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Legislative Analyst's OfficeAnalysis of the 2003-04 Budget Bill |
California Infrastructure Plan
Existing law requires the Governor to annually submit a five-year infrastructure plan in conjunction with the budget. The first infrastructure plan was submitted in the spring of 2002. At the time of this writing, the second required plan—due January 10, 2003—had not yet been submitted. When the administration releases the 2003-04 version of the plan, we will review it and provide comments as appropriate. Below, we reprint a December 2002 Legislative Analyst's Office (LAO) report assessing the administration's first plan. We review the plan, noting both its strengths and areas where future changes could make it even more helpful to the Legislature. We also suggest steps the Legislature could take to better evaluate capital outlay proposals and make its infrastructure funding decisions.
Background
Infrastructure funding is an increasingly important issue. During the 20th century, the state built roads, water projects, schools, prisons, and other facilities to accommodate population growth—without as much need to maintain and renovate an aging infrastructure stock. This has changed. Much of the state's infrastructure now must be renovated, adapted, and improved to meet current and future needs. However, the need to build new infrastructure to accommodate population growth will continue unabated. This dual challenge—to develop new infrastructure while extending the life of existing facilities—requires that the state address capital investment in a comprehensive way.
What Is the State's Major Infrastructure?
The state has hundreds of billions of dollars invested in infrastructure. Figure 1 shows the state's major capital outlay assets by program area.
In addition to funding capital development to support various departmental missions, the state has also historically provided funds for local infrastructure in the areas of K-12 school construction, community college construction, local streets and roads, local parks, wastewater treatment, flood control, and jails.
The 2002 California Infrastructure Plan
Most infrastructure planning information is developed by state agencies. In the past, however, this information was not consolidated into a statewide plan. As a result, the Legislature did not have a coordinated picture of the state's capital investment needs. Chapter 606, Statutes of 1999 (AB 1473, Hertzberg), requires a comprehensive long-term plan for California's infrastructure development programs. Specifically, the act directs the Governor, beginning in the 2002-03 budget year, to annually submit a five-year infrastructure plan for state agencies, K-12 schools, and higher education institutions, and a proposal for its funding.
Information Required
The plan must provide the following information for the ensuing five-year period:
- Identification of new and renovated infrastructure requested by state agencies to fulfill objectives identified in strategic plans.
- Aggregate funding for transportation infrastructure identified in the State Transportation Improvement Program.
- Infrastructure needs for K-12 public schools.
- Instructional and instructional support infrastructure for the three segments of higher education.
For all of the infrastructure identified, the plan is required to provide an estimate of its cost and a proposal for funding, subject to the following:
- If the proposal does not fund all of the identified infrastructure, the plan is to indicate the priorities and criteria used to select the infrastructure it does propose to fund.
- The funding proposal shall identify the specific funding sources to be used (such as the General Fund or bond funds). If the proposal plans the issuance of new state debt, it must evaluate the impact of the issuance on the state's overall debt position.
- The funding proposal is not required to recommend specific projects for funding, but may instead recommend the type and quantity of infrastructure needed to meet program objectives.
- Any capital outlay or local assistance appropriations proposed for funding in the Governor's budget must be included in the first year of the plan.
Department of Finance (DOF) Approach to Developing Plan
The DOF indicates it developed the Infrastructure Plan by directing departments to evaluate their infrastructure needs based on programmatic requirements, and to develop capital outlay proposals based on that evaluation. The DOF prepared guidelines for departments to use in preparing this information. Departments were directed to provide the following:
- Total Infrastructure Needs Over Five-Year Period. To do this, departments were directed to determine the types of services they would be providing, the level of service, and the infrastructure necessary to provide that type and level of service. For example, the Department of Motor Vehicles (DMV) might identify (1) issuance of new driver's licenses as a type of service and (2) access to a DMV office within 50 miles and completion of transactions within one hour as the desired levels of service. Using staffing and space standards, delivery of this type and level of service could lead logically to a conclusion that a specific number of DMV offices of particular sizes needed to be located at certain locations.
- Existing Infrastructure Evaluation. Departments were next directed to evaluate their existing infrastructure to determine to what degree it could satisfy the infrastructure need. In the DMV example above, the department might survey the location, size, and condition of its existing offices to determine their suitability to provide the level of service desired.
- Net Infrastructure Need. A department's net need would be the difference between its total infrastructure need and its existing infrastructure inventory.
