State Project Infrastructure Fund

LAO Bottom Line. The Governor’s May Revision proposes to deposit an additional $630 million General Fund into the continuously appropriated State Project Infrastructure Fund (SPIF). This funding is anticipated to fund the renovation of the Bateson, Unruh, and Resources Buildings, as well as the demolition of the State Printing Plant. We find that if these projects are a legislative priority for General Fund resources, it is reasonable to set aside funding for them. However, we continue to have serious concerns with the SPIF, which we find limits legislative oversight. Accordingly, we recommend modifying the SPIF so that it is no longer continuously appropriated.

Background

Administration Developed a State Office Building Strategy for Sacramento. As part of the 2014‑15 budget, the administration proposed and the Legislature approved funding for a study of state office buildings in the Sacramento area, which was to include assessments of the condition of state facilities (Facility Condition Assessments), a plan for sequencing the renovation or replacement of state office buildings in Sacramento (State Office Building Strategy), and a plan for funding these activities.

The Department of General Services completed the State Office Building Strategy in March 2016 and made some minor revisions to it in January 2018. The State Office Building Strategy includes building three new state office buildings—a new Resources Building on P Street to replace the existing Resources Building, a new building on O Street, and a new building on Richards Boulevard on the existing Printing Plant site. It also includes renovating seven existing state office buildings—the Bateson Building, the Unruh Building, the existing Resources Building, the Board of Equalization (BOE) Building, the Employment Development Department Headquarters and Solar Buildings, the Blue Anchor Building, and the Energy Commission Building. In addition to these projects, the State Office Building Strategy also proposes replacing or renovating the State Capitol Annex (Annex) in consultation with the Legislature’s Joint Committee on Rules.

SPIF Established. The 2016‑17 budget package established the SPIF. The fund is continuously appropriated for the renovation and construction of state buildings. The statutory language governing the fund allows the administration to establish and move forward with projects funded by the SPIF without having to receive legislative approval through the traditional state budget process, as is typically required for capital outlay projects. Instead, statute requires the administration to provide certain notifications and quarterly reports to the Joint Legislative Budget Committee (JLBC) related to SPIF-funded projects as we discuss here. Currently, the SPIF has a fund balance of about $125 million.

Legislature Funded Initial Projects in 2016‑17 and 2017‑18. The 2016‑17 Budget Act and 2017‑18 Budget Act included about $870 million in funding—mostly from lease revenue bonds—for the O Street and new Resources Buildings. The 2017‑18 Budget Act also provided $909,000 in General Fund for the preliminary plans phase of a project to demolish the existing Printing Plant.

Governor’s January Budget Proposal for 2018‑19 Proposed Funding Additional Projects. The Governor’s January budget for 2018‑19 includes $29.6 million from the General Fund for the initial planning phase—known as the performance criteria phase—for (1) the construction of the new building on Richards Boulevard, (2) the renovation of the Bateson Building, and (3) the renovation of the Unruh Building. The administration estimated the remaining design and construction phases of the projects—known as the design-build phase—would total about $1.3 billion and would be funded from lease revenue bonds. The Governor’s budget also proposed $815,000 from the General Fund for the working drawings phase of the demolition of the existing Printing Plant.

Governor’s May Revision Proposal

The Governor’s May Revision proposes to deposit $630 million General Fund into the SPIF in 2018‑19. According to the administration, this funding is anticipated to pay for the following four projects:

Renovation of the Existing Resources Building ($375.9 Million). This includes $8.9 million for the performance criteria phase and $367 million for the design-build phase of this project.
Renovation of the Bateson Building ($155.8 Million). This would fund the design-build phase of this project. (As noted above, the Governor proposed funding the performance criteria phase for this project in his January budget for 2018‑19.)
Renovation of the Unruh Building ($83.6 Million). This would fund the design-build phase of this project. (As noted above, the Governor proposed funding the performance criteria phase for this project in his January budget for 2018‑19.)
Demolition of the State Printing Plant ($14.7 Million). This would fund the construction phase of this demolition project. (As noted above, the Governor proposed funding the working drawings phase for this project in his January budget for 2018‑19.)

