If the state is to get the "biggest-bang-for-its-buck" in addressing state infrastructure needs, the state must adopt a more deliberate capital outlay planning and financing process. In our view, this requires development of an integrated five-year state capital outlay plan, which sets priorities and identifies financing alternatives, and presentation of this plan as part of the annual budget. This approach would provide a statewide context of needs and priorities, and highlight the financing tradeoffs to meet the state's highest priorities.
The state generally finances its infrastructure projects in one of two ways: "pay-as-you-go" or bonds. Pay-as-you-go is the least costly method of financing. Under this approach, direct appropriations to fund a project or acquisition are made on an annual basis. Bonds, on the other hand, generally allow the state to acquire expensive assets that it could not afford on a pay-as-you-go basis. Under this financing method, the state borrows money and then repays the borrowed money (principal) plus interest, over a period of years. These are the state's debt service payments.
In recent years, the state has placed before the voters single-purpose bond issues; the proceeds of which can only be used for a given program (for example, higher education). For certain projects outside these program areas, the state commonly has relied on lease-payment bonds authorized by the Legislature for a specific purpose, such as the construction of a state office building. To a far lesser extent, the state has used direct appropriations (pay-as-you-go funding). For example, over the previous five years, less than 0.1 percent of total General Fund expenditures have been used in this manner for capital outlay. The lack of a predictable funding source and a coordinated set of priorities for all capital outlay programs has meant that some high priority projects have been deferred.
Given the large demand for new capital outlay projects to serve a growing population and the inventory of existing state infrastructure, the state will probably always rely to some extent on bond financing for capital outlay. We believe it is important, however, to have a better balance between bond funding and pay-as-you-go financing than the state has had in recent years. Increasing pay-as-you-go funding would allow the Legislature to address more higher priority infrastructure needs across program areas, in a more timely and cost effective manner.
The Legislature used direct appropriations for many years to fund higher education facilities. Specifically, a large portion of tidelands oil revenues was transferred to the Capital Outlay Fund for Public Higher Education to address capital needs of the higher education segments. More recently, as discussed in the Crosscutting Issues section of the Resources chapter in this Analysis,the Legislature has transferred tidelands revenues to the Natural Resources Infrastructure Fund to meet program needs in that area.
As discussed in our companion publication, the 1998-99 Budget: Perspectives and Issues, we estimate that General Fund revenues, in the current and budget year combined, will be approximately $1 billion higher than the Governor's budget estimate. This situation gives the Legislature an opportunity to allocate a portion of these additional revenues to fund a greater portion of capital outlay through direct General Fund appropriations rather than through bond financing. Accordingly, we recommend that the Legislature use this opportunity to dedicate a portion of annual General Fund revenues to a special account for capital outlay to provide a stable funding source for priority capital outlay projects. The Legislature would then have a reliable funding source to annually address the state's highest priority infrastructure needs rather than be overly dependent on bonds.
This approach would have several advantages compared to bond financing.
Future Savings From Budget Year Investments. In the budget year, we recommend that the Legislature substitute General Fund appropriations for the new lease-payment bonds proposed in the budget for specific capital outlay projects. Our recommended cost for these projects is $165 million. By using direct General Fund appropriations, the state would save the additional future interest costs of around $180 million associated with bond financing. For future years, we recommend that the Legislature gradually increase the amount of annual revenues set aside in a capital outlay account. As discussed in the Capital Outlay Overview in this chapter of the Analysis, the state's debt service ratio will begin to decline after 1999-00 as approved bonds are paid off. The Legislature could dedicate some or all of this reduced debt burden for this purpose.
The Governor's budget proposes $471 million of capital outlay for the three segments of public higher education. The future cost to complete these projects is $176 million. In addition, it would cost $569 million to complete projects previously approved by the Legislature (but which are not funded for additional phases in the budget). Thus, over $1.2 billion is needed to complete all proposed and previously approved projects. With only $65 million in existing bond funds available, the Legislature will have to provide new funding sources to finance these projects. Given this demand and the projected growth in undergraduate enrollments, it is essential that the Legislature establish criteria to carefully evaluate all capital outlay proposals.
The state currently does not evaluate and fund all higher education capital outlay proposals on a priority basis. Instead, each system has an internal process for determining its priorities. The process used by the California Community Colleges (CCC) is based on fairly explicit criteria adopted by the Board of Governors. The California State University (CSU) uses very general guidelines to set priorities. The University of California's (UC's) criteria for setting priorities is unclear (it appears to use a per-campus allocation of anticipated state funds).
We believe that the state needs a "common yardstick" with which to judge capital outlay proposals across the segments. Only in this way can the Legislature be assured that the state is (1) getting the "biggest-bang-for-its-buck" for the investments made in higher education facilities and (2) meeting undergraduate enrollment demand. As discussed below, we have developed a specific priority list for funding all higher education projects. We hope that this will assist the Legislature in upcoming budget deliberations.
