LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Overview

Proposed funding for capital outlay in the budget year totals $1.3 billion. Most of this amount (86 percent) will come from bond proceeds. Almost two-thirds of the proposed spending are for higher education facilities.

The 2005-06 Governor's Budget proposes approximately $1.3 billion for capital outlay programs (excluding highway and rail programs, which are discussed in the "Transportation" chapter of this Analysis). This is spending on physical assets—such as college buildings, state parks, prisons, and office space.

Figure 1 summarizes the proposed 2005-06 expenditure authority for the capital outlay program. The proposed program represents a decrease of almost $499 million (28 percent) from the current-year level. The decrease occurs primarily in the higher education area because most of the funding from higher education general obligation bonds approved by the voters in 2004 has now been spent or committed.

Figure 1

State Capital Outlay Program By Major Program Area

(Dollars in Millions)

 

Estimated
2004-05

Proposed
2005-06

Change

 

Amount

Percent

Legislative, Judicial and Executive

$8.7

$10.1

$1.4

16.1%

State and Consumer Services

4.7

66.8

62.1

1,321.3

Business, Transportation and Housing

9.1

56.2

47.1

517.6

Resources

268.5

244.0

-24.5

-9.1

Health and Human Services

0.6

5.4

4.8

800.0

Youth and Adult Corrections

29.0

50.8

21.8

75.2

Education

73.2

17.0

-56.2

-76.8

Higher Education

1,360.8

829.1

-531.7

-39.1

General Government

32.5

8.9

-23.6

-72.6

    Totals

$1,787.2

$1,288.4

-$498.8

-27.9%

Funding Sources for Capital Spending

The Governor's budget proposes funding the capital outlay program primarily from general obligation and lease-revenue bonds. Specifically, the budget requests $963 million in funding from general obligation bonds and $145 million from lease-revenue bonds. In total, these bonds would make up about 86 percent of the program's funding in 2005-06. About $74 million in capital outlay projects would be supported directly from the General Fund, while special funds and federal funds would provide $107 million in project funding.

Figure 2 compares the sources of funds for the 2004-05 capital outlay program to those proposed for 2005-06. As the figure shows, funding from general obligation bonds is proposed to decrease from about $1.5 billion in 2004-05 to less than $1 billion in 2005-06. This drop is because most of the higher education general obligation bonds approved by the voters in 2004 have been spent or committed. The budget proposes increasing the amount from the General Fund by almost $37 million and increasing the amount from special funds by about $32 million. Most of the General Fund increase is for prisons and flood control projects. The special fund increase is primarily for Caltrans, Highway Patrol, and Department of Motor Vehicles offices, and funding for various land conservancies and the Department of Parks and Recreation.

Figure 2

State Capital Outlay Program Sources of Funding

(In Millions)

 

Governor’s Budget

Funds

2004-05

2005-06

General Fund

$36.7

$73.7

General obligation bonds

1,510.8

963.2

Lease-revenue bonds

161.1

144.8

Special funds

63.7

96.1

Federal funds

14.9

10.6

  Totals

$1,787.2

$1,288.4

Spending by Department

Figure 3 shows the amounts proposed in the Governor's budget for each department's capital outlay program. In total, the budget proposes $1.3 billion for capital outlay projects in 2005-06. Completing all the projects will require an additional $859 million in future costs. Thus, the capital outlay program proposed in the budget represents a total cost of roughly $2.1 billion.

Figure 3

2005-06 Capital Outlay Programs Budget Year and Future Costs

All Funds (In Thousands)

Department

Proposed
2005-06

Future Costs

Totals

Legislative, Judicial, and Executive

Office of Emergency Services

$1,493

$1,493

Justice

8,594

8,594

State and Consumer Services

General Services

$66,769

$66,769

Business, Transportation, and Housing

Transportation

$34,646

$34,646

Highway Patrol

10,237

$11,884

22,121

Motor Vehicles

11,286

11,286

Resources

Forestry and Fire Protection

$47,084

$26,046

$73,130

Wildlife Conservation Board

21,596

21,596

Boating and Waterways

3,380

3,380

Parks and Recreation

39,743

17,922

57,665

Water Resources

43,300

145,131

188,431

Land conservancies

88,931

88,931

Health and Human Services

Mental Health

$5,437

$5,437

Youth and Adult Corrections

Corrections

$47,206

$125,644

$172,850

Youth Authority

3,604

13,967

17,571

Education/Higher Education

Department of Education

$17,033

$17,033

University of California

305,161

$255,518

560,679

California State University

261,507

167,129

428,636

Community Colleges

262,476

95,602

358,078

General Government

Military

$7,077

$7,077

Veterans Affairs

862

862

Unallocated Capital Outlay

1,000

1,000

  Totals

$1,288,422

$858,843

$2,147,265

As the figure shows, the bulk of the proposed funding will be for capital improvements in the three segments of higher education—totaling $829 million (or 64 percent of total) in 2005-06, with anticipated future costs of $518.2 million. Other than higher education, the budget-year capital outlay program focuses on resources programs. The budget proposes $244 million for these programs in 2005-06, including $88 million for land acquisitions by various conservancies, $47 million for the Department of Forestry and Fire Protection to replace and relocate various fire stations and facilities, and $43 million for the Department of Water Resources mainly for flood control. The resources projects will require a total of $189 million to complete in future years.

