The 2016-17 Budget: Governor’s General Fund Deferred Maintenance Proposal

The 2016-17 Budget: Governor’s General Fund Deferred Maintenance Proposal MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • FEBRUARY 2016 Summary The Governor’s budget proposes $500 million from the General Fund to address deferred maintenance backlogs in state facilities managed by various departments. The Governor’s budget proposal does not identify the specific projects the departments would undertake with the proposed funding. Instead, it requires that project lists be provided to the Joint Legislative Budget Committee (JLBC) prior to the allocation of the funds. We find the Governor’s deferred maintenance proposal addresses an important state need. However, we also find that it raises several issues for legislative consideration. Specifically, we find that it lacks critical details, fails to address the underlying causes of the state’s deferred maintenance backlog, and proposes a process for identifying deferred maintenance projects for funding that is inadequate. Accordingly, we recommend (1) requiring lists of proposed projects to be funded by each department by April 1, 2016; (2) requiring individual departments to report at budget hearings on the underlying causes of their backlogs and their plans to address their backlogs; (3) modifying departments’ funding levels based on reviews of the lists of proposed projects; and (4) requiring that funded projects be listed in the Supplemental Report of the 2016-17 Budget Package. BACKGROUND Defining Deferred Maintenance. Facilities the amount of deferred maintenance is often require routine maintenance and repair to keep complicated because departments vary in what them in acceptable condition and to preserve and types of activities they consider maintenance. extend their useful lives. When such maintenance For example, some departments include as is delayed or does not occur, we refer to this as maintenance projects that are not traditionally deferred maintenance. Defining and estimating considered as such—for example, energy and 2016-17 BUDGET water efficiency upgrades, studies, and code (such as by holding maintenance positions vacant), compliance work. In contrast, other departments or poor facility management practices. do not include such activities when identifying Deferred Maintenance Funding Provided in maintenance projects. 2015-16. As shown in Figure 2, the 2015-16 Budget State Has Large Deferred Maintenance Act included Control Section 6.10, which provided Backlog. The Governor’s budget and the associated $120 million in one-time, non-Proposition 98 five-year infrastructure plan identify total state General Fund support for addressing deferred infrastructure deferred maintenance needs of maintenance in various departments. The $77 billion, as shown in Figure 1. Of this total, 2015-16 Budget Act also provided $148 million in $57 billion (74 percent) is related to the state’s Proposition 98 funds for deferred maintenance transportation system. Deferred maintenance can projects and certain other one-time purposes at be caused by various factors, including insufficient the California Community Colleges (CCC), and funding for ongoing maintenance, diverting Chapter 1 of 2015 (AB 91, Committee on Budget) maintenance funding to other operational purposes provided $2 million from the General Fund for deferred maintenance at the California Department Figure 1 of Forestry and Fire Protection (CalFire). Administration’s Identified Deferred As proposed by the Governor, Control Maintenance Needs in 2016-17 Section 6.10 of the 2015-16 Budget Act did not (In Millions) identify the specific projects that departments Department/Program Amount would undertake with the proposed funding. Transportation $57,000 Instead, the budget required that for each entity Water Resources 13,100 receiving deferred maintenance funds, the Judicial Branch 2,087 University of California 1,221 Parks and Recreation 1,150 Figure 2 Corrections and Rehabilitation 1,029 General Fund (Non-Proposition 98) Deferred Community Colleges 504 Developmental Services 378 Maintenance Funding in 2015-16 Budget Military 239 (In Millions) State Hospitals 154 General Services 135 Department/Program Amounta California State University 92 University of California $25 California Fairs 89 California State University 25 Highway Patrol 49 Parks and Recreation 20 Veterans Affairs 36 Corrections and Rehabilitation 15 Motor Vehicles 31 Developmental Services 7 Fish and Wildlife 21 State Hospitals 7 Forestry and Fire Protection 18 California Fairs 7 State Special Schools 10 General Services 5 Science Center 10 Emergency Services 3 Hastings College of Law 8 Military 2 Emergency Services 3 Veterans Affairs 2 Conservation Corps 1 Food and Agriculture 2 Food and Agriculture <1 Total $120 State Conservancies/Wildlife <1 a Conservation Board Does not include $2 million in one-time General Fund for California Department of Forestry and Fire Protection deferred maintenance projects that was included in Total $77,364 Chapter 1 of 2015 (AB 91, Committee on Budget). 