The 2016-17 Budget: The Governor's State Office Building Proposal

The 2016-17 Budget: The Governor’s State Office Building Proposal MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • FEBRUARY 2016 2016-17 BUDGET 2 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET EXECUTIVE SUMMARY Governor Proposes $1.5 Billion for State Office Buildings in Sacramento. The Governor’s budget for 2016-17 proposes one-time funding of $1.5 billion from the General Fund to be deposited into a new State Office Infrastructure Fund. Under the proposal, monies in this fund would be continuously appropriated for the replacement and renovation of state office buildings in the Sacramento area. The $1.5 billion primarily is intended to provide pay-as-you-go funding to replace or renovate three buildings—the Natural Resources Building, Food and Agriculture Annex, and State Capitol Annex. Of the total $1.5 billion proposed, roughly $10 million is requested in 2016-17 to begin study and design activities for the proposed projects. The remainder of these funds would be spent in future years to complete the projects and potentially fund the initial phases of other renovation and replacement projects the administration has identified as priorities. Proposal Raises Issues for Legislative Consideration. We find that the Governor’s focus on state office buildings makes sense given the age and condition of the facilities prioritized by the Governor. However, we identify several issues that merit legislative consideration: • Lack of Key Information. The proposal provides little detail on the proposed projects, no plan for project sequencing, and no plan for how future projects would be funded. • Continuous Appropriation Greatly Reduces Legislative Oversight. The proposed continuous appropriation of funds would greatly reduce legislative control and oversight compared to the traditional budget process. • New Fund Presents Trade-Offs for Funding Approach and Amount. We find that (1) there are benefits and drawbacks to using a pay-as-you-go approach to funding projects as proposed, (2) there is no need to appropriate more than $10 million in 2016-17 for the initial phases of the Governor’s three priority projects, and (3) setting aside additional monies for infrastructure on an ongoing basis could have merit. Recommend Modifying Governor’s Approach. With regard to the Governor’s proposal, we recommend that the Legislature take the following actions: • Require the administration to submit details on its three priority projects, as well as full plans for sequencing and funding other Sacramento area projects by April 1, 2016. • Reject the use of a continuous appropriation and require the administration to use the typical budget process for seeking project approvals. • Limit funding in 2016-17 to the initial phases of those projects that the Legislature approves. • Consider the state’s ongoing strategy for addressing its infrastructure, including potentially creating a dedicated infrastructure fund. Together, we find that these recommendations would help ensure that the state funds that are provided for infrastructure are directed to legislative priorities and are spent with adequate legislative oversight and accountability. www.lao.ca.gov Legislative Analyst’s Office 3 2016-17 BUDGET 4 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET BACKGROUND State Office Space Is Concentrated in in preserving and extending the useful life of state Sacramento Area. The state, through the office buildings.) Department of General Services (DGS), owns and Condition Assessment Report Identified maintains 58 general purpose office buildings that Buildings With Highest Needs. As part of the total over 16 million square feet. These buildings 2014-15 Budget Act, the administration proposed are located across the state, but most of the square and the Legislature provided a total of $2.5 million footage of the buildings—just under 10 million for a long-range planning study of state office space square feet—is in the Sacramento region. Other in the Sacramento area (Planning Study). The major metropolitan areas with a relatively large Planning Study proposed by the administration number of state office buildings are the San was to include (1) condition assessments of all state Francisco Bay Area and the Los Angeles area. The office buildings in the Sacramento area, (2) an state also leases about 13 million square feet of update of a 2008 planning study that identified general purpose office space, about 8 million of potential office space development opportunities which is in the Sacramento area. (We note that in Sacramento, (3) a plan for sequencing the state office space for more specific purposes is renovation or replacement of state office buildings generally under the control of the administering in Sacramento, and (4) a funding plan for Graphic Sign Off department and not DGS, such as the field offices of undertaking these projects. Chapter 451 of 2014 Secretary the Department of Motor Vehicles.) (AB 1656, Dickinson) provided further direction Analyst Many State-Owned Office Buildings in on the components of the Planning Study, such as MPA Sacramento Are Aging. The state’s office buildings specifying that the sequencing plan should guide in Sacramento vary widely in age. However, there the state over thAeR nTexWt 2O5 RyeKar s#. 