Legislative Analyst's Office
February 22, 1995

Capital Outlay Overview

Major Issues


Capital outlay expenditures account for a slightly increased share of total state spending as a result of increased debt service payments for bonds that have been used to acquire capital assets. Expenditures for capital outlay are proposed to total $2.5 billion from all state funds in 1995--96. This is about $180 million, or 7.7 percent, more than estimated current-year expenditures. Capital outlay expenditures reflect the state's current costs for capital outlay programs, either through debt service payments or direct appropriations (pay-as-you-go financing) to acquire assets. (The expenditure figure does not include the proposed appropriations of bond proceeds, because they do not represent a cost to the state until the bonds are paid off in future years.)

The $2.5 billion in 1995-96 expenditures has three components:

As shown in Figure 1, expenditures for capital outlay, excluding the state water project and direct expenditures on transportation, have increased significantly since 1988-89 growing from less than $700 million to $2.5 billion in 1995-96. This increase is directly attributable to the increase in debt service payments on GO bonds and lease-payment bonds. Over this same period, debt service payments have increased from $550 million to $2.4 billion, or 340 percent. Figure 1 shows that General Fund expenditures for capital outlay (most of which is debt service) have increased from less than 2 percent of General Fund spending in 1988 to almost 6 percent in the budget year.

The proposed budget-year changes, by component of capital outlay expenditure, are as follows:

Debt Service Ratio

The amount of debt service as a percentage of state General Fund revenues (that is, the state's debt ratio) is estimated to be 5.2 percent for the current year. The ratio has risen sharply in recent years, as it was only 2.5 percent in 1990-91. (A significant reason for this increased debt burden has been the lack of growth in General Fund revenues.) As shown in Figure 2, if all previously authorized bonds are sold (and no others are authorized), the state's debt ratio would reach a peak of about 5.4 percent in 1995-96 and then decline thereafter. (This estimate does not assume enactment of the Governor's tax cut and state-local restructuring proposals.) The figure also shows the impact of the Governor's proposed 1995-96 lease-payment bond authorizations. These additional bonds will not increase the peak of 5.4 percent but will raise the debt ratio in future years by about 0.5 percent.

Spending by Major Programs

About $2.1 billion, or 83 percent, of capital outlay expenditures fall within four areas K-12 education, youth and adult corrections, resources, and higher education. Figure 3 shows the expenditures in each of these areas over the past three years. The figure reflects the increased costs to make debt payments on bonds issued for these programs. The expenditures do not necessarily reflect actual construction activity because of the lag between construction, bond sales, and debt payments.

As shown in Figure 3, expenditures are increasing most rapidly for K-12 education (50 percent over three years) and higher education (54 percent over three years). No new bonds were authorized for K-12 facilities in 1994 and most of the previously authorized bonds have been allocated to specific K-12 projects and sold. Debt service costs in this area will increase little after 1995-96 unless additional K-12 bonds are authorized by the voters.

Debt service for corrections capital outlay has not increased as much as that for education. However, this is in part because the major capital outlays in this area are for new prisons, which have recently been funded with lease-payment bonds. Because the state does not incur debt service on these bonds until after the prisons are completed, there is a significant lag between the bond sales and when the debt service payments begin. The state will thus incur higher debt service costs in the next few years as previously authorized new prisons are completed. In addition, as discussed in the next section, the Governor is proposing an additional $2.3 billion in lease-payment bonds for youth and adult corrections capital outlay.

Summary of the 1995-96 Capital Outlay Program

We now turn from a discussion of capital outlay expenditures (the current costs of paying for capital assets) to a summary of the 1995-96 capital outlay program (proposals to obtain capital assets). The budget includes $877 million for capital outlay programs (excluding transportation systems). This is an increase of $600 million, or 224 percent, over current-year funded appropriations. The reason that this increase is so substantial is that $513 million in capital outlay appropriations in the 1994 Budget Act were from proposed general obligation bonds that were either not approved by or not placed before the voters.

Figure 4 compares each department's capital outlay funding request for 1995-96 with the amount approved by the Administration for inclusion in the Governor's Budget. The budget includes almost 80 percent of the $1.1 billion requested. As shown in the figure, the projects in the budget have a future completion cost of $174 million. Almost 50 percent of this future cost is for the University of California.

Figure 5 shows the budget proposal for each department by funding type. Over 80 percent of all funding is proposed from bonds $205 million in general obligation bonds (primarily for state office building seismic projects) and $525 million in lease- payment bonds. The budget also includes $74 million from the General Fund for capital outlay projects. Other capital outlay funding is proposed from various special funds ($54 million) and from federal funds ($18 million).

Governor's Bond Proposals

In addition to the bond proposals outlined above, the Governor indicates his support for additional lease-payment bonds of over $2.7 billion. These bonds, which would be authorized through separate legislation, would finance the following:

School Facilities Program. Almost all general obligation bonds previously approved for K-12 school facilities have been allocated and, without a special election, no additional bonds could be approved by the voters before March 1996. The Governor is therefore proposing a new way to fund school facilities both as an interim option for districts until new bonds are available and as an alternative to the existing state lease-purchase program if and when new bonds are authorized. Under this program, the state would make loans to districts by selling revenue bonds. The loans would be paid off through deductions to districts' apportionments. In other words, schools would pay for the facilities over time from within their existing resources. Proposition 98 funds would be provided to districts meeting certain hardship criteria (as yet defined) to assist in repaying their loans. It is our under standing that it is not the administration's intent to increase the total Proposition 98 allocation to provide this funding assistance.

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