2 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET Department of Finance (DOF) provide a list of In July 2015, the administration officially provided projects to the JLBC 30 days prior to allocating a list of projects to be funded from Control those funds. The budget further required DOF to Section 6.10. Since then, the administration has notify the JLBC quarterly of any changes to the notified the JLBC of several changes to the projects approved list of projects. The budget also specified proposed for funding. that expenditures must be made by June 30, 2017. GOVERNOR’S PROPOSAL $500 Million for Deferred Maintenance. The Figure 3 Governor’s budget proposes Control Section 6.10, General Fund (Non–Proposition 98) Deferred which provides $500 million in non-Proposition 98 Maintenance Proposal for 2016-17 General Fund to various entities for deferred (In Millions) maintenance as shown in Figure 3. (The Department/Program Proposed Amount Governor’s budget also includes $289 million Water Resources $100 from Proposition 98 funds for CCC for deferred State Hospitals 64 maintenance and certain other one-time expenses, Judicial Branch 60 Parks and Recreation 60 as well as $18 million from the Motor Vehicle Corrections and Rehabilitation 55 Account for deferred maintenance needs at the California State University 35 California Highway Patrol and Department of University of California 35 Developmental Services 18 Motor Vehicles.) Consistent with the Governor’s Military 15 approach in 2015-16, the proposed 2016-17 Fish and Wildlife 15 budget does not identify the specific projects that General Services 12 departments would undertake with the proposed Forestry and Fire Protection 8 Veterans Affairs 8 funding. Instead, the budget requires DOF to California Fairs 4 provide a list of projects to the JLBC 30 days prior State Special Schools 4 to allocating funds to a department. Subsequent to Science Center 3 Hastings College of Law 2 the allocation of funds, departments may change Emergency Services 1 their list of projects subject to approval by DOF. Conservation Corps 1 The budget requires DOF to notify the JLBC Food and Agriculture <1 State Conservancies/Wildlife <1 quarterly of these changes, but does not provide the Conservation Board JLBC with a 30-day review period. Total $500 LAO ASSESSMENT Governor’s Focus on addressing the state’s substantial accumulated Deferred Maintenance Is Positive backlog of deferred maintenance. Furthermore, we find that the additional, substantially larger, We find that the deferred maintenance funding amount of deferred maintenance funding provided in 2015-16 was a good first step towards www.lao.ca.gov Legislative Analyst’s Office 3 2016-17 BUDGET proposed for 2016-17 represents another important No Clear Methodology for Establishing contribution towards addressing this large backlog. Funding Levels. We find that the administration The state has invested many billions of dollars in has not provided a clear rationale for why the its infrastructure assets, which play critical roles in proposed funding levels were selected. Based the state’s economy. Moreover, when repairs to key on our discussions with the administration, we building and infrastructure components are put understand that they considered various factors off, facilities can eventually require more expensive when allocating deferred maintenance funding to investments, such as emergency repairs (when departments, such as the amount of departments’ systems break down), capital improvements (such identified needs and the amount of funding as major rehabilitation), or replacement. Thus, provided to departments in 2015-16. However, it while deferring annual maintenance lowers costs in is not clear how these and other considerations the short run, it often results in substantial costs in were ultimately weighed to arrive at the proposed the long run. funding amounts for departments. We note, for example, that the proposal includes sufficient Additional Details Warranted funding to cover all of the identified needs at While the Governor’s proposal addresses an several departments, such as the Department of important state need, we find that the Governor’s Food and Agriculture, the California Conservation proposal lacks critical details that would allow Corps, and the State Conservancies. In contrast, the Legislature to evaluate the specific funding the proposal funds about 5 percent of the allocations and understand how deferred needs identified by the Department of Parks maintenance funding is affecting the accumulated and Recreation and California Department of backlog. Corrections and Rehabilitation. Differing funding Limited Information on Proposed Projects. levels may make sense to the extent they reflect The administration has identified projects that differing levels of need, severity of need, or make up each department’s list of deferred priorities. However, the Governor’s proposal does maintenance needs. However, the administration not provide such clear justification. In fact, based has not provided lists of specific projects that are on the list of each department’s identified needs proposed for funding under Control Section 6.10. as provided by the administration, it appears the The absence of an identification of specific projects budgeted funding levels would be sufficient to fund makes it difficult for the Legislature to evaluate some very low priorities in some departments— whether projects will address the highest state such as new carpets and interior painting at the priorities. For example, the Legislature may wish to California Conservation Corps—while other prioritize funding certain types of projects—such departments might have fire, life, and safety as those that address fire, life, and safety issues projects and projects that maintain the integrity or