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Last Updated: 3/3/2010
Budget Issue: A Framework for Evaluating Resources Bond Spending
Program: Crosscutting
Finding or Recommendation: We recommend that the Legislature provide extra scrutiny in its evaluation of bond spending proposals, given the state's current fiscal environment. In the narrative below, we update the current status of various resources bond funds, and provide a framework for legislative evaluation of the Governor's bond spending proposals for the budget year. We think that the Legislature should determine its priorities among bond appropriations it approves, and direct the administration accordingly.
Further Detail

A Framework for Evaluating Resources Bond Spending

In a resource-constrained fiscal environment, proposals to spend the proceeds of state general obligation bonds in the budget warrant extra scrutiny by the Legislature. This is for two key reasons. First, bond expenditures come attached with a General Fund cost in terms of debt-service. The state needs to manage and contain these General Fund expenditures, as they compete with and potentially crowd out other legislative funding priorities. Second, given recent history, it is possible that the state will not have sufficient access to the bond markets in the budget year to sell all the bonds that would be needed to fully support all of the bond expenditures contemplated in the budget. Therefore, it will be important that the bond expenditures reflected in the final budget act be well-justified, be an appropriate funding source for the activity in question, and reflect legislative priorities.

In the sections that follow, we provide an update on the status of the fund conditions of various resources general obligation bond measures. (Our numbers incorporate the Governor’s various bond expenditure proposals.) We provide a framework for the Legislature to evaluate the Governor’s budget proposals and offer recommendations to ensure proper oversight of these expenditures.

A Status Report on Resources Bond Funds

$21 Billion in Resources Bonds Approved Since 1996. Between 1996 and 2006, voters approved seven resources bonds totaling $20.6 billion (Propositions 204, 12, 13, 40, 50, 84, and 1E). In addition, the Proposition 1B transportation bond allocated $1.2 billion for air quality purposes and the Proposition 1C housing bond allocated $200 million for local parks.

$3.2 Billion Would Remain Available for Future Appropriations. As shown in Figure 14, about $3.2 billion is projected to remain available under the Governor’s budget plan from the seven resources general obligation bond measures at the end of 2010-11 for appropriation in future years. As the figure shows, funds are substantially depleted from five of these measures. The funds remaining available for appropriation in future years are mainly for (1) flood management, largely in the state’s Central Valley and Delta regions (including about $1.5 billion of Proposition 1E funds) and (2) various water quality and water management programs (including about $750 million of Proposition 84 funds). Relatively few funds remain available for state and local parks-related purposes and for land/habitat conservation, restoration, and acquisition—activities carried out mainly by the state’s several land conservancies and the Wildlife Conservation Board.

Resources General Obligation Bonds, 1996 to Present

$800 Million of Resources Bond Spending Proposed for Budget Year. As shown in Figure 14, the Governor’s budget proposes about $800 million of bond expenditures from these resources bonds. A majority of these expenditures are proposed for flood management and water management activities carried out by the Department of Water Resources (DWR). (In addition, the Governor’s budget proposes $230 million from the Proposition 1B transportation bond for air quality projects in the state’s major transportation corridors.)

Evaluating Bond Proposals

As discussed further below, we recommend the following framework to guide legislative evaluation of the Governor’s bond spending proposals:

  • Evaluate each proposal to see whether meet a set of specified criteria before allowing any bond expenditure to be incorporated into the 2010-11 budget plan.
  • Set priorities for the expenditure of the bond funds in the event that bond market conditions do not permit all bond-spending proposals to be funded.

Resources Bond Expenditure Criteria. We think that it is important to consider the timing of the Legislature’s evaluation of bond expenditure proposals. Although the Governor’s January budget includes many requests for new appropriations and reappropriations of bond funds, the bulk of the administration’s resources bond-related requests are often submitted as proposed amendments to the budget plan in April and May (mainly as reappropriations) and acted upon during the May Revision process. For this reason, a comprehensive evaluation of proposed bond expenditures should occur upon the submittal of the complete package of bond expenditure proposals.

In its evaluation of proposed bond expenditures, we think that the Legislature should apply a number of basic criteria before approving any expenditure.

First, as with any budget request, we think that the administration should provide sufficient detail in terms of the description and justification for the proposal to enable the Legislature to make an informed decision about its merit. Lacking such information, we recommend that the request be rejected.

The project should address a current programmatic need and, consistent with prior statutory direction, be used for capital purposes—particularly for projects that provide benefits over a number of years. The department proposing to spend the funds on a capital project should be ready to spend the funds and capable of completing a project as proposed with the bond resources requested as well as other available funds.

Finally, the Legislature should consider whether bond funds are the most appropriate funding source for the activity in question, or whether there are alternative funding sources available. For example, the application of the “beneficiary pays” funding principle may suggest that funding from the direct private beneficiaries of the state expenditure is appropriate. Alternatively, federal or local funds may be available that should be used instead of state bond funding.

Applying the Criteria. We applied these criteria to the bond-related requests submitted as part of the Governor’s January budget proposal. We raise concerns about bond budget requests in two write-ups elsewhere in this budget analysis—“Implementation of the New Legislative Water Package”and “The Davis-Dolwig Act—Fundamental Reform Still Needed.”We outline our concerns about other specific bond budget requests in our Summary of LAO Findings and Recommendations on the 2010-11 Budget, a Web-based list which can be found at our Web Site,

Prioritizing Bond Expenditures in a Difficult Fiscal Environment. In our office’s previous reports and testimony to the Legislature regarding the state’s current fiscal situation, we have recommended that the Legislature identify priorities among bond-funded projects. This is particularly important given the likelihood that the state will not have sufficient access to the bond markets in the budget year to sell all the bonds that would be needed to fully support all of the bond expenditures contemplated in the budget. In 2009, this situation resulted in the postponement of the offering of some bonds for sale by the state. This, in turn, significantly delayed a number of state bond-supported projects. Some of these delays are continuing to occur, and more such problems are likely, at least in the near term.

When such constraints interfere with bond-supported expenditures, the current practice is that the administration allocates the available funds according to its priorities. For example, according to the Department of Finance (DOF), the administration has prioritized certain bond sales used to support state program operations and over capital outlay purposes. The administration has also prioritized projects that address fire/life/safety and public health deficiencies, leverage other funds, or provide an immediate economic stimulus and create jobs.

Legislature Should Set Its Priorities. We think that the Legislature should provide direction to the administration on the Legislature’s priorities among the resources bond appropriations which it approves, in case some portion of these appropriations cannot be spent due to problems with accessing the bond market. The Legislature might list the particular projects that are its top funding priorities, and then provide its highest priorities for the balance of the appropriations, expressed at a relatively high level. For example, these priorities for the balance might include funding projects which provide direct public safety benefits, or those which create state revenue opportunities (such as projects at fee-generating state parks).