Crosscutting Issues

Capital Outlay

Infrastructure Planning And Financing

The state needs to overhaul its process for planning, budgeting, and financing infrastructure. The Governor's establishment of a commission to examine this complex issue is a welcome first step. The commission faces a difficult challenge, however, to recommend a comprehensive bond package by May 1.

In our December 1998 report, Overhauling the State's Infrastructure Planning and Financing Process (reprinted in the 1999-00 Budget: Perspectives and Issues), we discuss the challenge the state faces to address its infrastructure needs in order to sustain a growing economy and population. To effectively meet this challenge, the state needs a well-defined process for planning, budgeting, and financing necessary infrastructure improvements.

Unfortunately, the state's current capital investment process suffers from a myriad of problems:

To address these problems, we recommend that the Legislature overhaul the planning, budgeting, and financing of the state's infrastructure by:

Governor's Proposed Commission

The Governor has also recognized the need to improve the planning and financing process in order to meet the state's infrastructure needs. To begin the development of a comprehensive multiyear plan, the budget stipulates that the Governor will establish a Commission on Building for the 21st Century by mid-February. According to the budget document, the commission will study the building needs of California for the next decade and will review several issues, including those listed in Figure 1.

The commission is to submit an initial report to the Governor by May 1, with its recommendation for "a comprehensive multi-year bond package to be placed on the 2000 ballot." The budget describes this as the first step in an effort to meet the state's public infrastructure needs. We applaud the Governor's proposal to begin addressing the state's infrastructure from a comprehensive and long-term perspective.

Given the general inadequacies in current planning and the need to determine the state's appropriate role in funding local infrastructure programs, the commission faces a difficult task to report back by May 1 with a comprehensive bond package. In view of the importance of this issue, however, every effort should be made by the administration and the Legislature to have the necessary planning and policies in place to develop an appropriate financing scheme by this fall. This will ensure that bond packages addressing the state's highest priority needs can be developed for future ballots.

Figure 1
Commission on Building for the 21st Century

Issues to Be Reviewed

A balanced program of building activity which adequately addresses the entire range of needs of Californians--including education, housing, and general government.
Approaches to project management and administration that will expedite project delivery.
A majority vote for local school bond issues, and the vote requirement for other local government bond measures.
Adjustments in the state-local match on building projects.
Assumption of responsibilities of certain projects either totally by the state or totally by local governments.
Identification of resources needed for debt payments.
Reforms in the manner and method of construction which do not jeopardize the health and welfare of the citizens of the state.
Linking eligibility for infrastructure funds to meeting performance criteria.
Utilization of the State Infrastructure Bank to assist in financing state and local infrastructure.
Dedication by both state and local governments of a set amount of funds for pay-as-you-go financing.
Determination of a prudent level of bond debt service for the State of California.
A rational prioritization of needs.
Source: 1999-00 Governor's Budget Summary (page 24).

Managing the Capital Outlay Program

Preliminary plans are not complete for 111 previously funded projects that are proposed in the budget for working drawings and/or construction funding. We recommend approval of these 111 projects contingent on completion of preliminary plans that are consistent with the cost and scope previously approved by the Legislature. Because most of the projects funded in the current year are behind schedule, we recommend partial or full deferment of almost all new major capital outlay projects that would be managed by the Departments of General Services and Parks and Recreation. We also recommend that the Department of General Services (DGS) report to the budget committees on steps that could be taken to improve its ability to maintain project schedules. Because this issue affects several departments, we suggest that the budget committees consider hearing this issue in full committee or in a subcommittee that would review the entire capital outlay program.

Preliminary Plans Not Complete on Prior-Year Projects

We recommend approval of $382,188,000 for working drawings and/or construction for 111 projects contingent on completion of preliminary plans that are consistent with the cost and scope previously approved by the Legislature.

Our analysis indicates that the amounts proposed in the budget for 111 projects previously funded for acquisition, preliminary plans, and/or working drawings are consistent with prior legislative actions. These 111 projects involve 13 different departments. Figure 1 shows the number of projects and the budget totals for each department. The preliminary plans for these projects, however, had not been completed at the time this analysis was prepared. Therefore, we recommend approval contingent on receipt of completed preliminary plans that are consistent with the legislatively approved scope and cost.

