LAO Analysis of the 1996-97 Budget Bill
Capital Outlay Overview

Major Issues

  • Comprehensive Statewide Capital Outlay Plan Still Needed. The state is still faced with multibillion dollar capital outlay needs and limited resources to fund capital outlays. These needs should be reviewed in the context of a statewide program. We believe that the Legislature must take a comprehensive and proactive approach to this issue by developing a multiyear financing strategy based on a statewide needs assessment and an evaluation of its funding priorities. (See page I-12.)
  • Need for New Prisons. The Legislature is faced with both near-term and longer-term issues concerning prison space. In the near-term the Legislature needs to authorize two new prisons early in 1996 and address what will be at least a short-term prison capacity gap in 1998. For the longer term the Legislature must develop a strategy for accommodating an inmate population that--based on current projections and no changes in current law--will require financing and construction of 24 prisons by 2005 at a cost of $7 billion. (See page I-33.)
  • Expansion of Department of the Youth Authority Institutions. The budget includes the initial funding for seven projects with a total cost of $142 million to expand Youth Authority institutions by 1,450 beds. We recommend that the Legislature not approve six of the seven projects (1,400 beds) because the Youth Authority's population is expected to remain relatively stable in the short-term and the option of building additional program facilities instead of housing units should be considered. (See page I-41.)
  • Higher Education Capital Outlay. The five-year capital outlay programs identified by the three segments of public higher education total $6.6 billion--an average of over $1.3 billion each year. Given the virtual certainty that funding at this level will not be available, it is essential that the segments prepare five-year plans that truly fit their near-term needs and identify highest priority projects on a systemwide basis. The Legislature also needs to be certain that projects funded in 1996-97 and thereafter meet the state's highest priorities for higher education on a statewide basis rather than an individual segment basis. (See page I-15.)
  • Enrollment Plan Needed for California State University. The California State University (CSU) currently has significant excess instructional capacity and its five-year capital outlay plan includes projects to add more capacity. For several years the CSU has not provided systemwide campus-by-campus enrollment projections that are necessary to evaluate the need for projects to increase instructional capacity. We recommend that the Legislature direct the CSU Chancellor's Office to prepare campus-by-campus projections in order to evaluate enrollment-related projects proposed in the budget and in future five-year plans. (See page I-54.)
  • Water Supply at CSU Monterey Bay. The new state university campus at Monterey Bay--on the former Fort Ord military base--may be limited to an enrollment of 12,500 full-time equivalent students because of an insufficient water supply. This enrollment level is one-half the planned enrollment for this campus. We recommend that the CSU report at budget hearings on this situation and the implications for future enrollments. (See page I-61.)


    Capital outlay expenditures continue to grow as a 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 1996-97. This is about $85 million, or 3.5 percent, more than estimated current-year expenditures. Capital outlay expendituresreflect the state's current costsfor capital outlay programs, either through debt service payments or direct appropri ations (pay-as-you-go financing) to acquire assets. (The expenditure figure does notinclude the proposed appropriations of bond proceeds, because they do not represent a direct cost to the state until the bonds are paid off in future years.)

    The $2.5 billion in 1996-97 expenditures has three components:

  • Debt service payments for general obligation (GO) bonds ($2 billion).
  • Payments for debt service on lease-payment bonds ($458 million).
  • Direct appropriations from the General Fund and from various special funds ($131 million). As shown in Figure 1, expenditures for capital outlay, excluding the state water project and direct expenditures on transportation, have increased significantly since 1989-90--growing from less than $900 million to $2.5 billion in 1996-97. 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 $700 million to $2.4 billion, or nearly 250 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 1989 to about 5.5 percent in the budget year.

