Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

University of California (6440)

The Governor proposes $699 million from general obligation and lease-payment bonds for 32 projects under the University of California's (UC's) 2002-03 capital outlay program. As shown in Figure 1, the budget provides $85 million in the budget bill for 23 projects from general obligation bonds and $279 million for 7 projects from lease-payment bonds under proposed economic stimulus legislation. The Governor also proposes a $335 million shift of funding from the General Fund to lease-payment bonds for the Institutes for Science and Innovation ($308 million) and the Merced campus ($27 million). The budget also contains $356,000 from the General Fund for one project.

We recommend the Legislature reduce $20 million from three projects and recognize reductions totaling $26 million in future costs as discussed in detail below.

UC Capital Outlay Plans Should Be Based on Full Implementation of Year-Round Operation

We recommend the Legislature direct the University of California to base its capital outlay plans on full utilization of instructional facilities during summer term.

The Legislature has previously indicated its interest in UC operating year round in order to reduce the need to construct new instructional facilities to accommodate projected enrollment growth. Chapter 383, Statutes of 2000 (AB 2409, Midgen), found that year-round operation increased student access and allowed students to accelerate their progress to degrees. The Supplemental Report of the 2001-02 Budget Act directed UC to establish five-year capital outlay plans based on summer enrollment goals at campuses intended to minimize the need to construct new instructional facilities. The Legislature also expressed its intent that UC not limit summer enrollment.

The Legislature's initiative to increase use of facilities in the summer included providing state support for all students enrolled in a summer term beginning in 2001. In the "Education" chapter of this Analysis, we report on the significant increase in summer enrollment experienced at UC in 2001. Total summer enrollment at the eight general campuses increased over 40 percent from that in 2000, and UC is now accommodating about one-third the number of students in the summer as in the fall term. This success however, and the potential for even greater use of facilities in the summer, is not reflected in UC's five-year capital outlay plan.

The UC indicates in its latest analysis of campus capacity that it bases its projections of future instructional facilities needs on summer term and off-campus enrollment equal to 40 percent of the average enrollment in the other terms. We are concerned with UC evaluating its instructional space needs with this limit on summer enrollment for two reasons. First, placing any limit on summer enrollment short of full capacity does not fully utilize campus facilities. With a limit on summer enrollment, a perceived need to construct new instructional facilities would arise much sooner than necessary. If facilities are planned based on full enrollment in summer term, the need to construct new instructional space is deferred substantially.

We are also concerned that UC includes off-campus enrollment with summer enrollment when characterizing its use of campus facilities in the summer. Off-campus enrollment consists of students enrolled in such UC programs as "education abroad" and "UC in Washington, D.C." These students generate no need for instructional space on general campuses and it is inappropriate to consider them accommodated in the same manner as students who attend during summer term. Currently UC has about 1,800 full-time equivalent (FTE) students in education-abroad programs and indicates it intends to accommodate ". . . .several times that number by 2010-11." It has about 280 FTE students at its Washington, D.C. center, and has smaller off-campus programs in Ventura and the San Joaquin Valley.

The primary financial benefit of year-round operation is that it reduces the need to construct new instructional space. If UC proposes new instructional facilities to the Legislature based on any limit on summer enrollment short of full campus capacity, it is not using year-round operation at its full potential. Similarly, to include enrollment accommodated off-campus within the same category as summer enrollment is inappropriate. So that the Legislature can properly evaluate UC's capital outlay needs, we recommend UC revise its capital outlay plans so they are based on summer enrollment generally equal to the average enrollment in the other terms. We also recommend the Legislature direct UC to not include off-campus enrollment with summer enrollment when developing and reporting on capital outlay plans.

Garamendi Bonds Are an Option to Fund Research Facilities

"Garamendi" bonds are lease-payment bonds underwritten by the University of California (UC) research revenue. They provide a way to finance construction of research space at UC campuses without committing state General Fund resources. We recommend the Legislature use Garamendi bonds to fund UC research facilities in order to free up limited state resources for other high priority needs throughout higher education.