1Th60e 0le2g5islation also Deputy is a concentration of older buildings. As shown in required that the Planning Study be completed by Template_LAOReport_large.ait Figure 1, almost half of the total square footage July 1, 2015. of the buildings in Sacramento—representing In July 2015, DGS released the portion of the well over 4 million square feet—is over 30 years Planning Study that included assessments of the old. Additionally, over one-fourth of the Figure 1 square footage—close Age of State Office Buildings in Sacramento to 2.5 million square Square Feet (In MIllions) feet—is over 50 years 3.0 old. While some of these 2.5 older buildings have been 2.0 renovated in recent years 1.5 (such as the Library and 1.0 Courts Building), others are 0.5 still largely in their original condition. (See the box on 10 or less 11-20 21-30 31-40 41-50 Over 50 page 7 for a discussion of Building Age (In Years) the role of maintenance www.lao.ca.gov Legislative Analyst’s Office 5 2016-17 BUDGET condition of office space in the Sacramento region building. (A high FCI score means that a building’s (Assessment Report). The report evaluated 29 state- repair costs are relatively high compared to the owned office buildings. (The report excluded a few cost of replacement.) Based on this anaGlyrsaisp, thheic Sign Off buildings that DGS does not consider to be typical report ranked the 29 buildings, identifying 9 in Secretary office space, such as the Food and Agriculture poor condition, 4 in fair condition, and 16 in Annex and State Capitol Annex.) Overall, the good condition as shown in Figure 3. AThnea rleypsotrt Assessment Report noted that all of the buildings ranked the Natural Resources BuildinMg,P PAersonnel that were evaluated were in a safe, servicAeaRbTleW, ORK #B1u6i0ld0in2g5, and Paul Bonderson BuildinDge aps uthtyose and functioning condition. As shown in Figure 2, in most critical need of renovation or replacement Template_LAOReport_large.ait the report developed a Facility Condition Index and recommended prioritizing the needs of these (FCI) score for each building, which compared the buildings over other buildings. estimated costs of repairing versus replacing the Figure 2 Condition of Buildings Evaluated in Assessment Report Building Natural Resources Personnel Bonderson EDD Annex Unruh Bateson Justice EDD Headquarters Blue Anchor Energy FTB Phase I Board of Equalization Library and Courts II Secretary of State Agriculture FTB Phase II Attorney General Buildings and Grounds East End Block 225 Library and Courts Campbell OES Office Building 8 Office Building 9 FTB Phase III East End Block 171 East End Block 172 Rehabilitation East End Block 174 East End Block 173 5 10 15 20 25 30 35 40 Facility Condition Indexa a The Facility Condition Index represents a ratio of each building's estimated repair costs to the estimated replacement value. EDD = Employment Development Department; FTB = Franchise Tax Board; and OES = Office of Emergency Services. 6 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET Maintaining State Office Buildings The condition of buildings is influenced not only by their age, but also by the level at which they are maintained. When buildings are not properly maintained and deferred maintenance develops, it can result in significant repair costs in the future and a shorter useful life of the buildings. In our March 2015 report, The 2015-16 Budget: Addressing Deferred Maintenance in State Office Buildings, we outlined some potential reasons the Department of General Services has struggled to maintain state office buildings, such as potential understaffing for maintenance, recent reductions to maintenance funding, inadequate prioritization of workload, and limited contracting authority. Figure 3 Highest Need Buildings Identified in Sacramento Condition Assessment Reporta Age Condition Condition and Building (Years) Condition Ranking Risk Rankingb Natural Resources Building 52 Poor 1 1 Personnel Building 62 Poor 2 2 Paul Bonderson Building 33 Poor 3 3 EDD Annex 33 Poor 4 6 Jesse M. Unruh Building 87 Poor 5 5 Gregory Bateson Building 35 Poor 6 4 Justice Building 34 Poor 7 10 EDD Headquarters 61 Poor 8 9 Blue Anchor Building 84 Poor 9 7 Warren-Alquist State Energy Building 34 Fair 10 11 FTB Phase I 32 Fair 11 13 Board of Equalization Headquarters Building 24 Fair 12 16 Library and Courts II Building 22 Fair 13 14 Secretary of State/Archives Building 21 Good 14 8 Agriculture Building 80 Good 15 17 FTB Phase II 24 Good 16 23 Attorney General Building 21 Good 17 18 Buildings and Grounds Headquarters 23 Good 18 12 East End Complex Block 225 14 Good 19 21 Stanley Mosk Library and Courts Building 88 Good 20 29 Campbell Building—Office of Emergency Services 14 Good 21 15 Office Building 8 47 Good 22 24 Office Building 9 47 Good 23 25 FTB Phase III 11 Good 24 19 East End Complex Block 171 13 Good 25 20 East End Complex Block 172 13 Good 26 22 Rehabilitation Building (OB10) 66 Good 27 28 East End Complex Block 174 13 Good 28 27 East End Complex Block 173 13 Good 29 26 a Report did not include buildings that were not considered to be suitable or available as typical office space, such as the Food and Agriculture Annex and the State Capitol Building and Annex. b The condition and risk ranking incorporated the condition of the building as well as other factors such as whether the building has fire, life, or safety deficiencies and houses a large number of workers. EDD = Employment Development Department and FTB = Franchise Tax Board. www.lao.ca.gov Legislative Analyst’s Office 7 2016-17 BUDGET GOVERNOR’S PROPOSAL Provides $1.5 Billion for New State Office beginning preliminary designs, detailed designs Infrastructure Fund. The Governor’s budget (typically referred to as “working drawings”), and proposes to create a new State Office Infrastructure