2002 Budget Analysis: Capital Outlay, Overview

Funding for capital outlay in the budget year totals about $1.7 billion. Over 90 percent of this is for projects financed using general obligation bonds and lease-payment bonds. The total includes spending from the administration's current-year proposal to issue lease-payment bonds as a way of funding the Governor's economic stimulus package.

The 2002-03 Governor's Budget proposes $1.7 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 buildings, state parks, and prisons. The Governor's plan is a combination of proposals contained in the budget bill and pending legislation that would authorize the issuance of $1.03 billion in lease-payment bonds. These bonds would: (1) provide funding for projects in the current and budget years under the Governor's proposed economic stimulus package, (2) shift funding for various projects from the General Fund in the current year, and (3) provide a source of future funds for the University of California Institutes for Science and Innovation and the Merced campus.

Figure 1 summarizes the proposed 2002-03 capital outlay program. The proposed plan would result in a decrease of $273 million (14 percent) from current-year spending.

Figure 1 State Capital Outlay Program
2001-02 and 2002-03 (In Millions)
	2001-02^a	2002-03^b	Difference
Legislative, Judicial and Executive	$3.7	$44.1	$40.4
State and Consumer Services	26.8	193.4	166.6
Business, Transportation and Housing	194.4	106.9	-87.5
Resources	354.0	230.4	-123.7
Environmental Protection	2.2	—	-2.2
Health and Human Services	359.9	73.0	-286.9
Youth and Adult Corrections	63.0	41.5	-21.5
K-12 Education	2.6	0.5	-2.1
Higher Education	897.3	933.7	36.4
General Government	27.3	34.9	7.6
Totals	$1,931.1	$1,658.3	-$272.8
^a Consists of spending from the 2001-02 Budget Act andGovernor's legislation package of $1.03 billion of lease-payment bonds, of which $403 million would provide funding for 24 projects as part of an economic stimulus package and $117 million to shift funding for ten projects from the General Fund.
^b Includes funding proposed in the budget bill plus $269 million from lease-payment bonds as part of the Governor's pending legislation package for nine continuing and four new projects.

Spending by Department

Figure 2 shows the amounts included in the Governor's budget for each department and the future cost for these projects. As shown in the figure, an estimated $1.1 billion will need to be appropriated in the future to complete these proposed projects. Thus, the request before the Legislature represents a total cost of nearly $2.8 billion.

Figure 2 Summary of Proposed 2002-03 Capital Outlay Program
All Funds (In Thousands)
Department	Proposed 2002-03^a	Future Cost	Totals
Legislative, Judicial, and Executive
Judicial Council	$31,909	—	$31,909
Office of Emergency Services	1,631	—	1,631
Justice	10,518	—	10,518
State and Consumer Services
California Science Center	$19,137	—	$19,137
Franchise Tax Board	288	—	288
General Services	173,952	$46,600	220,552
Business, Transportation, and Housing
Transportation	$86,400	$55,591	$141,991
Highway Patrol	12,163	—	12,163
Motor Vehicles	8,333	11,609	19,942
Resources
Tahoe Conservancy	$15,473	—	$15,473
Conservation Corps	12,914	—	12,914
Forestry and Fire Protection	52,844	—	52,844
Fish and Game	3,782	$1,600	5,382
Wildlife Conservation Board	51,514	—	51,514
Boating and Waterways	9,792	11,709	21,501
Coastal Conservancy	24,750	—	24,750
Parks and Recreation	49,906	31,532	81,438
Santa Monica Mountains Cons.	1,194	—	1,194
Water Resources	8,181	—	8,181
Health and Human Services
Health Services	$47,677	—	$47,677
Developmental Services	3,780	—	3,780
Mental Health	21,544	$3,556	25,100
Youth and Adult Corrections
Corrections	$22,534	$323	$22,857
Youth Authority	18,948	—	18,948
Education
Department of Education	$81	—	$81
State Library	427	—	427
Higher Education
University of California	$258,267	$216,823	$475,090
Hastings College	831	19,460	20,291
California State University	443,458	159,124	602,582
Community Colleges	231,180	561,006	792,186
General Government
Food and Agriculture	$21,237	—	$21,237
Military	9,485	$9,872	19,357
DVA—Cemetery	303	5,283	5,586
Veterans' Home of California	2,394	3,058	5,452
Unallocated Capital Outlay	1,500	—	1,500
Totals	$1,658,327	$1,137,146	$2,795,473
^a Includes spending from both the budget bill and pending legislation.