Chapter 1145, Statutes of 1989 (SB 578, Garamendi), authorized the State Public Works Board to finance the construction, renovation, and equipping of research facilities at UC campuses through issuance of revenue bonds secured by revenue from future research activities conducted at the facilities. These are referred to as Garamendi bonds, after the author of the enabling legislation. The bonds may be used to finance the acquisition, construction, renovation, and equipping of a building or facility for the UC that will be used, wholly or partially, for research. Garamendi bonds are the responsibility of UC, and increases in UC research revenue may be used to pay the costs of the bonds.

The university has successfully used Garamendi bonds to finance research facilities in the past. It has seen its research revenue increase from about $1.4 billion in 1993-94 to $2.3 billion in 2000-01 (about a 64 percent increase). Over 80 percent of UC's research is supported by the federal government and private entities. We recommend the Legislature authorize the State Public Works Board to issue Garamendi bonds to finance the research space in two projects proposed in the budget, as discussed below. This will allow limited state resources to be used for higher priority instructional needs throughout the three segments of higher education.

Projects Recommended for Reduction

Irvine: Computer Science Unit 3

We recommend the Legislature reduce $1,770,000 from this item to develop preliminary plans and working drawings for the Computer Science Unit 3 building at the University of California, Irvine and recognize future costs of $10,685,000 for construction and $3,000,000 for equipment because the cost of the project is high. We also recommend research space in the project be funded by Garamendi bonds. (Reduce Item 6440-302-0574 [3] by $1,152,000 and Item 6440-302-6028 [4] by $618,000.)

The budget includes $2.7 million for preliminary plans and working drawings for a new 87,400 assignable square feet (asf) project to provide space for the Department of Information and Computer Science, general assignment classrooms and surge space (space to be used on an interim basis when construction elsewhere on campus requires the temporary relocation of building occupants). The project consists of the construction of two buildings, one of 80,490 asf and the other 6,910 asf, for a total of 87,400 asf. The UC proposes to provide $14.7 million of nonstate funds for construction of 26,000 asf of surge space in the larger of the two buildings. Figure 2 shows how the remaining 61,400 asf of state-funded space is planned to be allocated.

The instructional space in the project is justified based on programmatic needs, and the academic and administrative office space in the project is justified based on enrollment growth and operational needs. While the proposed research space is not justified for state support based on our recommended space standards, the university could use nonstate funds to support its request, as discussed below. We recommend reduction in the state cost because (1) research space could be funded by the university using Garamendi bonds and (2) the estimated construction cost exceeds our recommended guidelines.

Garamendi Bonds for Research Facilities. The research space in the project is not justified for state-funding under our recommended space standards. As discussed in the "Crosscutting Issues" section in this chapter, we recommend the state authorize UC to fund research space using so-called Garamendi bonds. This provides a funding mechanism for research facilities that are not justified under state space standards. The university has used Garamendi bond financing in the past for research facilities and we recommend the research space in the Computer Science Unit 3 project be funded in this way. The effect of this recommendation on the state's cost is shown in Figure 3.

Construction Cost Is High. As discussed in the "Crosscutting Issues" section of this chapter, we recommend the Legislature apply construction cost guidelines when funding capital outlay projects for UC and the other segments of higher education. This does not prevent UC from constructing buildings that are more expensive than our recommended guidelines if it believes it is necessary. The university has other funds that can be allocated to capital outlay projects. Applying construction cost guidelines allows the state's limited resources to be used to fund other capital outlay projects at UC campuses and the other segments of higher education. Figure 3 shows the effect applying our guidelines has on the state's construction contract cost for this project.

When other costs are prorated and included, our recommendation for state funding is shown in Figure 4 . This reduction would reduce the cost of the state-funded portion of the project from $34.8 million to $14.7 million. 

Accordingly, we recommend the Legislature approve $963,000 for preliminary plans and working drawings and recognize future costs of $13,685,000--$10,685,000 for construction and $3,000,000 for equipment. This will free up about $20 million of limited state bond resources for high priority projects elsewhere at UC campuses, or at the California State University and community colleges segments.

