LAO Analysis of the 1997-98 Budget Bill
General Government, Part 2-a

  1. Office of Emergency Services
    1. Proposed Budget Should Be Viewed As Very Rough Estimate
    2. Failure to Provide Legislature Expenditure Information
    3. Improvements in Departmental Performance Are Slow
    4. Expenditures for Specific Disasters Should Be Highlighted in the Governor's Budget Document
    5. Hazard Mitigation: Recommendations Are Numerous, But Follow-Through Is Minimal
  2. State Controller (0840)
    1. Performance Audit Progress Report
    2. When Will Information Technology Improvements Be Made?
    3. Backlog of Notifications To Owners of Unclaimed Property
  3. Secretary of State (0890)
    1. No Funds Proposed to Implement Proposition 208
  4. California Science Center (1100)
    1. Center Seeks Major Funding Increase To Open New Science Facility
  5. Department of General Services (1760)
    1. Departmental Performance: A Work in Progress
    2. Statewide Support Services
    3. Should the State Continue to Maintain A Marginal Warehouse Operation?
    4. Will State Pay Telephone Contracts Be Extended or Rebid?
    5. Use of Sole-Source Contracts
    6. Approach to CALNET and State Telecommunications Networks Raises Questions
    7. Department Only Partially Responsive To Other Legislative Direction
    8. Inadequate Justification for Expanded Fleet Expenditures
    9. Department Anticipates End of Cash Flow Problem in the 911 Program
    10. Proposed Performance Budget Contract Additions Should Not Be Included in the Budget Bill
    11. Property Management Services
    12. Revise Leasing Notification Requirements
    13. Surplus Property Assessments

State Controller


The State Controller is responsible for (1) the receipt and disbursement of public funds, (2) reporting on the financial condition of the state and local governments, (3) administering certain tax laws and collecting amounts due the state, and (4) enforcing unclaimed property laws. The Controller is also a member of various boards and commissions, including the Board of Equalization, the Franchise Tax Board, the Board of Control, the Commission on State Mandates, the State Lands Commission, the Pooled Money Investment Board, and assorted bond finance committees.

The Governor's budget proposes expenditures of $103 million ($62.1 million from the General Fund) to support the activities of the State Controller in 1997-98. This amount is virtually the same level as estimated current-year expenditures.

Performance Audit Progress Report

The State Controller's report to the Legislature on the results of implementing recommendations of a performance audit leaves important questions unanswered.

Background. In early 1995 the Controller ordered a performance audit of the operations of the State Controller's Office. The audit, conducted by a consulting firm, resulted in a May 1995 report which contained many specific findings and made recommendations to improve the office's operations. These recommendations identified opportunities to achieve savings, and also noted where increased expenditures would be required in order to avoid failures in certain critical program areas. Since the report has been issued, the Controller has requested, and the Legislature has approved, reductions in the Controller's budget consistent with those identified in the audit report ($8.8 million and 104 positions as of June 30,1996, according to the Controller).

We raised several questions in last year's Analysis as to whether certain of the reductions would improve the operations of the office. In order to obtain a better understanding of how these reductions affected the operations of the State Controller, the Legislature adopted language in the 1996-97 Budget Act requiring a report from the Controller on performance results, including a historical analysis of expenditures and program output and an assessment of the office's performance as measured against specific performance measures.

Report Leaves Important Questions Unanswered. The report issued by the Controller on January 15, 1997 offers little in the way of a historical analysis of expenditures and program output, because it provides data for only 1995-96. According to the Controller's Office, 1995-96 was used as the base year because there were insufficient historical data to provide meaningful comparisons for previous years. Nevertheless, it is not possible for the Legislature to determine from the report, for example, the effect of position reductions on the office's ability to generate revenue through specific audit activities or carry out other aspects of its statutory mission. This is the kind of information the Legislature sought when it adopted the budget control language. Similarly, while the office has developed an extensive number of performance measures, many of the performance objectives and measures provide limited information. For example, a number of objectives are in the category of accelerating the processing of various tasks, but do not address the equally important issue of quality. Some measures do not really relate to performance of the Controller's Office (for example, those related to services provided by the Stephen P. Teale Data Center). Other measures do not provide the Legislature with useful information to assess how well the Controller's Office is performing. As an example, one performance objective is to improve client relationships by ensuring that audit reports are issued in a timely manner and provide value to the auditee. However, the performance measure focuses on timeliness and does not address the question of value to an auditee.

Conclusion. Based on our analysis, we believe that the Controller should review these performance objectives and measures with the purpose of improving them so that periodic assessments of performance, whether reported internally or shared with the Legislature, facilitate an understanding of the office's performance. Moreover, as the report has not addressed aspects of the Legislature's directive as stated in the 1996-97 Budget Act, the Legislature may wish to discuss this issue during budget hearings.

When Will Information Technology Improvements Be Made?

We recommend that the Controller and the Department of Finance submit a plan to the fiscal committees, prior to budget hearings, that specifies how and when critical information technology requirements cited in the Controller's 1995 performance audit will be met. The plan should include an assessment of the resources necessary to meet these requirements in the budget year and how the resources will be provided, such as through redirection of existing resources or budget augmentation.

Audit Report Emphasizes Need for Major Information Technology Investments. The May 1995 performance audit ordered by the Controller found that the office was faced with having to invest as much as $100 million over several years to replace "mission-critical" information systems. The audit noted that failure to make the investment would expose certain of the systems maintained by the Controller to an "extreme risk of failure." Specifically, the audit found that the state's fiscal, payroll and accounting systems are obsolete, difficult to maintain and in need of replacement. Also, the audit cited the need to modify computer programs in order to accommodate the Year 2000 change, a problem facing virtually all state agencies. (We discuss this issue from a statewide perspective in our analysis of the Department of Information Technology earlier in this chapter.) In addition to replacing mission-critical systems at a cost of up to $100 million, the audit also identified the need for the Controller to invest up to $3.5 million to upgrade personal computers and associated equipment, and $2.6 million annually for various other information technology needs.

Budget Does Not Address Information Technology Needs. According to the performance audit, upgrading the Controller's information technology systems cannot be deferred indefinitely. Indeed, the audit stresses that addressing the significant problems and opportunities identified by the audit will require major "up front" investments. Discussions of this situation with staff of the Controller's Office confirm that while some progress has been made toward addressing the problems outlined in the performance audit, additional resources should be allocated in 1997-98 in order to ensure that these critical information technology needs are addressed in a timely manner. However, the proposed budget identifies no funding for this purpose. Nevertheless, the performance audit progress report issued on January 15, 1997 indicates that current activity regarding these major needs is in the planning stage; however, it is not clear from the report when specific plans will be completed, nor is there any discussion of the need for major technology investments within a specific time frame.

