LAO Analysis of the 1997-98 Budget Bill
Capital Outlay Overview

  1. Major Issues
  2. Overview
    1. Overview of Capital Outlay Needs
    2. Bond Funding and Debt Service
      1. Governor's 1997-98 Bond Proposals
      2. Debt Service
      3. Debt Service Ratio
    3. Legislature Should Review Capital Outlay Program

Major Issues

Capital Outlay

Financing Plan Needed to Complete Capital Outlay Program State Should Change the Way It Budgets Higher Education Capital Outlay Projects Budget Capital Outlay to Enhance Legislative Oversight Federal Crime Bill Grants Should Be Appropriated Annually New Prison Needs Uncertain


Capital Outlay

Funding for capital outlay would increase significantly in the budget year, mainly as a result of proposed new state prison construction and General Fund increases for capital outlay programs.

The 1997-98 Governor's Budget proposes $1.18 billion for capital outlay programs, excluding highway and rail programs (these capital programs are discussed in the Transportation section of this Analysis). This is an increase of $480 million (69 percent) over current-year appropriations. Figure 1 compares the amounts appropriated for capital outlay in the current year to the amounts proposed in the budget for each general organizational area.
Figure 1
State Capital Outlay Programs

1996-97 and 1997-98

All Funds (Dollars in Millions)
1996-97 1997-98 Difference
Legislative, Judicial, and Executive $6.2 $44.5 $38.3
State and Consumer Services 106.8 48.3 -58.5
Transportationa 23.1 16.0 -7.1
Resources 71.9 132.3 60.4
Health and Welfare 30.9 13.2 -17.7
Youth and Adult Corrections 13.9 412.5 398.6
Higher Education 435.2 485.7 50.5
General Government 11.4 28.0 16.6
Totals $699.4 $1,180.5 $481.1
a Excluding highways and rail.

As shown in the figure, the largest increase ($399 million) is in the area of Youth and Adult Corrections. Other large increases are $60 million for the Resources Agency, $50 million for Higher Education, and $38 million under Legislative, Judicial, and Executive--for the Office of Emergency Services and the Department of Justice. The largest decrease ($58 million) is in the area of State and Consumer Services.

Figure 2 shows the amounts each department requested for capital outlay funding in 1997-98, the amounts approved for inclusion in the Governor's budget, and the future cost for the approved projects. As shown in the figure, an estimated $1.3 billion will need to be appropriated in the future in order to complete these projects. Thus, the request before the Legislature represents a total cost of $2.5 billion. Over 80 percent of the future cost is for higher education facilities and state prisons. We discuss the implications of this future cost in the Crosscutting Issues section of this chapter.

The Governor's budget proposes funding the capital outlay program from bonds, the General Fund, special funds, and federal funds. Figure 3 (see page 8) shows the proposed funding for each department by fund source. About 60 percent of all funding ($678 million) is from bonds. This bond amount includes $560 million from previously approved general obligation bonds and proposed lease-payment bond authorizations of $118 million (net of federal reimbursements, as discussed below). (The lease-payment bonds would be a General Fund obligation, but these bonds do not require voter approval.)

The $137 million in proposed General Fund spending is almost double the amount appropriated in the current year for capital outlay. The $58 million proposed from various special funds are mainly for resource and transportation/traffic safety related programs. Finally, the budget includes $307 million in federal funds, of which $225 million is from future federal appropriations that the administration assumes will be available to partially offset the lease-payment bonds proposed to construct one state prison.

Overview of Capital Outlay Needs

Those departments funded under the state's capital outlay program annually prepare project-specific five-year capital outlay plans. Figure 4 (see page 9) shows a summary of these five-year plans, which total $10 billion. (In addition to the $10 billion, we estimate five-year capital outlay needs of about $15 billion for highway and rail programs and about $10 billion for K-12 education facilities. These programs are not funded through project-specific appropriations in the budget, however, and thus are not part of our discussion in this chapter of the state capital outlay program.) These five-year estimates should be viewed with
Figure 2
1997-98 State Capital Outlay Summary
All Funds (Dollars in Thousands)
Governor's Budget
Department Request Proposed




