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

University of California (6440)

The Governor proposes $305 million from the 2004 Higher Education Capital Outlay Bond Fund for 24 projects. The proposed funding level would provide $297 million to continue work on 18 continuing projects and $8 million to start six major new projects.

Construction Cost Guidelines

As in the past, we recommend the Legislature fund the construction of facilities at the University of California based on construction cost guidelines similar to those used by the California State University.

Construction cost guidelines are an important tool available to the Legislature to contain construction costs. These guidelines, usually stated in terms of "dollars per assignable square foot (asf)," are developed by surveying the actual construction cost of similar buildings. When adjusted for inflation and cost differences due to geographical factors, the guidelines provide a means to assess the reasonableness of the cost of capital outlay proposals from the segments.

The California State University (CSU) and California Community Colleges (CCC) have used construction cost guidelines in implementing their capital outlay programs for a number of years. Figure 1 summarizes the cost guidelines used by the two segments for classrooms, teaching laboratories, and offices. We have compared the CSU and CCC guidelines to the actual construction cost of hundreds of similar higher education buildings at major public and private universities and colleges throughout the country and found their guidelines to be comparable.

The UC, however, does not use construction cost guidelines. Figure 2 summarizes the unit construction cost of nine UC buildings proposed in the budget containing classroom, teaching laboratory, office and faculty research space. As the figure shows, the estimated construction unit cost for these buildings ranges from $375 to $847 per asf.

When compared to CSU and CCC construction cost guidelines for the types of space they have in common with UC—classrooms, teaching laboratories, and offices—UC's costs are considerably higher than the construction cost guidelines for CSU and the community colleges.

Accordingly, we recommend the Legislature fund construction of space that is common to both UC and CSU—such as classrooms, teaching laboratories, and offices—based on CSU's construction cost guidelines. Use of these guidelines will allow UC to construct high quality instructional and academic support facilities while conserving the state's limited funding resources. (In our recommendations below, we use these guidelines in costing out the share of projects' total costs we recommend be borne by the state.)

Eight Projects Require Future Funding to Complete

Eight University of California (UC) projects in the budget will require future funding to complete construction. Because the availability of state funds for this purpose is uncertain, we recommend the Legislature designate unallocated 2004 bond funds for future construction of three of these projects. We further recommend funding the remaining five projects only if UC agrees to complete their construction with nonstate funds if state funds are not available in the future to do so.

As we discussed in the "Crosscutting Issues" section of this chapter, there are not sufficient funds to complete all higher education capital outlay projects proposed in the budget year (eight of these projects are proposed for UC). The budget proposes to fund early phases of these projects (such as for preparation of preliminary plans or working drawings) from the 2004 Higher Education Capital Outlay Bond Fund. However, our review shows that there is no assured source of funds to pay for over $212 million in future costs, primarily construction costs, to complete these projects.

We recommend that the Legislature allocate remaining bond funds to projects based on their priority ranking. For the UC, we find three projects to have high priority based on the deficiencies they are intended to address. These are shown in the top half of Figure 3. Specifically, the San Francisco project would correct health, safety, and related functional deficiencies in an existing building. The Riverside environmental expansion project would construct a facility to store and handle hazardous materials for the entire campus. As discussed in the "Crosscutting Issues" section write-up on "Insufficient Bond Funds to Complete All Higher Education Projects," both of these projects fall into the category of projects to correct fire, life safety, and seismic deficiencies. The Santa Cruz infrastructure improvement project would correct deficiencies in the campus storm water drainage system, and is a critical utility project. As we show in the "Crosscutting Issues" write-up, we estimate these three high priority projects can be funded—along with two CSU and five community college projects—from the remaining unallocated 2004 bond funds. Accordingly, we recommend the Legislature approve supplemental report language specifying that the completion of these three projects will be funded from unallocated 2004 bond funds.

We recommend the other five projects be funded only if UC agrees to fund their completion from nonstate funds if state funds are not available. These projects, which involve mainly expansion of faculty research facilities and faculty and administrative offices, are also listed in Figure 3.