construction. We note that, in some instances, Fund (SOIF) to support the construction and the Legislature has approved the use of alternative renovation of state office buildings in the processes for the funding and authorizing of Sacramento area. The Governor’s budget further certain projects. For example, the Legislature proposes to deposit $1.5 billion from the General has funded some prison construction projects Fund on a one-time basis into the SOIF in 2016-17. through a process that gives the administration The SOIF is intended to enable the administration more discretion by only requiring that it notify to fund the renovation or replacement of some the Legislature of project cost increases and office buildings on an up-front (pay-as-you-go) changes, rather than requiring formal legislative basis, rather than by borrowing through the approval. (As we discuss in more detail below, these use of long-term bonds. In recent decades, the alternative processes limit legislative oversight.) state has relied heavily on bonds to fund most of Identifies Three Priority Projects for SOIF. its infrastructure, including almost all general As shown in Figure 4 , the Governor proposes purpose office buildings. spending $10.1 million from the SOIF in 2016-17 Proposes Continuous Appropriation of to initiate the replacement or renovation of three SOIF. Under the proposal, monies in the SOIF state buildings. Specifically, the proposal includes would be continuously appropriated for the constructing a new building at the current replacement and renovation of various state office Food and Agriculture Annex site, building a buildings in the Sacramento area. This would new Natural Resources Building at a different allow the administration to move forward with site, and either replacing or renovating the State projects without having to receive legislative Capitol Annex. According to the administration, approval through the traditional state budget the $1.5 billion that would be deposited in the process. Typically, for capital outlay projects SOIF in 2016-17 is intended to cover the costs the administration proposes individual projects associated with constructing these three buildings as part of the Governor’s annual budget. These over the coming years. To the extent that the full proposals generally include various details on the $1.5 billion is not needed for these three buildings, proposed projects—such Figure 4 as the project scope, Governor’s Three Priority Projects timeline, costs, funding source, delivery method, (In Millions) and justification. Building 2016-17 Expenditures Total Estimated Cost Additionally, these Food and Agriculture Annex $5.7 $226 proposals are submitted Natural Resources Building 2.9 530 State Capitol Annex 1.5 Unknown at multiple stages of a Total $10.1 Unknown project—such as prior to 8 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET the administration indicates that it would use the appropriation, the administration would only need remaining funds for other priority buildings in the to notify the Legislature at the establishment of Sacramento area. Under the proposed continuous projects. LAO ASSESSMENT One of the most important functions of timeline. Without this information, it is impossible government is to provide infrastructure that is for the Legislature to understand what these necessary to deliver public services, including projects entail much less to determine their merits the office buildings that enable government relative to other potential projects. staff to carry out their responsibilities. Given For example, the administration provides the significant needs at state office buildings, as almost no information on even a basic scope documented in the Assessment Report, we find that or cost for the Capitol Annex project. Based on the Governor’s focus on this infrastructure makes our conversations with the administration, we sense. However, based on our review, we identify understand that they are considering various several issues that merit legislative consideration, options for the Capitol Annex, which could as summarized in Figure 5 and discussed in more include renovating the existing annex or building detail below. a separate building and demolishing the existing annex. These options would have important Proposal Lacks Key Information implications for the functionality of the building Little Detail on Three Priority Projects. Based as well as the project’s cost. The proposal also does on our preliminary review, the three priority not provide any information on the anticipated projects that the Governor proposes to initiate in schedule for the project, which makes it difficult 2016-17 appear to address reasonable needs. The to evaluate the timing of when costs will be Food and Agriculture Annex has been vacant incurred and when the project will be completed. for several years due to building deficiencies, the Furthermore, because DGS did not consider State Capitol Annex is aging and outdated, and Figure 5 the Natural Resources LAO Assessment of Governor’s Proposal Building was ranked 9 as the highest priority Proposal lacks important information for legislative evaluation. • Little detail on three priority projects. building for renovation • No plan for project sequencing. or replacement in • No plan for how future projects would be funded. the Assessment 9 Continuous appropriation greatly reduces legislative oversight. Report. However, the • Weakens Legislature’s fiscal control and oversight. administration has not • Weak rationale for bypassing traditional budget