Analysis of the 2005-06 Budget Bill Legislative Analyst's Office February 2005

Overview

Proposed funding for capital outlay in the budget year totals $1.3 billion. Most of this amount (86 percent) will come from bond proceeds. Almost two-thirds of the proposed spending are for higher education facilities.

The 2005-06 Governor's Budget proposes approximately $1.3 billion for capital outlay programs (excluding highway and rail programs, which are discussed in the "Transportation" chapter of this Analysis). This is spending on physical assets—such as college buildings, state parks, prisons, and office space.

Figure 1 summarizes the proposed 2005-06 expenditure authority for the capital outlay program. The proposed program represents a decrease of almost $499 million (28 percent) from the current-year level. The decrease occurs primarily in the higher education area because most of the funding from higher education general obligation bonds approved by the voters in 2004 has now been spent or committed.

Funding Sources for Capital Spending

The Governor's budget proposes funding the capital outlay program primarily from general obligation and lease-revenue bonds. Specifically, the budget requests $963 million in funding from general obligation bonds and $145 million from lease-revenue bonds. In total, these bonds would make up about 86 percent of the program's funding in 2005-06. About $74 million in capital outlay projects would be supported directly from the General Fund, while special funds and federal funds would provide $107 million in project funding.

Figure 2 compares the sources of funds for the 2004-05 capital outlay program to those proposed for 2005-06. As the figure shows, funding from general obligation bonds is proposed to decrease from about $1.5 billion in 2004-05 to less than $1 billion in 2005-06. This drop is because most of the higher education general obligation bonds approved by the voters in 2004 have been spent or committed. The budget proposes increasing the amount from the General Fund by almost $37 million and increasing the amount from special funds by about $32 million. Most of the General Fund increase is for prisons and flood control projects. The special fund increase is primarily for Caltrans, Highway Patrol, and Department of Motor Vehicles offices, and funding for various land conservancies and the Department of Parks and Recreation.

Spending by Department

Figure 3 shows the amounts proposed in the Governor's budget for each department's capital outlay program. In total, the budget proposes $1.3 billion for capital outlay projects in 2005-06. Completing all the projects will require an additional $859 million in future costs. Thus, the capital outlay program proposed in the budget represents a total cost of roughly $2.1 billion.

As the figure shows, the bulk of the proposed funding will be for capital improvements in the three segments of higher education—totaling $829 million (or 64 percent of total) in 2005-06, with anticipated future costs of $518.2 million. Other than higher education, the budget-year capital outlay program focuses on resources programs. The budget proposes $244 million for these programs in 2005-06, including $88 million for land acquisitions by various conservancies, $47 million for the Department of Forestry and Fire Protection to replace and relocate various fire stations and facilities, and $43 million for the Department of Water Resources mainly for flood control. The resources projects will require a total of $189 million to complete in future years.

For the Department of Corrections, the budget proposes capital projects totaling $47 million in 2005-06. About 60 percent of the amount is for a central heating, ventilation, and air conditioning system at the Chuckawalla Valley State Prison. The remaining funds are primarily for projects to address deficiencies in wastewater treatment systems at various correctional institutions. The department's projects will require an additional $125.6 million in future costs to complete.

Figure 4 displays the proposed funding for each department, by source. This shows that most funding for higher education and resources programs would come from general obligation bonds, while funding for transportation (buildings) and highway safety would come from special funds such as gasoline tax and vehicle registration fee revenues. The General Fund and lease-revenue bonds will be the main source of funds for correctional, fire protection and flood control projects, and general state offices.

Bond Funding and Debt-Service Payments

Figure 5 shows the state's General Fund debt-service expenditures for bonds that support traditional outlay projects from 1997-98 to 2005-06. It shows that these expenditures have increased in recent years, and are projected to reach $4 billion in 2005-06, up about $366 million from the current-year level. The total consists of $3.3 billion related to general obligation bonds, and about $655 million related to lease-revenue bonds. The rapid increase between 2003-04 and the current year is partly related to the conclusion of a two-year debt refinancing program undertaken by the Treasurer to help deal with the budget shortfall. This resulted in the deferral of about $900 million in annual debt payments in both 2002-03 and 2003-04. In addition, growth in debt service costs reflects voter approval and state issuance of a substantial amount of new debt for schools, resources, and other purposes.

Budget-Related Borrowing Imposing Additional Debt-Service Costs

In addition to costs associated with capital outlay related bonds, the state is also incurring annual costs for budget-related debt. This includes about $1.2 billion annually beginning in 2004-05 for the repayment of the deficit-financing bonds authorized by Proposition 57 (approved by the voters in March 2004). Under the Governor's budget plan, the state would also incur annual costs beginning in 2006-07 for debt service on pension obligation bonds (about $48 million annually) and a judgment bond (about $30 million annually).

The level of General Fund debt-service payments stated as a percentage of state revenues is commonly referred to as the state's debt service ratio (DSR). This ratio is used by policymakers and the investment community as one indicator of the state's debt burden. As shown in Figure 6, California's DSR for traditional capital outlay purposes peaked in the mid-1990s at about 5.4 percent before falling back to about 3 percent in 2002-03, reflecting the deferral of debt payments discussed above. The DSR rebounded beginning in 2003-04, and is expected to reach 4.7 percent in the budget year. We project that the DSR will rise further to around 5.5 percent by 2009-10, as the over $30 billion in currently authorized bonds are sold off. When the payments for budget-related bonds are included, the DSR rises to slightly over 7 percent by 2009-10.