The 2018-19 Budget: The May Revision

Deferred Maintenance

LAO Bottom Line. The Governor’s May Revision includes $1.06 billion from the General Fund for deferred maintenance projects at various state departments. We recommend that the Legislature (1) adopt budget trailer legislation to create a separate account to fund one-time deferred maintenance projects in the future and (2) deposit into this account the amount of General Fund revenues it decides is consistent with its overall General Fund priorities—an amount that could be higher or lower than that proposed by the Governor. The Legislature could separately appropriate funds in 2018‑19 for any projects it felt were well justified. We further recommend that the Legislature seek information from the administration regarding causes of deferred maintenance at individual departments, as well as longer-term plans to prevent deferred maintenance from continuing to accumulate.

Background

Prior budgets have appropriated significant one-time General Fund (non-Proposition 98) resources for deferred maintenance projects at various state departments. Specifically, the 2015‑16 Budget Act provided $120 million for projects at 12 departments, and the 2016‑17 Budget Act provided $485 million for projects at 21 departments. (Those budgets also included hundreds of millions of dollars in Proposition 98 General Fund for community college deferred maintenance projects, as well as some additional special funds for other departments.)

Governor’s May Revision Proposal

The Governor’s May Revision proposes $1.06 billion on a one-time basis from the General Fund (non-Proposition 98) for deferred maintenance projects at 20 state departments in 2018‑19. (The Governor also proposes $144 million in Proposition 98 General Fund for community college projects and $7 million from the Motor Vehicle Account for projects at the Department of Motor Vehicles and California Highway Patrol.) Figure 1 summarizes the administration’s General Fund proposal.

Consistent with the Governor’s approach in prior years, the administration does not identify the specific projects that departments would undertake with the proposed funding. Instead, the budget requires the Department of Finance (DOF) to provide a list of projects to the Joint Legislative Budget Committee (JLBC) 30 days prior to allocating funds to a department. Subsequent to the allocation of funds, departments may change their list of projects subject to approval by DOF. DOF must notify the JLBC of any projects added with estimated costs of greater than $1 million, as well as provide a quarterly report of all additions and removals of projects. Unlike in prior years, the administration’s proposal includes a provision that would allow departments to use up 10 percent of their allocations—up to $5 million—to conduct assessment of department infrastructure.

LAO Assessment

The deferred maintenance funding provided in prior years reflected an important commitment by the state to tackle its deferred maintenance. The state has invested many billions of dollars in its infrastructure assets, which play critical roles in the state’s economy. Moreover, when repairs to key building and infrastructure components are put off, facilities can eventually require more expensive investments, such as emergency repairs (when systems break down), capital improvements (such as major rehabilitation), or replacement. Thus, while deferring annual maintenance lowers costs in the short run, it often results in substantial costs in the long run. While we commend the administration for continuing to focus attention and resources on deferred maintenance, we have serious concerns with the specific proposal, as outlined below. We note that these concerns are consistent with ones we have raised in prior years, including in our analysis of the 2016‑17 deferred maintenance budget proposal.

Projects Not Identified and No Clear Basis for Proposed Funding Levels. As noted above, the administration has not identified lists of specific projects that would be funded under the proposal. This makes it impossible for the Legislature to evaluate whether the projects eventually undertaken will address the highest state priorities for deferred maintenance, or how to prioritize those projects with other potential uses of these General Fund resources.

The administration also has not provided a clear rationale for why the proposed department funding levels were selected. The administration says it relied largely on lists of deferred maintenance needs developed by departments. However, we have not had an opportunity to verify these lists—which total billions of dollars worth of projects—to understand how projects were identified. We note that based on our initial review of these lists—as in past years—they include a number of projects that are typically not considered deferred maintenance—such as energy efficiency upgrades, electric vehicle charging stations, and replacement of modular office equipment. Additionally, they include some relatively low-priority projects, such as interior painting and carpeting.