Analyst's Recommendation. In view of the above, we recommend that the Controller and the Department of Finance (DOF) submit a plan to the fiscal committees prior to budget hearings outlining how and when critical information technology needs cited in the performance audit will be met. Specifically, the plan should include an assessment of the resources necessary in the budget year to meet the critical needs and how the resources will be provided, such as through redirection of existing resources or budget augmentation. To the extent that the plan calls for redirecting resources, it should identify the programs the resources would be redirected from, as well as the impact of proposed redirections on existing programs.

Backlog of Notifications To Owners of Unclaimed Property

We recommend deletion of proposed budget bill language which would unduly limit the State Controller's ability to process the backlog of notifications intended to locate the owners of unclaimed property held by the state.

Background. Since 1959, banks and other institutions have been required by law to remit unclaimed property to the state. Examples of such property include bank accounts, safe deposit box contents, stocks and the proceeds of insurance policies. Property is deemed to be unclaimed when an account has remained dormant for three years and efforts by the institution holding the account to locate the owner have been unsuccessful. The unclaimed property is then transmitted to the State Controller, who maintains records of all receipts and their value and attempts to identify the owners of the property. Because the state is essentially holding unclaimed property in trust until a legal owner is identified, a portion of unclaimed property funds is returned annually to claimants. If a legal owner is not identified, the state assumes ownership of the property.

According to the Controller's Office, the state currently holds in excess of $2 billion in unclaimed property belonging to approximately five million individuals and organizations. Annually, the state receives in the range of $250 million to $300 million to hold pending efforts by the Controller to locate the owners. Annually, about $80 million is paid out to approximately 65,000 claimants. The 1997-98 Governor's Budget assumes that the state General Fund will receive net revenues of $165 million from unclaimed property in 1997-98.

Proposed Budget Restores Cap on Notification Expenses Which Legislature Had Removed.The Controller is required by law to take steps to locate and notify apparent owners of unclaimed property. The notifications, which are required within prescribed time frames, must be made in the form of publication in a general circulation newspaper and a mailed notice when there is an apparent owner. Beginning in 1992-93, the amount the Controller could spend on mailed notices was limited by the annual budget act to $35,000, an amount which allowed the Controller to mail 106,000 notices. This cap was removed when the Legislature passed the 1996-97 Budget Bill.However, the 1997-98 Budget Bill would restore the $35,000 cap. It is our understanding that this cap was reinstated because of a difference of opinion between DOF and the Controller as to how much should be budgeted for purposes of complying with the legal requirement to make timely notification and process claims.

Limitation Unduly Restricts Controller From Locating Rightful Owners of Property and Addressing a Notification Backlog. There is a significant backlog of notifications that must be processed. According to information provided by the Controller, the backlog may be as high as 1.6 million. With a cap of $35,000 on notifications, the Controller is able to mail notices to only 106,000 owners of unclaimed property.

As the Controller was given no additional funding in the current year to address the notification backlog, and none is proposed in the 1997-98 Governor's Budget, it is up to the Controller to determine how much effort to put toward fulfilling the notification requirements, a flexibility provided by the Legislature when it removed the $35,000 cap. Thus, the Controller can address the backlog through a redirection of resources, or an augmentation request to the Legislature during budget hearings.

Impact of Full Notification Requirement on General Fund Revenue.There is a direct relationship between the number of notifications made by the Controller and the number of claims filed by legal owners of property transmitted to the state. Reducing the backlog would accelerate, for a time, the filing of claims by legal owners of property transferred to the state. This would affect the General Fund in the form of increased pay outs to successful claimants, but only if additional resources were applied to claims-processing.

Analyst's Recommendation. While the amount of dollars potentially at stake is considerable, because almost all unclaimed property remains claimable without regard to time, the failure to address a growing backlog in the unclaimed property program raises an important public policy issue which we believe merits discussion before the Legislature. In the meantime, we see no justification for restoring a $35,000 cap on notifications to apparent owners of unclaimed property, because doing so reverses current legislative direction and unduly restricts the ability of the Controller to fulfill her obligation to seek to locate rightful owners of such property in a timely manner. Consequently, we recommend that the restrictive language be deleted from the 1997-98 Budget Bill.

Secretary of State


The Secretary of State, a constitutionally established office, has statutory responsibility for examining and filing financial statements and corporate-related documents for the public record. The Secretary, as the chief elections officer, also administers and enforces election law and campaign disclosure requirements. In addition, the Secretary of State appoints notaries public, registers auctioneers, and manages the state's archival function.

The budget proposes total expenditures of $64.6 million for the Secretary of State in 1997-98. This is $169,000, or 0.3 percent, less than current-year expenditures. Expenditures from the General Fund total $33.6 million, a decrease of $3.1 million, or 8.5 percent, compared to current-year expenditures. Expenditures were greater for 1996-97 primarily because of the costs of the 1996 General Election. Expenditures from the Secretary of State Business Fees Fund are projected to be $23.4 million in 1997-98, an increase of $2.1 million, or 9.7 percent, over current-year expenditures. This is due primarily to costs of implementing improvements in how the Secretary processes business filings and other corporate-related documents.

No Funds Proposed to Implement Proposition 208

We recommend that the Secretary of State and the Department of Finance submit a plan to the budget subcommittees, prior to budget hearings, that specifies how the Secretary will implement and enforce new campaign finance requirements imposed by Proposition 208. The plan should include an assessment of the resources needed in the budget year and how the resources will be provided, such as through redirection of existing resources in the Secretary's budget or budget augmentation.

In November 1996, the voters approved Proposition 208, the Political Reform Act of 1996. This measure makes many major changes to the state's campaign finance laws including setting limitations on campaign contributions; mandating a variety of duties and responsibilities on candidates, contributors, and committees; and increasing sanctions for those who violate the provisions of campaign finance and disclosure laws.

Implementing Proposition 208. Since 1974, two state agencies have had responsibility for carrying out California's campaign finance and reporting laws--the Fair Political Practices Commission (FPPC) and the Secretary of State.

The FPPC is the agency responsible for determining if a candidate or other group has violated state campaign finance and reporting laws. The FPPC may hold a hearing to determine if a violation has occurred. If the FPPC finds that a violation has occurred, then they may impose a variety of sanctions, including monetary fines. Proposition 208 makes provision for an annual appropriation of $500,000 to defray the costs of enforcing the new law. The 1997-98 Governor's Budget for the FPPC includes the $500,000, plus an additional $1 million for the costs of implementing Proposition 208.

The Secretary of State has the statutory responsibility of receiving, filing, preserving, and providing for public inspection all campaign statements and campaign finance reports from candidates and other groups in support of candidates (including groups supporting initiative measures)--for statewide and local elections. In addition, the Secretary of State registers all lobbyists and lobbying firms. As the repository for all campaign statements and reports, the Secretary of State is responsible for the timely and accurate review of all disclosure documents. The Secretary of State is also required to ensure timely public access to all campaign disclosure documents.