Given the above, we therefore recommend that the Legislature:
|LAO Recommended Priorities for Funding
Higher Education Capital Outlay Projects
|PriorityOrder||Description of Priority|
|1||Critical Fire, Life Safety, and Seismic Deficiencies|
|3||Critical Deficiencies in Utility Systems|
|4||Improvements for Undergraduate Academic Programsa|
|New construction or renovations that increase instructional capacity.|
|Renovation of existing instructional buildings.|
|5||Integrity of Operationally Important Facilities|
|6||Administrative, Research, and Support Facilitiesa|
|Faculty and administrative offices.|
|aProjects in these ranks are recommended for funding in the order of priority listed.|
The following is a brief description of the types of projects that would fall within each priority.
Priority No. 1: Critical Fire, Life Safety and Seismic Deficiencies.These projects correct critical fire, life safety and seismic deficiencies where there is an immediate threat of personal injury. Critical seismic deficiencies are those that would be rated as a level V or VI risk using the evaluation methods developed by the Department of General Services. (Please see "Assessing Seismic Risk in Higher Education Buildings" also in this Crosscutting Issues section.) Projects for seismic strengthening in this priority address seismic deficiencies and directly related building code corrections only. This category also includes satisfaction of legal claims based on judgments or settlements.
Priority No. 2: Necessary Equipment. Projects in this rank fund equipment purchases needed to complete and make operational newly constructed projects. In effect, these proposals "finish off" prior commitments.
Priority No. 3: Critical Deficiencies in Utility Systems. These projects correct utility system deficiencies that have rendered, or pose the immediate threat of rendering, a significant part of a campus inoperable.
Priority No. 4: Improvements for Undergraduate Academic Programs.Projects of this priority are intended to achieve facilities improvements for undergraduate academic programs by providing new and renovated buildings. Projects would not be funded if they increase a campus' instructional capacity (classrooms and laboratories) to more than 95 percent of that justified by campus (or community college district) enrollment at the time the project is planned for completion. Libraries would be addressed on a case-by-case basis because library standards are in a state of transition due to changes in information technology.
Priority No. 5: Integrity of Operationally Important Facilities. These projects would upgrade important facilities to assure they continue to meet the needs of the campus. Examples would be upgrading of libraries, central plants, data processing centers, and utility systems.
Priority No. 6: Administrative, Research, and Support Facilities. We recommend first priority in this category be given to faculty and administrative offices, then research facilities, and then other support facilities. In view of the high cost of research facilities and competing needs for undergraduate enrollments, we recommend that new research facilities be funded only to the extent that existing campus research space is below 90 percent of that justified by campus enrollments at the time the project is planned for completion, or if existing space is 30 years old or older and no longer can accommodate the research activities.
We believe the consistent use of these priorities would not only focus funding on meeting the state's need to provide adequate facilities for projected undergraduate enrollment growth, but would also provide a stable and rational framework within which the three segments can undertake their capital planning.
|Evaluation of Higher Education
Capital Outlay Proposals Using Proposed Priorities
|(Dollars in Thousands)|
|Priority||Number ofProjects||Budget BillAmount||Cost toComplete|
|Projects Satisfying Criteria|
|Priority No. 1--Critical Fire, Life Safety, and Seismic Deficiencies|
|Subtotals, Priority No. 1||2||$1,270||$0|
|Priority No. 2--Necessary Equipment|
|Subtotals, Priority No. 2||24||$22,559||$0|
|Priority No. 3--Critical Deficiencies in Utility Systems|
|Subtotals, Priority No. 3||2||$21,737||$0|
|Priority No. 4--Undergraduate Academic Improvements|
|New buildings and renovations that increase instructional capacity|
|Renovation of instructional space--enrollment shifts (other than wet labs)|
|Renovation of existing instructional buildings--buildings 30 years or older|
|Subtotals, Priority No. 4||20||$122,366||$48,319|
|Priority No. 5--Operationally Important Facilities|
|Subtotals, Priority No. 5||10||$35,982||$0|
|Priority No. 6-- Administrative, Research, and Support Facilities|
|Administrative and Support Facilities|
|Subtotals, Priority No. 6||7||$85,129||$31,238|
|Projects Requiring Reevaluation|
|Projects Not Meeting Criteria|
|Grand Totals, All Projects||91||$470,791||$177,556|
|aIncludes one support facility that is a lower priority than the research facilities.|
The Governor's budget proposes $471 million in new spending--$450 million from a proposed 1998 bond, $10 million from the 1996 bond and $11 million from proceeds of lease-payment bonds that were authorized by the Legislature and sold for other purposes.