Figure 1
Preliminary Plans Not Completed
(Dollars in Thousands)
Item Department Number of Projects Budget Bill Amount
1760 General Services 1 $21,098
2740 Motor Vehicles 1 6,669
3540 Forestry and Fire Protection 11 12,564
3680 Boating and Waterways 4 4,048
3790 Parks and Recreation 4 2,811
4300 Developmental Services 1 1,000
4440 Mental Health 1 16,887
5100 Employment Development 1 2,079
5240 Corrections 40 144,047
5460 Youth Authority 18 29,218
6440 University of California 2 44,207
6870 Community Colleges 26 90,694
8570 Food and Agriculture 1 6,866
Totals 111 $382,188

Defer Most New DGS-Managed Projects

We recommend deletion of $27.9 million for 77 new projects from various funds because the Department of General Services cannot manage these new projects in addition to its ongoing workload. The department should report to the budget committees on steps that could be taken to improve its ability expedite the delivery of capital outlay projects.

With the exception of higher education facilities and highway construction, the management of most other major capital outlay projects for state departments is done by the DGS. Most of these projects are designed by private sector architectural/engineering firms and built by private contractors. Project directors at DGS are responsible for (1) coordinating all work done by designers and contractors and (2) keeping projects on schedule and within the legislatively approved scope and cost.

Since last year, the number of projects being managed by DGS, as listed in its quarterly project status report, has increased from 185 to 271, or an increase of 46 percent. This increase is generally due to the relatively large number of new capital outlay projects that were funded in the 1998-99 Budget Act. In order to address this increased workload, the budget authorized 15 new project director positions. Furthermore, the department notified the Legislature in October 1998 that it was using authority contained in provisional budget language to establish an additional nine project director positions.

Given the time necessary to hire qualified personnel for these positions, the DGS did not have sufficient staff to begin work on many of the new projects upon enactment of the budget. (Unless the design is to be done by state staff, the initial work on a new project involves advertising, selecting, and negotiating a contract with a design firm.) Moreover, of the 24 recently authorized project director positions, 14 were still vacant at the time this analysis was written. Of the 111 projects referred to in Figure 1, the DGS is managing 73 projects, or 66 percent, of the total. Almost all of these projects managed by the department are behind schedule, with preliminary plans to be completed between March and June 1999 instead of November and December 1998 as originally scheduled.

For 1999-00, the DGS will face a significant challenge to manage the state capital outlay program. This workload has three basic components: (1) the working drawing and/or construction phases--as proposed in the budget--for the 73 DGS-managed projects summarized in Figure 1; (2) other ongoing projects, such as various new state office buildings, that are already authorized for construction and in some cases are under construction; and (3) 94 new projects proposed in the budget. Given the magnitude of its ongoing workload, we recommend that most of the new DGS-managed capital outlay projects proposed for 1999-00 be deferred. Many of these new projects are meritorious capital improvements that should be funded in the future. The appropriation of funds for a capital program, however, should only be made to the extent the program can be implemented in a timely manner to spend those funds. There has to be a balance between the capital program and the ability to undertake and manage it. We believe that deferral of most new projects for one year will help bring the program into balance using authorized project management resources.

Figure 2 lists the number of new projects that we recommend deferring for each department in 1999-00. In our analyses of individual departments' capital outlay programs (later in this chapter), we also recommend deletion of certain projects or reductions to the amount proposed for some projects for reasons other than this management workload concern.

The administration's proposal to proceed with many new capital improvements at state facilities is laudable, but we believe, unattainable for 1999-00. We intend to work with the DGS and the Department of Finance (DOF) to examine how management resources could be kept in better balance to successfully implement the state capital outlay program. We recommend, as one step, that the DGS report to the budget committees on ways it could deliver projects more expeditiously. One possibility the department should consider is contracting with private sector individuals or firms with project director capabilities in order to meet workload peaks.

Figure 2
New DGS-Managed Capital Outlay Projects

Recommended for Deferral

(Dollars in Thousands)
Budget Item Department Number of Projects Budget Bill Amount
0820 Justice 1 $710
1730 Franchise Tax Board 3 963
1760 General Services 1 275
2660 Transportation 1 604
2720 Highway Patrol 5 3,499
3540 Forestry 45 15,881
3680 Boating and Waterways 2 175
5100 Employment Development 2 497
5240 Corrections 6 1,806
5460 Youth Authority 3 819
6110 Education (special schools) 2 860
8570 Food and Agriculture 1 411
8940 Military 3 944
8960 Veterans' Home 2 410
Totals 77 $27,854

Partially Defer Some New DGS-Managed Projects

We recommend a reduction of $8.1 million from the General Fund to defer phases of ten new projects and to reduce the amount provided for unallocated capital outlay because the Department of General Services cannot manage its ongoing workload and implement all phases of these projects that are proposed in the budget.