Secretary of State Will Likely See Significant Workload Increases. In analyzing Proposition 208 for the 1996 General Election Ballot Pamphlet, we determined that the Secretary of State would see a significant workload increase if the measure passed.

For example, many of the 10,000 existing political contribution committees must file new registration documents in order to comply with the provisions of the law. Furthermore, Proposition 208 creates a new contributor category ("small contributor committees") which will probably increase the number of new registration filings. In addition, the Secretary of State will have to ensure compliance with many new requirements for each of these committees, such as committee memberships and the length of time these committees have been established.

Additionally, the Secretary of State processes voluminous amounts of campaign disclosure documents, especially contribution and expenditure documents. In 1993-94, the last full year in which data were available, the Secretary of State processed 900,000 pages of campaign disclosure documents. Under the provisions of Proposition 208, the number of these documents will probably increase significantly because of new disclosure requirements. Furthermore, the Secretary of State will have to ensure that each document meets the various new reporting requirements and the Secretary will need to ensure that its review is done in a timely manner. For example, under the new law, both the contribution and spending limits for candidates change if they fail to adhere to voluntary spending limits. Inaccurate or delayed Secretary of State compliance reviews could subject the state to litigation if inaccurate or late reviews effect the outcome of an election. Furthermore, voters could use the documents available from the Secretary of State for any civil suits against candidates in local courts. Inaccurate or delayed documentation could affect court decisions. Proposition 208 also establishes specific restrictions on when campaign funds can be solicited, received, and used thereby necessitating timely review of every document.

1997-98 Budget Request. The 1997-98 Governor's Budget does not request any new resources for the Secretary of State to implement the provisions of Proposition 208, even though the Secretary of State's workload is likely to increase.

Analyst's Recommendation. In view of the above, we recommend that the Secretary of State and the Department of Finance submit a plan to the budget subcommittees prior to budget hearings that specifies how the Secretary will implement and enforce the measure. Specifically, the plan should include an assessment of the resources needed in the budget year and how the resources will be provided, such as through redirection of existing resources in the Secretary's budget or budget augmentation. To the extent that the plan calls for redirecting resources, it should indicate the programs from which the resources would be redirected, as well as the impact of proposed redirections on existing programs.

California Science Center


The California Science Center, recently renamed after previously being known as the California Museum of Science and Industry, is an educational, civic, and recreational center located in Los Angeles. The center also has 26 acres of public parking, which are available for museum visitors as well as patrons of the adjacent coliseum and sports arena. These facilities are all located in Exposition Park, which is owned by the state and maintained through the center.

Associated with the center is the California African-American Museum, established by the Legislature to preserve, collect, and display artifacts of African-American contributions in a wide variety of disciplines.

The budget proposes total expenditures of $13.8 million for the center in 1997-98. This is an increase of about $5.7 million, or 70 percent, above the level of expenditures projected for the current year. The total includes $11.4 million from the General Fund, $2.2 million from the Exposition Park Improvement Fund, and $232,000 in reimbursements.

About $5.5 million of the additional funding would go to the California Science Center, while the California African-American Museum would receive a $195,000 increase in its funding above the current-year level. The budget proposal also includes a proposed statutory change that would allow $832,765 in revenue from the Exposition Park parking lots to be diverted to the center. Unless this statutory change is adopted, the funds would otherwise automatically be deposited in the General Fund. Thus, the proposed budget would provide the center with a total of $6.3 million more in funding in 1997-98 than it would otherwise receive. The reasons for the proposed budget increase are outlined below.

Center Seeks Major Funding Increase To Open New Science Facility

We withhold recommendation on a $6.3 million augmentation from the General Fund requested by the California Science Center to open its new science and technology exhibit hall, pending receipt of a statutorily required study on the feasibility of transferring management and operation of the center to an auxiliary support organization. We also withhold recommendation on a proposed statutory change to shift center parking lot revenues from the General Fund to the center. In addition, we recommend that the Legislature consider the options of establishing admission fees at the center or partially supporting the center with Proposition 98 education funding in order to reduce the center's requested General Fund augmentation.

This fall the California Science Center is scheduled to complete the $46 million state-funded reconstruction of the historic Howard F. Ahmanson Building, which center officials describe as a state-of-the-art science learning facility and an architectural landmark. In addition to the state funds used for reconstruction, other private and public fund-raising efforts have been led by the California Museum Foundation of Los Angeles, a nonprofit auxiliary that assists in the operation of the center. The foundation will provide many of the science and technology exhibits for the new facility.

Center Funding Proposal Detailed. Because the new facility is scheduled to open this fall, the center is requesting about $6.3 million from the General Fund in the budget year, as discussed above, for center operations.

Specifically, the Governor's budget proposes the following additional funding for the center:

In addition to the $6.3 million in funding requests for the center's own facilities, the budget also proposes to provide the California African-American Museum with $195,000 to hire a visual arts curator and an executive assistant who will coordinate traveling exhibitions and grant-writing efforts that could bolster the museum's finances.

Significant New Financial Commitment. Adoption of the Governor's budget proposal represents a significant new financial commitment to the support and operation of the California Science Center at a time when the center's ability to generate additional operating revenue from its own resources has waned. The relocation of the National Football League's Los Angeles Raiders to Oakland, and the subsequent loss of parking fees paid by football fans, has eroded parking lot revenues by nearly $1 million. If the Governor's budget plan were adopted, General Fund support for the center will have more than doubled in just two years.

Because the new science center is about to open, and because the costs for the center's operations are proposed to increase so significantly, we believe this is the appropriate time for the Legislature to examine the way the museum is structured organizationally and financially.

Funding Alternatives Should Be Considered. Last year, the Legislature adopted Chapter 201, Statutes of 1996 (AB 3493, Committee on Budget), directing the center to study the feasibility of transferring the management and operation of the center complex to its auxiliary California Museum Foundation. The bill authorized the center to examine other alternatives it deemed appropriate. The center advises that a preliminary report on the issue will be provided to the Legislature as required by law by March 1, 1997. The law requires a final report to the Legislature by May 1, 1997.

One option we recommend be considered now is the establishment of visitor admission fees in accordance with the practice of many other privately and publicly supported museums.

Center administrators have indicated that they oppose the establishment of admission fees. They contend that they would undercut the center's goal of encouraging children, especially those from low-income families, to learn more about science and deter many of its estimated two million visitors per year.

While we agree that fees would have some impact on attendance, we believe the establishment of a reasonable fee would not have the major impact that the center administration fears. First, in keeping with the policy of other museums, we believe it would be appropriate to establish regular opportunities--perhaps one or more days each month--on which anyone could visit the center without paying a fee. We would note that the Natural History Museum of Los Angeles County, adjacent to the center within Exposition Park, charges admission fees but also provides free visitation days that ensure no one is denied an opportunity to visit the facility because they cannot afford to pay a fee.

