed the minimum 14 percent assumed by the administration. The state's TIS share will likely decline to some extent (below 23 percent), however, as other states become eligible under this program.

For illustrative purposes, we prepared an alternative estimate of the state's grant awards assuming (1) total federal appropriations grow by only 10 percent per year and (2) the state receives the maximum 9 percent of VOI grants and 19.5 percent of the TIS grant funds (the midpoint between the state's maximum and minimum potential TIS awards). Under this scenario, the state would receive a total of about $370 million over the five years--about $50 million less than the administration's assumptions.

Administration's Funding Plan

As shown in the figure, the administration's plan has the following features:

• Board of Corrections--Receives $65 million, including $63 million (15 percent of estimated total grants) to be allocated to local governments for local jail and juvenile hall projects.
• Department of the Youth Authority--Receives $28.6 million to build additional housing units and support facilities that will increase the design capacity of Youth Authority institutions by 350 beds.
• Department of Corrections--Receives $273 million in grant monies to (1) complete design work for three new prisons (at Delano and California City in Kern County, and one in San Diego County); (2) perform environmental reviews on three additional prison sites (Taft in Kern County, Sacramento County, and Solano County); and (3) construct one new state prison (at Delano).
• Reserve--$53 million is set aside in contingency reserve.

Budget Bill Proposal. The state has received $60.5 million in federal grants, and the administration's plan anticipates another $54 million in the budget year--a total of $114.5 million. Nevertheless, the budget bill includes specific appropriations of federal grants totaling $311 million--$197 million more than the administration expects to have available in 1997-98. In addition, the budget bill includes Item 5591-401 which presents the administration's five-year expenditure plan and includes language stating that the Legislature supports this plan. The language also states that any additional federal funds that are received are not subject to reporting requirements under Control Section 28.00 of the budget. It is not clear, but this language seems to infer that the administration can (1) allocate any federal funds received above the $311 million appropriated in the budget bill according to its five-year plan and (2) allocate any funds received above $420 million for any purpose allowed under the grant programs.

Analysts's Recommendations

Legislature Should Appropriate Funds Each Year

In lieu of the administration's proposal, we recommend that the Legislature appropriate the federal funds each year based on actual appropriations by the Congress and the state's expected share of those funds. This will allow the Legislature to retain legislative oversight of these expenditures and allocate the funds based on a yearly assessment of its priorities for using these monies. We therefore recommend that the Legislature delete Item 5591-401 and instead appropriate no more than $114.6 million as part of the 1997-98 budget. This total consists of (1) the $60.5 million in grants already awarded to the state plus (2) $54.1 million, which is the minimum that the state will receive based on the actual FFY 1996-97 appropriation. Below we discuss our recommendations for allocating the federal grants.

Allocation Plan for Federal Grants

Board of Corrections. As allowed under the grant programs, we recommend the Legislature provide 15 percent of total funds, or $17.2 million, to local jails and juvenile facilities. The Legislature should direct the Board of Corrections to allocate these funds for modifying existing jails and juvenile facilities in order to increase security levels. As a consequence of the implementation of the "Three Strikes" law and because of increasing numbers of violent juvenile offenders, the state's jail and juvenile facilities do not have sufficient space for the highest security inmates. The board estimates that as many as 2,000 jail beds and most juvenile facilities were not built to the security level currently needed. For both types of facilities there is a significant need for funding security improvements. Funding these types of projects will have a double benefit. First, upgrading security will allow the state to increase its capacity for housing violent adult and juvenile offenders. Second, these projects are less costly than constructing new facilities and consequently, this approach will allow a greater number of local agencies to benefit from the limited federal funds. Regarding the proposed $202,000 for the board's administrative costs, we withhold recommendation in our analysis of the board's support budget, pending receipt and review of a specific plan for spending these monies.