In evaluating all of the new projects proposed for 1999-00, our review indicates that several projects should proceed in the budget year for various reasons. These projects are listed in Figure 3. In general, the projects in the figure address safety or security problems or can be accomplished with little impact to DGS' project management workload. While we believe that work on these projects should move forward in the budget year, given the DGS' large workload, we recommend the Legislature defer some of the project phases until the 2000-01. In general, our recommendations would (1) fund the acquisition phase and/or the preparation of preliminary plans and (2) defer the working drawing and/or construction phases.

Unallocated Capital Outlay. The budget also includes $1 million under Item 9860-301-0001 for unallocated capital outlay. These funds are provided to the DOF, but are mainly spent by DGS to prepare cost and scope estimates (referred to as budget packages) for future projects that DOF determines are meritorious for state funding. Because we recommend deferring most of the new projects proposed in 1999-00, there will be fewer additional projects needing budget packages for the 2000-01 budget. We therefore recommend reducing the unallocated amount to $500,000, as shown in Figure 3.

Figure 3
Projects Recommended for Partial Deferral
(In Thousands)
Item--Department: Project Budget Bill Amount LAO Amount Comment
1760--General Services: Blue Anchor Building--fire/life safety and ADA corrections $1,122 $74 Addresses code

violations cited by State Fire Marshal.

1760--General Services: Resources Building--fire/life safety corrections 2,063 102 Addresses code

violations cited by State Fire Marshal.

4260--Health Services: Southern California Laboratory--fire/life safety renovation 300 120 Addresses code


4300--Developmental Services: Agnews--Building 54 fire/life safety upgrades 2,461 117 Addresses code

violations cited by State Fire Marshal.

5240--Corrections: CCI--New potable water source, Phase II 1,728 224 Second of two new wells needed to replace existing water supply system.
5240--Corrections: CIM--TB/HIV housing engineering controls 140 60 Improves ventilation to reduce chance of another tuberculosis outbreak.
5240--Corrections: CMF--TB/HIV housing engineering controls 140 60 Improves ventilation to reduce chance of another tuberculosis outbreak.
5460--Youth Authority: Nelles--Renovate Taft Adjustment Center 140 55 40-year-old building used as lock-up unit is severely deteriorated.
5460--Youth Authority: Stark--Fire alarm system for education area 195 75 Provides alarm system in education area.
8960--Veterans Home: Yountville--Remodel Holderman Activity Area 250 88 Corrects building deficiencies in hospital therapy area.
9860--Unallocated Capital Outlay 1,000 500 With deferral of new projects, fewer budget packages needed in 1999-00.
Totals $12,686 $4,622

Approve Seven New Projects

We recommend approval of $3.1 million for seven new projects because the Department of General Services can accomplish the phases of these projects as proposed in the budget.

Figure 4 (see page 22) lists seven new life safety or security projects for which we would recommend approval as budgeted. We believe that the DGS can accomplish the phases of work as proposed in the budget because the projects are relatively small and not complex.

Figure 4
New DGS-Managed Projects Recommended for Approval
(In Thousands)
Item--Department: Project Phasesa Budget Bill Amount Comment
2660--Transportation: Redding Office--seismic retrofit PW $79 Consistent with legislative policy to fund seismic risk level VI retrofits.
2740--Motor Vehicles: Sacramento--first floor asbestos abatement and seismic retrofit P 440 Part of multiphase asbestos removal project.
5240--Corrections: CMC--Hospital air conditioning PW 65 Hospital currently lacks air conditioning.
5240--Corrections: CRC--Perimeter fence P 120 Corrects security problems.
5460--Youth Authority: Stark--Security lighting in ward rooms PW 100 Current lighting fixtures easily tampered with and metal parts are used as weapons.
6110--Education: School for the Deaf, Riverside--Fire/life safety code corrections PWC 218 Addresses deficiencies cited by State Fire Marshal (minor capital outlay project).
8940--Military: Bakersfield--Acquire new armory site A 2,125 Site already identified. Existing buildings will need minimal alteration in 2000-01.
Total $3,147
a A=acquisition; C=construction; P=preliminary plans; and W=working drawings.

Refined Cost Estimates Pending

The Department of General Services is reviewing the cost estimates provided by the departments for many of the new projects proposed in the budget. More refined cost estimates should be available by the spring for the Legislature's review.

The cost estimates for many of the new projects proposed in the budget were prepared by the individual departments. These estimates generally contain insufficient detail to evaluate whether the proposed budget is appropriate. The DGS is reviewing the departments' estimates and preparing budget packages that will be available by the spring. We will review these budget packages and provide any recommendations as appropriate.