If the center charged fees equal to the fees charged by the Natural History Museum, ($6 fee to adults; $3.50 for older children, age 13 to 18, students, and seniors; and $2 for children age 5 to 12) we estimate that the center could generate more than $2.7 million during 1997-98 to offset the $6.3 million General Fund augmentation requested in the budget. This estimate of potential revenue is conservative given that the center's new facility is well-planned and should prove highly attractive to visitors.

We believe the Legislature should also consider the option of funding part of the California Science Center budget with Proposition 98 education funding. We would note that the center's plans revolve around an educational mission and include the establishment of a science-oriented public school on the grounds of Exposition Park. In recent years, the state has provided Proposition 98 funding for several projects at other museums. Given this history, using Proposition 98 funding for specific educational purposes of the center (such as presentations, workshops, and exhibits specifically targeted to school children) is an option that the Legislature could consider.

As with the fee option, a switch to Proposition 98 funding, which would require a statutory change, could reduce the amount of the non-Proposition 98 General Fund augmentation requested by the California Science Center.

Analyst's Recommendation. Because of the potential significance of the ongoing study of restructuring the center's organization and finances, we believe the Legislature should defer final approval of the center's 1997-98 budget request until the study has been completed and the Legislature has considered the admission fee and Proposition 98 funding options. For these reasons, we withhold recommendation on the additional $6.3 million requested by the California Science Center to open its new science and technology exhibit hall and the proposed statutory change to permanently shift more parking lot revenues to the center. We also recommend approval of the additional $195,000 for the California African-American Museum.

Department of General Services


The Department of General Services (DGS) is responsible for (1) providing a broad range of support services to operating departments and (2) performing management and oversight activities related to these support services. It provides these services through two programs: statewide support and property management services.

The Governor's budget proposes total expenditures of $544 million from various funds (including $11.2 million from the General Fund) to support the activities of the DGS in 1997-98. This reflects a net decrease of $15 million, or 2.7 percent, below estimated current-year expenditures. Approximately three-quarters of the department's funding is appropriated in other departments, and paid to the DGS for various services, primarily through the Service and Architecture Revolving Funds.

Statewide Support Services. Expenditures for statewide support services are $337 million in the budget year, representing a decrease of $14.8 million, or 4.2 percent, below estimated current-year expenditures. This decrease is the result of a number of factors, including a reduction in the costs of central supply stores because the DGS has contracted with a private business to provide the same services to state agencies at less cost (savings of $9.6 million to the department). In addition, many expenditures made in the current year are not continued for the budget year because they were one-time-only expenditures.

Although there is an overall reduction in statewide support services, the budget also contains several individual increases in expenditures in this area. Major proposed increases include an augmentation for 911 system upgrades to better manage calls from cellular telephones ($6.8 million), increased replacement of state fleet vehicles ($5.9 million), continued replacement of microwave communications equipment ($2.5 million), and continuation of technical services to various state agencies for radio and microwave-related services ($1.6 million).

Property Management Services. Proposed budget-year expenditures for property management services are $201 million--$800,000 more than current-year levels. Major changes include (1) a decrease of $26 million for one-time expenditures in the local public buildings portion of the 1990 earthquake safety program, (2) an increase of $27 million in the Office of Energy Assessments (which is a flow-through payment mechanism for the Natural Gas Procurement Program), (3) an increase of $1.1 million to operate a new state office building in Oakland, (4) an increase of $1.5 million for debt service payments on the Riverside State Office Building, and (5) a decrease of $3 million for inspection services on prison construction due to completion of the last authorized prison in the fall 1997.

Departmental Performance: A Work in Progress

The department appears committed to improving the performance of its various operations.

Background. In 1993 the DGS was designated as one of four departments selected to participate in a performance budgeting pilot project initiated by the Governor with the objective of changing fundamentally the state's budget process and improving the performance of state programs. The department cited its involvement in the pilot project as demonstration of its commitment to improved performance, which we had found seriously lacking in our Analysis of the 1993-94 Budget Bill.

Department Appears Committed to Improvements. Although performance budgeting has not achieved many of the initial goals sought by the Governor (please see our analysis of the Department of Finance later in this chapter), it has created within the DGS a commitment to improved performance. This commitment is demonstrated not only by the considerable investment in time and resources dedicated to the project (estimated at approximately $1.2 million in last year's Analysis) but by indications of improvement in several of the department's many separate operations. One example is the department's fleet operations. State employees are now able to reserve fleet sedans by telephone, thereby allowing a more productive use of staff time because they no longer have to travel to the state garage to determine whether a vehicle is available. The department has also demonstrated innovation and initiative by designing and ordering vans which provide a mobile office for departments with field operations.

In addition, the department has implemented in the current year a process that enables state agencies to purchase office commodities at a substantially reduced price through a contract with a private sector office supply firm. This has allowed the department to scale back significantly its own warehouse operations. Also noteworthy are efforts by the Office of Real Estate Design Services and the Division of State Architect to be more customer-oriented, including the assigning of account managers to respond to the needs of major customer departments.

In our judgment, these and other improvements in departmental operations reflect a continuing commitment to reforming an institution long viewed by state departments subject to its authority as being burdensome, overpriced, and often resistant to change.

While recognizing progress has been made in improving the operations of the department, we discuss below areas where we believe the department's efforts can be improved.

Statewide Support Services

Should the State Continue to Maintain A Marginal Warehouse Operation?

We recommend the adoption of supplemental report language directing the Department of General Services to provide the Legislature, by December 1, 1997, a plan to phase out its surplus property warehouse operations.

The department manages two programs designed to reutilize surplus property. One program is to make surplus federal property available to local governments and non-profit institutions. The other is designed to reissue surplus state property to state departments, and if that is not possible, then sell it to the public. The budget includes $2.3 million and 25.2 personnel-years in 1997-98 to support these two programs at warehouses located in Sacramento and Fullerton.

According to the department, much of the surplus state property which is reutilized never goes through either of the warehouses. Rather, it is distributed directly from the donor department to one or more other departments which have requested the property. Surplus state property sent to DGS warehouses is available for reissue to departments or purchase by the public, although certain items, such as file cabinets and conference tables, are held for 90 days before going on public sale. Surplus state property not reissued or sold within a year is sold to a recycler. Federal property which is not reissued within one year is returned to the federal government.

Warehouse Operations Are Marginal State Program. The department indicates that the surplus property programs had net revenues of about $115,000 in 1994-95, but lost approximately $408,000 in 1995-96. The department anticipates improving this situation in the current and budget years, but its estimates rely on increased sales.

Despite the marginal value of the surplus property warehouse operation, the department apparently has no plans to phase it out. This is occurring at the same time that the department is reducing its central stores warehouse function in favor of a contract with a private sector company which appears to meet the needs of state agencies for office supplies while also saving the department $9.6 million in 1997-98. Moreover, the department indicates that it intends to reduce central stores operations further by making more items available directly to state agencies through contracts with private sector providers.

