Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

University of California (6440)

The Governor proposes $339.4 million from the Higher Education Capital Outlay Bond Fund of 2004 (on the March 2004 ballot) for 34 projects and $55 million from lease revenue bonds for one project. The Governor's proposal provides $274 million to fund 19 continuing projects and $120.4 million for 16 new projects.

Infrastructure Plan

In the 2003 California Five Year Infrastructure Plan, the University of California (UC) identified a need for $3.4 billion of capital outlay between 2003-04 and 2007-08 (see Figure 1). Of this amount, $323 million was approved in the 2003-04 Budget Act and $394 million has been proposed in the 2004-05 Governor's Budget.

General Issues Regarding UC Capital Outlay

The UC has one of the state's most expensive capital outlay programs. As such, it is important that such a program be managed in a cost-effective way. To help achieve this, we recommend existing facilities be utilized more efficiently, construction costs be controlled, and faculty research facilities can be funded from reimbursements—such as UC's research overhead revenue. These issues are discussed below, and our general findings are then applied in our analysis of specific projects proposed for funding in 2004-05.

UC Instructional Facilities Continue to Be Underutilized  

We recommend the Legislature direct the University of California to base its state-funded capital outlay plans on utilization of instructional facilities year-round in accordance with state utilization standards.

Existing state utilization standards for higher education require classroom stations (typically, a student's desk) to be occupied and in use 35 hours per week and teaching laboratory stations about 20 hours per week. The UC's overall utilization is below these standards. The university reports that, segmentwide, its classroom stations are being utilized about 28 hours per week (80 percent of the standard) and teaching laboratory stations about 18 hours per week (90 percent of the standard). All general campuses except Riverside use their facilities less than the state's utilization standards. For example, Berkeley utilizes its classrooms 72 percent as much as required by the state's standards and Davis and Santa Cruz use their teaching laboratories about 82 percent as much as called for by the standards. This means, overall, UC might be able to accommodate as many as 25 percent more students in existing classrooms and 10 percent more in existing teaching laboratories just by utilizing them as required by the state's standards.

In addition to underutilization of its instructional facilities in terms of hours-per-week, UC's classrooms and teaching laboratories are also underutilized during the summer. The UC recently reported about 20,000 full-time equivalent (FTE) students were enrolled at general campuses during summer term 2002. However, the campuses accommodate about 170,000 FTE students during each of its other terms, so up to 150,000 additional FTE students could be accommodated in summer term at all campuses. This means that by enrolling as many students in summer as in other terms, as many as 38,000 more students could obtain a full academic year of instruction than UC campuses are currently serving. This would be a 23 percent increase in the number of students served using UC's existing physical capacity.

Increasing UC's utilization of its facilities is a cost-effective option for increasing the segment's instructional capacity while minimizing the need to construct new instructional facilities to accommodate enrollment growth. We recommend the Legislature take into account the segment's underutilized capacity when considering university proposals to construct new instructional facilities. We also recommend the Legislature make clear its interest in efficient utilization of instructional facilities by adoption of appropriate supplemental report language.

Construction Cost Guidelines Are Recommended

We recommend the Legislature fund construction of new University of California (UC) buildings based on construction cost guidelines similar to those used by the California State University (CSU) and the community colleges. 

The California State University and community colleges have used reasonable construction cost guidelines in implementing their capital outlay programs. The CSU and community colleges have done this for many years, while consistently constructing attractive, durable, and functional buildings.

The UC, however, does not adhere to construction cost guidelines. The UC's construction costs have consistently been much higher than those at CSU and the community colleges. They are also high when compared to similar buildings constructed elsewhere in the country (after adjustment for geographical differences in construction costs). For example, the five projects with which we raise issues below have construction contract unit costs that range from $507 to $734 per assignable square foot (asf) (see Figure 2).

For comparison, CSU and California Community College construction contract cost guidelines for similar buildings are shown in Figure 3. The figures illustrate that UC's costs are considerably higher than those for CSU and the community colleges. 