process. provided key information 9 New fund presents trade-offs for funding approach and amount. on each of the proposed • Benefits and drawbacks to pay-as-you-go. projects—such as scope, • Full $1.5 billion appropriation not necessary in 2016-17, but setting aside cost by project phase, and funds could have merit. www.lao.ca.gov Legislative Analyst’s Office 9 2016-17 BUDGET the Capital Annex to be typical office space and table in the 2016 Five-Year Infrastructure Plan that excluded it from the Assessment Report, the lists the first nine buildings that would be sequenced Legislature does not have an evaluation of the and the estimated amount to be spent over the needs of this building relative to other buildings in next five years. However, there is little information Sacramento. provided on which buildings would be renovated No Plan for Project Sequencing. The Governor versus replaced, what order projects would occur, envisions the three priority projects as the first or where existing staff would be located during steps in implementing a larger plan to renovate and renovations. Figure 6 provides a summary of the replace state office buildings in the Sacramento limited information the administration provided area. We find that the concept of addressing regarding the sequencing of projects. Graphic Sign Off state office buildings as part of a larger plan and A detailed sequencing plan would provide strategy—rather than on an ad hoc basis—makes the Legislature with information on thSe eorcdreert ary sense. However, the proposal provides very and timing of the renovation and replaAcenmaelynst tof little information on the Governor’s larger plan. buildings. This information is important because it MPA Specifically, the administration has not provided at would allow the Legislature to determine whether Deputy this time a sequencing plan for the renovation or it wants projects to move forward on a different replacement of state office buildings in Sacramento, timeline than proposed—either more slowly or as required by AB 1656. Instead, the only quickly—and whether the ordering of projects information provided to the Legislature to date is a reflects legislative priorities for renovation and Figure 6 Administration's Plan for State Office Building Projects Project 2016-17 2017-18 2018-19 2019-20 2020-21 Food and Agriculture Performance Design-build Annex Replacement Criteria Begins New Natural Planning and Lease Study Resources Building Construction Begins Begins State Capitol Annex Study Bonderson Building Performance Design-build Study Replacement Criteria Begins Printing Plant Study and Working Construction Demolition Preliminary Plans Drawings Begins Natural Resources Preliminary Working Construction Building Renovation Plans Drawings Begins Unruh Building Preliminary Working Renovation Plans Drawings Bateson Building Study Renovation Personnel Building Study Renovation 10 Legislative Analyst’s Office www.lao.ca.gov ARTWORK #160025 Template_LAOReport_large.ait 2016-17 BUDGET replacement. It might be the case, for example, that anticipated project costs through 2020-21 are the Legislature would want to prioritize different included in the administration’s 2016 Five-Year buildings than the administration does—thus Infrastructure Plan, the administration has not undertaking renovations to those buildings sooner provided any information on expenditures past than the administration proposes and perhaps 2020-21. Thus, the proposal does not provide waiting longer to address other buildings. estimates of total project costs for most of the We also note that major building renovations projects identified. Furthermore, the Governor’s and replacements frequently require that the proposal does not identify sources of funding buildings be vacant. Thus, it is often necessary to for these future projects—whether pay-as-you go relocate staff either permanently or temporarily from the General Fund, lease-revenue bonds, or during construction. These relocations can result in an alternative approach—so it is unclear when the costs—for example, for leasing temporary space and state would need to provide the funding necessary moving employees—as well as affect department to complete these projects. Accordingly, the operations. Thus, it often makes sense to strategically Legislature does not have the full picture of the sequence building renovations to mitigate the funding levels and timing that would be required impacts of relocations. This means that these types to complete these projects, which would help of projects are often intrinsically interrelated to each inform its choices regarding whether to take on the other and makes understanding the order in which financial commitments necessary to implement they are proposed to occur particularly important. the Governor’s plan or to pursue an alternative For example, according the administration, the approach to addressing state office building needs. proposed replacement of the Food and Agriculture Finally, the proposal does not include an Annex would provide space to house state staff evaluation of the options available to meet the state’s that are currently in the Bateson building, thus office space needs—such as buying existing nonstate allowing the state to renovate or replace that office buildings, constructing new buildings, building. It is difficult to evaluate whether to renovating or replacing existing state buildings, or prioritize replacing the Food and Agriculture leasing additional space—and the reason that the building without understanding the various options proposed