Major Issues

Capital Outlay

The State Needs a Better Planning and Financing Process for Capital Outlay

In recent years the state has relied heavily on the use of bonds for addressing its capital outlay needs. Over the last five years, less than 0.1 percent of General Fund expenditures have been used to fund projects on a "pay-as-you-go" basis. The state needs a better balance between debt financing and pay-as-you-go-financing.

The lack of a predictable funding source and a coordinated set of priorities has meant some high priority projects have been deferred.

We recommend the Legislature dedicate a portion of annual General Fund revenues to provide a pay-as-you-go funding source for capital outlay. (See page H-15.)

Set Priorities Instead of Allocating Equal Amounts for Capital Outlay in Higher Education

The administration and the Legislature for the past several years have allocated funds to the segments of higher education based on an equal amount rather than based on relative needs.

We have recommended specific criteria and priorities for the Legislature to use when evaluating higher education capital outlay across all three segments. (See page H-18.)

The Legislature Needs a Better Way to Assess Seismic Risk in Higher Education Buildings

The Department of General Services has developed a method for evaluating the relative seismic risk of state buildings that the Legislature has used to fund structural improvements for the highest risk state buildings.

To give the Legislature a common evaluation system, we recommend that the Legislature require the University of California and the California State University to reevaluate their buildings for seismic safety using the Department of General Services' methodology. (See page H-27.)

A Plan Is Needed for Housing Judicially Committed and Penal Code Patients in State Hospitals

The number of judicially committed and penal code committed patients in the Department of Mental Health are expected to grow by about 300 each year.

The administration has not developed a long range plan for accommodating this population and instead is proposing to expand Atascadero State Hospital in two 250-bed units.

The Legislature needs to address this need in a comprehensive manner that considers various alternatives including construction of more facilities. We recommend the Legislature not approve additional beds for these patients until a comprehensive plan is presented. (See page H-51.)


Capital Outlay

Funding for capital outlay would increase significantly in the budget year, mainly as a result of General Fund increases for capital outlay programs and new authorizations of lease-payment bonds for three large projects. Nearly one-half of the proposed appropriations are from a general obligation bond that has not yet been approved by the Legislature or the voters.

The 1998-99 Governor's Budget proposes $958 million for capital outlay programs (excluding highway and rail programs which are discussed in the Transportation section of thisAnalysis).This is spending on physical assets--college lecture halls, parklands, and prisons. (Spending to pay off those assets that have been financed with bonds is discussed later in this section.) The proposed amount is an increase of $200 million (27 percent) over current-year appropriations. Figure 1 compares the amounts appropriated for capital outlay in the current year to the amounts proposed in the budget for each general organizational area. As shown in the figure, the largest increase ($147 million) is in the area of Health and Social Services

Figure 1
State Capital Outlay Programs
1997-98 and 1998-99

(In Millions)

1997-98 1998-99 Difference
Legislative, Judicial, and Executive $19.8 $32.7 $12.9
State and Consumer Services 79.2 55.8 -23.4
Transportation (excluding highways and rail) 3.5 15.6 12.1
Resources 90.3 145.0 54.7
Health and Social Services 18.8 165.3 146.5
Youth and Adult Corrections 51.8 54.9 3.1
Higher Education 490.4 470.8 -19.6
General Government 0.6 18.2 17.6
Totals $754.4 $958.3 $203.9

Figure 2 shows the amounts each department requested for capital outlay funding in 1998-99, the amounts approved for inclusion in the Governor's budget, and the future cost for the approved projects. As shown in the figure, an estimated $418 million will need to be appropriated in the future in order to complete these projects. Thus, the request before the Legislature represents a total cost of almost $1.4 billion.

The Governor's budget proposes funding the capital outlay program from bonds, the General Fund, special funds, and federal funds. Figure 3 (see page 8) shows the proposed funding for each department by fund source.

