Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

Governor’s Strategic Growth Plan

Together with the proposed 2006-07 budget, the Governor is proposing a Strategic Growth Plan (SGP), a ten-year funding plan to improve various aspects of the state infrastructure. Areas of capital improvement include: transportation, education (both K-12 and higher education), flood control and water supply, public safety and courts, and other public service infrastructure.

In this section, we summarize the key elements of the SGP, discuss the plan’s positive aspects, and identify issues and concerns the plan raises that warrant legislative consideration. (In the “Crosscutting Issues” section of the “Transportation” chapter, we review the transportation component of the SGP within the context of overall funding for transportation programs.)

Key Elements of Strategic Growth Plan

The Governor’s ten-year Strategic Growth Plan calls for $223 billion in capital outlay funding for various program areas. Funding would come from a combination of sources, including $68 billion in general obligation bonds, mainly for education (K-12 and higher education) and transportation.

Plan Calls for $223 Billion Infrastructure Funding Over Ten Years. Figure 1  summarizes the funding proposed in the SGP for the various program areas. It indicates that about one-half of the funding ($107 billion) would be for transportation/air quality improvements and over one-fourth of the funding would be for K-12 and higher education facility improvements. Flood control and water supply improvements would account for 16 percent of total proposed funding, and the remaining 9 percent would be for public safety, mainly for local jail construction, and court improvements.

Funding to Come From a Mix of Existing and New Sources, Including Bonds. The Governor proposes to fund the plan with a mix of existing and new fund sources. Specifically, about 43 percent ($96 billion) of the funding would be provided from existing resources, such as state and federal gas tax revenues and local school bonds. About 31 percent ($68 billion) of the funding would be provided from general obligation (GO) bonds. The remaining 27 percent of funding ($59 billion) would come from new sources, such as revenue bonds backed by gas tax and weight fee revenues, private investments in transportation facilities, and fees to be charged on water users.

Plan Includes a Total of $68 Billion in GO Bonds. A key element of the SGP is the use of GO bonds in all the program areas. Specifically, the plan calls for a total of $68 billion in GO bonds to be approved by voters between 2006 and 2014. Over one-third of that amount is proposed for authorization in 2006, with the remaining bonds to be authorized over four successive election cycles, as shown in Figure 2.

Of the amount to be authorized in 2006, about one-half ($12.4 billion) is proposed for education, and almost one-quarter ($6 billion) would be for transportation. The remaining amounts would pay for flood control and other water management projects, public safety, and court improvements. Over the ten-year period, the plan proposes $38 billion in GO bonds for education, accounting for 56 percent of all GO bonds proposed by the plan. Another $12 billion (18 percent) would fund transportation improvements, and the rest of the proposed bond funds would be split among flood control and water management, public safety, and courts.

Plan Proposes Constitutional Cap on Debt Service. In addition, the Governor proposes to place a cap on the costs the state would spend for debt service each year relative to the state’s General Fund revenues. Specifically, the Governor proposes a constitutional amendment to set that limit at 6 percent.

Growth Plan Has Positive Aspects

The Strategic Growth Plan takes into consideration the capital outlay requirements of different infrastructure, ranging from schools, to levees, to roads, and courts. The plan also takes a longer-term perspective in funding infrastructure than the state has done in the past, and it identifies some areas of infrastructure requirements that have been understated to date.

Plan Considers Funding Priorities of Different Infrastructure, Takes a Long-Term Perspective. The plan proposes funding for infrastructure in several key state program areas. By considering the funding requirements for each of the areas over ten years, the Governor’s plan highlights the substantial amount of capital improvements the state should consider making over the long term in order to accommodate California’s demand for services. The plan also reflects the administration’s ranking of the relative funding priorities for the different areas of state infrastructure.

Plan Considers Multiple Funding Sources. The plan identifies a combination of sources for funding state capital improvements including user fees and private investment, instead of relying exclusively on bonds.

Plan Identifies Elements Previously Understated. The plan also identifies certain elements of capital improvements that have been understated or overlooked in the past. For instance, the plan addresses flood control-related infrastructure funding requirements at a level several times higher than previously identified. Similarly, the plan highlights the role of goods movement in transportation, an area the state has not focused much attention on previously.

Plan Provides Funding but Capital Outlay Requirements Not Defined

The $68 billion general obligation bond proposal is made without a supporting infrastructure plan that identifies specific capital outlay improvements in the various program areas. As a result, it is difficult for the Legislature to know how the bond proposal addresses the state’s highest infrastructure priorities. We recommend that the Legislature not approve the Strategic Growth Plan until the administration provides a state infrastructure plan as required by current law.

State Infrastructure Plan Still Under Development. The SGP provides overall funding levels for large program areas. For many of these program areas, however, it is not known at this time what specific projects and types of capital improvements are to be funded. Chapter 606, Statutes of 1999 (AB 1473, Hertzberg), requires the Governor to submit to the Legislature annually in January, a five-year infrastructure development plan for state agencies, K-12 schools, and higher education institutions, along with a proposal for its funding.