approach was selected. These options, for addressing the Bateson building as well. For which the administration proposed including in the this reason, a comprehensive sequencing plan is funding plan portion of the Planning Study, could critical for the Legislature to evaluate its choices for have substantially different implications not only moving forward with the administration’s three for how much it costs the state to address the needs priority projects as well as addressing the other of state office buildings in Sacramento, but also the state buildings in Sacramento. We note that the timing of those costs. Thus, an understanding of the administration indicates that it intends to provide a options that were considered and the rationale for sequencing plan to the Legislature. the Governor’s approach is necessary for evaluating No Plan for How Future Projects Would Be the Governor’s proposal. Funded. The proposal not only lacks a plan for As noted above, the Legislature required sequencing projects, but it also fails to include a DGS to develop a funding plan as part of the longer-term plan for how future projects—beyond Planning Study in the 2014-15 Budget Act. The the three priority projects—would be funded. administration has not indicated when it intends to For example, while some rough estimates of provide a funding plan. www.lao.ca.gov Legislative Analyst’s Office 11 2016-17 BUDGET Continuous Appropriation implement changes to address them. Furthermore, Greatly Reduces Legislative Oversight if the state is experiencing a budget shortfall, the Legislature can reevaluate whether it can afford to Weakens Legislature’s Fiscal Control and continue to provide the base level of funding for the Oversight. Since funds in the SOIF would be program or move forward with the capital project continuously appropriated under the Governor’s as scheduled or whether it would prefer to reduce or proposal, the Legislature would lose its ability delay spending. With a continuous appropriation, to control how and when such funds are spent. the Legislature no longer has the ability to make Instead, the Legislature would delegate those these annual modifications to expenditures. decisions to the executive branch. Furthermore, Weak Rationale for Bypassing Traditional the Legislature would not only lose control over Budget Process. The administration indicates that the initial approval of projects, but it would have it is proposing a continuous appropriation—rather no role in approving funding at later stages of than reliance on the traditional budget process—in a project’s design and construction. This would order to provide greater flexibility in project severely constrain the Legislature’s ability to schedules. The administration maintains that a conduct its traditional oversight role—which continuous appropriation would allow it to proceed typically involves monitoring projects as they more quickly with projects, since project phases progress and ensuring that they remain on track. would not have to align with the budget process. For example, the process used for certain The administration further states that by reducing prison projects requires that the administration project timelines, this approach would allow it notify the Legislature—through the Joint to avoid some inflation in construction costs and Legislative Budget Committee—at various stages result in cost savings. The administration has not either 30 days in advance of or concurrently with provided information to quantify the amount of the State Public Works Board’s consideration time or cost savings associated with bypassing the of the project. In the event that the Legislature budget process. However, we expect that, if the had concerns about the project, it could raise budget process slowed projects or increased costs, them to the administration, but could not legally these impacts would likely be minimal. Moreover, compel the executive branch to address them. while the Governor’s proposed projects may be This represents a significant delegation of the worthwhile, they are not highly time-sensitive. The Legislature’s constitutional authority to appropriate Assessment Report found that all the buildings funds and weakens its fundamental role as a that were evaluated are safe, serviceable, and counterbalance to the executive branch. functioning. Thus, the state can continue to operate We note that, in many respects, the these facilities for the near future, and there is no Legislature’s role in overseeing capital projects reason why a modest difference in project timelines through the budget process is similar to its would be particularly problematic operationally. role overseeing support budgets. In both cases, regular reviews through the budget process allow Legislative Considerations for the Legislature to ensure that expenditures are Funding Approach and Level directed to its top priorities. Also, if the Legislature Benefits and Drawbacks to Pay-As-You-Go. has concerns about how a program or project The administration indicates that by setting aside is operating, it has the opportunity to reduce $1.5 billion in a dedicated fund, the proposal would expenditures or direct the administration to 12 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET allow the state to rely more heavily on the use of that the Legislature deposit the full amount that pay-as-you-go funding for state office buildings. they anticipate requiring to study, design, and On the one hand, it can be reasonable to fund construct the three priority projects—$1.5 billion— infrastructure projects