- Identification of Alternatives. The fourth step in this process was for departments to identify alternatives for meeting the net infrastructure need. This would include consideration of alternatives for delivering the service other than from a traditional infrastructure approach. As an example, the DMV might evaluate issuance of driver's licenses over the Internet in order to reduce the net infrastructure need. Even where a net infrastructure need remained, different infrastructure alternatives were to be considered, such as renovation or expansion of existing facilities as an alternative to constructing new buildings.
- Project Proposals. The next step for departments was to evaluate alternatives and prepare specific capital outlay proposals for submission to the DOF. These were then considered for inclusion in the Infrastructure Plan. If at all practical, proposals were to be project-specific—that is, the location of a facility was to be specified, the scope (size and general configuration) of the facility provided, and a cost estimate and development schedule prepared.
- Consequences of Not Addressing Infrastructure Need. The last step in the process was for departments to provide an evaluation of the consequences of not satisfying the net infrastructure need. This would include showing how the level of service provided would be affected.
The DOF reviewed the infrastructure plans proposed by departments and made recommendations to the Governor's office concerning the justification for proposed projects. Those considered justified were included in and constituted the Infrastructure Plan.
Plan Overview
State departments identified $65.5 billion of capital outlay projects to the DOF for the five-year period 2002-03 through 2006-07. Of these, the Governor included $56 billion (about 85 percent) in the 2002 plan. The $9.5 billion of projects that were not proposed in the Governor's plan were deleted for various reasons: the administration considered that they were not justified, they were deferred for consideration to later years, or they were deleted for policy reasons. In some cases, projects were deferred for consideration in later years on the basis that funding for these projects was considered unlikely to be available in the five-year period covered by the plan. The sectors with the largest deletions were higher education ($7 billion) and resources ($1.4 billion).
Figure 2 (see next page) shows how the $56 billion of identified expenditures was distributed (about $11 billion each year) among major program areas of the state budget. As the figure indicates, proposed spending is concentrated in the areas of transportation and K-12 education. These two areas account for three-fourths of total spending. Proposed funding of these expenditures relies heavily on bonds (primarily for education), and on federal and special funds (almost exclusively for transportation).
LAO Review of the Plan
The 2002 plan is the first installment of what will be an annual document. Below, we review the report with an eye to making it as useful as possible to the Legislature. We first summarize the many positive aspects of the initial plan, followed by comments on how future plans might be improved. We then explore some key policy issues that both the administration and the Legislature will have to address in the near future with regard to the state infrastructure.
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Figure 2 2002 Infrastructure Plan |
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2002-03 Through 2006-07 |
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Program Area |
Bond |
Special |
Federal
Funds |
General
Fund |
Other |
Totals |
|
Transportation |
$0.1 |
$14.1 |
$13.5 |
-- |
-- |
$27.7 |
|
K-12 Schools |
14.9 |
-- |
-- |
-- |
-- |
14.9 |
|
Higher Education |
5.4 |
-- |
-- |
-- |
-- |
5.4 |
|
Water Supply and Quality |
0.2 |
-- |
-- |
$0.2 |
$2.0 |
2.4 |
|
Natural Resources and |
1.2 |
0.2 |
-- |
0.1 |
-- |
1.5 |
|
Public Safety |
0.6 |
0.1 |
-- |
0.4 |
-- |
1.1 |
|
Other |
2.0 |
-- |
0.1 |
0.9 |
0.1 |
3.0 |
|
Totals |
$24.3 |
$14.4 |
$13.6 |
$1.6 |
$2.1 |
$56.0 |
|
Detail may not add to total due to rounding. |
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Positive Features
The administration's first plan is a positive first step in helping policymakers address state infrastructure needs. Positive features in the plan are:
Big Picture. The plan presents, for the first time, the administration's "big picture" of the state's infrastructure needs. In the past the state only had focused capital outlay plans for some departments and programs, but no source of information that provided an overview of all of the state's capital outlay needs. The infrastructure plan provides this overview and this will help the Legislature to better understand the overall funding need and permit it to establish priorities.
Projects Identified for All Plan Years. It is particularly helpful that the infrastructure plan identifies specific projects in all five years that it covers. The enabling legislation did not require that the plan identify specific projects other than in the budget year. By going beyond the limited information required by the statute, the administration and the DOF have provided a significantly more useful document to the Legislature.
