2009-10 Budget Analysis Series: Higher Education

Capital Outlay Overview

As shown in Figure 22, the Governor’s budget proposal includes about $1 billion in new capital outlay funding for 2009–10. Most of the proposed funding for UC and CSU would come from lease–revenue bonds. The remaining capital outlay funding would come from the balances of general obligation bonds authorized by voters in previous years.

Figure 22

Governor's Proposed Higher Education
Capital Outlay Appropriations

(In Millions)



General Obligation Bonds


University of California




California State University




California Community Colleges







Most Capital Outlay Projects Suspended in December

Although the Governor’s proposal includes funding for continuing and new projects, the Pooled Money Investment Board (PMIB) in December 2008 suspended bond funding for most state–funded projects at the three higher education segments. (See the box below for background information about PMIB and the suspension of bond funding.) The suspension affects approximately 400 projects in higher education. These projects range from $30,000 capital renewal projects to $50 million academic facilities.

The State’s Pooled Money Investment Account (PMIA)

What Is PMIA? The PMIA is the state’s short–term savings account. Moneys in the General Fund and state special funds are held in PMIA and invested according to conservative guidelines. The PMIA is governed by the Pooled Money Investment Board (PMIB), which is chaired by the Treasurer and also includes the Controller and the Director of Finance.

How Does PMIA Fund Infrastructure Projects? The PMIA typically has a significant balance which allows it to provide short–term loans (known as “AB 55 loans”) to jump start projects funded by the future sale of state general obligation and lease–revenue bonds. When the bonds are sold, the proceeds are used to repay the AB 55 loans and replenish PMIA.

Why Did PMIB Suspend Funding for Infrastructure Projects? On December 17, 2008, PMIB voted to begin the process of shutting down the AB 55 loan program, effectively halting most bond–funded projects. The deterioration of the state’s cash cushion in PMIA and the state’s inability to access the bond markets—due in part to its budget and cash crises—were the reasons cited for the action. Continuing to provide AB 55 loans would have drained cash from PMIA that would be needed to pay the state’s other bills. The PMIB will be able to restart the AB 55 loan program once the state’s budget and cash crises are addressed.

Many of the projects were at convenient stopping points—such as the end of preliminary plans or preparing to go to bid. Others, however, were in the middle of construction, and thus incurred extra costs to close down and secure the construction sites. Additionally, projects under construction could incur extra costs through penalties paid to contractors if the suspension of work exceeds the terms allowed in the contract, usually 30 to 45 days.

These cost factors could cause numerous projects to exceed their budgets and require augmentations for completion. The segments, however, could cover the cost increases resulting from the suspension of projects without a new funding source in a number of ways. These include:

These options are not ideal. Projects would still be delayed and savings that would normally go toward funding additional projects would be spent on the rising costs of current projects. However, these options provide ways for the segments to cope with potential delays without further state funding.

Limitations of Lease–Revenue Bonds

The Governor’s proposal relies heavily on lease–revenue bonds for funding projects at UC and CSU because their general obligation bonds are essentially exhausted. The 2008–09 Budget Act also used lease–revenue bonds for many UC and CSU projects in lieu of the Governor’s original proposal to fund education projects with a new general obligation bond. Financing with lease–revenue bonds costs slightly more than general obligation bonds, but in the current economic climate moving projects forward with lease–revenue bonds allows the state to take advantage of low construction costs. The exclusive reliance on lease–revenue bonds, however, creates capital–planning problems because the bonds are not appropriate for some types of projects.

Lease–Revenue Bonds Cannot Be Used for the Segments’ Highest–Priority Capital Projects. Due to requirements for selling the bonds, lease–revenue bonds are limited to funding new buildings, replacement buildings, additions, or significant renovations. Many of the segments’ top priorities—such as seismic upgrades, minor renovations of older buildings, campus infrastructure, capital renewal (upgrades to building systems), and minor capital outlay—cannot be funded with lease–revenue bonds. Older buildings and outdated infrastructure typically represent the greatest safety risks on campuses. Lease–revenue bonds can be used to demolish and replace older buildings, but cannot be used for minor renovations of the existing structures, which is often more cost efficient. Capital renewal and minor capital outlay are also cost efficient because they maintain existing buildings, extending their useful life. The Governor’s 2009–10 proposal for UC and CSU includes two replacement buildings and one extensive renovation, but otherwise proposes new buildings. Meanwhile, seismic renovations, infrastructure projects, and other priority projects in the segments’ capital outlay plans remain unfunded.

DOF Concluded Equipment Cannot Be Funded With Lease–Revenue Bonds. As recently as the 2007–08 Budget Act, lease–revenue bonds were used to cover all phases of higher education projects—including equipment. However, DOF has recently told state agencies that it will no longer allow lease–revenue bonds to finance the equipment phase of projects due to requirements in the underwriting process for the bonds. The Governor proposes using lease–revenue bonds to fund the initial phases of 14 projects at UC and CSU, requiring that additional funds be made available for their equipment phases in subsequent years. The total estimated equipment costs for these 14 projects would be $32 million. The 2008–09 Budget Act also used lease–revenue bonds to fund 11 projects at UC and CSU that will require an additional $18 million for equipment. The UC indicated that some campuses would use gifts or other funds to cover their equipment costs. Since UC and CSU’s general obligation bonds are depleted, the state voters would most likely need to approve additional general obligation bonds in order for the state to cover these equipment costs. In our view, the state should not invest in projects that lack sufficient funding for their completion. We therefore recommend that the Legislature require UC and CSU to commit to using nonstate funds for the equipment phases prior to appropriating lease–revenue funding to these new projects.