Analyst's Recommendation. We can find little or no value to the state in continuing its surplus property warehouse operation. Our review of material stored in the Sacramento warehouse found that much of it was of little or no monetary value. The program appears to operate at or near a net loss, and what service it does provide might well be accomplished at a significantly reduced cost through a contractual arrangement with the private sector. For these reasons, we recommend that the Legislature adopt the following supplemental report language:

The Department of General Services shall, by December 1, 1997, provide the Joint Legislative Budget Committee and the Legislature's fiscal committees with a plan to phase out its surplus property warehouse operations.

Will State Pay Telephone Contracts Be Extended or Rebid?

We withhold recommendation on $451,000 and 2.8 personnel-years budgeted for management of the state pay telephone program pending receipt of a report from the Departments of General Services and Corrections, prior to budget hearings, as to their plans for the state pay telephone contracts and the status of the marketing analysis required pursuant to the Supplemental Report of the 1996 Budget Act.

Background. In 1986-87, the department contracted with private telephone companies to install and support pay telephones in state facilities, with a share of the receipts accruing to the General Fund. Since then, annual revenue derived from the state's share of pay telephone usage has grown from $904,000 in 1986-87 to $16 million in 1995-96. The department anticipates that revenue will increase to approximately $18 million in 1997-98 based on current contracts with two private sector communications companies.

Approximately 72 percent of the annual revenue is derived from pay telephones at state prisons. About one year ago, the DGS and the California Department of Corrections (CDC) agreed to extend the two contracts until August 1997, apparently because they were unprepared to rebid the contracts prior to the August 1996 expiration date. We believe that this decision may have cost the state several millions of dollars of additional revenue, because other states have been able to secure more favorable revenue sharing ratios for similar services.

Last year, the Legislature adopted supplemental report language directing that the DGS and the CDC jointly provide the Legislature their market analysis of the state's prospects for increasing General Fund revenue from prison system pay telephones, within 30 days after completion of their analysis. The Legislature also required a report within 30 days after rebidding the contracts, as to the level of General Fund revenue provided over the life of the contract, and changes in communications services provided to the state.

Consultant Recommends Delay in Rebidding State Pay Telephone Business. According to the DGS, a consultant it retained has advised the department to delay rebidding the state pay telephone business until August 1998. We understand that the recommendation is based on a concern that the effects of recent federal deregulation of communications service providers have not yet settled out, and therefore, now is not an opportune time to put the state pay telephone business up for bid. On the other hand, the department acknowledges that potential competitors are interested in bidding for the state business because of the amount of revenue generated by state pay telephones. The department indicates that it must make a decision soon as to whether to renew the contracts or rebid them.

Can the State Strike a Better Deal? In last year's Analysis, we expressed our concern that in delaying the rebidding of the state pay telephone business, the state was deferring an opportunity to improve its share of pay telephone receipts. We believed that an increased share of pay telephone revenues was possible, given that other states have negotiated higher percentages of revenue. In discussing with the department the possibility that the DGS may soon elect to renew the contracts set to expire in August 1997, the department expressed its belief that it would be able to increase the state's share by a significant margin. This suggests that the current revenue sharing ratios are in fact too low, and raises the question as to why the DGS did not renegotiate the state's share when it extended the contracts last year.

State Law Favors Competition. Although state law clearly favors competitive acquisition of services, the department's consultant has recommended that the contracts with the current vendors be renewed without a competitive bid process. In order to implement the consultant's recommendation, the department would have to justify renewal on a sole-source award basis. Generally, the law allows a sole-source award to be made in the event of an emergency, for the public's health and safety, or when there is only one source available. It is not clear what justification the department would use to renew the state pay telephone contracts on a sole source basis. Moreover, in the absence of an open competition for the state's pay telephone business, it would be difficult, if not impossible, for the department to prove that it had obtained the best possible revenue sharing arrangement.

Analyst's Recommendation. We believe, and the department concurs, that the state's share of revenue derived from the state pay telephone program can be increased through negotiating and renewing current contracts. There is a question, however, as to whether doing so would be consistent with legislative intent regarding competitive bidding, and whether it would in fact produce the most favorable revenue sharing ratio for the state. There is also a question as to whether the DGS has allowed sufficient time to prepare for and conduct a competitive bid, and might therefore be inclined to favor renewal. Finally, the DGS and the CDC have not provided the Legislature with a required report on the prospects for increasing General Fund revenue from prison pay telephones given the competitive nature of the telecommunications market.

For these reasons, we withhold recommendation on $451,000 and 2.8 personnel-years budgeted for management of the state pay telephone program, pending receipt of a report from the DGS and the CDC prior to budget hearings, as to their plans for the state pay telephone contracts and the status of the required marketing analysis.

Use of Sole-Source Contracts

We recommend that the department review its policy authorizing exceptions to the competitive acquisition of goods and services, and report prior to budget hearings as to how its policy is consistent with both legislative intent and direction from the Governor.

Background. Generally, as noted above, state procurement law requires the competitive acquisition of goods and services except in cases of emergency, public welfare, or safety, or where only a specific brand name or supplier can meet the state's requirements. In 1994, the Governor issued an executive order that was consistent with the Legislature's emphasis on competitive acquisition and limited the use of sole-source contracts to state emergencies or where required for public health and safety. The executive order requires that any sole-source contract be approved by the DGS and a Cabinet-level agency secretary or, for those organizations not reporting to an agency secretary, the highest-level employee of the organization.

Department's Actions Appear Inconsistent With Both Statutory and Administration Direction.In July 1996, the DGS issued a management memo to all state agencies for the purpose of implementing the Governor's 1994 executive order. The management memo notes that the executive order " . . . reinforces the state's policy whereby procurements or contracts for goods and services are to be awarded through the use of a competitive process." However, other parts of the management memo appear to be inconsistent with the Governor's executive order and the law in that it allows departments to enter into sole-source contracts when it is in the "best interests of the state," an exception that we have not found in statute or the executive order. Consequently, rather than reinforcing state policy governing competitive acquisition, it seems to weaken it.

In our opinion, the policy expressed in the July 1996 management memo provides a loophole which allows departments to circumvent the Legislature's and the Governor's policy direction because it provides an exception not found in statute or the executive order. In this regard, we note that last year the Department of Consumer Affairs (DCA), with the approval of the DGS, awarded a sole-source contract for the development and implementation of the DCA's Integrated Consumer Protection System. The sole-source award followed a competitive acquisition which the DCA canceled on the grounds that the single proposal which was submitted was too costly. Subsequently, the DCA awarded a sole-source contract to the firm which had submitted the lone proposal, specifying a different solution than that which had been proposed during the previous competition. When we asked the DCA as to the justification for what we believed to be a sole-source award, the DCA advised us that it was a "single-source," rather than a sole-source, award approved by the DGS. When we asked the DGS about this, we were advised that it was a sole-source award, although a "single-source" definition was being worked on. We are unaware of any provision of law that makes a distinction between a sole-source award and a "single-source" award.

