The 2017-18 Budget

Military Department

The California Military Department (CMD) is responsible for the command and management of the California Army and Air National Guard, as well as other activities. To support the operations for a force of about 22,000 personnel, the department maintains a headquarters in Sacramento, about 100 armories, and various other facilities throughout the state. The Governor’s budget proposes $328 million for CMD in 2017-18, which is an increase of $98 million (43 percent) from current-year estimated expenditures. This increase is driven primarily by proposed funding for a new Headquarters Complex, as discussed below. Of the funding amount proposed for CMD in 2017-18, $147 million is from the Public Buildings Construction Fund associated with lease revenue bonds for the Headquarters Complex, $58 million is from the General Fund, and the remainder is mostly from federal funds.

In this analysis, we discuss our findings and recommendations regarding two proposals for CMD included in the Governor’s 2017-18 budget: (1) the Sacramento Consolidated Headquarters Complex and (2) Advance Plans and Studies.

Sacramento Consolidated Headquarters Complex

LAO Bottom Line. The Governor proposes $147 million in lease revenue bond funds for the design-build phase of the Headquarters Complex project. The request reflects a roughly one-third increase in project costs since 2016-17, driven primarily by the choice to construct the project as Zero Net Energy (ZNE). We withhold our recommendation until CMD reports at budget hearings on the cost-effectiveness of constructing the project as ZNE.

Background

Headquarters Staff Currently Spread Out in Multiple Buildings. Currently, CMD headquarters staff are divided between three leased buildings in the Sacramento region. According to the department, the location and the condition of these buildings present several challenges. For example, the distance between these buildings can make coordinating activities amongst the different staff difficult. In addition, the buildings currently do not meet security requirements set forth by the U.S. Department of Defense, such as having a certain amount of land in between their entryways and the parking lots and walls with a certain thickness.

Plans for New Consolidated Headquarters Building. In view of the above concerns with the existing leased facilities, the Legislature provided $1 million in 2006-07 for CMD to acquire a purchase option for 30 acres of land at Mather Field in Sacramento County. (A purchase option is a mechanism used to reserve land for future purchase, in order to prevent others from buying the land.) The land was proposed to be the site of a new consolidated headquarters building that would house all headquarters staff and meet federal security requirements. In 2015-16, the Legislature provided an additional $9 million from the General Fund to purchase the site. The Legislature provided another $7 million in 2016-17 to develop the performance criteria for the project. At that time, CMD estimated the total project cost at $124 million.

Governor’s Proposal

The Governor’s budget proposes $147 million in lease revenue bond funds for the design-build phase of the Headquarters Complex project. This will bring the total cost of the project—including the $10 million for acquisition and $7 million for performance criteria—to $163 million.

LAO Assessment

Proposal Reflects Significant Increase in Costs, Mostly Due to Addition of ZNE. The estimated cost of the Headquarters Complex project has increased by close to $40 million since the Legislature approved performance criteria in 2016-17—roughly one-third of the estimated project cost at that time. According to CMD, almost half of the cost increase—about $18 million—results from the department’s decision to construct the building to be ZNE. A building is ZNE if the total amount of energy used on an annual basis is equal to the amount of renewable energy created on the site. To date, the state has not constructed any ZNE buildings. CMD indicates that its decision to propose the building as ZNE is driven by the Governor’s Executive Order B-18-12, which calls for 50 percent of new facilities beginning design after 2020 to be ZNE. In addition to the inclusion of ZNE, other major contributors to the cost increase include the failure to account for cost escalation ($15 million) and the state’s CalGreen building standards ($2 million) in the 2016-17 cost estimate, as well as the emergence of some unanticipated site work ($6 million).

Insufficient Evidence That Addition of ZNE Is Cost-Effective for State. We recognize that energy conservation is a worthy state goal. This is because energy conservation can help reduce the state’s environmental impact, and help it achieve its climate change-related goals. However, CMD has not been able to provide analysis to substantiate the cost-effectiveness of constructing the Headquarters Complex project as ZNE at this time. For example, it has not provided an estimate of the energy savings or other cost savings that are anticipated to be achieved by the project. Consequently, it is unclear if adding the ZNE requirement to this project is a good fiscal investment for the state. The department indicates that it is in the process of further refining its cost estimate for the project which should include a more refined ZNE cost estimate, and that updated cost estimate may be available in the coming weeks.

If this project were shown not to be cost-effective, the state could accomplish more energy savings by investing in other projects—such as energy efficiency projects or solar photovoltaic projects—with the same funding.

LAO Recommendation

Withhold Recommendation. In view of the above, we withhold recommendation on the proposed $147 million in lease revenue bonds until CMD reports at budget hearings on the cost-effectiveness of constructing the Headquarters Complex as ZNE, as well as any revisions to the project’s cost estimate. This information will help ensure that the Legislature has the best information available before deciding on the level of lease revenue bond funding to authorize for the project.

Advance Plans and Studies

LAO Bottom Line. We recommend that the Legislature reject CMD’s proposal for $300,000 ($150,000 General Fund and $150,000 federal funds) for the development of advance planning documents for future armory renovation projects. We find that the proposed funding is not needed at this time because the Legislature has already funded planning work for the next round of proposed armory renovation projects—currently expected to be proposed in the 2018-19 budget.

Background

CMD’s Armory Strategic Plan calls for renovating three armories per year. This plan would allow CMD to renovate most of its roughly 100 active armories within about 30 years and also result in the consolidation of certain armories. Each of the past two budgets have included about $300,000 for CMD to prepare advance planning documents—including conceptual designs and validated cost estimates—related to the renovation of the next couple of projects in its plan. For example, in 2016-17 the Legislature funded advance-planning documents for three armory renovation projects that were expected to be proposed in 2017-18.

Governor’s Proposal

The Governor’s budget proposes $300,000 ($150,000 General Fund and $150,000 federal funds) on a one-time basis for the development of advance planning documents to support three future armory renovation projects. The budget does not include funding to initiate three new projects in 2017-18, as previously planned. Instead, the administration indicates it is delaying these projects until 2018-19.

LAO Assessment

The Legislature has already provided funding for the advance planning documents for the next round of renovation projects—originally anticipated to be proposed for funding in 2017-18, but now expected to be proposed for funding in 2018-19. Accordingly, it is not clear that additional funding for advance planning is needed at this time. We note that CMD indicates that having advance-planning documents for a greater number of projects would enable the department to choose among different options when determining the next set of projects to construct. However, it is not clear that this has been necessary in the past.

LAO Recommendation

Reject Proposal. We recommend that the Legislature reject the Governor’s proposal for $300,000 in one-time advance-planning funds. We find that the requested funding is not needed at this time because of the pause in constructing the next round of projects. The Legislature already provided advance-planning funding for the next round of proposed armory renovation projects now expected to be proposed for construction funding in the 2018-19 budget. In 2018-19, the administration can request more advance planning funding if additional renovations are still expected to begin in 2019-20.