In the event it is necessary for UC to fund completion of these projects using nonstate funds, it has available for this purpose the overhead revenue it receives for faculty research. This issue is discussed below.

Projects Recommended for Partial Reimbursement Funding

We recommend the Legislature shift $79 million proposed for five projects from General Fund-supported bonds to reimbursements from the University of California's (UC's) research overhead revenue. We also recommend the Legislature approve supplemental report language recognizing a shift of $88 million in future funding for three of these projects from state bonds to UC reimbursements. (Delete $4,258,000 from Item 6440-301-6041 [4] and add [18] $4,258,000 Reimbursements for the same project; delete $634,000 from Item 6440-301-6041 [16] and add [20] $634,000 Reimbursements for the same project; delete $31,758,000 from Item 6440-302-6041 [4] and add [8] $31,758,000 Reimbursements for the same project; delete $1,644,000 from Item 6440-302-6041 [5] and add [9] $1,644,000 Reimbursements for the same project; delete $40,674,000 from Item 6440-302-6041 [6] and add [10] $40,674,000 Reimbursements for the same project.)

As we noted in an earlier report (Funding UC Faculty Research Facilities, June 2004), UC has a large revenue source in the facilities and administration overhead it charges sponsors for faculty research. Most of UC's revenue for research comes from the federal government and private for- and not-for-profit entities. This revenue has increased consistently over the last 20 years. For example, between 2000-01 and 2003-04 it grew from $2.4 billion to $2.9 billion, a 21 percent increase. For 2005-06, the UC projects research revenue to increase to over $3 billion, of which about 55 percent is from the federal government.

Included in this research revenue is overhead revenue for facilities, which accounts for about 13 percent of the total research revenue. In 2003-04, we estimate the overhead revenue for facilities was about $377 million and will be roughly $390 million in 2005-06. Overhead revenue is retained by UC for various uses at its discretion and is not allocated by the Legislature.

Proposed Projects Include Faculty Research Facilities. Five projects proposed for funding in the Governor's budget have a mixture of uses but consist predominantly of faculty research space, ranging from 51 percent to 83 percent of total usable space.

If construction of faculty research space in these buildings is funded by the university from research overhead revenue and construction of the remaining space is funded by the state, the cost to the university would be about $79 million in 2005-06 and an additional $88 million in the future. This is shown in Figure 4. This means that, in total, about $167 million would need to be funded from research overhead revenue to complete these proposed projects. As it has done in the past, UC can finance this amount by the sale of bonds backed by a pledge of its research overhead revenue.

This financing would cost the university about $13 million a year over 25 years. This is about 3 percent of the research overhead revenue UC currently receives from its research sponsors a year.

Our review shows that paying the capital outlay cost of faculty research space from research overhead is appropriate and consistent with the state's historical policy of not funding the construction of UC facilities that are capable of being self-funded (for example student and faculty housing, parking garages, and teaching hospitals). Accordingly, we recommend the cost of the faculty research space in these five buildings be shifted from the state to UC reimbursements because it will relieve the state of a General Fund-backed debt burden of about $167 million. We estimate this would save the General Fund about $325 million in debt repayment costs over 25 years.

Berkeley Long Range Development Plan Lacks Specifics

The University of California's new "Long Range Development Plan" for the Berkeley campus proposes to construct up to 2.2 million gross square feet (gsf) of new buildings by 2020. The plan does not contain enough information for the Legislature to use it as a basis for considering future proposals at the campus. We recommend the Legislature not fund construction of additional new buildings at the Berkeley campus if it would increase the amount of academic and support buildings on the campus beyond the present 12.1 million gsf, unless the university provides information that demonstrates the proposed expansion is justified based on enrollment and programmatic needs.