General Obligation Bonds Provide More Flexibility. Relying on lease–revenue bonds to finance higher education capital outlay limits the range of projects which the state can support. In the long run, it would promote costlier growth and replacement projects as opposed to renovations. It would also limit the ability of the state to support essential projects including seismic upgrades, campus infrastructure projects, and capital renewal. The segments hope that a federal stimulus package (see next section) would provide funds for these projects in the short term. However, over the long term, the state would need the flexibility of general obligation bonds to continue meeting higher education’s capital outlay demands. In the event additional general obligation bonds become available, the Legislature should consider reserving a large portion for renovations, renewals, and infrastructure as the other types of capital projects could continue to be funded with lease–revenue bonds when general obligation bonds have been spent.

Economic Stimulus

With the economic downturn, there has been added emphasis on the role of infrastructure spending in stimulating the economy based on the idea that the state or federal government’s investment in capital projects would help to create jobs. For funding to provide an immediate stimulus to the economy, it would need to be directed to projects that are “shovel–ready”—meaning the projects have completed their environmental studies and design plans and are ready to start construction. Work could also begin on projects that do not typically require extensive environmental studies or design plans, such as equipment purchases, deferred maintenance, capital renewal, and energy–efficiency improvements.

State’s Ability to Provide Economic Stimulus Through Higher Education Capital Outlay Spending Is Limited. The higher education segments do not have many shovel–ready projects ready for funding in the budget year. Due to many factors—most notably, planning funds from a 2008 general obligation bond did not materialize—the segments do not have many projects in advanced planning stages that could break ground soon. Additionally, many of the shovel–ready projects at UC and CSU—such as infrastructure, seismic upgrades, and capital renewal projects—are not eligible for funding with lease–revenue bonds. As a result, less than 25 percent of the projects proposed in the Governor’s budget could begin construction within the budget year.

Potential for Federal Stimulus. Given indications that the federal government is considering economic stimulus legislation that includes infrastructure funds for states, each of the higher education segments submitted a list of projects to the Governor’s office to be considered for federal funds. The lists mainly include those shovel–ready projects that could not be funded with lease–revenue bonds and smaller maintenance projects. However, the size of a potential federal stimulus award, the procedures for its distribution, and any conditions attached to the funds are unclear. The availability of federal funds could provide additional options for funding higher education’s capital outlay priorities. While relying on federal funds would be premature at this time, we believe the Legislature, if possible, should delay finalizing its 2009–10 capital spending plan for higher education to allow for the inclusion of any federal funds.

Evaluating the Governor’s Capital Outlay Proposals

Although the Governor’s proposal has limited potential for immediate economic stimulus, the construction climate makes it an appropriate time for the state to invest in capital projects. In our opinion, however, the Legislature should remain cautious in its funding decisions and only fund those projects which reflect state priorities, minimize costs, and for which funding is available. We offer recommendations in the next section on how the Legislature could apply this approach to the specific proposals in the Governor’s budget. The Legislature might have additional options if federal stimulus funds become available, but at this time we confine our recommendations only to the Governor’s proposals due to the uncertainty surrounding the federal stimulus plan. We summarize our recommendation in Figure 23.

Figure 23

LAO Recommendations for Higher Education Capital Outlay Projects


University of California (UC)

✔    Require UC to commit nonstate funds to the equipment phases of proposed new projects funded with lease-revenue bonds.

✔    Withhold funding for telemedicine projects at Davis and San Francisco campuses until additional information is provided.

✔    Withhold funding for Telemedicine and PRIME Facilities Phase 2 at the Los Angeles campus due to potential changes in scope.

✔    Delete $2.9 million from Biological and Physical Sciences Building at the San Diego campus due to unjustified cost increases.

✔    Delete $10.2 million from Business Unit 2 at the Irvine campus by reducing excess meeting rooms from the proposed project.

California State University (CSU)

✔    Require CSU to commit nonstate funds to the equipment phases of proposed new projects funded with lease-revenue bonds.

✔    Withhold $5.1 million in supplemental funding for sustainable design from five proposed projects.

✔    Reduce equipment funding for three replacement buildings to encourage the reuse of equipment.

✔    Delete $7.3 million from Science II, Phase 2 at the Sacramento campus by removing excess capacity from the proposed project.

✔    Delete $4.2 million from Taylor II Replacement Building at the Chico campus by removing excess capacity from the proposed project.

California Community Colleges

✔    Prioritize projects in order to provide funding to complete existing projects and key infrastructure projects.

✔    Reject remaining project proposals because there is insufficient funding to complete them in later years.

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