Analysis of the 2005-06 Budget Bill Legislative Analyst's Office February 2005

Insufficient Bond Funds to Complete All Higher Education Projects

The budget includes funding for development of preliminary plans and/or working drawings for 17 higher education projects. These projects will require substantial future funding to complete construction. Existing 2004 bond funds are insufficient to cover all of these future costs and the availability of state funds to complete construction of these projects is uncertain. We recommend that remaining 2004 bond funds be allocated to these projects in a priority order. We further recommend that seven lower priority projects be funded contingent upon the segments committing to use nonstate funds to complete the projects in the event state funds are not available in the future.

The source of state funds for the higher education capital outlay proposals in the Governor's budget is the Higher Education Capital Outlay Bond Fund of 2004. The fund was established by voter approval of Proposition 55, the Kindergarten-University Public Education Facilities Bond Act of 2004. That act authorized the issuance of $12.3 billion of general obligation bonds—including $10 billion for K-12 education facilities and $2.3 billion for higher education facilities. Figure 1 summarizes the amount of funds authorized for higher education facilities in the 2004-05 budget and the amounts proposed for 2005-06 in the Governor's budget.

The Governor's budget proposes $829 million for new projects and continuing projects that have been partially funded in prior years. Included is $69 million for partial funding of 17 new and continuing projects in the three segments that will require an estimated $419 million of future funding beyond 2005-06 to complete their construction.

Given these future costs, there would not be sufficient money remaining in the 2004 bond fund to cover the future funding requirement. Specifically, only $199 million would be available after 2005-06 if the Governor's proposed projects are approved. This means, in order to fully fund all the proposed projects, an additional $220 million will be needed beyond 2005-06 from either future voter-approved general obligation bonds, lease-revenue bonds, the General Fund, or some nonstate funds from the segments. Because the availability of state funds to complete these projects is uncertain, we do not think proceeding with these projects as proposed in the budget year would be prudent. Instead, we recommend that the uncommitted 2004 bond funds be allocated in accordance with the priorities we discuss below.

Target Remaining Bond Funds to High Priority Projects. We first recommended priorities for allocating limited state funds for capital outlay for higher education facilities in our Analysis of the 2001-02 Budget Bill. Our priorities, as summarized in Figure 2, were based on the principles of, first, providing safe and reliable infrastructure, then using existing facilities efficiently, then providing new facilities for student instruction to meet the needs of enrollment growth and programmatic changes, and finally providing other new facilities needed to support the academic program.

We examined the 17 projects that will need future funding and classified them according to the seven priority rankings in Figure 2. We did this using information about the projects submitted by the segments—among the most important of which was the amount of space devoted to different uses in a building. Our project rankings are shown in Figure 3.

Figure 3 shows that the $199 million of unallocated 2004 bond funds is enough to fund the estimated $173 million needed to complete the ten projects in the first four rankings. This would leave about $26 million of unallocated 2004 bond funds, which is not sufficient to fund the next priority project—the Santa Cruz McHenry Project—with an estimated future cost of $40 million. In any event, we believe that the $26 million amount is a reasonable reserve for contingencies. Therefore, we recommend the Legislature allocate remaining 2004 bond proceeds to fund completion of the top ten projects shown in Figure 3.

Only Approve Lower Priority Projects With Nonstate Funding Commitment. As noted above, we recommend that the state not commit to the start of the last seven projects ranked in Figure 3. The budget requests a total of $46.2 million in 2005-06 for these projects, and they will require an additional $246 million in future years to complete. If funding for these seven projects in the budget year is approved but state funds are not available in the future to complete their construction, funding in the budget may be wasted. For example, preliminary plans and working drawings completed in 2005-06 would be shelved, awaiting funds to construct the projects. For the Santa Cruz McHenry Project, which is requesting only a portion of the funds needed for construction, there is a risk that about half of the building might get constructed with funds appropriated in 2005-06, but the other half could not be completed if additional state funds were not available in the future. This could place the Legislature in a position of having to fund the construction of the remaining half of the building with funding that otherwise would have been available for higher statewide priorities.

Accordingly, we recommend that funding proposed in the budget for these seven lower priority projects be approved contingent upon the segments committing to use nonstate funds to complete the projects if state funds are not available in the future. This can be carried out by stating explicitly the segments' funding commitment in the supplemental report language that defines these projects.