Development of Plan Well Conceived. The methodology used by the DOF in developing the plan (described above) was logical and reasonable. It asks departments to base their infrastructure needs on the services they provide to the public, to evaluate the capacity of their existing infrastructure to provide for delivery of those services, and then to determine the need for new facilities. The plan also categorizes infrastructure needs as driven by:
- Critical infrastructure deficiencies.
- Facility/infrastructure modernization.
- Workload space deficiencies.
- Enrollment/caseload/population.
- Environmental restoration.
- Program delivery changes.
- Environmental acquisitions and restoration.
- Public access and recreation.
This type of categorization can be helpful to the Legislature in deciding how to allocate limited state funds among programmatic needs.
Administration Decisions Were Made. The administration made some policy decisions that were needed in order to address departmental in frastructure requirements. For example, the plan makes clear the administration's intention to keep San Quentin State Prison in operation. As another example, the plan articulates the administration's intention to pursue jointly the objective of developing and improving existing state parks and the objective of making new state park land acquisitions. The plan also clearly shows the administration's intent to issue large amounts of bonds to fund infrastructure in the plan. The Legislature may not agree with these policy decisions, but at least the plan makes the administration's positions clear and sets the framework for discussions during budget and policy committee hearings.
Suggested Improvements for Future Plans
Our review of the first infrastructure plan also revealed a number of issues that could be clarified in future plans.
Unclear Methodology for Establishing Departmental Priorities. As discussed above, the administration developed a rational approach for identifying departmental infrastructure needs. The plan does not, however, explain how departments prioritized their proposed capital projects. As an example, it is not clear if the Department of Parks and Recreation places a higher priority on funding environmental restoration projects or those that provide for public access and recreation. Similarly, the plan proposes $56.3 million for the California Highway Patrol (CHP) and the DMV for "critical infrastructure deficiencies." This represents only 45 percent of the total $124 million in deficiencies identified by the two departments combined for the five-year period. The plan does not explain how the departments prioritized their deficiencies and concluded that some deficiencies should be included in the plan and others not. An explanation of the departments' priorities would help the Legislature to better understand the administration's strategy for addressing infrastructure needs.
Planning Coordination. In some cases, it is not clear that departments operating in related areas coordinated their efforts in development of the infrastructure plan. For example, the Departments of Parks and Recreation and Fish and Game, together with the various conservancies and the Wildlife Conservation Board, all have land preservation and habitat conservation as important features of their missions, but it is not clear that they coordinated the development of their capital outlay plans. Similarly, it is important that proposals for new campuses and off-campus centers among the community colleges, California State University, and the University of California are coordinated in order to provide geographical access in the most efficient manner possible. Coordination of infrastructure planning efforts is important in order to avoid duplication and assure that the related proposals mesh together. Where such coordina tion has taken place, the plan should explain the methodology used to bring together the efforts of the involved agencies.
No Statement of Statewide Priorities. We note that the plan does not identify the administration's infrastructure priorities on a statewide level. In enacting Chapter 606, the Legislature stated its intent that the plan identify state infrastructure needs and set out priorities of funding and, moreover, that the plan ". . . provide a clear understanding of the type and amount of infrastructure to be funded and the programmatic objectives to be achieved by this funding." While the plan presents various departmental priorities, it does not place these priorities in the context of the administration's overall, statewide priorities. For example, the plan does not state whether the administration's priorities are: the renovation of aging facilities, addressing certain critical deficiencies, the development of new facilities and capacity, or a combination of these. We believe that such a context is needed in order to better understand and assess the departmental proposals and priorities in context of the entire state budget.
Needs Assessments Should Not Be Tied to Funding Availability. It appears that some departments identified available funding first, followed by an identification of needs that exactly matched this anticipated funding. For example, the total funding needs reported by the Wildlife Conservation Board essentially match the proposed funding for the funding needs, although the plan alludes to there being a backlog of "most essential" capital projects totaling a much higher amount than enumerated in the funding needs chart.
Funding-Related Issues. In some instances the plan left unanswered important issues related to funding of infrastructure. For example, the plan does not indicate what parties, public and private, would provide funding for water storage projects developed under the CALFED Bay-Delta Program. Rather, the plan merely provides that yet-to-be-identified "beneficiaries" of these projects will be the funding source. Since this is a $2.2 billion proposal, it will have a big impact on the state's ability to fund other infrastructure investments. A much smaller (less than $100 million) but nevertheless important issue is how the state will fund the seismic retrofitting of remaining state buildings that possess a substantive earthquake risk. Also, the plan proposes many acquisitions of land for land and habitat conservation, but does not address the costs of developing and maintaining these lands after they have been acquired. Without information about these costs, the Legislature will not be able to fully evaluate the magnitude of the state's infrastructure funding needs.