reduce future state costs—over other types of and longevity of buildings unfunded. projects—such as those that address aesthetic Lack of Analysis of Other Potential Funding concerns or that could potentially be funded Sources. It is unclear whether some projects through other sources. However, without lists of identified by the administration as deferred specific projects, the Legislature cannot assess maintenance needs could be funded by other whether the funding provided will go to projects sources rather than the General Fund—such as that meet those or other legislative priorities. user fees, federal funds, or donations. For example, 4 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET energy efficiency projects identified as deferred 2016-17 even though these departments received maintenance needs by some departments such funding for deferred maintenance in 2015-16. as the Office of Emergency Services and the Meanwhile, the identified deferred maintenance Department of Veterans Affairs might be able need at CalFire declined by over $100 million—from to be funded by cap-and-trade auction revenues $126 million to $18 million—when only $2 million or various state revolving fund programs (where was provided to address the department’s backlog in project costs are recouped over time through the the 2015-16 Budget Act. project’s energy savings). In many cases, it is unclear what drove these Unclear Why Deferred Maintenance Backlog substantial changes in the identified backlogs. Has Changed Over Time. As shown in Figure 4, the Specifically, it is uncertain whether these administration’s identified deferred maintenance changes reflect actual differences in needs since backlog has changed substantially since 2015-16. last year or are a result of differences in how For example, the identified needs for the California deferred maintenance is catalogued or reported Military Department and the Department of State by departments. It is important to understand Hospitals more than doubled between 2015-16 and what is leading to these—in some cases very Figure 4 Changes in the Administration's Identified Backlog for Selected Departments Department and Year 2015-16 Military 2016-17 2015-16 State Hospitals 2016-17 2015-16 General Services 2016-17 2015-16 California Fairs 2016-17 2015-16 Veterans Affairs Identified Unfunded Need 2016-17 Funding 2015-16 Fish and Wildlife 2016-17 Forestry and 2015-16 Fire Protection 2016-17 State Special 2015-16 Schools 2016-17 2015-16 Science Center 2016-17 50 100 150 200 250 $300 (In Millions) www.lao.ca.gov Legislative Analyst’s Office 5 2016-17 BUDGET large—changes to identified backlogs because it Notification Process for Projects Is Inadequate may point to different legislative responses. To the As discussed above, the Governor’s proposal extent that changes in backlogs represent actual does not require the identification of specific differences in accumulated needs since last year, projects prior to passage of the budget or prior they can provide useful information on how much to changing the approved project lists. Instead, departments’ current maintenance programs are Control Section 6.10 includes a JLBC notification affecting backlogs. For example, if a department process. This approach raises a few concerns. First, experienced a large increase in its backlog since last the process would identify projects proposed for year, it might suggest that its routine maintenance funding after the Legislature has made its decisions activities are insufficient to keep up with its annual on the budget. This would divorce decision needs and that it should improve its maintenance making on the amount of funding provided to program to prevent the further accumulation of each department from the set of projects to be deferred maintenance. However, to the extent that funded. As a result, the funding amounts might the changes in reported need levels are a result not correspond with the projects that would be of differences in reporting methodologies, the prioritized by the Legislature. Second, the proposed information on these reported backlogs might JLBC process provides the Legislature with much not be sufficiently reliable to inform decision less time to review proposed projects than the making about how to most appropriately address traditional budget process and is less transparent a department’s deferred maintenance challenges to the public. For this reason, the JLBC process is and might instead point to the importance of typically reserved for minor, midyear changes to improved facility condition assessments or other the budget rather than for the initial identification data collection. of projects proposed for funding. Third, the proposed process to allow the administration to Plan Does Not Address move forward with changes to funded projects Causes of Deferred Maintenance without legislative approval would diminish the Providing one-time funding is only a Legislature’s control over how funds are spent and short-term response to the underlying problem— could result in the funding of projects that are not the failure to consistently maintain state assets consistent with legislative priorities. on an ongoing basis. The administration does not The 2015-16 process highlights some of the include an assessment of, or a plan to address, the challenges associated with the administration’s underlying causes of the accumulation of deferred proposed approach. Specifically, one of the