Considering the future costs of all prior projects and those proposed in the budget, there is a $1.2 billion shortfall (see Figure 11). If the Governor's proposal for a $1 billion general obligation bond (of which $100 million is proposed to be set aside to match Federal Emergency Management Agency [FEMA] grants) is approved, the funding shortfall would be about $262 million. Under this scenario, a large number of approved projects could not be completed. In our analysis of the capital outlay program for each segment, we have recommended that the Legislature reduce the budget requests by a total of$182 million (with additional future savings of $98 million). If these recommendations are approved, there would be sufficient funds to complete all approved projects, leaving a balance of about $18 million. Even under this situation, there would essentially be no funds available for any new projects in 1999-00.
|Higher Education Capital Outlay
|Cost of projects in 1998-99 Governor's budget||$470.8|
|Cost to complete projects in Governor's budget||176.5|
|Cost to complete projects approved in earlier years||569.5|
|Available general obligation bond funds||-55.0|
|Proposed Higher Education Capital Outlay Bond Fund of 1998||-900.0a|
|Funding shortfall if 1998 bond approved||$261.8|
|Recommended reductions in Governor's budget||-181.7|
|Future cost savings from recommended reductions in
|Funds available after recommended reductions||$18.3|
|aThe Governor's higher education capital outlay bond proposal is for $1 billion, but $100 million is designated to match federal funds for hazard mitigation.|
Our concern is that the state has in essence "overcommitted" itself by starting projects without having the funding resources to complete them. To address this problem, we recommend that the Legislature budget higher education capital outlay so that an available fund source is identified to complete projects before approving the initial phase of any project. (We also recommend this for all other state capital outlay programs.) The Legislature should not initiate higher education projects that are dependent on a future bond in order to complete the project. In keeping with this recommendation, we have recommended that existing bond funds be used to complete the highest priority projects included in the budget across the three segments and that the balance of the projects approved by the Legislature be funded from the proposed bond issue. The bond measure should be of sufficient size to complete all projects approved by the Legislature--plus any amount that the Legislature wishes to reserve for new projects in 1999-00. Further, we recommend that the Legislature appropriate $55 million from existing general obligation bonds (leaving $10 million in reserve) rather than the $9.5 million in the Governor's budget.
These criteria identify seven levels of seismic risk (I lowest, VII highest). Based on the DGS evaluation of state buildings using these criteria, the Legislature decided to seismically strengthen all buildings rated at risk levels VI and V (level VII buildings are unstable and no state buildings that were evaluated fall into this category). Buildings rated lower than risk level V are not considered a high life safety risk and have not been funded under this program. Figure 12 summarizes the DGS seismic risk levels III through VI.
|State Building Seismic Safety Program
Risk Level Characteristics for a 7.0 Magnitude Earthquake
|Level III||Level IV||Level V||Level VI|
|Risk to Life|
|Minor.||Moderate.||Substantial.||Extensive, but not imminent; extrication protracted and difficult.|
|Building Structural System|
|Minor damage; repairable.||Moderate damage; substantial repair.||Substantial damage; repair may not be cost-effective.||Extensive damage; collapse likely.|
|Other Building Systems|
|Disrupted for days to months.||Disrupted for months to years.||Total disruption; repair may not be cost-effective.||Total disruption; repair probably not cost-effective.|
|Within weeks, with minor disruptions.||Partially to totally vacated during repairs.||Totally
|Totally vacated during repairs (if repairable).|
UC Method. The UC uses a ranking system of its own device. In the UC rating system, buildings are characterized as good, fair, poor, and very poor. The lesser number of ranks and the words used to describe projects that fit them tend to give some projects the appearance of being of sufficient seismic risk as to warrant funding, when such may not be the case. The seven levels of rank in the DGS system allow more refinement in classifying buildings than the four used by UC. In characterizing a building's life safety risk, the UC system requires the evaluator to classify it at one key point as "low" or "appreciable" with no intermediate ranking such as "moderate" allowed.
An additional concern is that it appears the UC system considers only the structural condition of the building and does not take into account the presence or absence of people in a building in a meaningful way in evaluating life safety risk. The length of time people are in a building is as important as the number present. The five-step evaluation process developed by the DGS does a better job of addressing this consideration, although there is still room for improvement. We believe the UC rating system is less useful than that of the DGS and does not give the Legislature the information it needs to assess the relative life safety risk of buildings in the UC system and the CSU system.
CSU Method. The CSU uses a well documented process to guide the engineers who evaluate the seismic risk of CSU buildings. The CSU process also involves peer review of the engineer's evaluation. Thus, the CSU system is technically sound. An important weakness, however, is that it results in a listing of buildings from highest to lowest risk without identifying the level of risk. Consequently, it is possible only to know that one project is of higher priority than another, but the ranking says nothing about whether one, both, or neither are of sufficient seismic risk to warrant funding.
The driving consideration in retrofitting a building for seismic safety is the risk to human life--property damage is secondary. In order to have a high degree of confidence that the evaluation of buildings will identify the highest risk buildings the evaluation system must include (1) clear guidance on the evaluation process, (2) common definition of risk levels, (3) consideration of building occupancy, and (4) a common method for placing the buildings in relative priorities based on life safety risks. The DGS method contains all these elements whereas the UC and CSU methods do not. Lacking a common evaluation system, the Legislature does not have the information it needs to weigh the relative merits and risks of projects when making funding decisions. The DGS system of evaluation is not a burdensome procedure and the UC and CSU should be able to undertake this reevaluation within existing resources and in a short period of time. Consequently, we recommend that prior to funding any further seismic retrofit projects, the Legislature direct the UC and CSU to evaluate all projects for seismic retrofit using the DGS method.