Of that total, two-thirds is in higher education, with these costs funded almost entirely from proposed lease-payment and general obligation bonds. The figure also shows spending of $174 million for the Department of General Services, including $107 million for renovation of the twin office towers currently serving the Departments of Social Services and Health Services in downtown Sacramento.

Funding Sources for Capital Spending

The Governor's budget proposes funding the capital outlay program from general obligation and lease-payment bonds, the General Fund, special funds, and federal funds. Figure 3 compares the sources of funds for the 2001-02 capital outlay program to those proposed for 2002-03. The budget proposes decreasing the amount for direct appropriations from the General Fund by $146 million and from special funds by $178 million. With regard to bond appropriations, the budget includes $637 million from general obligation bonds and $875 million from lease-payment bonds.

Figure 4 Proposed 2002-03 Capital Outlay Program(a)
(Dollars in Thousands)
Department	GO Bonds(a)	LP Bonds	General	Special	Federal	Total
Legislative, Judicial, and Executive
Judicial Council	—	$31,909	—	—	—	$31,909
Office of Emergency Services	—	—	$1,631	—	—	1,631
Justice	—	5,518	5,000	—	—	10,518
State and Consumer Services
California Science Center	—	$19,137	—	—	—	$19,137
Franchise Tax Board	—	—	$288	—	—	288
General Services	$21,090	152,862	—	—	—	173,952
Business, Transportation, and Housing
Transportation	—	$72,599	—	$13,801	—	$86,400
Highway Patrol	—	—	—	12,163	—	12,163
Motor Vehicles	—	—	—	8,333	—	8,333
Resources
Conservation Corps	—	$12,255	$659	—	—	$12,914
Tahoe Conservancy	$14,278	—	—	$1,195	—	15,473
Forestry and Fire Protection	—	52,359	485	—	—	52,844
Fish and Game	1,768	—	—	2,000	$14	3,782
Wildlife Conservation Board	30,000	—	21,301	213	—	51,514
Boating and Waterways	—	—	—	9,792	—	9,792
Coastal Conservancy	17,750	—	—	5,000	2,000	24,750
Parks and Recreation	39,208	—	—	9,198	1,500	49,906
Santa Monica Mountains Conservancy	728	—	—	466	—	1,194
Water Resources	—	—	7,181	1,000	—	8,181
Health and Human Services
Health Services	—	$47,527	$150	—	—	$47,677
Developmental Services	—	—	3,780	—	—	3,780
Mental Health	—	20,808	736	—	—	21,544
Youth and Adult Corrections
Corrections	—	$12,785	$9,749	—	—	$22,534
Youth Authority	—	16,659	2,289	—	—	18,948
Education
Education	—	—	$81	—	—	$81
State Library	—	427	—	—	—	427
Higher Education
University of California	$82,543	$172,368	$356	$3,000	—	$258,267
Hastings College	831	—	—	—	—	831
California State University	258,750	184,708	—	—	—	443,458
Community Colleges	169,401	61,779	—	—	—	231,180
General Government
Food and Agriculture	—	$11,203	—	$10,034	—	$21,237
Military	—	—	$9,485	—	—	9,485
DVA—Cemetery	—	—	303	—	—	303
Veterans' Home of California	$743	—	273	—	$1,378	2,394
Unallocated	—	—	1,500	—	—	1,500
Totals	$637,090	$874,903	$65,247	$76,195	$4,892	$1,658,327
a Includes spending from both the budget bill and pending legislation. GO bonds = general obligation bonds. LP bonds = lease payment bonds.

Proposed Economic Stimulus Package

As a component of the Governor's budget, the administration is sponsoring legislation in 2001-02 to authorize $1.03 billion in lease-payment bonds. Of this amount, $671.7 million represents an economic stimulus package that proposes to fund 28 capital outlay projects in 2001-02 and 2002-03. Additionally, the pending legislation proposes a shift of ten capital outlay projects currently funded from the General Fund to lease-payment bonds. Figure 5 displays the funding plan for 2001-02 and 2002-03, by department. It shows that $788 million of the total would be spent in the current or budget year, with the remaining $242 million reserved for future years.