While the plan was submitted in both 2002 and 2003, it has not been submitted for 2004, 2005, or 2006. According to the Department of Finance, the required 2006 plan will soon be made available. Without an infrastructure plan that identifies what capital outlay improvements are required over the five-year period, the Legislature cannot gauge how well the proposed funding meets the state’s needs, and whether the administration’s funding priorities correspond with legislative priorities. For instance:

• The SGP proposes to provide equal amounts of bond funds to each of the three higher education segments. It is not known what the administration proposes in capital improvements over the next five years to address modernization, enrollment growth, or other infrastructure needs. Consequently, it cannot be determined whether the proposed allocation of funds would address the highest priority capital outlay requirements for higher education.

• The SGP proposes $620 million for Central Valley and delta levee repairs and improvements, as well as $1 billion for integrated water management from a proposed 2006 bond measure. However, it is not known what the total requirements are to repair these levees. It is also not known how the proposed funding for integrated water management would address the state’s water supply issues.

It is important that the Legislature have information on what capital outlay improvements the state needs to make to ensure that the state’s infrastructure is preserved and that it can accommodate the state’s demand for services. Based on this information, which is statutorily required to be available in the state infrastructure plan, the Legislature can then set funding priorities. The Legislature can also consider policy and programmatic changes to reduce the amount of capital investments the state has to fund.

Accordingly, in order that the Legislature can assess how SGP addresses the state’s capital outlay requirements, we recommend that the Legislature not approve SGP bond proposals until a state infrastructure plan is made available that provides information called for by Chapter 606.

Statewide Needs Beyond 2010 Not Known. Even if the administration submits a five-year state infrastructure plan, however, the Legislature would still not be able to determine whether the total $68 billion bond proposal is warranted. This is because the SGP would provide funding for a longer, ten-year period than is covered by the statutorily required infrastructure plan. There is no comparable ten-year capital needs plan against which the SGP can be assessed. Most capital planning currently done by state agencies, including the higher education segments, is done on a five-year basis. Thus, no statewide data are available that provide a comprehensive assessment of what the state’s capital outlay requirements are over ten years. Without that type of information, there is little basis to assess the levels of bond funding proposed in the SGP for various program areas for 2010 through 2014. Accordingly, we recommend that the Legislature not approve any bond proposals beyond the funding level identified in the five-year state infrastructure plan.

State Infrastructure Funding Should Align With State Responsibilities

The Strategic Growth Plan proposes funding certain local infrastructure. The Legislature should assess how the funding proposed aligns with the state’s responsibilities for the provision of the services involved.

The SGP proposes to fund certain infrastructure that is under the control of local jurisdictions. The Legislature should first decide whether the program for which funding is proposed is a state, local, or shared responsibility. For instance:

• Funding of Local Jail Construction. The SGP would provide $12 billion over ten years to add approximately 83,000 jail beds throughout California. The funding consists of $4 billion in state GO bonds, $4 billion in other state “existing” resources, and $4 billion in matching funds from local governments. This raises fundamental questions about the roles and responsibilities of the state and local governments. Because law enforcement is a local responsibility in California, it generally makes sense that local governments bear the cost of building jails. However, given that state law established crimes and punishments, it may be appropriate for the state to share in the cost of jail construction. Although the administration has proposed to use one-third of the additional jail beds to relieve overcrowding in state prisons, it is not clear what the ongoing programmatic and fiscal implications are of this aspect of the SGP.

• California Community Colleges (CCC). The budget proposes almost $500 million from proposed bond funds for CCC in 2006-07. The budget notes that districts have committed $261 million of their own funds towards these projects. This raises the issue: What are the appropriate state and local shares of CCC facilities costs? The Legislature may want to consider placing in statute a funding scheme for these facilities similar to the current approach for K-12 facilities. This would involve specified matching ratios for new construction and modernization projects.

State Can Reduce Facilities Demand, Reduce Infrastructure Funding Requirements

There are policy and programmatic changes that the state can adopt to reduce the demand for infrastructure improvements.

The amount of investment spending identified in past state infrastructure plans generally assumed programs and services are provided in the same manner in the future as they are today. These spending requirements could be reduced if the state modifies the way some services are provided. For instance, in higher education, more extensive use of year-round education would accommodate a lot of new enrollment without any additional capital costs. The California State University system currently is at 9 percent of capacity in the summer, while the University of California (UC) is at about 20 percent. Furthermore, as we have recommended in past analyses, applying space utilization standards and cost guidelines can help limit the total cost of facilities.

Other policy changes, such as an increase in the state gas tax, would potentially reduce the amount of miles people drive, reducing the growth in congestion. As another example, the Legislature could enact legislation to more closely tie local land use decision making to flood risks and the related fiscal consequences of those decisions. Such an approach would potentially reduce the demand for state-funded flood control infrastructure.

As the 2006 infrastructure plan is not yet available, it cannot be known at this time what the plan assumes regarding how services will be provided throughout the five-year plan period and beyond. To the extent programmatic or policy changes are assumed, the administration should make these assumptions explicit so that the Legislature can better assess the funding levels proposed in the SGP.