through a pay-as-you-go into the SOIF in 2016-17. However, only a tiny approach. Pay-as-you-go is typically somewhat portion of this amount—$10.1 million—is proposed cheaper than borrowing since the state does to be used in 2016-17. This funding would go not have to pay interest. We note, however, the towards initial studies of the replacement Natural difference in costs associated with paying cash Resources Building ($1.5 million) and the Capitol rather than borrowing is relatively small right now Annex ($2.9 million). It would also go towards given the current low interest rate environment. performance criteria (conceptual designs) of Additionally, paying for projects up-front allows the replacement for the Food and Agriculture the state to avoid future debt-service costs that Annex ($5.7 million). The remaining costs of the could crowd out spending on other areas in future projects are anticipated to be incurred in future years. Furthermore, pay-as-you-go can be desirable years. Thus, even if the Legislature is comfortable for certain types of projects that may be difficult to with the information that they receive from the fund with bonds. administration and wishes to proceed with these On the other hand, there are advantages to projects, there is no reason that additional funds funding projects by borrowing. Most state facilities would need to be appropriated in 2016-17. are intended to provide benefits over many years, so . . . But Setting Aside Funds Could Have it makes sense for future as well as current taxpayers Merit. While it is not necessary to set aside to help fund them. Also, by spreading costs out over additional funds for the administration’s three time, bonds require fewer expenditures in the near priority projects in 2016-17, there are substantial term, which provides the Legislature with more infrastructure needs across the state. Thus, there budgetary flexibility in the budget year to fund could be value in establishing a dedicated fund for other priorities. Furthermore, given the scale of the purpose of allocating additional funds—beyond the state’s infrastructure needs, bonds are likely to the $10.1 million—for infrastructure purposes. play a substantial role for years to come—whether Given the state’s healthy budget outlook for 2016-17, for funding the Governor’s three proposed priority this budget could be an opportunity to consider projects or other infrastructure projects. developing an ongoing approach for providing Full $1.5 Billion Appropriation Not Necessary funds for future infrastructure priorities. in 2016-17 . . . The administration is requesting LAO RECOMMENDATIONS As we noted above, several state office buildings buildings. First, we recommend that the Legislature in Sacramento have significant needs. Thus, the direct the administration to provide the additional administration’s focus on infrastructure makes information that is necessary for an adequate sense. However, based on our assessment, we make evaluation of the proposal. Second, to the extent that several recommendations below related to the the administration provides this information and the specifics of the Governor’s proposal for state office Legislature wants to proceed with the construction www.lao.ca.gov Legislative Analyst’s Office 13 2016-17 BUDGET of these buildings, we strongly recommend that approach. Furthermore, it should include an state office building projects be funded through the evaluation of project alternatives and a description typical budget process rather than a continuous of why the proposed approach was selected over the appropriation. Third, we recommend that the alternatives. This information should be sufficiently Legislature determine its preferred approach detailed and reliable to enable the Legislature for funding these projects—pay-as-you-go or to understand what it would be funding and to borrowing—and how much funding to allocate to evaluate the merits of the projects. address the state’s infrastructure demands both in Project Sequencing Plan. We recommend 2016-17 and ongoing. that the Legislature direct the administration to Of course, as it makes these decisions, the provide the required sequencing plan. Consistent Legislature will want to consider how it prioritizes with AB 1656, this plan should outline a course of spending on state office buildings against other action for the next 25 years. The plan should also potential priorities for infrastructure funding— provide options on how to start and sequence the such as repairing roads and highways—as well as renovation and construction of office buildings other priorities for General Fund spending—such and identify the order in which the administration as addressing pension liabilities. proposes addressing state office buildings, consistent with the scope of the Planning Study Direct Administration to Provide Additional that the administration proposed in 2014-15. A Details Prior to Moving Forward well-developed sequencing plan will be important We recommend that the Legislature withhold for the Legislature to evaluate the administration’s action on the three priority projects pending the three priority projects and how they fit into the receipt of the information from the administration larger plan proposed by the administration. outlined below. This information is critical to Furthermore, it will be important to understanding understanding the individual proposals and any alternative options that were considered by longer-term plan. It is important for the Legislature the administration, but not ultimately selected, to