Department of the Youth Authority. We recommend funding only 50 of the 350 additional beds proposed because the number of wards at

Figure 15
Analyst's Recommendations for Appropriating Federal Prison Grants
(In Thousands)
	Budget Bill Amount	Analyst's Recommendation	Comments
Department of Corrections
State Operations:
Grant administration	$167	--	Department can absorb these costs.
Project administration	$2,196	Withhold	Pending review of new inmate population projections.
Capital Outlay:
Design three prisons, environmental impact reports for three prisons	$40,455	Withhold	Pending review of new inmate population projections.
Delano II construction	$22,4910	--	Construction funding not needed in 1997-98.
Subtotals	($267,728)	--
Department of the Youth Authority
State operations	$263	--	Department can absorb costs associated with one project.
Capital outlay	27,608	4,217	Fund 50-bed intensive treatment unit at Southern Reception Center only.
Subtotals	($27,871)	($4,217)
Board of Corrections
State operations	$202	Withhold	Pending receipt of plan for spending funds.
Local assistance	14,868	$17,190	Allocate 15 percent of total funds for local projects.
Subtotals	($15,070)	($17,190)
Department of Mental Health
Capital Outlay	--	$5,518	Expedite construction of perimeter fence at Napa State Hospital.
Total appropriations	$310,669	$26,925
Withhold recommendation	--	$42,853
Amount still available	--	$44,822

Youth Authority institutions will be relatively stable over the next four years, and overcrowding levels will remain below previous levels. The 50-bed addition is for an intensive treatment program that is in need of additional space. With only one project funded with the federal grants, we do not believe the Youth Authority would require federal funds for administrative functions.

Department of Mental Health. The budget includes funding from the General Fund to prepare preliminary plans and working drawings for a perimeter fence at Napa State Hospital. The number of judicially committed/Penal Code patients at the hospital is projected to exceed 900 by June 2001. We recommend a modification to the request and an augmentation of federal grant monies for construction in the budget year.

Department of Corrections. In our analysis of the Department of Corrections' capital outlay budget (in this section), we withhold recommendation on $40.5 million for planning and design of new prisons, pending review of the department's spring 1996 inmate population projections. We also withhold recommendation on $2.2 million in the department's support budget for administrative costs associated with the new prisons. We recommend the Legislature reject the $225 million for construction of the Delano prison because, based on the time that would be required to design the facility, construction funds will not be needed in 1997-98. We also recommend deletion of $167,000 for administrative costs associated with the federal grant programs because the department can absorb those costs.

Our funding recommendations (including those proposals for which we have withheld recommendation) would leave a balance of $44.8 million from the $114.6 million total we estimate the state will receive from the first two federal appropriations. It is important to note that these funds do not have to be appropriated this year. As mentioned earlier, the state has four years to spend the grant monies. Therefore, next year the Legislature could consider how to allocate the remaining funds, plus additional funds that will be available from the FFY 1997-98 appropriation, based on the state's priorities at that time. Below, we discuss one additional option for the Legislature to consider with respect to allocating the available federal grants in future years.

Additional Funding for Local Juvenile Facilities. Although federal rules restrict to 15 percent the amount of the state's grant that can be given to local agencies, federal officials advise that the rules allow for all or a significant portion of the state's grant to be awarded to counties for the construction of facilities for juvenile offenders. Currently, county probation departments operate about 10,000 juvenile hall, ranch, and camp beds for housing juvenile offenders. A 1990 needs assessment projected the need for over $350 million for new beds and repairs to existing facilities. In addition, as we note in our analysis of the Youth Authority's support budget, counties now have fiscal incentives to decrease the number of offenders sent to the state, but this will necessitate the creation of new local alternatives.

The state lacks an updated comprehensive assessment of current and future needs for local juvenile facilities. Consequently, we recommend that the Legislature direct the Board of Corrections to undertake a statewide needs assessment of local facilities and projected needs. The development of new local juvenile facilities would decrease the future need for additional capacity at the Youth Authority and could eventually provide reductions in adult incarceration needs. We believe the use of federal grant funds for these types of facilities should be a high priority.