Los Angeles: Engineering 1 Seismic Mitigation

We recommend the Legislature reduce $17,573,000 from this project for development of working drawings and construction of the Engineering 1 Seismic Mitigation building at the University of California, Los Angeles because the construction cost is high and research space in the building can be funded by Garamendi bonds. (Reduce Item 6440-302-0574 (2) by $903,000 and reduce Item 6440-302-6028 [3] by $16,670,000.)

The budget includes $26.3 million for working drawings and construction to fund construction of a new 44,000 asf building to replace the existing seismically deficient 75,602 asf Engineering 1 building, which will be demolished. The UC estimates the cost to correct seismic and other code deficiencies in the existing Engineering 1 building to be $27.2 million, and it estimates the cost to fully renovate and modernize the building to be $46.2 million. The school of engineering is the only occupant of the existing Engineering 1 building.

We are concerned about this project because (1) it reduces the amount of space for the school of engineering, (2) the research space can be funded by Garamendi bonds in order to conserve limited state resources for high priority instructional needs, and (3) the proposed construction cost is high.

School of Engineering Space Is Reduced. The amount of space available to the school of engineering will be reduced as a result of this project by 31,602 asf, because the existing 75,602 asf Engineering 1 building will be replaced by a 44,000 asf new building. Figure 5 shows the amount and types of space the school of engineering has in the existing building and the amount it will have in the new replacement building.

The UC does not explain how it plans to accommodate activities currently housed in the almost 32,000 asf of space that will be lost to the school of engineering as a result of this project. We recommend UC report at budget hearings on how it proposes to make up for this lost space in the school of engineering.

Research Space Should Be Funded by Garamendi Bonds. As discussed above, we recommend the Legislature authorize UC to use Garamendi bonds to finance construction of research space. This would allow the state to use its limited resources to fund capital improvements for other purposes. Almost half of the space in the proposed new building will be for research laboratories. Because the revenue that research activities generate can be used to underwrite Garamendi bonds, we recommend the Legislature finance that research space using this type of revenue bond financing. 

High Construction Cost. We recommend the Legislature fund construction of new facilities in accordance with the cost guidelines we discussed in the "Crosscutting Issues" section of this chapter. Figure 6 shows the funding we recommend for the construction contract cost of this project.

When additional construction phase costs for contingencies and architectural engineering services are added to the construction contract cost, we recommend state funding of $8,258,000 for the construction phase of this project and $447,000 for working drawings. Accordingly, we recommend the Legislature reduce this item by $17.6 million. This will free up almost $18 million of limited state resources to fund high priority projects elsewhere in higher education.

Santa Cruz, Humanities and Social Sciences Facility

We recommend the Legislature reduce $462,000 from this item for development of preliminary plans for the Humanities and Social Sciences Facility at the University of California, Santa Cruz, and recognize future costs of $19,760,000, because the construction cost is high. (Reduce Item 6440-301-6028 [8] by $462,000.)

The budget includes $1.5 million for development of preliminary plans to construct a new 51,140 asf humanities and social sciences building at the Santa Cruz campus. The building is proposed to contain over 80 percent faculty and administrative offices and research space, and about 19 percent classrooms and teaching laboratories. The office and instructional space in the project is justified on the basis of projected enrollment growth and our recommended space standards.

Our concern with this project is that the estimated construction contract cost of the building is high. We have previously discussed construction cost guidelines and recommended the Legislature use them in considering higher education capital outlay proposals. Figure 7 shows how our recommended construction cost guidelines apply to this project. We recommend the Legislature reduce funding for this project in order to bring the estimated construction contract cost within our recommended guidelines. To do this, we recommend the Legislature reduce the amount proposed in the budget for development of preliminary plans to $1,017,000 and recognize future costs of $19,760,000 ($788,000 for working drawings, $16,972,000 for construction, and $2 million for equipment).

The estimated total project cost will be reduced from $29.3 million to $20.8 million, freeing up $8.5 million for other high priority projects throughout the three segments of higher education.