Accordingly, we recommend that the Legislature use construction cost guidelines for UC based on the cost of constructing similar buildings at peer institutions nationwide (adjusted for inflation and geographical differences in construction costs). As discussed in more detail in our 2000-01 Analysis (page G-68), we recommend that costs be based on the 75th percentile of costs of these comparable buildings. This means 75 percent of the buildings in our data base of comparable buildings cost less than the UC guideline we recommend. Our recommended construction cost guidelines for UC are shown in Figure 4. Although we show a cost guideline for research, we recommend UC research space be funded from nonstate sources—as discussed below.

Faculty Research Facilities Can Be Funded by Reimbursements

Faculty research facilities can be funded from reimbursements—such as research overhead revenue. Since these facilities can be self-financed, we recommend that the Legislature reserve state bond funds for other higher education facilities.

Historically, the state has not funded construction of UC facilities that generate sufficient revenue for them to be "self-financing." Frequently, this is done through UC's issuance of revenue bonds. For example, the state does not fund student housing and parking garages because they generate enough revenue to pay for themselves. Another major example is teaching hospitals, which generate hospital services revenue.

The UC research facilities also generate revenue for the university, and are capable of being self-financed. The revenue comes from research contracts and grants. Over half of UC's research revenue comes from the federal government, and the rest from for- and not-for-profit private companies and foundations and from the state. In 2002 UC received about $3.2 billion from contracts and grants. Included in this amount are "overhead" revenues which UC charges to recover the costs of facilities and other indirect costs. In effect, UC recovers each year from the sponsored research that takes place in its research facilities enough funds to pay for the amortized cost of the facility.

Given that UC has the ability to finance its research from this revenue source, we believe that state funding should be reserved for other facilities—such as classrooms and teaching laboratories. Accordingly, in the project-specific discussions that follow, we are recommending no direct state funding of research space. It should be stressed that we are not recommending deletion of proposed research space—only that it be funded from research overhead revenue (or other nonstate sources—such as gifts).

Projects Recommended for Partial Reimbursement Funding

Irvine: Engineering Unit 3

We recommend the Legislature shift partial funding for the Engineering Unit 3 facility at the Irvine campus from state bonds to reimbursements because faculty research space can be funded from reimbursements and estimated construction costs are high. (Delete $2,426,000 from Item 6640-302-6041[5] and add $2,426,000 from reimbursements for preliminary plans and working drawings, and recognize a shift of $31,629,000 of future costs from state funding to reimbursements.) 

The budget includes $3,440,000 for funding of development of preliminary plans and working drawings for an 86,895 asf engineering building at Irvine. The budget proposes 74,195 asf of the project be funded from state sources and 12,700 asf from nonstate sources. The portion of the building proposed for state funding has future costs of $44,853,000 for construction and $3,150,000 for equipment. Figure 5 shows how the budget proposes that the state portion of the project be funded.

Figure 6 shows the proposed uses of the space in the building. While the university indicates the state-funded part of the proposed building is needed to accommodate enrollment growth, only 21 percent of it will be instructional space (classrooms plus teaching laboratories) while 59 percent will be for faculty research.

We have the following concerns with this project:

• Research Space Can Be Self-Financed. As discussed above, we recommend the faculty research space be funded by reimbursements. The university should be able to recover from overhead funds dedicated for facilities costs adequate monies to finance this space.
• Construction Costs Are High. The estimated unit construction contracts cost for the building is high—$507 per asf—and the estimated total project cost is $727 per asf. As discussed earlier, we recommend faculty research space be funded at not more than our recommended construction cost guidelines. Figure 7 shows our recommended unit construction cost guidelines applied to this project. 

Recommended Funding. For these reasons, we recommend the Legislature approve funding the faculty research space from reimbursements—such as research overhead revenue—and fund the other space in the project based on our recommended construction cost guidelines. When other project costs not directly related to construction contracts are included, our recommended funding from general obligation bonds (the Higher Education Capital Outlay Bond Fund of 2004) and reimbursements is shown in Figure 8.

Applying our recommendation reduces the impact of the project on the Higher Education Capital Outlay Bond Fund of 2004 by $2.4 million in the budget year and future costs by almost $32 million. This will make over $34 million available to fund other high priority projects in higher education.