receive this information no later than April 1, which will inform the Legislature’s deliberations 2016 so that it can evaluate it as part of the budget regarding which approach to addressing state subcommittee process. Absent this additional building needs best align with its priorities. information, we would recommend that the Project Funding Plan. We also recommend that Legislature reject the proposal. the Legislature direct the administration to provide Project Specific Details. We recommend that a funding plan. The funding plan should include the Legislature direct the administration to provide the anticipated costs associated with projects and individual capital outlay budget change proposals the anticipated timing of those costs. Additionally, (COBCPs), or equivalent, for the three priority it should include the proposed approach for projects that they are proposing to undertake funding those costs—whether pay-as-you-go from starting in 2016-17. Each of these COBCPs should the General Fund, lease-revenue bonds, or an provide the type of information that is typically alternative approach. Finally, it should evaluate included in such proposals, including a description the various funding options for achieving the of the project scope and its justification. It should sequencing plan—such as buying existing nonstate also identify the estimated project cost (by project buildings, building new space, or leasing additional phase), funding source, timeline, and delivery space—and provide recommendations. A clear 14 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET description of the various options that are available Limit Appropriations for Specific Projects to and the administration’s proposed approach Funding Needed in 2016-17. If the Legislature is would help inform the Legislature about the cost comfortable moving forward with any parts of the implications of various approaches and enable it to administration’s proposal, we further recommend determine whether it would like to proceed with that the Legislature appropriate no more than the administration’s larger plan to undertake office $10.1 million for the proposed priority projects in building renovations and replacements. 2016-17. There is no need to appropriate more than is required in the budget year for these projects. Reject Continuous Appropriation of SOIF The administration could then request additional We strongly recommend that the Legislature funding for these projects as needed in future years. reject any language that would provide the In those future years, the administration should administration with a continuous appropriation of have updated information on the status, scope, and funds for state office building projects. Instead, if costs of the projects to inform legislative decision- the Legislature is comfortable with the information making. Based on that information, the Legislature that the administration provides and would like could appropriate the necessary funding to to proceed with the proposed projects in 2016-17, continue to move forward with the projects, if we recommend that it approve them through desired. We note that this approach is consistent the typical budget process. The budget process with the typical budget process and will ensure that provides the Legislature with the ability to use its the Legislature maintains adequate control and constitutionally granted appropriation authority to oversight over these projects. ensure that state funds are directed to its highest Consider Potential Strategy for Other priorities and are spent with adequate legislative Infrastructure Funding Needs. The Legislature may oversight and accountability. also want to use this proposal as an opportunity to consider its broader approach to addressing the Determine Preferred Funding state’s infrastructure. There are significant needs Approach and Levels related to maintaining and renewing the state’s Consider Whether Bonds Are Preferred large array of infrastructure—not only state office to Pay-As-You-Go for These Projects. If the buildings, but also other types of infrastructure Legislature is comfortable with the Governor’s such as prisons, parks, and highways. One potential plan for the three priority projects, it will want to way to start addressing these needs is to create a determine what funding approach it prefers. This dedicated fund in which to set aside additional will inform the timing of the funding that will be monies to address infrastructure needs. This needed to undertake these projects in 2016-17 and dedicated fund could be used for not only state beyond. We emphasize that there are benefits and office buildings in Sacramento but also other types drawbacks to both pay-as-you-go and bonds. Thus, of infrastructure throughout the state. In addition, there is no one right choice. Instead, the Legislature addressing the state’s infrastructure needs will will want to consider its priorities for spending require more than a one-time commitment of funds in the near term versus spreading those costs funds, and instead would benefit from an ongoing out over the longer time period during which bonds strategy. This strategy could provide funding on a would be repaid—decisions that should be made in regular basis to care for the state’s assets. the context of its other budget priorities. www.lao.ca.gov Legislative Analyst’s Office 15 2016-17 BUDGET LAO Publications This report was prepared by Helen Kerstein, and reviewed by Brian Brown. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 16 Legislative Analyst’s Office www.lao.ca.gov