For the Department of Corrections, the budget proposes capital projects totaling $47 million in 2005-06. About 60 percent of the amount is for a central heating, ventilation, and air conditioning system at the Chuckawalla Valley State Prison. The remaining funds are primarily for projects to address deficiencies in wastewater treatment systems at various correctional institutions. The department's projects will require an additional $125.6 million in future costs to complete.

Figure 4 displays the proposed funding for each department, by source. This shows that most funding for higher education and resources programs would come from general obligation bonds, while funding for transportation (buildings) and highway safety would come from special funds such as gasoline tax and vehicle registration fee revenues. The General Fund and lease-revenue bonds will be the main source of funds for correctional, fire protection and flood control projects, and general state offices.

Figure 4

2005‑06 Capital Outlay Program Funding Sources by Department

(In Thousands)

 

GO
Bonds

LR
Bonds

General
Fund

Othera

Totals

Legislative, Judicial, and Executive

Emergency Services

$1,493

$1,493

Justice

$8,594

8,594

State and Consumer Services

General Services

$750

$49,082

$16,937

$66,769

Business, Transportation, and Housing

Transportation

$34,646

$34,646

Highway Patrol

10,237

10,237

Motor Vehicles

11,286

11,286

Resources

 

 

 

 

 

Forestry and Fire Protection

$41,746

$5,338

$47,084

Wildlife Conservation Board

$545

$21,051

21,596

Boating and Waterways

3,380

3,380

Parks and Recreation

25,898

13,845

39,743

Water Resources

26,600

16,700

43,300

Land conservancies

80,264

8,667

88,931

Health and Human Services

Mental Health

$5,437

$5,437

Youth and Adult Corrections

Corrections

$28,881

$18,325

$47,206

Youth Authority

3,604

3,604

Education/Higher Education

Department of Education

$16,563

$470

$17,033

University of California

$305,161

305,161

California State University

261,507

261,507

Community Colleges

262,476

262,476

General Government

 

 

 

 

 

Military

$3,484

$3,593

$7,077

Veterans Affairs

862

862

Unallocated

1,000

1,000

Totals

$963,201

$144,866

$73,650

$106,705

$1,288,422

a  Includes special and federal funds.

Bond Funding and Debt-Service Payments

Figure 5 shows the state's General Fund debt-service expenditures for bonds that support traditional outlay projects from 1997-98 to 2005-06. It shows that these expenditures have increased in recent years, and are projected to reach $4 billion in 2005-06, up about $366 million from the current-year level. The total consists of $3.3 billion related to general obligation bonds, and about $655 million related to lease-revenue bonds. The rapid increase between 2003-04 and the current year is partly related to the conclusion of a two-year debt refinancing program undertaken by the Treasurer to help deal with the budget shortfall. This resulted in the deferral of about $900 million in annual debt payments in both 2002-03 and 2003-04. In addition, growth in debt service costs reflects voter approval and state issuance of a substantial amount of new debt for schools, resources, and other purposes.

Budget-Related Borrowing Imposing Additional Debt-Service Costs

In addition to costs associated with capital outlay related bonds, the state is also incurring annual costs for budget-related debt. This includes about $1.2 billion annually beginning in 2004-05 for the repayment of the deficit-financing bonds authorized by Proposition 57 (approved by the voters in March 2004). Under the Governor's budget plan, the state would also incur annual costs beginning in 2006-07 for debt service on pension obligation bonds (about $48 million annually) and a judgment bond (about $30 million annually).

The level of General Fund debt-service payments stated as a percentage of state revenues is commonly referred to as the state's debt service ratio (DSR). This ratio is used by policymakers and the investment community as one indicator of the state's debt burden. As shown in Figure 6, California's DSR for traditional capital outlay purposes peaked in the mid-1990s at about 5.4 percent before falling back to about 3 percent in 2002-03, reflecting the deferral of debt payments discussed above. The DSR rebounded beginning in 2003-04, and is expected to reach 4.7 percent in the budget year. We project that the DSR will rise further to around 5.5 percent by 2009-10, as the over $30 billion in currently authorized bonds are sold off. When the payments for budget-related bonds are included, the DSR rises to slightly over 7 percent by 2009-10.


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