Legislative, Executive, and Judicial
Emergency Services $22,818 $22,818 -- $22,818
Justice 29,212 21,666 $7,151 28,817
Secretary of State 59 59 -- 59
State and Consumer Services
General Services 75,429 48,295 -- 48,295
Transportation 4,038 989 17,339 18,328
Highway Patrol 7,352 7,353 715 8,068
Motor Vehicles 7,612 7,612 5,664 13,276
Tahoe Conservancy 20,481 4,036 -- 4,036
Conservation Corps 120 120 -- 120
Forestry and Fire Protection 37,928 31,853 14,238 46,091
Fish and Game 1,496 1,478 -- 1,478
Wildlife Conservation Board 27,137 24,298 -- 24,298
Boating and Waterways 8,384 8,692 4,144 12,836
Coastal Conservancy 28,071 25,589 -- 25,589
Parks and Recreation 31,862 22,490 6,267 28,757
Santa Monica Mtns. Conservancy 5,000 5,000 -- 5,000
Water Resources 8,750 8,750 -- 8,750
Health and Welfare
Health Services 5,358 4,551 92,608 97,159
Developmental Services 13,452 1,926 897 2,823
Mental Health 19,097 6,727 11,059 17,786
Youth and Adult Corrections
Corrections 364,508 359,468 573,657 933,125
Youth Authority 101,512 53,023 35,720 88,743
Higher Education
University of California 150,030 171,667 117,057 288,724
Hastings College of the Law 8,332 8,332 -- 8,332
California State University 268,349 152,500 113,765 266,265
Community Colleges 158,996 153,175 291,831 445,006
General Government
Cal Expo 500 500 -- 500
Food and Agriculture 1,238 1,059 4,922 5,981
Military 38,914 26,391 -- 26,391
Veterans' Home of California 9,691 -- -- --
Unallocated capital outlay 50 50 -- 50


$1,455,776 $1,180,467 $1,297,034 $2,477,501

Figure 3
1997-98 State Capital Outlay Program

Proposed Appropriations by Fund

(In Thousands)
Department Bonds General Special Federal Total
Legislative, Executive, and Judicial
Emergency Services $22,818 -- -- -- $22,818
Justice 18,435 $3,231 -- -- 21,666
Secretary of State -- 12 $47 -- 59
State and Consumer Services
General Services 47,295 -- 1,000 -- 48,295
Transportation -- -- 989 -- 989
Highway Patrol -- -- 7,353 -- 7,353
Motor Vehicles -- -- 7,612 -- 7,612
Tahoe Conservancy 1,000 2,500 536 -- 4,036
Conservation Corps -- 120 -- -- 120
Forestry and Fire Protection 12,360 19,493 -- -- 31,853
Fish and Game 200 -- 1,278 -- 1,478
Wildlife Conservation Board 9,300 -- 14,998 -- 24,298
Boating and Waterways -- -- 8,692 -- 8,692
Coastal Conservancy 7,000 12,589 4,500 $1,500 25,589
Parks and Recreation 4,729 6,804 10,357 600 22,490
Santa Monica Mtns. Conservancy 5,000 -- -- -- 5,000
Water Resources -- 8,750 -- -- 8,750
Health and Welfare
Health Services -- 4,551 -- -- 4,551
Developmental Services -- 1,926 -- -- 1,926
Mental Health -- 6,727 -- -- 6,727
Youth and Adult Corrections
Corrections 56,252 a 37,851 265,365 b 359,468
Youth Authority 8,382 17033 -- 27,608 53,023
Higher Education
University of California 171,667 -- -- -- 171,667
Hastings College of the Law 8,332 -- -- -- 8,332
California State University 152,500 -- -- -- 152,500
Community Colleges 153,175 -- -- -- 153,175
General Government
Cal Expo -- -- 500 -- 500
Food and Agriculture -- 1,059 -- -- 1,059
Military -- 14,044 -- 12,347 26,391
Unallocated -- 50 -- -- 50
Totals $678,445 $136,740 $57,862 $307,420 $1,180,467
a The budget also includes a request to authorize another $225 million in lease-payment bonds that the administration assumes will be offset by the proposed appropriations of future federal funds.
b Includes a $225 million appropriation of future federal funds to offset proposed lease-payment bonds.