Proposed Notification Process Hinders Legislative Oversight. Rather than funding specific projects, the administration’s proposed budget approach is to rely on a JLBC notification process. This approach raises several concerns. First, the process would identify projects proposed for funding after the Legislature has made its decisions on the budget. This would divorce decision making on the amount of funding provided to each department from the set of projects to be funded. As a result, the funding amounts might not correspond with those that would be prioritized by the Legislature, such as projects that are not typically considered deferred maintenance or are low priority, as has happened in recent years. Second, the proposed JLBC process provides the Legislature with much less time to review proposed projects than the traditional budget process and is less transparent to the public. For this reason, the JLBC process is typically reserved for minor, midyear changes to the budget rather than for the initial identification of projects proposed for funding. Third, the proposed process to allow the administration to move forward with changes to funded projects without legislative approval would diminish the Legislature’s control over how funds are spent and could result in the funding of projects that are not consistent with legislative priorities. For most projects (those $1 million or smaller), the Legislature would only be provided with quarterly notification after the fact.

Recent experience with the administration of the deferred maintenance funds provided in 2015‑16 and 2016‑17 highlights the challenges for legislative oversight inherent in this process. For example, in late 2017, the administration notified JLBC that the Department of Fish and Wildlife had changed more than three-quarters of the projects they identified to be supported by funds provided in the 2016‑17 Budget Act and had already moved forward with these changes without providing the required quarterly notification to JLBC.

Underlying Causes of Deferred Maintenance Not Addressed. Providing one-time funding is only a short-term response to the underlying problem—the failure to consistently maintain state assets on an ongoing basis. The administration does not include an assessment of, or a plan to address, the underlying causes of the accumulation of deferred maintenance. Without such a strategy, there is no certainty that departments will have the necessary tools or other resources to address the underlying causes of their deferred maintenance backlogs. A strategy for preventing the accumulation of new deferred maintenance projects is essential to ensuring that the problem does not get worse. Moreover, the administration has not identified a long-term plan for working through the rest of the deferred maintenance backlog.

LAO Alternative Approach

Set Funding Aside for Future Appropriation. We recommend the Legislature (1) adopt budget trailer legislation to create a separate account to fund one-time deferred maintenance projects and (2) deposit into this account the amount of General Fund revenues it decides is consistent with its overall General Fund priorities—an amount that could be higher or lower than the $1.06 billion proposed by the Governor. Under our alternative approach, this funding would then be available for appropriation by the Legislature in future years for departments and specific projects that it deems well justified and high priority. In our view, this approach would better balance a reasonable interest in dedicating more resources to maintaining state facilities with greater legislative oversight of these large General Fund allocations.

To the extent that the Legislature finds that there are certain allocations that are more justified, it could appropriate funding for those purposes in the 2018‑19 Budget Act. This could include, for example, providing a share of funds for facility assessments, as proposed by the administration. These facility assessments could help identify the actual deferred maintenance needs at facilities and help address our concerns about the accuracy of the deferred maintenance backlogs identified by departments. In addition, in contrast to proposals for many other departments, we find that the Governor’s proposal to provide $100 million for deferred maintenance on the state’s flood infrastructure is consistent with the conditions noted above that spending be targeted towards projects that are well justified, high priority, and clearly defined. Maintaining the state’s flood infrastructure is critical because levees in poor conditions (partially due to damage from the severe storms of 2016) pose a significant risk to health and safety should they fail, and the state holds liability for any damage that occurs as a result of poorly maintained levees in most of the Central Valley, where this funding is proposed to be used. In addition, the administration has developed a clear prioritization process for identifying which levees are in conditions that pose critical or serious risks, and for how this funding will be directed to reduce that risk. We further note that the state has developed an overarching plan for identifying and addressing capital and ongoing maintenance needs for the state’s flood system—the Central Valley Flood Protection Plan (2017)—and separately proposes an ongoing funding increase to prevent a deferred maintenance backlog from growing in the future. As a result, this proposed funding is one component of the Governor’s proposal that we think merits approval in the budget year.

Require Departments to Detail Plans for Better Maintaining Facilities. Prior to making future allocations of funds from the above deferred maintenance account, we recommend the Legislature seek information from the administration regarding what factors led to the accumulation of deferred maintenance at individual departments, as well as what longer-term plans departments have developed to ensure that appropriate ongoing maintenance is sustained so that deferred maintenance does not continue to accumulate. This information would enable the Legislature to better assess the nature of the current backlogs and assist it in crafting policies to ensure that departments effectively manage their maintenance programs on an ongoing basis.