Bonds. Over 70 percent of all proposed funding for capital outlay ($710 million) is from bonds. This includes $75 million from previously approved general obligation bonds, $450 million from proposed general obligation bonds (for higher education), $11 million in previously issued lease-payment bonds for the California State University, and $174 million from proposed lease-payment bond authorizations. (The debt service on all general obligation and virtually all these lease-payment bonds would be a General Fund obligation.)

Direct General Fund Appropriations. The proposed $152 million from the General Fund is almost four times the General Fund appropriations in the current year for capital outlay.

Special Funds. The $81 million proposed from various special funds are mainly for resources and transportation-related programs. This amount includes $7.5 million from the state's tidelands oil revenues that are placed in the Natural Resources Infrastructure Fund. This fund was created by Chapter 293, Statutes of 1997 (SB 271, Thompson). For a more detailed discussion of all proposed uses of this fund, please see the Crosscutting Issues section of the Resources chapter of this Analysis.

Overview of Capital Outlay Needs

Those departments funded under the state's capital outlay program--excluding the land conservancies and the Wildlife Conservation Board--annually prepare project-specific five-year capital outlay plans. These five-year estimates should be viewed with caution because some of the plans are incomplete and also may include proposals that, upon examination, would not merit funding. Nevertheless, the plans provide at least a reasonable assessment of the overall magnitude of the state's capital outlay needs.
Figure 2
1998-99 Capital Outlay Summary
All Funds (In Thousands)
Governor's Budget
Department Request Proposed1998-99 FutureCost Totals
Legislative, Executive, and Judicial
Emergency Services $27,312 $27,083 $7,644 $34,727
Justice 5,962 5,602 18,233 23,835
State and Consumer Services
Franchise Tax Board $3,945 -- -- --
General Services 63,497 $55,834 -- $55,834
Business, Housing, and Transportation
Transportation $18,661 $3,033 -- $3,033
Highway Patrol 12,150 140 -- 140
Motor Vehicles 12,474 12,474 $6,452 18,926
Stephen P. Teale Data Center 2,100 -- -- --
Tahoe Conservancy $16,473 $16,473 -- $16,473
Conservation Corps 430 -- -- --
Forestry and Fire Protection 36,802 32,286 $21,051 53,337
Fish and Game 2,050 1,789 -- 1,789
Wildlife Conservation Board 25,683 24,183 -- 24,183
Boating and Waterways 7,121 6,100 9,489 15,589
Coastal Conservancy 20,718 23,440 -- 23,440
Parks and Recreation 33,658 20,892 15,296 36,188
Santa Monica Mountains Conservancy 30,165 -- -- --
Coachella Valley Mountains Conservancy 40 40 -- 40
Water Resources 47,558 19,760 13,360 33,120
Health and Social Services
Health and Welfare Data Center $5,236 $5,236 -- $5,236
Health Services 115,668 115,668 -- 115,668
Developmental Services 7,541 2,191 $1,869 4,060
Mental Health 48,000 34,262 52,222 86,484
Employment Development 8,996 7,907 2,000 9,907
Youth and Adult Corrections
Corrections $47,648 $40,679 $52,258 $92,937
Youth Authority 38,285 14,211 21,002 35,213
Higher Education
University of California $150,940 $151,043 $126,972 $278,015
California State University 150,000 161,303 6,649 167,952
Community Colleges 206,491 158,445 43,935 202,380
General Government
Food and Agriculture $6,797 $650 $6,498 $7,148
Military 29,445 16,836 13,255 30,091
Veterans' Home of California 6,614 -- -- --
Unallocated capital outlay 831 744 -- 744
Totals $1,189,291 $958,304 $418,185 $1,376,489

