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

• The administration has not identified funding sources for $800 million in future costs of projects proposed in the budget.
• For the long-term, the state needs a multiyear capital outlay plan.
• As an initial step, we recommend that the Legislature not approve any capital outlay project unless there is a specific plan for funding the future completion costs.
• We also recommend that the Legislature consider a multipurpose state facilities bond act for the June 1998 ballot. (See page H-15.)

• The administration has presented no plan to fund the completion costs of proposed and previously approved higher education projects.
• We believe the Legislature should begin budgeting higher education capital outlay so that projects can be initiated and completed within identified fund sources.
• We recommend funding specific projects and deferring other, mostly new, projects until the state has a multiyear capital outlay plan identifying the state's highest priority needs and financing strategies to complete them. (See page H-19.)

Budget Capital Outlay to Enhance Legislative Oversight

• Recent administrative actions have disregarded the scope and cost of projects approved by the Legislature.
• To assure that the Legislature can maintain appropriate authority over projects, we recommend that funding only be provided for the preliminary plan phase of all new projects. (See page H-28.)

• The state could receive several hundred million dollars in federal grants over a five-year period to build or modify correctional facilities. The administration has proposed a plan to allocate all grant funds it anticipates receiving and requests legislative authorization of the entire plan in the 1997-98 budget.
• We recommend that the Legislature instead appropriate funds on an annual basis in order to retain legislative oversight of these expenditures and to allocate the funds based on a yearly assessment of its priorities for using these monies. (See page H-32.)

New Prison Needs Uncertain

• The Governor's budget includes proposals involving the development of six new state prisons.
• Actual inmate population growth continues to be lower than projected. Thus, the need for and timing of new prison development projects is uncertain.
• We withhold recommendation on funding for new prisons pending review of the department's spring 1997 inmate population projections. (See page H-75.)

Overview

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

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

Governor's 1997-98 Bond Proposals

• The budget bill includes $93 million in new lease-payment bond authorizations for the following departments: Office of Emergency Services ($22.8 million), Justice ($18.4 million), Forestry ($12.4 million), Corrections ($31.3 million), and Youth Authority ($8.4 million).
• The budget bill includes an additional authorization of $250 million in lease-payment bonds for a new state prison. The administration assumes that $225 million of this amount will be offset by future federal grants under the 1994 federal crime bill. These future federal funds, however, are dependent on Congress and the President annually appropriating funds through the year 2000.
• The Governor indicates his intent to seek legislation, separate from the budget bill, for $511 million in lease-payment bonds to construct two prisons.
• The Governor also indicates he would support two general obligation bond measures for the June 1998 ballot: (1) $2 billion for K-12 schools and (2) $200 million for a state infrastructure bank.

Debt Service

• General Obligation Bonds. The Governor's budget reflects a General Fund cost increase of $26 million over current-year expenditures of $1.95 billion for general obligation debt service.
• Lease-Payment Bonds. We estimate that the state's cost for debt service on lease-payment bonds will be about $527 million in 1997-98. This is an increase of $88 million, or 20 percent, over the current year. About 93 percent of the debt service on these bonds is paid by the General Fund.

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

Legislature Should Review Capital Outlay Program

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.