Policy Issues
There are a number of key policy issues that both the administration and the Legislature will have to address in its future deliberations on infrastructure. These issues fall into three categories: (1) assignment of funding responsibilities, (2) key programmatic decisions, and (3) other issues—such as the use of debt financing and funding for facilities maintenance.
Assignment of Funding Responsibilities
In assessing its infrastructure demands, it is imperative that the state first clearly delineate the assignment of funding responsibilities. Typically, this involves defining the relationship between the state's responsibility and those of local agencies. In some cases, the limits of the state's responsibility for a particular area have never been defined and in others the responsibilities have been defined differently on an ad hoc basis (such as in allocations within bond proposals or designations in specific pieces of legislation). Below are some examples where the Legislature may want to better define funding responsibilities.
Parks and Natural Resources. There has developed an increasingly blurred view over the years of where the state's responsibility to acquire, develop, and manage recreation and natural resource facilities ends and those of municipalities and park districts begins. As the state's financing and development of parks has increasingly moved into urban areas through grants and direct capital investment, there arises a question of how far the state's responsibility extends.
Community Colleges. It has been the recent practice of the state to fund 100 percent of the cost of capital projects for community colleges. Recent voter approval of Proposition 39 reduced the vote requirement for local bond measures from two-thirds to 55 percent. Many districts have already had local bond measures approved under this lower vote requirement. In light of this improved funding capability by local districts, the state might want to reconsider the level of the state's responsibility to provide infrastructure funding for community colleges.
K-12 Education. In recent years, the state has funded—entirely with general obligation bonds—50 percent of the costs of most K-12 school projects (and higher proportions of modernization and "hardship" projects). With the passage of Proposition 39, local school districts have a significantly improved ability to provide local funding. The Legislature may wish to revisit the issue of the extent of the state's responsibility to provide capital funding for K-12 schools. The Legislature may also want to consider the method by which state assistance is provided to local school districts (for one possible alternative see A New Blueprint for California School Facility Finance, Legislative Analyst's Office, May 1, 2001).
Fire Protection. Fire protection services provided by the California Department of Forestry and Fire Protection (in coordination with the U.S. Forest Service) were originally limited to wildland areas which, in some cases, are now becoming more urbanized. As a result, the department has found itself providing fire protection services (and the necessary network of fire stations) in areas where the population may now be sufficient to support a greater local role in providing emergency services. The Legislature may wish to address the issue of the state's responsibility for providing fire protection services in these populated rural areas.
Key Programmatic Decisions
The Legislature will soon be faced with some important programmatic issues with regard to infrastructure. While many of these issues are referenced in the plan, it does not offer any particular resolution to them.
Funding Court Facilities. Chapter 850, Statutes of 2002 (SB 1732, Escutia), was enacted to implement the Legislature's goal of shifting responsibility for funding court facilities from local governments to the state. With regard to the takeover, the state could face nearly $2.8 billion of court construction and modernization expenses and around $2 billion for future court expansion. These costs are expected to be funded over 20 years from surcharges on court filing fees deposited into the "Court Facilities Trust Fund." The 2002 plan does not directly address any of the facility issues associated with this transfer of responsibility. The Legislature will soon need to address such issues as:
- Should capital outlay functions such as project management for court facilities be provided by the Department of General Services and the Public Works Board?
- What action should the Legislature take if the Court Facilities Trust Fund has insufficient funds to meet the Judicial Council's renovation and new construction needs?
Developmental Services. Chapter 93, Statutes of 2000 (AB 2877, Thomson), directed the Department of Developmental Services (DDS) to identify a range of options to meet the future needs of individuals currently being served by DDS. Among the various options reviewed in a report prepared pursuant to AB 2877 is the renovation of all existing developmental center facilities. The report, dated June 2002, concludes that the developmental centers should not be renovated as a whole because funds needed for such an effort may be better utilized in creating a new "service structure," such as small state-owned or leased community residential facilities. The DDS indicates that because development of new options will be a "slow process," some capital outlay expenditures will be necessary in order to continue to operate the developmental centers. (The 2003-04 Governor's Budget has directed the Department of Developmental Services to develop a plan to transition clients living at the Agnews Developmental Center into community based facilities as appropriate, and close the Agnews facility by July 2005.) Given this situation, the Legislature will need to consider the following:
- How should developmental services be provided in the future?