Figure 3
1998-99 Capital Outlay Program

Proposed Expenditures by Fund Type

(In Thousands)
Department Bonds General Special Federal Total
Emergency Services $25,841 $1,242 -- -- $27,083
Justice -- 5,602 -- -- 5,602
General Services 55,834 -- -- -- 55,834
Transportation -- -- $3,033 -- 3,033
Highway Patrol -- -- 140 -- 140
Motor Vehicles -- -- 12,474 -- 12,474
Tahoe Conservancy 5,000 2,500 8,973 -- 16,473
Forestry and Fire Protection -- 32,286 -- -- 32,286
Fish and Game 550 -- 1,239 -- 1,789
Wildlife Conservation Board -- -- 24,183 -- 24,183
Boating and Waterways -- -- 6,100 -- 6,100
Coastal Conservancy 850 11,590 9,000 $2,000 23,440
Parks and Recreation 1,457 5,890 12,945 600 20,892
Coachella Valley Mountains Conservancy -- -- 40 -- 40
Water Resources 1,650 18,110 -- -- 19,760
Health and Welfare Data


-- 5,236 -- -- 5,236
Health Services 115,668 -- -- -- 115,668
Developmental Services -- 2,191 -- -- 2,191
Mental Health 32,956 1,306 -- -- 34,262
Employment Development -- -- 3,000 4,907 7,907
Corrections -- 40,679 -- -- 40,679
Youth Authority -- 14,211 -- -- 14,211
University of California 151,043 -- -- -- 151,043
California State University 161,303 -- -- -- 161,303
Community Colleges 158,445 -- -- -- 158,445
Food and Agriculture -- 650 -- -- 650
Military -- 9,470 -- 7,366 16,836
Unallocated -- 744 -- -- 744
Totals $710,597 $151,707 $81,127 $14,873 $958,304

Figure 4 compares the five-year estimates with proposed 1998-99 appropriations. (In addition to the programs in Figure 4, we estimate five-year capital outlay needs of about $15.6 billion for highway and rail programs and about $11 billion for K-12 education facilities. These programs are not funded through project-specific appropriations in the budget, however, and thus are not part of our discussion in this chapter of the state capital outlay program.) In aggregate terms, the Governor's budget proposal funds about 9 percent of the identified five-year capital outlay needs. As the figure shows, the budget would fund a significant share of the five-year needs in the areas of Resources; Health and Social Services; and Executive, Legislative, and Judicial. On the other hand, the budget would fund a small portion of the five-year need for Youth and Adult Corrections and Higher Education. The Governor, however, is proposing a total of $1.3 billion in bond funding and federal funds for new prisons through legislation separate from the budget. This would fund nearly 70 percent of the estimated five-year need for Youth and Adult Corrections.
Figure 4
Five-Year Capital Outlay Plans

Compared to Budget Bill Proposal

(In Millions)
Five-Year Total a Budget Bill Amounts
Legislative, Judicial, and Executive $64 $33
State and Consumer Services 609 56
Transportation (excluding highways and rail) 134 15
Resources 736 145
Health and Social Services 359 165
Youth and Adult Corrections 1,944b 55
Higher Education 6,484 471
General Government 176 18
Totals $10,506 $958
a1998-99 through 2002-03. Total does not include estimated five-year needs of $15.6 billion for highway and rails programs and $11 billion for K-12 education facilities.
bIncorporates Legislative Analyst's Office estimate for new prison construction.

For higher education, the budget includes about 7 percent of the identified five-year need. The Governor's proposed $1 billion bond measure ($100 million would be set aside to match federal hazard mitigation funds) for higher education--from which the segments' 1998-99 program would be funded--would cover less than 15 percent of the estimated need. This five-year total may be overstated, however. Last year, the California Community Colleges (CCC) reported a five-year need of $750 million, which was based on an assumed future funding level of $150 million each year. This year the CCC indicates a five-year need of $3.6 billion. As discussed in our review of the CCC's capital outlay program (later in this chapter), this amount probably overstates the segment's need over the next five years.

Bond Funding and Debt Service

Over the last several years, the majority of capital outlay has been funded with bonds. In the 1990s, the voters have authorized $16.4 billion in general obligation bonds. While this amount is a substantial level of bond funding, only about $3 billion was to finance the state's capital outlay programs discussed above. The other $13.4 billion included $5 billion for transportation and rail programs and $8.4 billion for facilities, such as K-12 schools, water quality enhancements, and veterans' housing loans. In addition to these general obligation bonds, the Legislature has authorized $5.6 billion in lease-payment bonds since 1990. These bonds have funded higher education facilities, prisons, state office buildings, state laboratories, and state homes for veterans.

