Analysis of the 2007-08 Budget Bill: Capital Outlay

Overview

Capital Outlay

This section discusses the state’s infrastructure funding, primarily for the state’s capital outlay program. Capital outlay includes new construction, renovation of existing structures, and acquisition of real property. The 2007-08 Budget Bill proposes total expenditure of about $2.4 billion for the state’s capital outlay program (excluding highway and rail programs).

$43 Billion in Infrastructure Funds Added by Recent Ballot Measures

In November 2006, voters approved a package of five general obligation (GO) bond measures to help address California’s aging infrastructure. The measures include $19.9 billion for transportation, $2.9 billion for housing, $10.4 billion for schools, $4.9 billion for flood control, and $4.6 billion for resources projects. Most of the bond funds will be allocated to specific projects over the next few years. While the Governor proposes spending $8.7 billion of the bond proceeds in 2007-08, the majority of the expenditures are in transportation (which are discussed in the “Transportation” chapter of this Analysis) and for local schools. The remaining spending is on the state’s capital outlay program, encompassing prisons, state office buildings, state hospitals, state parks, and university facilities. (For a detailed analysis of the November infrastructure bonds, please refer to the “Crosscutting Issues” sections of the applicable chapters throughout this publication, including this one.)

The State’s 2007-08 Capital Outlay Program

The 2007-08 Budget Bill proposes $2.4 billion in state capital outlay funding. This is new funding for continuing phases of existing projects started in previous years, the starting of new projects, and acquisitions of property. (This total does not include billions of dollars of spending from past capital outlay appropriations that is expected to occur in the budget year. We account for these funds in the years they were appropriated.) Of the $2.4 billion, over $1.8 billion—or about three-fourths—is funded from the November bonds. The remaining funding is proposed from the General Fund, lease-revenue bonds, prior-year GO bonds, federal funds, and special funds (primarily the Motor Vehicle Account). Figure 1 shows the distribution of funding proposed in this budget.

Funding by Program

Figure 2 shows the funding amounts proposed in the budget bill for each program. The bulk of the proposed funding is in two areas, higher education and resources. An overview of proposed capital outlay funding is presented below. Unlike prior years, analyses of proposed capital outlay projects are discussed in individual departmental write-ups in each chapter of this publication rather than in this chapter.

Higher Education. Funding totaling $1.5 billion (or nearly 60 percent of the total allotted to capital outlay) is divided among the three segments.

• University of California—$573 million.

• California State University—$346 million.

• California Community Colleges—$546 million.

This funding principally comes from GO bonds passed since 1998, as well as $70 million in lease-revenue bonds. While most of the GO bond funding comes from Proposition 1D passed in November 2006, $87 million comes from prior bond acts. The budget proposal would allocate most remaining funds from these prior acts and leave approximately $685 million in Proposition 1D bonds available for future years.

Resources. Proposed funding in resources totals $653 million.

• Department of Water Resources—$167 million mainly for flood control.

• Department of Forestry and Fire Protection—$162 million to replace and relocate various fire stations and facilities.

• Various conservancies and Wildlife Conservation Board—$127 million for land acquisition.

The balance of the funds are allocated primarily for parks and conservancy projects throughout the state. Bonds fund 94 percent of the proposed resources projects—71 percent from GO bonds and 23 percent from lease-revenue bonds.

Corrections and Rehabilitation. The budget bill proposes capital outlay funding of $84 million for the Department of Corrections and Rehabilitation. These expenditures are largely for infrastructure projects to address kitchen facilities, cell enhancements, exercise yards, and deficiencies in water and wastewater treatment systems at various correctional institutions. Additional amounts are proposed for the department in the Governor’s new bond proposals, which are discussed below.

Governor’s New Bond Proposals

The Governor proposes $43.3 billion in additional bond funding over the next few years to support a variety of infrastructure projects (see Figure 3). The proposal includes $29.4 billion in GO bonds to be put before the voters in 2008 and 2010. Of this amount, $23.3 billion would be for education purposes, such as the construction and modernization of K-12 and higher education facilities. The remaining GO bond funds would be mostly allocated to water development projects ($4 billion) and court facilities ($2 billion).

Additionally, $13.9 billion in capital infrastructure funding is proposed as lease-revenue and traditional revenue bonds. The Governor’s bond plan for prison reform, in response to overcrowding and medical treatment issues, makes up the most of this amount with a proposal to fund $9.5 billion in new capital outlay projects. Figure 4 shows how this funding (along with $300 million from the General Fund) would be allocated. It is anticipated that this funding would be spent over multiple years.

The remaining components of the borrowing plan are to provide $2 billion for water development projects and $2.3 billion for a variety of state projects (including forestry and fire protection, mental health facilities, seismic retrofit of state facilities, state special schools for the blind and deaf, and a DNA laboratory).

Awaiting Infrastructure Plan Update

Chapter 606, Statutes of 1999 (AB 1473, Hertzberg), requires the Governor to annually submit to the Legislature a five-year infrastructure plan in January in conjunction with the submission of the Governor’s budget. The plan is required to identify new and renovated infrastructure requested by state agencies (including higher education), and aggregate funding for transportation and K-12 education. Additionally, the plan is required to provide a cost estimate and a specific funding source for the infrastructure projects identified. Thus, the plan represents the administration’s funding priorities for infrastructure improvements across all departments and programs.

Plan Not Submitted on Time. The administration did not submit a 2007 infrastructure plan as required in January. Instead, the administration reports that it plans to submit it on March 1, 2007. The 2007 plan is expected to incorporate (1) the availability of the $43 billion in GO bonds from November 2006, (2) the Governor’s prison capital outlay program, (3) the Governor’s proposals to place an additional $29 billion in GO bonds before the voters in 2008 and 2010, and (4) the Governor’s other proposals.

Debt Service on Infrastructure Bonds

For those infrastructure projects that are funded through bonds, the state must make annual debt-service payments to retire the bonds. Most of these payments are to cover infrastructure projects that were completed in prior years. We estimate that the total infrastructure debt-service payments from the General Fund will be $4.7 billion in 2007-08. In the “Crosscutting Issues” section of this chapter, we discuss the payments in more detail and how they will be affected by the passage of the November 2006 bond package.

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