- If a new service structure is implemented, to what extent should capital outlay improvements still be undertaken at existing developmental centers?
- Regardless of the service delivery model selected, should the state consider closing one or more developmental centers given the decline in resident population?
Corrections Facilities Closures. Declining inmate population and obsolete facilities have raised issues about the continued operation of some adult and youth correctional facilities. For instance, through the Supplemental Report of the 2002 Budget Act, the Legislature directed the department to report on issues related to the potential closure of the Northern California Women's Facility (NCWF). (The 2003-04 Governor's Budget proposes to convert the facility to a men's institution by 2004-05.) The Legislature has also recognized a declining Youth Authority population and has directed the Youth Authority to develop and submit a written plan to close at least three institutions by June 30, 2007, and to close one of the identified institutions by June 30, 2004. As of the time this analysis was prepared, neither of these reports had been provided.
Other Key Issues
Bond Versus Pay-As-You-Go Financing. The administration's proposed financing for its infrastructure program over the next five years highlights a dichotomy. Financing for transportation (almost half of the plan's total fiscal effect) is almost entirely "pay-as-you-go"—that is, funded from an annual stream of state and federal taxes on gasoline. The remainder of the plan—almost entirely a General Fund responsibility—is proposed to be funded from bonds. This raises two basic issues. First, bonds are more costly than pay-as-you-go financing—roughly one-third more on an inflation-adjusted basis. Second, bonds are a less reliable (in that their use depends on voter approval) and less stable (in that bond proposals are only periodically placed on the ballot) than pay-as-you-go funding. The Legislature has responded to these concerns by recently placing ACA 11 (Richman) on the March 2004 statewide ballot. This measure could result in a significant level of pay-as-you-go General Fund financing for state and local infrastructure, which could influence legislative decisions regarding the need for future general obligation bonds and lease-revenue bonds authorizations.
Facility Maintenance. A crucial omission in the administration's plan is the issue of facility maintenance. Appropriate maintenance of infrastructure has been a chronic problem for the state. Difficulties have arisen because of either an inadequate level of maintenance funding or funds appropriated for maintenance have been spent for other purposes. This results in deterioration of facilities and an accumulation of "deferred maintenance" projects, which are costly and cause bumps in capital funding needs that are sometimes difficult to accommodate. In our view, this issue should be addressed in future infrastructure plans. For instance, large departments could include summary information as to the status of their maintenance program (such as the relationship between scheduled maintenance requirements and funding for these purposes, and the levels of any deferred maintenance). The Legislature may want to consider other options, such as the establishment of sinking funds to accommodate future maintenance needs.
How Should the Legislature Respond?
As noted above, the administration's initial infrastructure plan provides useful information to the Legislature. With selective improvements, it can evolve into an essential document to evaluate and make decisions on state capital projects. As noted above, however, there are many key policy decisions that have to be made to fully address the state's infrastructure needs. These include the assignment of funding responsibilities between the state and locals, key programmatic decisions in areas such as the judiciary and developmental services that will drive capital requirements, and significant decisions about how to fund the infrastructure program.
Given the complexity of these issues, it is critical how the Legislature as an institution addresses these matters. We have recommended in the past that the Legislature establish special policy and budget committees to deal with capital outlay issues. With the infrastructure plan now a reality, some institutional changes would be beneficial. For example, the creation of infrastructure policy committees would provide a mechanism for the Legislature to make its decisions regarding capital priorities. These priorities could be reflected in statute or in annual resolutions outlining the Legislature's key policies in assessing infrastructure proposals.
Similarly, the establishment of budget subcommittees which hear all capital outlay requests is one way for the Legislature to evaluate in a more comprehensive way the infrastructure proposals made by the administration. Such subcommittees could also serve as the "enforcers" of policies established by the policy committees.
There are many different ways the Legislature could respond to the annual infrastructure report and the related budgetary proposals of the administration. What is critical is that the Legislature independently assess the state's infrastructure needs, articulate its policies regarding capital outlay, and make informed annual budgetary decisions on capital facilities.