Los Angeles: Life Sciences Replacement Building

We recommend the Legislature shift partial funding for the Life Sciences Building at the Los Angeles campus from state bonds to reimbursements because faculty research space should be funded from reimbursements and the estimated construction costs are high. (Delete $1,970,000 from Item 6640-301-6041[5] and add $1,970,000 from reimbursements for preliminary plans, and recognize a shift of $58,028,000 of future costs from state funding to reimbursements.)

The budget includes $2,200,000 for funding of the development of preliminary plans for an 87,238 asf building to replace the existing 115,846 asf Life Sciences Building at Los Angeles. The building is proposed to be partially funded from nonstate sources. The budget proposes a total project cost of $87,029,000, with $66,733,000 coming from state funds and $20,296,000 of nonstate funds. The state-funded portion of the project consists of construction of the Life Sciences Replacement Building. (The portion of the project to be funded with nonstate funds consists of the renovation of Hershey Hall.) Figure 9 shows how the cost of the state-funded portion of the project is proposed to be funded.

Figure 10 shows the proposed uses for the spaces in the state-funded replacement building. It shows that the building will contain over 72,000 asf of faculty research space—83 percent of the building total.

We have two basic concerns with the proposed funding level for this project:

• Research Space Can Be Self-Financed. As discussed above, we recommend faculty research facilities be funded from reimbursements such as overhead revenue the university receives from faculty research contracts and grants.
• Estimated Construction Costs Are High. The estimated unit construction contracts cost for the building is $734 per asf and the estimated total project cost is $983 per asf. These are extremely high. Figure 11 shows the funding we recommend for the building based on our recommended construction cost guidelines.

Recommended Funding. When other costs not directly related to construction are included, our recommended funding from general obligation bonds (the Higher Education Capital Outlay Bond Fund of 2004) and reimbursements is shown in Figure 12. 

Compared to the funding proposed in the budget, this will free up almost $60 million of the Higher Education Bond Fund of 2004 for higher priority projects elsewhere in higher education.

Riverside: Materials Science and Engineering Building

We recommend the Legislature shift partial funding for the Materials Science and Engineering Building at the Riverside campus from state bonds to reimbursements because proposed construction costs are high and faculty research space should be funded from nonstate sources. (Delete $2,971,000 from Item 6640-302-6041[9] and add $2,971,000 from reimbursements for preliminary plans and working drawings, and recognize a shift of $37,954,000 of future costs from state funding to reimbursements.)

The budget includes $3,749,000 for development of preliminary plans and working drawings for a 76,940 asf building with future costs of $52,220,000 for construction and equipment, for the Materials Science and Engineering Building for the College of Natural and Agricultural Sciences (CNAS) and the Bournes College of Engineering (BCOE) at Riverside. The CNAS will occupy 23,625 asf in the proposed building, BCOE will occupy 25,275 asf, and the building will include 18,370 asf of general assignment classrooms, and a 9,670 asf nanofabrication core facility.

We are concerned with this project because the construction cost is high and the majority of the building is proposed to be devoted to space for faculty research rather than student instruction or other necessary uses.

• Faculty Research Space. As discussed above in this chapter, faculty research has consistently generated billions of dollars in revenue for UC. Two-thirds of this building is proposed to be used for faculty research and only 26 percent for classrooms and teaching laboratories for student instruction and 8 percent for offices. The overhead the university charges its research sponsors is available to fund the construction of faculty research space, and we recommend this be done.
• Estimated Construction Costs. The estimated cost for construction contracts for the building (not including site construction work, the cost to prepare preliminary plans and working drawings, and provide equipment) is $535 per asf. When all other costs are included, the estimated total project cost is $674 per asf. We recommend the Legislature fund the construction of this building applying our recommended cost guidelines, as shown in Figure 13. 

Recommended Funding. With research space funded from reimbursements and other spaces funded at the construction cost levels we recommend, our recommended funding for this project from general obligation bonds (the Higher Education Capital Outlay Bond Fund of 2004) and reimbursements is shown in Figure 14.

Applying our recommendation reduces the impact of this project on the Higher Education Capital Outlay Bond Fund of 2004 by almost $3 million and future state costs by almost $38 million. This would make almost $41 million available to fund other high priority projects in higher education.

