Major Issues

Capital Outlay

The State Needs to Overhaul Its Process for

The state faces a significant challenge over the next decade and beyond to address both the deficiencies of an aging public infrastructure and the need for new infrastructure to sustain a growing economy and population. To meet this challenge the state needs a well-defined process for planning, budgeting, and financing necessary infrastructure improvements.

Unfortunately, decisions on state capital investment have been made more on an ad hoc basis. In addition, the lack of stable funding has led to an underinvestment in the state's infrastructure.

We recommend the Legislature take several steps to overhaul the current process, including adopting a policy that dedicates 6 percent of annual General Fund revenues to infrastructure investment. (The 1999-00 Budget: Perspectives and Issues, Part V.)

Maintain Level of "Pay-As-You-Go" Funding for Capital Outlay

The budget proposes $195 million in direct General Fund appropriations for capital outlay in 1999-00.

Given the current tight budget situation, it will be difficult to significantly increase these direct appropriations, but at least the level proposed by the Governor should be maintained.

We recommend that, to the extent the Legislature accepts our recommendations to reduce the General Fund amounts appropriated for specific capital outlay projects, these funds be redirected to reduce the level of lease-payment bond authorizations proposed in the budget. (See page G-24.)

Year-Round Operation in Higher Education Saves Capital Outlay Costs

Enrollment projections indicate that the California State University, University of California, and community colleges will need to accommodate an additional 300,000 full-time equivalent students by 2007-08. To construct new facilities for these additional students would cost several billion dollars. This cost can, however, be avoided if the segments operate campuses year round.

We recommend the Legislature direct the segments to implement year-round operation. This would allow existing campuses to accept one-third more students, before there will be a need for new instructional space. Accordingly, we recommend that the Legislature delete $9.5 million in the budget for projects that would not be needed under year-round operation. The estimated future cost of these projects is $10 million. (See page G-27.)

Discontinue Practice of Providing Equal Amounts of Bond Funds to Each Segment of Higher Education

In recent years, the administration has provided an equal amount of bond funds to each segment. This results in "grants" to each segment without regard to their mission or the condition of the facilities on each campus. It can also result in lower priority projects in one segment receiving funds while a higher priority project in another segment goes unfunded.

The segments have developed five-year capital outlay plans that total over $6.4 billion. In contrast, the higher education bond act that was approved by the voters in November 1998 totals $2.5 billion. 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 capital outlay on the merits of projects in the context of statewide priorities, rather than equal funding to each segment. (See page G-28.)

Overview

Capital Outlay

The 1999-00 Governor's Budget proposes $1.1 billion for capital outlay programs (excluding highway and rail programs, which are discussed in the Transportation section of this Analysis).This is spending on physical assets--college lecture halls, parklands, and prisons. (Spending to pay off this debt on those assets financed with bonds is discussed later in this section.) The proposed amount is a decrease of $500 million (32 percent) from 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 decreases are in the areas of Resources ($261 million), State and Consumer Services ($245 million), and Health and Social Services ($115 million). These decreases generally reflect three large current-year appropriations (one in each area) totaling $500 million--the Headwaters Forest acquisition ($230 million), a new state office building in Sacramento ($160 million), and a new public health laboratory in Richmond ($110 million).

Figure 1
State Capital Outlay Programs
1998-99 and 1999-00 (In Millions)
	1998-99	1999-00	Difference
Legislative, Judicial, and Executive	$30.5	$58.8	$28.3
State and Consumer Services	272.2	27.4	-244.8
Transportation (excluding highways and rail)	15.8	28.5	12.7
Resources	401.5	152.7	-248.8
Health and Social Services	167.5	49.1	-118.4
Youth and Adult Corrections	55.0	188.2a	133.2
Education (state special schools)	--	1.1	1.1
Higher Education	637.4	572.4	-65.0
General Government	25.1	17.5	-7.6
Totals	$1,605.1	$1,095.6	-$509.5
a Includes proposed fund shift of $62.4 million appropriated from the General Fund in 1998-99 to lease-payment bonds in 1999-00.

The $133 million increase in the area of Youth and Adult Corrections includes a proposed $62 million shift in fund source--from the General Fund approved in the current year to lease-payment bonds proposed for the budget year--to construct ten administrative segregation housing units at various state prisons.

