Translate

Back to 2010 Issues

 

2010

Other Budget Issues

Last Updated: 5/3/2010
Budget Issue: The Governor's April Letter proposals include $442 million in 2010-11 bond authorizations to fund capital outlay projects at UC and CSU.
Program: University of California and California State University
Finding or Recommendation: We recommend downsizing the Governor's proposal by funding only the highest-priority projects that address life-safety issues or provide equipment necessary to complete previously funded projects. Funding only these projects would reduce proposed 2010-11 bond authorizations by $222 million and out-year capital outlay obligations by $143 million.
Further Detail

Governor’s Proposal. In the April letters, the Governor proposes $442 million in 2010-11 bond authorizations for UC and CSU. This would consist of $23 million in previously authorized GO bonds and $419 million in new lease-revenue bonds. Additionally, completing the projects started with these funds would require authorizing an additional $196 million in bond borrowing, most likely in 2011-12.

LAO Comments. Last year, the Governor proposed lease-revenue bonds to fund most of these same projects at UC and CSU, which the Legislature did not approve. In taking this approach, the Legislature was responding to a number of concerns. Since last year, the state’s access to the bond market has improved, but many of the concerns remain:

  • Increased Debt. Authorizing additional bond funding would create new debt-service obligations that would add to the state’s structural budget deficit and potentially crowd out other legislative funding priorities.
  • Increased Costs. Due to the lack of interim financing from the Pooled Money Investment Board (PMIB), the cost of financing projects through lease-revenue bonds is more expensive than in the past. Traditionally, the state would build most of a project with low-interest interim financing from PMIB, then sell the lease-revenue bonds to pay back the PMIB loan. In the absence of such interim financing, the state must sell the lease-revenue bonds up front to finance the construction, thus incurring full interest costs for the duration of the construction period. To cover these costs the state must sell additional bonds above the project costs. For example, in the state’s most recent bond sale for CSU, the Public Works Board sold $181 million in lease-revenue bonds to cover two projects with estimated costs of $131 million.
  • Slow Implementation. One potential benefit of funding the Governor’s proposal would be the economic impact of state spending on the construction industry. However, the state’s ability to quickly sell the bonds and start the projects immediately is doubtful. With other projects still awaiting funding, it is not likely bond sales on these projects would occur in the near term.

Recommend Downsizing Governor’s Proposal. Given the above issues, the Legislature may wish to take the same approach as last year. We would recommend, however, downsizing the Governor’s proposal by only funding the highest-priority projects that address life-safety issues or provide equipment necessary to complete previously funded projects. Limiting bond authorizations to only these projects would result in less borrowing compared to the Governor’s proposal while still funding the universities’ most critical capital outlay projects. As summarized in Figure 1, funding only the life-safety and equipment projects would reduce 2010-11 bond authorizations by $222 million and out-year capital outlay obligations by $143 million compared to the Governor’s proposal. Prioritizing the projects in this way is consistent with our past recommendations for how the Legislature should consider prioritizing higher education bond funds. The remaining projects—namely modernizations or projects to accommodate enrollment growth—would be able to seek funding in subsequent years.

 

 

Figure 1

Estimated Costs of Proposed Life-Safety and Equipment Projects

(In Millions)

 

CSU

Campus

Project

2010-11

 

2011-12

Northridge

Performing Arts Center

$1.4

 

San Jose

Spartan Complex Renovation (Seismic)

3.2

 

$52.9

Stanislaus

Science I (Seismic)

18.8

 

 

UC

Campus

Project

2010-11

 

2011-12

Berkeley

Campbell Hall Seismic Replacement

65.2

 

Los Angeles

CHSSouth TowerSeismic Renovation

129.0

 

Irvine

ArtsBuilding—Equipment

2.7

 

Totals

$220.3

 

$52.9