Analyst's Recommendation. The DGS, as the administration's procurement agency, is responsible for overseeing state procurement activities, including the establishment and enforcement of policy governing the competitive acquisition of goods and services. As noted above, some of the department's actions in this regard do not appear to be consistent with state law and policy which favor competition for state contracts. Therefore, we recommend that the department review its policy authorizing exceptions to the competitive acquisition of goods and services, and report to the Legislature prior to budget hearings as to how its policy is consistent with both Legislative intent and direction from the Governor.

Approach to CALNET and State Telecommunications Networks Raises Questions

The Department of General Services (DGS) and the Department of Information Technology (DOIT) have proposed the divestiture of the state's telecommunications operations, in response to legislative direction to improve the cost-effectiveness of state telecommunications. Given the dependence of state operations on telecommunications, it is essential that the proposal be on a sound footing. Therefore, we recommend that the DGS and the DOIT report during budget hearings on the status of their efforts to implement the California Integrated Information Network Plan.

Background. The Department of General Services has broad oversight responsibility for state government telecommunications. In addition to a policy-setting and oversight role, the department also contracts for telecommunications services on behalf of state agencies, and manages the California Integrated Telecommunications Network (CALNET) to provide telecommunications services to state and local government.

In previous Analyses we have discussed the department's problems with CALNET, a statewide voice and data system estimated to cost about $100 million when fully implemented. These problems include a net annual loss of approximately $2 million from the sale of CALNET services to customer departments, and the reluctance of many state departments to acquire telecommunications services from the DGS, when they can acquire equivalent or better services at less cost from other sources.

Many departments are leery of the DGS when it comes to data communication services, because the department has failed twice in the last 20 years to sell statewide data services to departments. The Legislature, in approving the department's budget for the current year, adopted both budget act and supplemental report language to provide policy direction to the DGS regarding this situation. Specifically, in the DOIT's budget, the Legislature required that the DGS and the DOIT provide the Legislature, by October 31, 1996, the administration's plan for resolving the problems associated with CALNET, and a plan for consolidating the state's separate telecommunications networks in a manner that meets the service requirements of state departments at the same or less cost. The language further states the Legislature's intent that to the maximum extent practical, the administration should provide for the competitive acquisition of telecommunications services, including network management, in lieu of state ownership and management.

In addition, the Legislature adopted supplemental report language precluding any state agency that is not using a DGS service from being forced to acquire service from the DGS unless a specified process is followed. That process requires that the Joint Legislative Budget Committee be notified in any event where a department's preferred alternative for acquiring telecommunications services is overruled by the administration.

Concerns with the CIIN Plan. In response to the budget act language, the administration released in January 1997 the California Integrated Information Network (CIIN) strategic plan. The plan identifies short-term measures intended to allow CALNET to recover the cost of its operation prior to the state divesting itself of this telecommunications infrastructure, and a long-term strategy to move to an intergrated, privately owned and operated network. As discussed in our analysis of DOIT, we question whether the plan provides a sound basis upon which to divest an infrastructure which is of critical importance to many state programs. Although we do not take issue with the general concept of divestiture, we are concerned that the plan may be unrealistic in terms of its time frame, because it proposes to contract out for state telecommunications support by January 1, 1998. We believe that this is an unrealistic schedule for a number of reasons, including the DGS' own track record in meeting schedules for technology-related contracts. Moreover, DOIT--DGS' partner in this endeavor--is relatively new and has not established a track record which would warrant confidence in its ability to meet the January 1, 1998 date.

In addition to a concern with the plan's overall implementation schedule, we note that there is no schedule for the many critical project tasks which must be accomplished in order to implement the plan. The department advises that a detailed plan will be developed at a later date, at which point in time it will be possible to reassess the time frame required to implement the plan.

A further concern is that the plan's underlying premises are misleading; for example, an underlying premise is that owning and operating telecommunications networks are neither "core competencies" nor "core responsibilities" of the state. We believe that this premise is misleading if applied to the extensive telecommunications networks managed by the Department of Justice, the Health and Welfare Agency Data Center, and the Teale Data Center. However, the plan's premise is not qualified, and therefore suggests that state networks which have served many critical state programs for years are not competent operations.

State Departments Should Be Integral Part of Planning Process. The CIIN plan states that the DOIT consulted with staff and managers at major state data centers and state agencies. However, managers in departments we contacted indicated that no consultations had occurred, or those that did occur were minimal or focused on technical aspects of their telecommunications, and not on their program needs. Departments whose operations depend on effective telecommunications systems are naturally reluctant to give up existing systems if they have not been a meaningful participant in the project to plan for a replacement and are going to be even less willing if they are not confident in the ability of the DGS and the DOIT to provide a fully responsive and cost-effective telecommunications service. Consequently, we believe a more effective approach to resolving the state's telecommunications situation would be to involve key state agencies in the project, similar to the 21st Century project initiated by the State Controller in 1995, which has involved several key departments in assessing the human resource management system needs of state departments in order to develop a unified approach to meeting these needs through new computer-based systems.

Policy Directive Conflicts With Recent Legislative Policy. On January 14, 1997, the DOIT released a management memo intended to begin implementation of the CIIN plan. The management memo requires state agencies to utilize contracts issued by the DGS to meet their departmental telecommunications needs for both voice and data services. As such, it appears to be in direct conflict with the supplemental report language discussed above, which prevents state departments from being forced to acquire telecommunications services from the DGS unless a specific process is followed.

Implementation of the CIIN Should Not Proceed Without an Approved Feasibility Study Report. The State Administrative Manual (SAM) requires that " . . . a feasibility study must be conducted prior to the encumbrance or expenditure of funds on any information technology project." (The Government Code includes telecommunications in the definition of information technology.) It is not clear whether the department intends to prepare a feasibility study in accordance with the SAM prior to proceeding with the consolidation and divestiture of state telecommunications operations, because the CIIN strategic plan is silent on this point. The plan indicates, however, that some components of a feasibility study will be addressed; for example, an analysis of costs and benefits. A properly prepared feasibility study should provide all stakeholders an objective presentation of the business case for the administration's consolidation and divestiture plans.

Analyst's Recommendation. Telecommunications services are critical components of state operations. Previous efforts by the DGS to provide statewide telecommunications services have not been successful, even when attempts have been made to force departments to use the department's services. For these reasons, we recommend that the DGS and the DOIT report during budget hearings as to the status of their efforts to implement the California Integrated Information Network strategic plan.

Department Only Partially Responsive To Other Legislative Direction

The department has not been fully responsive to supplemental report language relating to its annual strategic telecommunications plan.