Figure 2 shows the amounts each department requested for capital outlay funding in 1999-00, the amounts approved for inclusion in the Governor's budget, and the future cost for the approved projects. As shown in the figure, an estimated $1 billion will need to be appropriated in the future in order to complete these projects. Thus, the request before the Legislature represents a total cost of $2.1 billion.

Figure 2
1999-00 Capital Outlay Summary
All Funds (In Thousands)
Department	Requests	Governor's Budget
		Proposed 1999-00	Future Costa	Totals
Legislative, Executive, and Judicial
Emergency Services	$7,644	$6,720	--	$6,720
Justice	52,061	52,061	$6,653	58,714
State and Consumer Services
California Science Center	$38	$38	--
Franchise Tax Board	1,514	963	--	$963
General Services	149,022	26,429	--	26,429
Business, Housing, and Transportation
Transportation	$4,376	$833	$5,507	$6,340
Highway Patrol	20,550	20,431	11,177	31,608
Motor Vehicles	8,024	7,209	9,282	16,491
Continued
Resources
Tahoe Conservancy	$16,473	$16,473	--	$16,473
Conservation Corps	1,286	349	--	349
Forestry and Fire Protection	52,020	34,200	$74,151	108,351
Fish and Game	2,500	569	--	569
Wildlife Conservation Board	20,087	20,087	--	20,087
Boating and Waterways	8,343	8,192	6,448	14,640
Coastal Conservancy	24,346	24,346	--	24,346
Parks and Recreation	25,463	22,876	21,664	44,540
Coachella Valley Mountains Conservancy	100	100	--	100
Water Resources	44,449	25,495	--	25,495
Health and Welfare
Health and Welfare Data Center	$5,526	$5,526	--	$5,526
Health Services	252	300	$2,312	2,612
Developmental Services	15,297	3,461	--	3,461
Mental Health	58,228	36,972	279,000	315,972
Employment Development	4,229	2,823	4,312	7,135
Youth and Adult Corrections
Corrections	$125,751	$153,946	$82,816	$236,762
Youth Authority	35,837	34,222	9,938	44,160
Education
Department of Education	$1,578	$1,078	$4,018	$5,096
Higher Education
University of California	$209,819	$209,819	$109,163	$318,982
California State University	214,898	209,481	105,141	314,622
Community Colleges	170,340	153,127	306,892	460,019
General Government
Food and Agriculture	$7,593	$7,593	$4,962	$12,555
Military	12,231	8,024	2,102	10,126
Veterans' Home of California	6,122	900	6,037	6,937
Unallocated Capital Outlay	1,000	1,000	--	1,000
Totals	$1,306,997	$1,095,643	$1,051,575	$2,147,218
a Department estimates.

Budget Relies Heavily on Debt Financing

The Governor's budget proposes funding the capital outlay program from bonds, the General Fund, special funds, and federal funds. Figure 3 displays the proposed funding for each department by fund source. As the figure shows, the budget relies heavily on bonds--including $262 million in proposed new lease-payment bond authorizations--to finance capital improvements. Unlike general obligation bonds, the use of lease-payment bonds avoids the uncertainty of obtaining voter approval, but the state incurs significant interest costs with this financing method. As stated in our December 1998 report, Overhauling the State's Infrastructure Planning and Financing Process (reprinted in the 1999-00 Budget: Perspectives and Issues), we believe a better balance is needed between bond financing and pay-as-you-go funding. Increasing pay-as-you-go funding will bring more stability to infrastructure investment and allow the state to get a "bigger-bang-for-the-buck" (by avoiding interest and issuance costs) with its infrastructure spending.