Governor's 1998-99 Bond Proposals

The Governor proposes new bond authorizations over the next several years totaling $13.2 billion:
Figure 5
Governor's General Obligation Bond Proposal for 1998 Elections
(In Millions)
Program Amount
K-12 Schools $2,000
Higher Education 1,000
Local Juvenile Facilities 350
Infrastructure Bank 200
Water 1,300
Watershed, Wildlife, and Parks


Total $5,650

Figure 6
Governor's Proposed

1998 Lease-Payment Bonds

(In Millions)
Department/Project(s) Amount
Department of Corrections
New state prisons $1,024a
California Youth Authority
Security housing units 33a
Department of Health Services
Richmond Laboratory, Phase II 116
Office of Emergency Services
Headquarters facility 26
Department of Mental Health
Atascadero State Hospital addition 33
Unspecified projects 300


Total $1,532
aThe administration indicates that a final decision has not been made as to whether these will be general obligation or lease-payment bonds. In calculating the fiscal effect of the $13.7 billion in bonds on the state's debt service costs, however, the Department of Finance assumed lease-payment financing for these bonds.
bAuthorization in 1998 and/or 1999.

Debt Service

The state's debt-service payments on bonds will be $2.6 billion in the budget year--10 percent over current-year costs. There are two debt- service components:

Debt service for lease-payment bonds is becoming a greater portion of total debt-service costs, as shown in Figure 7. For example, lease-payment debt service was 13 percent of total debt service in 1990-91 and will increase to 21 percent in the budget year.

As currently authorized bonds are sold, debt-service payments will increase to $2.8 billion in 2000-01 and decline thereafter if no new bonds are authorized. If the Governor's proposed $13.2 billion in additional general obligation and lease-payment bond are authorized, we estimate that debt payments would increase to $3.5 billion by 2004-05 and decline thereafter.

Debt Service Ratio

We estimate that the amount of debt service on General Fund-backed bonds as a percentage of state General Fund revenues (that is, the state's debt ratio) will be 4.3 percent for the current year. As shown in Figure 8, this ratio rose significantly in the early 1990s, but has been declining since 1994-95. This decline has occurred because of stronger General Fund revenue growth and relatively stable debt-service payments. We estimate that, as currently authorized bonds continue to be sold, the debt ratio will increase in the budget year, rise to 4.7 percent in 1999-00, and decline thereafter. (This projection uses our General Fund revenue estimates.)

Figure 8 also shows the impact on the debt ratio if the Governor's proposed $13.2 billion in general obligation and lease-payment bonds are authorized. We estimate that, as these bonds are sold over the next decade or so, the debt ratio would peak at 5.1 percent in 2001-02. After that time the debt ratio would gradually decline.

The Department of Finance has indicated that sales of the proposed bond would increase the debt ratio to a peak of 5.9 percent--as compared to our estimated peak of 5 percent. There are two reasons for this difference. First, the department's calculations included General Fund revenue estimates that in future years are less than our estimates. Second, the department assumed--contrary to historical experience--that a much greater share of the proposed bonds would be sold within two years after receiving voter approval.

Maintenance and Deferred Maintenance

In recent years, we have discussed the underfunding of routine maintenance in state facilities and K-12 schools and the resulting backlogs of deferred maintenance. Over the last two years, funding for maintenance and/or deferred maintenance has increased at certain agencies--the community colleges, California State University (CSU), the Department of General Services (for state office buildings), and K-12 schools (a one-time increase in 1997-98 for deferred maintenance).

For 1998-99, the Governor's budget is taking a very positive step in addressing these problems by including the following increases in maintenance-related funding:

Though in some cases these increases are modest in relation to the overall need, the administration's effort to improve the condition of state and K-12 school facilities is encouraging. A key element to providing this funding, however, is an assurance from each agency that these funds, as well as other maintenance funds in their budget, will be used for these purposes.


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