Plan Relies on Some Questionable Assumptions

In addition to the bonds proposed, the Strategic Growth Plan (SGP) assumes that substantial amounts of new resources will be available for infrastructure in the next ten years. Whether all of the assumed resources would be forthcoming is questionable. If not, there would be a funding shortfall in the SGP.

In addition to the GO bonds proposed, the SGP also assumes significant amounts of existing and new funding sources, particularly for flood control and water supply, and transportation improvements. While undoubtedly the state will be receiving substantial portions of the assumed funding, some of the amounts are based on questionable assumptions. For instance, the SGP assumes that a majority of funding for flood control and water supply would come from existing federal and local sources-$5 billion and $16 billion, respectively, over the ten-year period. This level of federal and local investment is highly uncertain. As regards federal funding, the state has to get over two major hurdles. First, the federal government must authorize the projects. Second, funding has to be appropriated for the projects. Given the recent funding history of CalFED, it is risky to assume that all of the funds authorized for water projects will actually be appropriated.

Regarding local funding, it is also highly uncertain what the level of local investment for local water projects will be in future years. This is because the state does not generally track these local expenditures, and decision making related to these local investments is generally not part of a state planning process.

If the assumed new resources do not materialize, there would be a funding shortfall for projects or programs proposed in the SGP. The Legislature should consider its relative funding priorities and what would not be funded under those circumstances.

Balance Use of General Obligation Bonds With Other Fund Sources

The Strategic Growth Plan relies heavily on general obligation bonds for future state investment in capital outlay beyond what would be provided from existing resources. The Legislature may want to consider a combination of pay-as-you-go direct appropriations and revenue bonds to fund the state’s infrastructure.

The SGP calls for a substantial amount of GO bonds to fund future state capital outlay improvements. Figure 3 shows the allocation of the proposed GO bonds to various purposes in five program areas. As the figure shows, the bulk of the $68 billion bond funds would be for education (including K-12 and higher education) and for transportation. While the SGP also proposes $800 million in lease-revenue bonds, mainly for public safety and various other state infrastructure, the amount is small by comparison to the amount of GO bonds proposed.

The state has funded capital outlay from a number of sources. While capital improvements for K-12 schools and higher education have traditionally relied on GO bond funding, that is not the case for other areas of state infrastructure. For instance, transportation investments have traditionally relied on user fees-including state excise taxes on gasoline and diesel, and weight fees-to provide pay-as-you-go funding. For public safety, the state has in recent years also relied on lease-revenue bonds, as well as direct appropriations from the General Fund, to pay for capital outlay improvements.

In responding to the SGP, the Legislature should consider how much other funding sources, besides GO bonds, are appropriate to use for capital outlay projects. For instance, the Legislature should consider the extent users of certain services should support the cost of the service. Where there is a clear nexus between users and the service provided, and where users fees can generate a stable stream of revenue, these revenues instead of the General Fund should be considered as an alternative. The Legislature should also consider setting aside some General Fund monies for pay-as-you-go spending. The state has many other program areas that would not be funded under the SGP, such as state office buildings. Having a certain level of General Fund revenues set aside would help the state address these other areas.

Certain Areas of Infrastructure Improvements Not Included

The Strategic Growth Plan does not address certain areas of the state infrastructure, such as deferred maintenance in state parks.

While the SGP addresses certain key areas of the state’s infrastructure, some other areas are not included. For instance, the state currently has significant deferred maintenance requirements in the state park system, which the Department of Parks and Recreation estimates to cost about $900 million. Similarly, improvements are needed to retrofit state hospitals and UC hospitals to seismic safety standards. Additionally, facility improvements may be needed for various state buildings over the next decade that are not included in the SGP. It is not clear whether the Governor plans to address these other capital outlay requirements separately, through future direct appropriations, lease-revenue bonds, or through other means.

Proposed State Debt-Service Ratio Cap Limits State’s Responsiveness to Future Capital Outlay Needs. The SGP proposes a cap of 6 percent on the state’s debt-service ratio. This ratio measures the amount of debt-service payments on GO bonds and lease-revenue bonds (which are primarily financed by the General Fund) relative to the state’s annual General Fund revenue. To the extent the issuance of bonds proposed in the SGP results in the state debt-service ratio hitting the cap, the state would not be able to use additional GO and lease-revenue bonds (beyond those proposed in the SGP) to respond to unforeseen needs, such as those created by natural disasters, or fund other necessary capital outlay improvements that are not included in the SGP.

Elements of Bond Fund Allocation Need Justification

Some purposes for which the Strategic Growth Plan proposes to direct general obligation bond funding lack justification. Absent documentation that justifies the proposed use, we recommend that the Legislature reject the proposals.

The SGP proposes to allocate bond funds to a number of purposes for which documentation that justifies the allocation is lacking. For instance, the administration has not demonstrated the need for the proposed level of investment in career technical education, charter schools, and telemedicine. Similarly, there are no details to support the proposed allocation of $5.5 billion to water management grants. Without information that justifies these proposed uses of the bond funds, we recommend that they be rejected.