In approving the current year's budget, the Legislature adopted supplemental report language directing the DGS to fulfill its telecommunications oversight responsibilities by maintaining an annual strategic telecommunications plan. In addition the Legislature required that the plan identify specific long-term goals, policies, procedures and annual objectives for improving statewide benefits obtainable from (1) CALNET, (2) the capital area fiber optic loop, (3) state telephone usage, (4) telecommuting, (5) videoconferencing, (6) telemedicine, (7) facsimile transmission, and (8) electronic commerce.

In its letter of transmittal for the CIIN plan, the department indicates that the plan satisfies the statutory requirements regarding the annual strategic telecommunications plan. Our review of the CIIN plan concludes that this is not the case, as the CIIN plan only specifically addresses two of the areas listed above--CALNET and state telephone usage. The DGS , in a recent letter to the Joint Legislative Budget Committee, indicates that it will include the other areas in a formal request for information to be issued in March 1997 to telecommunications service providers as part of the CIIN effort.

Plan to Reduce Government Paper Pending. The Legislature also adopted supplemental report language requiring the DGS, in conjunction with the DOIT, to provide the Legislature a plan for reducing, through the application of information technology and other methods, the state's costs associated with generating, handling and maintaining paper records. The report was required to be submitted to the Legislature by December 31, 1996. According to the DGS, it provided an original draft of the report to the DOIT on December 24, 1996. The DOIT and the DGS met on January 17, 1997, and a revised draft was given to the DOIT on January 22. In this instance, it appears as though the DGS has attempted to comply with the Legislature's reporting deadline.

Inadequate Justification for Expanded Fleet Expenditures

We withhold recommendation on $5.9 million requested to replace vehicles in the state fleet maintained by the department, pending receipt of additional information from the department.

The budget for 1997-98 includes an increase of $5.9 million to replace certain vehicles in the state fleet maintained by the DGS. This amount would be in addition to the baseline budget of $6.9 million to maintain the 5,150-vehicle fleet. The proposed increase is based in part on a desire to replace sedan vehicles (roughly three-fourths of the fleet) when mileage exceeds 100,000 miles; however, the department acknowledges that it has well-maintained vehicles which continue to operate safely considerably beyond 100,000 miles. Moreover, the department was not able to provide compelling data to validate that 100,000 miles should be a maximum.

Rental Rates Would Increase Approximately 25 Percent Under Department's Proposal.According to budget documents, replacing the vehicles would result in an approximate 25 percent increase in rates the department charges other departments to rent vehicles. The department states that even with such a significant rate increase, its rates would still be well below the most favorable rental rates it has negotiated with private companies providing rental cars to state employees. It is not clear, however, whether the private sector could improve on the department's rates, because, to our knowledge, the state has not tested, through a bid or formal request, the private market's willingness to manage the state fleet.

Analyst's Recommendation. In the absence of information which would validate the department's position that state vehicles should be retired once they acquire mileage in excess of 100,000 miles, we are unable to recommend approval of the $5.9 million requested to replace these vehicles. However, we recognize that the cost of new vehicles tends to increase, and that it is important to replace vehicles which have been damaged or become unsafe to operate, or which are simply not worth maintaining. However, the budget documents which have been provided do not indicate how much of the proposed $5.9 million increase will be allocated to replacing high-mileage vehicles versus those that are damaged or unsafe to drive.

Pending receipt of this information, we withhold recommendation on $5.9 million requested to replace vehicles in the state fleet.

Department Anticipates End of Cash Flow Problem in the 911 Program

Recently enacted legislation is anticipated to end a perennial cash flow problem in the State Emergency Telephone Number Account (911 Account).

In last year's Analysis we reported on the cash flow problems affecting the State Emergency Telephone Number Account (911 Account). The account is used to collect and disburse to primarily local agencies funds necessary to support the 911 program. The funds to support this program are obtained from a surcharge on telephone bills collected by telephone companies and remitted to the state. For several years, including the current year, the DGS has had to borrow from the General Fund to provide sufficient cash flow to reimburse local agencies and the California Highway Patrol for their costs to support the 911 program. In the current year, $10.1 million was borrowed. To correct this situation, we recommended that the law be changed to require telephone companies to remit the funds within 15 days following the month in which the surcharge was collected, rather than the several months of "float" which the law allowed.

The Legislature enacted Chapter 432, Statutes of 1996 (AB 3204, Knox), which now requires that telephone companies remit surcharge revenue to the state no more than three months after the surcharges were collected. As a result of this change, the department believes that it should not require a General Fund loan for 1997-98, despite increased expenditures of $6.8 million in the budget year to upgrade emergency call systems to better manage calls made from cellular phones.

Proposed Performance Budget Contract Additions Should Not Be Included in the Budget Bill

We recommend that the Legislature not approve additional exemptions from statutory requirements sought by the department as part of its budget contract with the Legislature, because (1) it would be an inappropriate use of the budget bill, and (2) the department has not demonstrated significant performance improvement as the result of exemptions which have been provided to date.

In our analysis of the Department of Finance (DOF) later in this chapter, we discuss the state's performance budget pilot program, noting that exemptions from various statutes provided to pilot departments, including the DGS, do not seem to have produced significant improvements in departmental performance. We recommend that the Legislature not approve proposed additional exemptions from statutory requirements sought by the DGS as part of its budget contract with the Legislature, because it would be (1) an inappropriate use of the budget bill, and (2) the department has not demonstrated significant performance improvement as the result of exemptions which have been provided to date. (For a full discussion of this issue, please see our analysis of the DOF.)

Property Management Services

Revise Leasing Notification Requirements

We recommend changes in the current law for leasing of state office space that would enhance legislative oversight by requiring notification to the Legislature (1) for of all high-cost leases and (2) earlier in the leasing process.

As the state's property manager, DGS is responsible for acquiring most of the general office space used by state agencies. This includes both state-owned space and space leased from the private sector. Statewide, agencies occupy about 21.6 million square feet of office space that is controlled by DGS. About 70 percent of this space--15 million square feet--is in leases from the private sector. Leasing of facilities for state agencies is the responsibility of the DGS's Office of Real Estate and Design Services (OREDS).

Current Leasing Procedures and Requirements. If a department is in need of office space, it submits a request to OREDS to obtain the space. OREDS works with the department to refine the space needs based on the number of staff to be housed and the department's program requirements. Concurrent with developing the space requirements, OREDS and the department determine the general location--for example within a particular city or close to an airport--that will meet the department's operational needs. After the space and location requirements have been established, OREDS begins selecting a site (usually with the aid of advertising) and the office will then either negotiate a lease or receive competitive bids and award to the lowest bidder. As the lease is negotiated, planners at OREDS work with the department to determine what, if any, alterations (also referred to as tenant improvements) are needed to meet the department's program requirements. When the lease is signed and the space to meet the department's needs is available, the department moves into the leased space.