Parks and Recreation Workload

We recommend the Legislature delete $290,000 from the General Fund for two new projects proposed by the Department of Parks and Recreation because the department has a large backlog of design and construction work that should be completed before starting new projects. (Delete $130,000 from Item 3790-301-0001 [8] and $160,000 from Item 3790-301-0001 [10].)

The 1998-99 Budget Act granted the Department of Parks and Recreation (DPR) the authority to acquire, plan, design, construct, and administer construction contracts in the same manner as the DGS. As discussed above for projects managed by the DGS, DPR has a large backlog of uncompleted capital outlay work. For example, during budget years 1992-93 through 1995-96 the department had to obtain reappropriation of funds for 64 of the 84 approved major projects (76 percent) because the department did not complete its work on schedule. Furthermore, these projects had to be reappropriated an average of twice before the work was completed and many of the department's projects have had to be reappropriated three, four, and five times.

In view of these chronic implementation problems, we recommend the Legislature not approve new major projects for the department until the backlog of work is substantially reduced. Accordingly, we recommend the following projects in the Governor's budget be deleted:

Sonoma Coast State Beach: Trail Rehabilitation and Development--study and preliminary plans, $130,000.

Sugar Pine State Park: Rehabilitate Day Use Area--preliminary plans and working drawings, $160,000.

Pay-As-You-Go for Capital Outlay

The Governor's budget proposes $195 million in direct General Fund appropriations for a variety of capital outlay projects. In recognition that the state should increase its use of pay-as-you-go funding, we recommend that the Legislature maintain direct General Fund spending at least at the level proposed by the Governor. Furthermore, we recommend that any funds "freed up" by legislative action to adopt our General Fund reductions to proposed projects be redirected to reduce the level of lease-payment bond authorizations in the budget.

In our December 1998 report, Overhauling the State's Infrastructure Planning and Financing Process (reprinted in The 1999-00 Budget: Perspectives and Issues), we indicate that, outside the transportation area, the state has devoted a minuscule amount of pay-as-you-go funding for infrastructure. Instead, the state has relied almost exclusively on bond authorizations to fund these needs. As discussed in the Overview of this chapter, the Governor's budget continues this trend. For example, out of the proposed $1.1 billion capital outlay program, $844 million are from bonds, including proposed authorizations of $262 million in new lease-payment bonds. The remaining $252 million are direct appropriations from the General Fund ($195 million) and other funds ($57 million) for pay-as-you-go funding.

In our December report, we recommend that the state (1) adopt an infrastructure investment policy that would devote 6 percent of General Fund revenues to infrastructure spending and (2) within this level dedicate a greater proportion for pay-as-you-go spending. Increasing direct General Fund spending will both provide more stable funding for infrastructure and allow the state to get a "bigger-bang-for-the-buck" with state expenditures (by avoiding the interest and other costs associated with bonds).

Given the state's current budget situation for 1999-00, we realize that significantly increasing General Fund spending on infrastructure will be difficult. We believe, however, that pay-as-you-go spending should at least be maintained at the level proposed by the Governor. In our analyses of the capital outlay projects proposed for pay-as-you-go funding, we have recommended General Fund reductions totaling $32.6 million. We recommend that the Legislature apply this amount to projects that are proposed to be funded with lease-payment bonds, which in turn will reduce future debt costs.

Figure 1 lists, by department, the lease-payment bonds proposed in the budget. Depending on legislative actions on our recommended General Fund reductions, the Legislature could redirect those funds to these departments' capital outlay programs for 1999-00. We recommend that the first priority for such redirection of General Fund support be $7 million to prepare the preliminary plans for the Department of Mental Health's sexually violent predator facility. As discussed in our analysis of the department's capital outlay program (later in this chapter), it makes little sense to incur the interest costs associated with lease-payment bond financing to perform design work on this project.

Figure 1
Departments with Proposed

1999-00 Lease-Payment Bonds

(In Thousands)
Item Department Amount
0690 Emergency Services $6,720
0820 Justice 50,199
1760 General Services 21,098
2720 Highway Patrol 11,214
3540 Forestry 7,192
4440 Mental Health 22,687
5240 Corrections 124,270
5460 Youth Authority 11,733
8570 Food and Agriculture 6,519
Total $261,632

Capital Outlay in Higher Education

The Governor's budget includes $572 million from general obligation bonds for capital outlay in California's three segments of public higher education--University of California, California State University and California Community Colleges. The proposed amounts for each segment and our recommendation for each are summarized in Figure 1.

Figure 1
Higher Education Capital Outlay

1999-00 Budget Amount and Analyst Recommendations

(In Thousands)
Segment Budget Amount LAO Recommended Approval
University of California $209,819 $159,794
California State University 209,481 125,853
California Community Colleges 153,127 140,614
Totals $572,427 $426,261a
a Includes a total of $137.3 million for which we have withheld recommendation pending receipt of additional information.