LAO Assessment

Reasonable to Set Aside Funding for Priority Projects, and Projects Appear Reasonable. We think the projects that the administration anticipates supporting with the proposed funding are reasonable to undertake. In our view, it makes sense for the state to invest in the repair and renovation of its physical assets in order to ensure that they can continue to provide services for years to come. Furthermore, the Facility Condition Assessments determined that the existing Resources Building, Bateson Building, and Unruh Building were in poor condition. Thus, it is reasonable to pursue a renovation of these buildings. (We would note, however, that we have raised concerns about the apparent high costs of the Unruh and Bateson Buildings in this February 2018 analysis.) With regard to the Printing Plant demolition, we have not raised concerns about it because the demolition appears justified regardless of the ultimate use of the site. (See here.)

Unclear if Anticipated Projects Are Highest Priorities. The Legislature will want to consider which projects are its highest priorities—whether the four projects discussed above or others—when providing additional funds for state buildings. We note that, in previous analyses, we have raised concerns with the lack of some key information on the larger State Office Building Strategy—such as alternatives considered. (See here and here). This information would help the Legislature assess whether the proposed projects are consistent with its priorities.

Minimal Information Available on Renovation of Resources Building. While the renovation of the existing Resources Building is envisioned in the State Office Building Strategy, this is a new project and the administration has not provided a Capital Outlay Budget Change Proposal (COBCP) for it. Accordingly, the Legislature lacks key information on this project—such as scope and cost details. Without this information and given the amount of time the Legislature has to review the May Revision, it is difficult to analyze the reasonableness of the cost estimate for the project or determine whether it is the highest priority for funds.

Current SPIF Process Limits Legislative Oversight. We find that the use of the SPIF process greatly reduces legislative oversight, as we have pointed out in previous analyses. (See, for example, here and here). The administration indicates that it anticipates funding the four projects discussed above. However, because of the design of the SPIF (such as it being continuously appropriated), the funds could be used for a different mix of projects than are currently proposed, including for establishing new projects that have not yet been considered by the Legislature. While current statute requires certain reports and notifications to the Legislature for projects undertaken with SPIF funds, these notifications do not serve as adequate replacement for the typical capital outlay budget process, for a few reasons:

First, the notification process through the JLBC provides the Legislature with significantly less time to review proposed projects than the approval process through the traditional capital outlay process. The JLBC review period is as little as 20 days in some cases—far less than is necessary to complete a thorough evaluation of a large project.
Second, the notification process is less transparent to the public than the traditional capital outlay process, which includes public hearings that enable the Legislature to ask questions and the public to provide input. For this reason, the JLBC notification process is typically reserved for minor, midyear changes to the budget rather than substantial actions such as the approval of new projects costing many millions of dollars.
Third, the notification process does not require the same level of information that would typically be required for a COBCP. For example, a COBCP typically includes a narrative describing the justification for the project. It also includes an evaluation of the other available alternatives. This type of information is not a required part of the SPIF notifications, but would be valuable to assist the Legislature in determining whether the administration’s proposals make sense.

LAO Recommendations

Set Aside Funding for Priority Projects. If the Legislature prioritizes spending additional one-time General Fund for building projects, we recommend reserving funding—whether $630 million or another amount—for this purpose. When determining the appropriate amount to set aside, the Legislature will want to consider whether the proposed projects reflect its highest priorities or whether there are other projects—such as the Annex or BOE Buildings—that it would prefer to fund first. We also continue to recommend that the administration provide additional information on its strategy for state buildings in the Sacramento area to inform future decisions on how to prioritize funding.

Modify SPIF to Eliminate Continuous Appropriation Authority. We recommend that the Legislature pass trailer bill legislation that modifies the SPIF so it is no longer continuously appropriated. Instead, we recommend that funding provided in the SPIF for state office building projects go through the typical budget process. Doing so would ensure that the Legislature could control how these funds were used and make it easier for the Legislature to provide robust oversight. We note that the activities that the administration anticipates funding with the $630 million are not envisioned to occur until at least 2019‑20. Accordingly, if the Legislature ultimately wants to support them with these funds, they would not be delayed by going through the typical budget process.