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

  • General Obligation Bond Debt Service.The Governor's Budget reflects a General Fund cost increase of $8 million over current-year expenditures of about $1.95 billion for GO bond debt service.
  • Lease-Payment Bond Debt Service.Debt service payments for lease-payment bonds are estimated to total $458 million in 1995-96. This is an increase of $83 million, or 22 percent, over the current year. These bonds are primarily used for higher education facilities, prisons, and state office buildings. About 94 percent of the debt service on these bonds is paid by the General Fund.
  • Direct Appropriations.Capital costs through proposed direct appropria tions total $131 million--about $5 million less than in 1995-96. These expenditures include $81 million from the General Fund and $50 million from various special funds, such as the Motor Vehicle Account.

    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 5.1 percent for the current year. This ratio has risen since 1990-91 (when it was 2.5 percent), but will slowly decline in 1996-97 and beyond if no new bonds are authorized. (This projection uses our General Fund revenue estimates and does not account for any impacts of the Governor's tax cut proposals on future revenues.) Figure 2 shows the impact on the debt ratio if voters were to approve the Governor's general obligation bond proposals for the 1996 ballots (a total of $7.8 billion). We estimate that sales of these additional bonds would increase the debt ratio in future years by about 1 percent.

    Spending by Major Programs

    About $2.1 billion, or 81 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.

    Summary of the 1996-97 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 1996-97 capital outlay program (proposals to obtain capital assets). The budget includes $820 million for capital outlay programs (excluding transportation systems). This is an increase of $130 million, or 19 percent, over current-year appropriations.

    Overview of Capital Outlay Needs

    The five-year plans prepared by state agencies provide a project-specific inventory of needs. Figure 4 shows a summary of these five-year plans, which total $25 billion for state agencies and for K-12 education. These five-year estimates should be viewed with caution because some of the plans are incomplete and also may include proposals that, upon examination, would not merit funding. Nevertheless, the plans provide a reasonable assessment of the overall magnitude of the agencies needs.

    Figure 4
    Projected Five-Year Capital Outlay Needs
    For the State and K-12 Education
    1996-97 Through 2000-01
    (In Millions)
    Five-Year Total
    Executive $50
    State and Consumer Services 1,325
    Department of Motor Vehicles/
    California Highway Patrol
    Resources 840
    Health and Welfare 420
    Youth and Adult Corrections 4,604
    K-12 Education 10,500a
    Higher Education 6,610
    General Government 228
    Total $24,820
    a Estimate only. No statewide five-year plan.

    Governor's Budget

    Figure 5 (see page 10) 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 about 60 percent of the $1.4 billion requested. As shown in the figure, the projects in the budget have a future completion cost of $730 million. About 50 percent of this future cost is for higher education.

    Figure 5
    1996-97 State Capital Outlay Summary
    (In Thousands)
    Department Department
    Governor's Budget
    1996-97 Amount
    Emergency Services $4,227 $4,227 $23,939
    General Services 154,569 154,569 --
    Transportation 2,118 2,118 --
    Highway Patrol 12,528 10,000 5,468
    Motor Vehicles 9,954 9,483 3,240
    Tahoe Conservancy 14,217 2,983 --
    Conservation Corps 380 380 --
    Forestry and Fire Protection 52,556 16,743 15,250
    Fish and Game 2,373 505 --
    Wildlife Conservation Board 22,465 13,327 --
    Boating and Waterways 10,251 4,512 2,312
    Coastal Conservancy 6,660 4,663 --
    Parks and Recreation 31,928 18,296 --
    San Joaquin River Conservancy 40 40 --
    Water Resources 11,025 6,400 --
    Health Services 40,080 2,989 97,159
    Mental Health 29,754 17,972 --
    Employment Development 9,785 9,394 --
    Corrections 79,639 84,812 39,487
    Youth Authority 34,599 31,248 147,998
    University of California 152,235 142,325 53,961
    Hastings College of the Law 709 709 8,291
    California State University 416,350 150,000 179,899
    Community Colleges 321,652 119,592 139,576
    Cal Expo 2,225 483 --
    Food and Agriculture 2,178 1,036 4,096
    Military 17,005 10,500 9,066
    Veterans' Home of California 9,691 620 --
    Unallocated capital outlay 200 200 0
    Totals $1,415,393 $820,126 $729,742