The DGS has virtually unlimited authority to obtain leased space because the Director of General Services can enter into a lease, regardless of its length or cost, without legislative approval. Under current law, the director must notify the Chairperson of the Joint Legislative Budget Committee and the chairs of the fiscal committees in each house at least 30 days prior to entering into a lease agreement if (1) the lease is for a firm term of five years or longer and(2) the annual rental costs exceed $10,000. This gives the Legislature a degree of oversight through review of these proposals but the Legislature does not have approval authority. Consequently even though the Legislature may disagree with the proposal, the director has the authority to enter into the agreement. In the past, the director has seldom proceeded if the Legislature disagrees with a proposed lease. As discussed below, we recommend the Legislature change existing law to enhance legislative oversight in this area.

No Legislative Oversight of Most Leases. As discussed above, notification to the Legislature is required only for leases that include a five year or longer firm term and annual costs exceeding $10,000. Under current practice by the administration, these limits result in the Legislature not receiving notice of most lease agreements. For example, over the two-year period 1994-95 and 1995-96, OREDS entered into or renewed 373 leases. Figure 12 summarizes the number of leases and the varying ranges of annual lease cost for them. As shown in the figure, only 47 of these leases (13 percent) had a firm term longer than five years (all over $10,000 in annual rents) and thus required notification of the Legislature. The Legislature was provided a review opportunity for leases with a total annual cost of $28.5 million while no review was afforded for leases costing $46.6 million.
Figure 12
State Leasing Activity

1994-95 and 1995-96

Annual Rent Firm Term of Lease
Leases Less Than

Five Years

Leases Five Years

Or Longer

Up to $50,000 131 --
$50,000 to $100,000 81 5
$100,000 to $250,000 68 13
$250,000 to $500,000 32 13
$500,000 to $1 million 9 7
Over $1 million 5 9
Total Leases 326 47
Total Annual Lease Cost $44.6 Million $28.5 Million

Based on our experience over many years, we believe the Legislature would have a more meaningful review of proposed leases if this review focused solely on the lease amount rather than a combination of lease amount and lease term. While a long lease term generally is deserving of greater legislative review, many leases have been signed that are under five years. As a result, it is probably more productive for the Legislature to concentrate on the higher-cost leases, regardless of lease term.

We therefore recommend that the Legislature modify existing law to require the administration to notify the Legislature for all leases with average annual rental costs of $250,000 or more. This will give the Legislature the opportunity to assess the merits of lease proposals in relation to an agency's program, space needs, and operating budget. If this level of review had been in effect during 1994-95 and 1996-97, the Legislature would have received notifications for 75 of the leases in Figure 12.

Notifications Should Be Made Early. As indicated earlier, prior to entering into a lease agreement, the director is required in specific instances to give the Legislature a 30-day review of the proposal. This notification should occur at a point in the process that makes the Legislature's review meaningful. Thus, legislative review should occur afterOREDS has determined that the department's space needs should be met through leasing and beforeOREDS has solicited proposals from potential lessors. At this earlier point in the process, OREDS should be able to provide the Legislature with an estimate of the annual cost to the department based on the amount of space needed and market conditions in the proposed leasing area.

Notification before OREDS solicits for lease proposals gives the Legislature the opportunity to review the proposal and advise the administration of any concerns before OREDS, the department, and the private sector spend considerable time and money finalizing a leasing proposal. For example, this latter situation occurred when OREDS recently sought new leased space for the Stephen P. Teale Data Center. In this case, OREDS pursued a build-to-suit data center with a 20-year lease and did not notify the Legislature until negotiations were completed and an agreement was ready to be signed between the state and a developer. The Chairperson of the Joint Legislative Budget Committee notified the director of specific concerns with the proposal at which point the DGS postponed signing an agreement until additional studies are completed.

In order to (1) avoid situations like that described above and (2) provide the Legislature an opportunity to review leases in a way that is cost-effective for the state and the private sector, we recommend amending current law to require notification to the Legislature prior to solicitation of proposals for lease space.

Recommendation. Our recommendations, as described above, would require changes to Section 13332.10 of the Government Code as shown below:

The Director of General Services may not enter into a lease agreement between the state and another entity, public or private, in which the state is lessee if the agreement is to be for the lease of a building or building space, or both, which will be for the occupancy of any agency or agencies of the state with a firm lease period of five years or longer and an annual average rental, over the term of the lease, in excess of ten thousand dollars ($10,000) two hundred fifty thousand dollars ($250,000), unless not less than 30 days prior to soliciting proposals for entering into the lease the Director of General Services notifies the chairperson of the committee in each house which considers appropriations and the Chairperson of the Joint Legislative Budget Committee, or his or her designee, in writing of the director's intention to enter into the agreement solicit proposals for such a lease, or not sooner than such lesser time as the Chairperson of the Joint Legislative Budget Committee, or his or her designee, may in each instance determine. No funds appropriated in any Budget Act may be encumbered or expended for any lease entered into on or after July 1, 1979, for office space in the County of Sacramento unless all solicitations for leases for office space in the County of Sacramento under the above-described conditions contain the statement, "The state is anticipating capital construction in the City of Sacramento and intends to eventually reduce the use of space on a leased basis."

Surplus Property Assessments

We withhold recommendation on $100,000 under Item 1760-0150002(g)(1) for a property development study of property at the California Institution for Men prison site in Chino, pending completion of the master plan for that site.

The budget includes $1.7 million to pay consultants for various studies related to potential selling or leasing 16 state properties. The amounts requested for each property are listed under Item 1760-015-0002. Under Chapter 193, Statutes of 1996 (SB 1770, Johnston), the Director of General Services was given authority to sell or lease most of these properties, which were previously identified as part of the state's Surplus Property Inventory. Disposition of a few of the sites, such as the state San Bernardino State Building and the San Diego State Garage, was authorized in other legislation.

The purpose of the consultant studies is to obtain information about the characteristics of the properties so the state can maximize its return through selling or leasing. The studies can include environmental assessments, engineering investigation of soils, toxic materials, and site infrastructure, and planning and zoning reviews. For example, DGS used similar funding provided in recent years to obtain changes in the land use designation for a portion of the Agnews Developmental Center in San Jose. This change, from agriculture/open space to allow the development of office space, significantly increased the value of the property and hence the state's return from the sale of the property to a private firm.

One of the 16 proposals for 1997-98 involves the California Institution for Men in Chino. The DGS, in conjunction with the Department of Corrections (CDC), is currently preparing a master plan for this 2,200-acre prison site, for which $250,000 was funded in the 1995-96 Budget Act. It is our understanding that the main purpose of the master plan is to determine to what extent the property is needed for CDC's current and future needs. The 1997-98 budget proposes an additional $100,000 to prepare a property development strategy for the site. We withhold recommendation on this request pending completion and review of the master plan, which should be available prior to budget hearings.

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