Riverside: Genomics Building

We recommend the Legislature shift partial funding for the Genomics Building at the Riverside campus from state bonds to reimbursements because faculty research space should be funded from reimbursements and construction costs are high. We further recommend that UC revert to the General Fund $44.6 million of proceeds from the sale of surplus land at Riverside. (Delete $55,000,000 from Item 6440-301-0660[1], and add $55,000,000 to Item 6440-301-6041[24] with $17,624,000 from the Higher Education Capital Outlay Bond Fund of 2004 and $37,376,000 from reimbursements for preliminary plans, working drawings, construction, and equipment.)

The budget includes $55 million for development of preliminary plans, working drawings, construction, and equipment for a 63,986 asf Genomics Building at the Riverside campus. The new building will be occupied by the College of Natural and Agricultural Sciences and will contain 45,004 asf of faculty research space (70 percent), 18,418 asf of offices (29 percent) and 564 asf of other space (1 percent). The budget proposes to fund this project from lease-revenue bonds.

Background. The administration and UC entered into an agreement whereby the $55 million of proceeds from the sale of surplus land the university is planning to sell at the Riverside campus would be reverted to the General Fund in the current year in exchange for the administration agreeing to issue $55 million of lease-revenue bonds to finance the construction of this Genomics Building. (The 2004-05 budget plan includes revenues of $55 million in 2003-04 related to this agreement.) When the now-surplus land was purchased, 81 percent of the purchase price was from the General Fund and the remaining 19 percent from university funds. The issue of disposition of the proceeds from the land sale is separate from that of the merits of the proposed Genomics Building, and we discuss them separately below.

Merits of the Proposed Funding Level for Genomics Building. We have the following concerns with the funding proposed for this project:

• Faculty Research Space. Seventy percent of the space in the proposed building is for faculty research laboratories. Because UC has a very large and reliable revenue source in its faculty research overhead charges, we recommend faculty research overhead revenue—or other nonstate sources such as gifts—be used to fund the
• faculty research space in the proposed building. This is consistent with the state's practice of not funding the construction of buildings for higher education if they generate enough revenue to be "self-funding" (such as student housing, parking garages and some teaching hospital buildings).
• Construction Costs. The estimated cost for construction contracts for the building (not including site construction work, the cost to prepare preliminary plans and working drawings, and provide equipment) is $553 per asf. When these other costs are included, the estimated total project cost is $860 per asf. Using our suggested construction costs guidelines, we recommend the Legislature fund the proposed space as shown in Figure 15.

Recommended Funding. With research space funded from reimbursements and other spaces funded at the construction cost levels we recommend, our recommended funding is shown in Figure 16. Because of savings to the Higher Education Capital Outlay Bond Fund of 2004 (general obligation bonds) we have recommended on other projects in this chapter, we recommend that state funding come from the Higher Education Capital Outlay Bond Fund of 2004 rather than lease-revenue bonds (the Public Buildings Construction Fund) as proposed by the Governor.

Applying our recommendation reduces the impact of this project on the Higher Education Capital Outlay Bond Fund of 2004 by $37 million. This will make this amount available to fund other high priority projects in higher education.

Disposition of Proceeds From Surplus Land Sale. Since the state provided 81 percent of the purchase price for the now-surplus land at the Riverside campus, we recommend the Legislature acknowledge the state's interest in 81 percent of the $55 million of sale proceeds—that is, $44.6 million. We therefore recommend UC be directed to revert $44.6 million of the sale proceeds to the General Fund. The remaining $10.4 million which UC retains could be applied by UC to fund the Genomics Building.

Projects Recommended for Deletion

San Diego: Music Building

We recommend the Legislature delete $3,802,000 for preliminary plans and working drawings for the Music Building at the San Diego campus because existing facilities are not utilized year-round at the state's standards and renovation of existing facilities has not been adequately explored. (Delete $3,802,000 from 6640-301-6041[13].)