    Figure 6 shows the budget proposal for each department by funding type. Almost 80 percent of all funding ($647 million) is proposed from GO bonds. About $490 million of this bond funding is dependent on legislative and/or voter approval of new bonds in 1996. The budget also includes $77 million from the General Fund for capital outlay projects. Other capital outlay funding is proposed from various special funds ($59 million) and from federal funds ($36 million). No new funding is proposed from lease-payment bonds.

    Figure 6
    1996-97 Capital Outlay Program
    Proposed Expenditures by Fund Type
    (In Thousands)
    Department Bonds General Special Federal Total
    Emergency Services -- $4,227 -- -- $4,227
    General Services $154,569 -- -- -- 154,569
    Transportation -- -- $2,118 -- 2,118
    Highway Patrol -- -- 10,000 -- 10,000
    Motor Vehicles -- -- 9,483 -- 9,483
    Tahoe Conservancy -- 2,500 483 -- 2,983
    Conservation Corps -- 380 -- -- 380
    Forestry and Fire Protection -- 16,743 -- -- 16,743
    Fish and Game -- -- 305 $200 505
    Wildlife Conservation Board 1,561 -- 11,766 -- 13,327
    Boating and Waterways -- -- 4,512 -- 4,512
    Coastal Conservancy -- -- 4,663 -- 4,663
    Parks and Recreation 178 5,481 12,037 600 18,296
    San Joaquin River Conservancy -- -- 40 -- 40
    Water Resources -- 6,400 -- -- 6,400
    Health Services -- 2,989 -- -- 2,989
    Mental Health -- 17,972 -- -- 17,972
    Employment Development -- -- 3,004 6,390 9,394
    Corrections 50,612a 7,200 -- 27,000 84,812
    Youth Authority 27,748a 3,500 -- -- 31,248
    University of California 142,325a -- -- -- 142,325
    Hastings College of the Law 709a -- -- -- 709
    California State University 150,000a -- -- -- 150,000
    Community Colleges 119,592a -- -- -- 119,592
    Cal Expo -- -- 483 -- 483
    Food and Agriculture -- 595 441 -- 1,036
    Military -- 8,470 -- 2,030 10,500
    Veterans' Home of California -- 620 -- -- 620
    Unallocated -- 200 -- -- 200
    Totals $647,294 $77,277 $59,335 $36,220 $820,126
    a Dependent on legislative and/or voter approval of proposed bonds.

    Governor's Bond Proposals

    The budget indicates the Governor's support for (1) the two bond measures already placed on the March 1996 ballot and (2) three additional bond measures for the November 1996 ballot. These five measures, totaling $7.8 billion, are summarized below:

    March 1996 Ballot

    Governor's Proposal for November 1996 Ballot

    Comprehensive Legislative Review of Capital Outlay Still Needed

    The state continues to be faced with the situation we discussed last year in the Analysis of the 1995-96 Budget Bill(page I-13). The state and local governments have tens of billions of dollars in unfunded capital outlay needs. In recent years, bonds have been a primary fund source for capital outlay, but almost all GO bonds that were previously approved by the voters have been allocated to specific projects. The state's debt service costs have increased significantly since 1990, resulting in a relatively high General Fund debt service ratio of 5.1 percent. This ratio will decline, beginning in 1996-97, if no new bonds are approved and sold. We believe that the state could prudently approve and issue additional GO bonds, but in doing so it is essential that any additional bonds be directed to the state's highest priority needs.

    As we discussed last year, state capital outlay programs and consideration of assistance to local governments have not been reviewed and funded in the context of a statewide program. We believe that the Legislature must undertake a comprehensive review of the state's capital outlay needs, set priorities, and establish a financing plan to fund these priorities over a multiyear period.

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