Figure 3
1999-00 Capital Outlay Programs Proposed Expenditures by Fund Type
(In Thousands)
Department	Bonds	General	Special	Federal	Total
Emergency Services	$6,720	--	--	--	$6,720
Justice	50,199	$1,862	--	--	52,061
California Science Center	--	38--	--	--	38
Franchise Tax Board	--	963	--	--	963
General Services (seismic retrofit)	788a	--	--	--	788
General Services (other)	21,098	4,543	--	--	25,641
Transportation	--	--	$833	--	833
Highway Patrol	11,214	--	9,217	--	20,431
Motor Vehicles	--	--	7,209	--	7,209
Tahoe Conservancy	--	12,416	4,057	--	16,473
Conservation Corps	--	--	349	--	349
Forestry and Fire Protection	7,192	27,008	--	--	34,200
Fish and Game	--	--	319	$250	569
Wildlife Conservation Board	--	17,290	2,797	--	20,087
Boating and Waterways	--	--	8,192	--	8,192
Coastal Conservancy	--	15,320	7,026	2,000	24,346
Parks and Recreation	841a	9,925	11,510	600	22,876
Coachella Valley Mountains Conservancy	--	--	100	--	100
Water Resources	3,270a	22,225	--	--	25,495
Health and Welfare Data Center	--	5,526	--	--	5,526
Health Services	--	300	--	--	300
Developmental Services	--	3,461	--	--	3,461
Mental Health	27,523	9,449	--	--	36,972
Employment Development	--	--	99	2,724	2,823
Corrections	124,270	29,676	--	--	153,946
Youth Authority	11,733	22,489	--	--	34,222
Education	--	1,078	--	--	1,078
University of California	209,819a	--	--	--	209,819
California State University	209,481a	--	--	--	209,481
Community Colleges	153,127a	--	--	--	153,127
Food and Agriculture	6,519	1,074	--	--	7,593
Military	--	7,988	--	36	8,024
Veterans' Home of California	--	900	--	--	900
Unallocated	--	1,000	--	--	1,000
Totals	$843,794	$194,531	$51,708	$5,610	$1,095,643
a General obligation bonds--all other bond proposals are lease-payment bonds.

The following is a summary of the funding proposal from each state fund type.

Bonds. Almost 80 percent of all proposed funding for capital outlay ($844 million) is from bonds. This includes $582 million from currently authorized general obligation bonds, almost all of which are for higher education projects. The budget also includes $262 million from proposed lease-payment bond authorizations--$66 million less than in 1998-99. These funds will be used to fund projects in nine departments--including five criminalistic laboratories for the Department of Justice and health-care related buildings at several state prisons. (The debt service on all general obligation bonds and virtually all these lease-payment bonds would be a General Fund obligation.)

Direct General Fund Appropriations. The proposed $195 million from the General Fund is a reduction of $275 million from General Fund appropriations in the current year for capital outlay. The proposed funds are for projects in 20 departments, including land acquisition by the state conservancies, new fire stations, and various infrastructure and building-code related improvements.

Special Funds. The $52 million proposed from various special funds is a reduction of $18 million from current-year appropriations. These funds are mainly for resources programs (such as habitat acquisition) and transportation-related programs (such as offices for the California Highway Patrol and the Department of Motor Vehicles).

Bond Funding and Debt Payments

Over the last several years, the majority of capital outlay has been funded with bonds. In the 1990s, the voters have authorized $25.6 billion in general obligation bonds. Most of these authorizations have been for K-12 schools ($13.1 billion), higher education ($4.8 billion), and transportation ($5 billion). In addition to these general obligation bonds, the Legislature has authorized $6.1 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.

Debt Payments

The state's debt payments on bonds will be $2.7 billion in the budget year--an increase of 10 percent over current-year costs. There are two components of this debt:

• General Obligation Bonds. The estimated budget-year cost of debt payments on general obligation bonds is $2.1 billion from the General Fund--an increase of $164 million over current-year payments.
• Lease-Payment Bonds. The state's cost for debt on lease-payment bonds will be about $630 million in 1999-00--an increase of 19 percent over the current year. We estimate that about 92 percent of this debt is paid by the General Fund.

Debt for lease-payment bonds continues to become a greater portion of total debt costs. For example, lease-payment debt was 13 percent of total debt payments in 1990-91 and will increase to 23 percent in the budget year. Annual debt payments for the $262 million in lease-payment bonds proposed in the Governor's budget will total about $22 million. As shown in Figure 4, with sales of currently authorized bonds, total debt payments will increase to $3.3 billion in 2003-04 and decline thereafter if no new bonds are authorized.

Debt Payments As a Percent of General Fund Revenue

We estimate that the amount of debt payments on General Fund-backed bonds as a percent of state General Fund revenue (that is, the state's debt ratio) will be 4.5 percent for the budget year. As shown in Figure 5, this ratio rose significantly in the early 1990s, and has declined for the last three years because of stronger General Fund revenue growth and relatively stable debt payments. We estimate that, as currently authorized bonds are sold, the debt ratio will increase to 4.6 percent in 2001-02 and decline thereafter (assuming no further bond authorizations).