projects maintenance. Without such a strategy, there is no that the administration proposed to fund under certainty that departments will have the necessary Control Section 6.10 of the 2015-16 Budget Act—the tools or other resources to address the underlying replacement or retrofitting of the existing boilers at causes of their deferred maintenance backlogs. Porterville Developmental Center—had previously A strategy for preventing the accumulation of been rejected by the Legislature. While the new deferred maintenance projects is essential administration ultimately did not move forward to ensuring that the problem does not get worse. with this project after the JLBC expressed concerns, Moreover, the administration has not identified a the Control Section 6.10 process—with its lack of long-term plan for working through the rest of the time for review and more limited transparency— deferred maintenance backlog. made it more challenging to ensure that this type 6 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET of project was identified and removed from the initial list of projects), the administration would administration’s plan for funding. Furthermore, not have been required to provide the Legislature if this project had been proposed to replace an with any opportunity to review the change prior to approved project (rather than being included on the proceeding with the project. LAO RECOMMENDATIONS Require Additional Reporting Furthermore, we recommend that the Legislature seek information on whether the administration Require Lists of Proposed Projects. We has a longer-term plan to (1) address accumulated recommend that the Legislature require the deferred maintenance backlogs and (2) ensure that administration to provide lists of specific projects appropriate ongoing maintenance is sustained so that would be funded by each department. These that deferred maintenance does not continue to lists are critical for the Legislature to have in accumulate. order to assess whether the proposed projects are consistent with its priorities and whether the Adjust Funding Levels funding allocations are appropriate. In order to Based on Review of Project Lists enable the Legislature to consider the lists during Once the Legislature receives lists of projects its budget deliberations, we recommend the from departments, we recommend that it review administration provide the required information these lists to determine if the proposed funding by April 1, 2016. levels and projects are consistent with its General Require Individual Departments to Report Fund priorities. As it conducts its reviews, the at Budget Hearings. We recommend that the Legislature might wish to consider various factors, Legislature use its budget hearings to gather including whether the projects address critical more information from the administration program needs, reduce state liability, and prevent and individual departments. In particular, we higher future costs. If the Legislature is comfortable recommend the Legislature seek information from with these lists, we recommend that the Legislature departments on other potential sources of funding approve them as proposed. However, if the lists that could be available to support the proposed include projects that it deems to be of lower projects. This could allow the proposed General priority—such as those that address aesthetic Fund resources to support a greater number of issues or could be funded from other sources—we projects overall. In addition, we recommend recommend that the Legislature adjust the funding that the Legislature seek information from the levels proposed for departments accordingly. administration regarding why the backlog for Finally, if departments are unable to provide project specific departments has changed over time and lists by April 1, 2016 or are unable to justify their what factors led to the accumulation of deferred proposed projects to the Legislature’s satisfaction, maintenance. This information would enable we recommend that the Legislature reject the the Legislature to better assess the nature of administration’s proposed funding for those the backlog and assist it in crafting policies to specific departments. ensure that departments effectively manage their maintenance programs on an ongoing basis. www.lao.ca.gov Legislative Analyst’s Office 7 2016-17 BUDGET Require Funded Projects Report of the 2016-17 Budget Package. We Be Listed in Supplemental Report recognize that there will likely be some instances when departments have reasonable rationales for Because we recommend that departments be changing the projects on their proposed lists after required to provide lists of proposed projects by the budget is adopted. Therefore, we recommend April 1, 2016 and that the Legislature reject funding including control section language that allows for departments that fail to provide these lists, we departments to modify their proposed lists. find that the proposed language requiring a report However, we recommend that the control section to JLBC prior to allocating funds is unnecessary. language require that these changes occur no Instead, we recommend that all projects approved sooner than 30 days after notifying the JLBC. by the Legislature be included in the Supplemental LAO Publications This brief 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 brief 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. 8 Legislative Analyst’s Office www.lao.ca.gov