caution because some of the plans are incomplete and also may include proposals that, upon examination, would not merit funding. Nevertheless, the plans provide at least a reasonable assessment of the overall magnitude of these capital outlay needs. In aggregate terms, the Governor's budget proposal of $1.18 billion funds about one-tenth of the identified five-year capital outlay needs.
Figure 4
Projected Five-Year

State Capital Outlay Needs

1997-98 Through 2001-02

(In Millions)
Five-Year Total
Legislative, Judicial, and Executive $68
State and Consumer Services 544
Transportation 93
Resources 670
Health and Welfare 255
Youth and Adult Corrections 4,285
Higher Education 3,903
General Government 213
Total $10,031 a
a Total does not include estimated five-year needs of $15 billion for highway and rail programs and $10 billion for K-12 education facilities.

Bond Funding and Debt Service

Over the last several years, the majority of capital outlay has been funded with bonds. In the 1990s, the voters have authorized $16.4 billion in general obligation bonds. While this amount is a substantial level of bond funding, only about $3 billion was to finance the state's capital outlay programs (other than transportation). The other $13.4 billion included $5 billion for transportation and rail programs and $8.4 billion for facilities such as K-12 schools, water quality enhancements, and veterans' housing loans. In addition to the bonds approved by the voters, the Legislature has authorized $5.1 billion in lease-payment bonds since 1990. These bonds have funded higher education facilities, prisons, state office buildings/laboratories, and state homes for veterans.

Governor's 1997-98 Bond Proposals

The Governor's budget proposes the following new bond authorizations in 1997-98:

Debt Service

We estimate that the state's debt payments on bonds will be $2.5 billion in 1997-98. This is an increase of $114 million, or 4.8 percent, over current-year debt services costs. There are two debt service components:

Debt service for lease-payment bonds is becoming a greater portion of total debt service costs, as shown in Figure 5. For example, lease-payment debt service was 13 percent of total debt service in 1990-91 and will increase to 21 percent in 1997-98.

Debt Service Ratio

The amount of debt service on General Fund-backed bonds as a percentage of state General Fund revenues (that is, the state's debt ratio) is estimated to be 4.9 percent for the current year. As shown in Figure 6 (see next page), this ratio rose significantly in the early 1990s, and has remained around 5 percent since 1993-94. We estimate that, as currently authorized bonds are sold, the debt ratio will increase to 5.2 percent in 1999-00 and decline thereafter 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 proposals on future revenues.) Figure 6 also shows the impact on the debt ratio if the Governor's proposal for an additional $2.8 billion of general obligation bonds and lease-payment bonds is approved. We estimate that sales of these additional bonds would increase the debt ratio in future years by about 0.4 percent.

Legislature Should Review Capital Outlay Program

The state and local governments have tens of billions of dollars of capital outlay needs. Given that bonds are a primary capital outlay funding source and the state already has a relatively high debt service level, it is essential that any additional bonds be directed to the state's highest priority needs. As we have discussed in recent years, 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 continue to recommend that the Legislature 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.

The need for such a comprehensive review is evidenced by the Governor's budget proposal for capital outlay. For example, the Governor's proposed 1997-98 capital outlay program will require an additional $1.3 billion to complete. The Governor's budget, however, is silent on how this additional cost will be financed. The Governor has indicated support for two general obligation bonds but neither of these address state agencies' capital outlay needs. Instead, they focus on local government. In addition, the administration continues to allocate equal amounts of higher education general obligation bond funds among the three segments of higher education without consideration of the relative needs of each segment or an evaluation of statewide priorities for higher education facilities.

Again this year, the Legislature has been presented with a series of proposals absent a statewide context of needs and priorities or a financing plan to complete projects that the Legislature is asked to begin. Without such a plan, the Legislature is lacking information to determine (1) whether the Governor's proposals are consistent with state priorities or (2) what future spending obligations the Legislature is requested to commit to in order to complete the proposed projects.

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