The UC prepares Long Range Development Plans (LRDP) for each campus that set upper limits for broad campus parameters—such as enrollment, number of employees, and square footage of buildings—for 15 to 20 years into the future. The plans may also identify special features that might be built such as athletic stadiums, parking garages, faculty and student housing, and nature reserves. Sometimes operating systems that are planned are also identified—such as shuttle buses and exclusive bicycle and pedestrian circulation paths. An environmental impact report (EIR) is prepared on the LRDP and after required public review both the plan and EIR are approved by the UC Board of Regents. The LRDP then serves as the "outer envelope" for campus growth in the period covered by the plan.

Berkeley Campus New Long Range Plan Just Adopted. The Berkeley campus prepared a draft LRDP and EIR for the period 2005 through 2020. The plan (which is referred to as the "2020 LRDP") and EIR were made available for public comment in the spring of 2004, and the university's Board of Regents approved them in January 2005. The 2020 LRDP calls for expanding the amount of academic and support buildings on the campus by 2.2 million gross square feet (gsf). This would increase the total amount of academic and support buildings on the campus from 12.1 million to 14.3 million gsf—an 18 percent increase. (Academic and support buildings are most of what is on a college campus; housing, parking, and athletic facilities make up most of the balance.)

Few Specifics Provided to Justify Expansion. The 2020 LRDP provides little information about the buildings it plans to construct, other than to indicate up to 700,000 gsf (32 percent) would be for faculty research. No information is provided about how much of the additional space would be for student instruction, faculty and administrative offices, and other purposes such as libraries and plant maintenance buildings.

There is also little information to show that this large increase in campus facilities is needed to accommodate enrollment growth. For example, the 2020 LRDP indicates the campus plans to accommodate an additional 4,000 full-time equivalent (FTE) students by 2010 over its base year of 1998. But in 1998 the Berkeley campus accommodated 28,443 FTE students and in 2002 it accommodated 32,469—an increase of 4,026 FTE students. This means the Berkeley campus was able to accommodate all of the enrollment growth assumed in the 2020 LRDP within the existing facilities on the campus in 2002. Therefore, it is unclear why 2.2 million additional gsf of buildings would be needed to accommodate enrollment.

Similarly, there is nothing in the 2020 LRDP to demonstrate that the additional buildings are needed for programmatic reasons. For example, there is no information to show that a special type of teaching laboratory is needed to meet demand for certain science courses or that new rehearsal space is needed in order to offer instruction in a type of performance art not presently offered at the campus. In the absence of information that connects enrollment and programmatic needs to the proposed 2.2 million additional gsf of buildings, the planned expansion of the Berkeley campus is not justified for state funding at this time.

2020 LRDP Needs More Information. Before the Legislature can use the Berkeley campus 2020 LRDP as a basis for future capital outlay decisions, it needs to be supplemented by additional information showing that enrollment and programmatic needs require an increase in the amount of buildings on the campus. This includes:

• An analysis showing the amount of instructional space needed to accommodate projected enrollment based on year-round utilization of the facilities.
• A survey of existing academic and support space and its utilization, to determine if instructional needs can be satisfied within existing facilities, assuming appropriate renovations, and—if not—the amount of additional space actually needed.
• Information about programmatic deficiencies that may exist and an analysis to demonstrate that new space needed for programmatic reasons cannot be accommodated in existing facilities with appropriate renovations.

The LRDP is an important capital planning tool for the university and the Legislature. The LRDPs establish the infrastructure limits of the campus—in terms of physical size and capacity—within which project-specific five-year capital outlay plans are prepared. These five-year plans are the basis for capital improvement proposals the university makes for state funding. But for LRDPs to be helpful, they must provide sufficient information to show how an increase in campus facilities is actually needed to serve students. The Berkeley campus' 2020 LRDP lacks this information. Accordingly, until information on enrollment and programmatic needs is provided to the Legislature to justify the increase in the size of the Berkeley campus proposed in the 2020 LRDP, we recommend state funding not be provided for projects that would increase the amount of academic and support buildings on the campus beyond the current total of about 12.1 million gsf.