Bond Funding and Debt Service Payments

In recent history, the majority of the state's capital outlay projects have been funded with bonds. Since 1990, California voters have approved $30.1 billion in general obligation bonds for K-12 schools ($13.1 billion), higher education ($4.8 billion), transportation ($5 billion), natural resources ($5.1 billion), and various other purposes ($2.1 billion). In addition to these general obligation bonds--which require voter approval and are backed by the full faith and credit of the state--the Legislature has authorized $7.5 billion in lease-payment bonds since 1990. These bonds--which do not require voter approval and whose debt service is paid for through annual General Fund budget appropriations for lease payments--have been used for higher education facilities, prisons, state office buildings, state laboratories, and state homes for veterans. The above figures do not include regular revenue bonds, which are not paid for by the General Fund but rather through revenues generated by the projects they finance.

Figure 5 Summary of Governor’s Proposed Lease-Payment Bond Authority in Pending Legislation
(In Thousands)
Department	Economic Stimulus Package		Shift From General Fund (2001-02)	Total^a
Department	2001-02	2002-03	Shift From General Fund (2001-02)	Total^a
Legislative, Judicial, Executive
Justice	—	—	$11,710	$11,710
State and Consumer Services Agency
General Services	$13,195	—	—	$13,195
Resources Agency
Conservation Corps	—	—	$1,500	$1,500
Forestry and Fire Protection	$7,176	—	4,611	11,787
Youth and Adult Corrections
Corrections	—	—	$2,913	$2,913
Youth Authority	—	—	2,708	2,708
Education
State Library	$321	$10,166	—	$10,487
Higher Education
University of California	$266,633	$12,392	$91,851	$370,876
California State University	6,601	184,708	—	191,309
Community Colleges	108,689	61,779	—	170,468
Totals	$402,615	$269,045	$115,293	$786,953
^a While the Governor's pending legislation package proposes a total of $1.03 billion of lease payment bonds, only $788.4 million is spent in 2001-02 and 2002-03. The remainder—$241.5 million—would be spent on University of California Institutes in future years.

Debt Service Costs to Total $3.1 Billion

As shown in Figure 6, the state's General Fund debt service expenses on bonds are projected to be about $3.1 billion in the budget year--an increase of slightly less than 1 percent over current-year costs. This consists of costs on both general obligation debt (which are estimated to increase from $2.5 billion in the current year to $2.6 billion in 2002-03) and lease-payment debt (which are estimated to increase from $526 million in the current year to $555 million in 2002-03). The Governor's budget assumes that principal payments on new general obligation bonds issued between January 2002 and June 2003 will be deferred beyond the end of the budget year, so that during this period only interest will have to be paid on this new debt.

Debt Service Ratio Would Rise Modestly

In evaluating a state's capacity for bonded indebtedness and the impact debt service costs have on the budget, one of the many factors that bond raters and financial analysts look at is the state's debt service ratio (DSR). This ratio is defined as the share of the General Fund budget that is devoted to debt service expenses on General Fund-backed debt. There is no agreed-upon single DSR that "fits" all states, and the appropriate DSR for an individual state can vary depending on such factors as its need and preference for new infrastructure. As a general rule, however, a DSR in the range of 6 percent or less has been recognized as a reasonable level for states.

As shown in Figure 7, California's DSR peaked in the early 1990s at just over 5 percent, and has since fallen to about 4 percent in the current year. Looking ahead, Figure 7 shows that the DSR would steadily fall in the future from its present level if currently authorized bonds are sold off and no additional debt is approved. On the other hand, the figure also shows that if (1) the Governor's proposed $30 billion in school bonds were approved over the next three election cycles, (2) the $2.8 billion in park and voter equipment bonds on the March 2002 ballot were approved, and (3) these new bonds were sold off rapidly, the DSR would rise modestly from its current level to just over 5 percent by 2007-08. Thus, even under this aggressive bond sale scenario, the DSR would still remain well below the 6 percent threshold. This suggests that California currently has ample capacity to use new debt as a means of addressing its current infrastructure needs.

Figure 3 Sources of Funds for Capital Outlay Program
2001-02 and 2002-03 (In Millions)
Funds	2001-02^a	2002-03 Governor’s Budget^b
General Fund	$211.0	$65.2
General obligation bonds	801.3	637.1
Lease-payment bonds	660.5	874.9
Special funds	254.5	76.2
Federal funds	3.7	4.9
Totals	$1,931.1	$1,658.3
^a Includes both 2001-02 Budget Act and pending legislation.
^b Includes both budget bill and pending legislation.

Legislative Analyst's Office