As shown in the figure, we recommend the Legislature approve $426 million of the requested amount. In general, we have recommended approval of projects that address critical safety issues (such as seismic safety), renovate space to meet academic or other campus programs, provide research space, and correct infrastructure problems. On the other hand, we have recommended that the Legislature reduce the request by a total of $146 million by deleting or reducing projects if the segment has not substantiated either the need for or the cost of the project. Also, in several instances, the request is for new space that is not justified because the campus has sufficient space to accommodate current and projected enrollment. In other cases, the segment has proposed a project without providing sufficient detail to justify the need for the project or other alternatives that would be more cost effective. An additional issue we have raised this year is the year-round operation of campuses throughout higher education.

Year-Round Operation Saves Capital Outlay Costs

Our analysis indicates that operating higher education campuses on a year-round basis will result in a capital outlay savings of $19 million related to projects proposed in the budget and potentially several billion dollars over the next decade and beyond.

In our companion document The 1999-00 Budget: Perspectives and Issues (Part V), we recommend that the segments begin implementing year-round operation. Currently, no campus offers the full schedule of courses that is available in the normal three quarters (or two semesters). As a result, during the summer months, enrollment is limited and existing instructional space is vacant. Our analysis indicates that the projected enrollment growth in public higher education in California could be accommodated in existing instructional space well past the next decade if the campuses operated year round.

Consistent with our findings on year-round operation, we have recommended that the Legislature delete $9.5 million (future cost to complete of $10 million) from the proposed budget for projects that would not be needed under year-round operation. Over the next decade and beyond, year-round operation should result in several billions of dollars in savings related to the reduced need for new instructional space.

Legislature Should Consider Additional Projects

We recommend that the Legislature consider funding additional priority projects for higher education using any bond funds "freed up" by legislative action accepting our recommendations to reduce project costs in the Governor's budget.

As shown in Figure 1, we have recommended that the Legislature reduce the proposed budget for higher education capital outlay by $146 million. The three segments, however, have estimated that over the next five years a total of over $6 billion will be needed for capital improvements. Many of these projects are to renovate instructional space to accommodate changes in academic programs, address life safety issues such as seismic safety of buildings, correct infrastructure problems, and other facility deficiencies.

In view of these identified needs, we urge the segments to submit new proposals that address these other priority needs for legislative consideration for funding in the 1999-00 Budget Bill. This would also allow the Legislature to assess the need for projects that are a priority for the segments but currently are not included in the Governor's budget. The Legislature could then consider funding these other projects with any amounts "freed up" by accepting our recommendations.

Discontinue Past Practice of Equal Bond Amounts for Each Segment

We recommend that the Legislature discontinue the past practice of providing an equal amount of bond funds to each segment because this practice does not address the highest-priority needs throughout higher education.

Appropriations Should Be Based on Project Merits Rather Than Equal Amounts to Each Segment. In recent years, the administration has had an agreement with the segments to provide an equal amount of total available bond funds to each segment (these amounts, however, may vary in any one year). This agreement results in "grants" to each segment without regard to the condition of the physical facilities on an individual campus or the merits or priority of individual projects . This can result in lower-priority projects in one segment receiving funds while a higher-priority project in another segment may go unfunded. As a result, the state's current practice of equal bond fund allocations neither addresses the highest-priority needs throughout higher education nor provides the Legislature the information it needs to assure that its actions in appropriating funds are meeting statewide needs.

Furthermore, we believe it is essential to target funding to the highest statewide priorities because there is a limited amount of bond funds dedicated to higher education. Proposition 1A, approved by the voters in November 1998, provides $2.5 billion in general obligation bonds for higher education. Of this amount, $1.25 billion cannot be issued or sold before July 1, 2000 and $165 million is dedicated to new campuses, campuses with enrollments less than 5,000 full-time equivalent students, and off-campus centers. As mentioned above, the three segments have developed five-year capital outlay plans that total over $6 billion. If, as we recommend, year-round operation is implemented, the five-year capital outlay need will be significantly reduced. However, the capital needs to correct seismic safety issues, renovate buildings to meet changes in academic programs, and provide other new space such as faculty/administrative offices and research space, will greatly exceed the available bond funds. Thus, in order to assure that the bonds approved by the voters are spent on the highest statewide priorities, we recommend that the Legislature appropriate funds for higher education on the merits of the projects in the context of statewide priorities rather than equal "grants" of funds to each segment.

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