The budget includes $3,802,000 for development of preliminary plans and working drawings for a 47,000 asf building, with future costs of $36,333,000 for construction and equipment, for a new Music Building at the San Diego campus. The new building would be occupied by the music department and would contain 35,055 asf (75 percent) of teaching laboratories, 10,275 asf (22 percent) of offices, 750 asf (1 percent) of research space and 895 asf (2 percent) of other space. Construction of this building would increase the amount of music department space from about 36,000 to 64,000 asf (a 75 percent increase).

We are concerned about this project because existing music department facilities are not fully utilized, and we question the campus's assertion that acoustic conditions in existing music department facilities in Mandeville Auditorium cannot be corrected to a reasonable level by renovation.

Existing Facilities Not Fully Utilized. The latest enrollment information UC has made available (2001-02) indicates the San Diego campus—which has a capacity to accommodate about 20,000 FTE students—had only about 100 FTE students enrolled during summer term. Therefore, the campus can accommodate about one-third more students if summer term is utilized as fully as other quarters.

Renovation of Existing Facilities Not Considered. One of the two principal facilities currently used at the San Diego campus for music department programs is the 800-seat Mandeville Auditorium. The university says there are acoustic deficiencies at Mandeville (sound reverberation, echo, and insulation) that make it unsuitable for music department needs. As a result, the proposal includes a 400-seat recital hall in the proposed Music Building. The university, however, has provided no information to show that it evaluated acoustic renovation of Mandeville Auditorium as a less costly alternative to constructing a new recital hall. Since acoustic renovation of existing buildings can be successful using relatively inexpensive wall treatments and architectural modifications, it is not clear if the university has evaluated alternatives which would meet programmatic needs. Given these concerns we recommend the Legislature not approve this project. This would result in budget-year savings of $3.8 million, with future-year savings of $363 million (all state bonds).

If, however, the Legislature elects to fund this project, we recommend it be funded in accordance with our recommended construction cost guidelines, discussed above. The university has proposed an estimated construction contracts cost of $30.6 million—almost $651 per asf—and the estimated total project cost is $40.1 million—$809 per asf. These costs are significantly higher than the $434/asf which results from applying our recommended construction cost guidelines.

Santa Cruz: Digital Arts Facility

We recommend the Legislature delete $1,330,000 for the Digital Arts Facility at the Santa Cruz campus for working drawings, construction, and equipment because existing facilities are not being utilized year-round at the state's standard and research space should be funded from reimbursements. (Delete $1,330,000 from Item 6640-301-6041[22].)

The budget includes $1,330,000 for development of preliminary plans for a new 25,600 asf Digital Arts Facility at the Santa Cruz campus, with future cost of $19,341,000 for working drawings, construction, and equipment. The new building will be occupied by the Arts Division, which includes the visual arts, music and theater arts departments, and the digital arts and new media program. It will contain 14,870 asf (58 percent) of research space, 4,158 asf (16 percent) offices, and 6,565 asf (26 percent) teaching laboratories. The project also includes a 1,140 asf addition to the Theater Arts Complex.

We are concerned with this project because the university has not adequately evaluated using existing facilities to meet programmatic needs, and research space in the proposed facility should be funded from nonstate sources. We also note UC had not previously identified the project as a priority in prior state plans.

Need for New Facility Has Not Been Justified. The state has funded three projects on the Santa Cruz campus for arts programs in the last seven years and the campus now has almost 158,000 asf assigned to the Arts Division. These recently completed projects are summarized in Figure 17.

It is unclear why these recently completed projects—together with an additional 100,000 asf assigned to arts programs elsewhere on campus—are not adequate for programmatic needs of the campus.

Facilities Not Utilized Year-Round. The campus is largely unused for instructional purposes during summer term. The latest enrollment information UC has made available shows that in the summer less than 300 FTE students—all graduate students—were enrolled at the campus. If the university used its instructional facilities fully in summer term, it could accommodate almost one-third more students without the need to construct new instructional facilities.

For these reasons, we recommend deletion of the project, for budget-year savings of $1.3 million and future savings of $19.3 (all state funds). If, however, the Legislature elects to fund this project, we recommend that: (1) the research space be funded from reimbursements and (2) the remaining space be funded in accordance with our recommended construction cost guidelines.