The 2019-20 Budget: Deferred Maintenance

The 2019-20 Budget: Deferred Maintenance GABRIEL PETEK LEGISLATIVE ANALYST FEBRUARY 8, 2019 Summary The Governor’s budget includes over $600 million from the General Fund and Proposition 68 for deferred maintenance projects at various state departments. We recommend that the Legislature require (1) departments receiving funding to report at budget hearings on the approach they will use to prioritize projects, as well as specific projects they plan to undertake; (2) the Department of Finance to report, no later than January 1, 2023, on which projects departments ultimately undertook with the funds provided; and (3) departments that continue to experience growth in deferred maintenance backlogs over the next few years to identify the reasons for the increases and the specific steps they plan to take to improve maintenance practices on an ongoing basis. Background 2015-16, 2016-17, and 2018-19 budgets provided a total of almost $1.3 billon—$910 million from State Has a Large Deferred Maintenance Backlog. non-Proposition 98 General Fund and $18 million Facilities require routine maintenance and repair to from the Motor Vehicle Account for projects at keep them in acceptable condition and to preserve and 25 departments, as well as $333 million in Proposition 98 extend their useful lives. When such maintenance is General Fund that could be used for deferred delayed or does not occur, we refer to this as deferred maintenance projects at the community college system. maintenance. The administration has identified a total These budget acts included language that allocated state infrastructure deferred maintenance need of most of the funding to departments after they provided about $70 billion. Of this amount, about $50 billion is notifications to the Joint Legislative Budget Committee related to the state’s transportation system and the (JLBC) of the specific projects to be undertaken. The remaining $20 billion is associated with other types of language also allowed departments to change their state facilities. Deferred maintenance can be caused by proposed projects subject to certain requirements for various factors, including insufficient funding for ongoing notifying the JLBC. maintenance, diverting maintenance funding to other operational purposes (such as by holding maintenance Governor’s Proposal positions vacant), or poor facility management practices. The Governor’s budget proposes $614 million Recent Budgets Have Provided $1.3 Billion for ($585 million from the General Fund and $29 million Deferred Maintenance Projects. Prior budgets have from Proposition 68, a natural resources related bond appropriated significant one-time resources for deferred approved by voters in 2018) on a one-time basis in maintenance projects at various state departments. 2019-20 to address deferred maintenance backlogs at Specifically, as shown in Figure 1 (see next page), the 24 departments. The budget authorizes departments analysis full gutter 2019-20 BUDGET to commit funds to projects over three years— The budget includes provisional language that, through June 30, 2022. Figure 2 summarizes in several ways, is different from prior allocations the administration’s proposal. (The budget also of deferred maintenance funding. First, the allocates significant funding for maintaining 2019-20 budget includes language that generally transportation facilities, including $1.2 billion from limits the funding provided to deferred maintenance Chapter 5, Statutes of 2017 [SB 1, Beall] for the projects that address critical infrastructure repair and maintenance of the state’s highway deficiencies. Second, the language does not require system. Additionally, it provides new one-time departments to identify the specific projects that funding of $6.5 million in 2019-20 for some they will undertake before being able to utilize specific roof and fire alarm replacement projects the funding, nor does it require reporting to the at the California Department of Corrections and Legislature should they change which projects they Rehabilitation [CDCR].) plan to undertake. Third, the provisional language Figure 1 Deferred Maintenance Funding in 2015-16, 2016-17, and 2018-19 Budgets (In Millions) Department/Program 2015-16 2016-17 2018-19 Total General Fund (Non-Proposition 98) Water Resources — $100 $100 $200 California State University $25 35 35 95 University of California 25 35 35 95 Judicial Branch — 45 50 95 State Hospitals 7 64 10 81 Parks and Recreation 20 60 — 80 Corrections and Rehabilitation 15 55 9 79 Developmental Services 7 18 10 35 General Services 5 12 10 27 Military Department 2 15 4 21 Fish and Wildlife — 15 — 15 California Exposition — — 15 15 California Fairs 7 4 3 14 Veterans Affairs 2 8 4 14 Forestry and Fire Protection — 8 2 10 Science Center and African American Museum — 3 7 10 State Special Schools — 4 4 8 Emergency Services 3 1 4 8 Food and Agriculture 2 <1 1 3 Hastings College of Law — 2 1 3 Conservation Corps — 1 1 1 Employment Development Department — — 1 1 San Joaquin River Conservancy — <1 — <1 Subtotals ($120) ($485) ($305) ($910) Motor Vehicle Account Highway Patrol — $10 — $10 Motor Vehicles — 8 — 8 Subtotals (—) ($18 ) (—) ($18) Proposition 98 General Fund Community Colleges $148 $185 $28 $333 Total Deferred Maintenance Funding $268 $688 $333 $1,261 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET for certain departments allows for other uses of the Figure 2 funds besides deferred maintenance. For example, Administration’s 2019-20 the funding for the California State University is also Deferred Maintenance Proposals available for the construction of childcare facilities for student parents. Additionally, a portion of the funding (In Millions) provided to the California Department of Parks and Department Amount Recreation is also available to fund activities that California State University $247.0a increase tourism and visitor experiences, consistent University of California 138.0 with the requirements of Proposition 68. Accordingly, Parks and Recreation 45.6b the actual amount spent on deferred maintenance Judicial Branch 40.0 could be less than the proposed $614 million. State Hospitals 35.0 Corrections and Rehabilitation 25.0c LAO Assessment General Services 16.0 Fish and Wildlife 10.0d Continued Focus on Deferred Maintenance Network of California Fairs 7.0d Is Positive. The deferred maintenance funding Forestry and Fire Protection 6.0 proposed for 2019-20 reflects the continuation of Developmental Services 5.0 an important commitment by the state to tackle Military Department 5.0 its deferred maintenance backlog. The state has Highway Patrol 5.0 invested many billions of dollars in its infrastructure Veterans Affairs 5.0 assets, which play critical roles in the state’s State Special Schools 5.0 Motor Vehicles 3.0 economy. Moreover, when repairs to key building Exposition Park 3.0 and infrastructure components are put off, facilities Food and Agriculture 3.0 can eventually require more expensive investments, Housing and Community Development 3.0 such as emergency repairs (when systems break Employment Development 2.0 down), capital improvements (such as major Office of Emergency Services 2.0 rehabilitation), or replacement. Thus, while deferring Conservation Corps 1.0 annual maintenance lowers costs in the short run, it Hastings College of the Law 1.0 often results in substantial costs in the long run. Tahoe Conservancy 1.0 Total $613.6 Budgeting Approach Provides Departments a Funds can also be spent on on-campus childcare facilities. Discretion to Choose Projects. As described b $34 million from the General Fund and $11.6 million from Proposition above, the proposed provisional language generally 68 ($11.5 million of the Proposition 68 amount can also be spent on projects that increase tourism and visitor experiences). limits the funding to deferred maintenance projects c The budget also includes additional funding for specific roof and fire that address critical infrastructure deficiencies. alarm replacements. d However, the language does not define critical Funded entirely from Proposition 68. infrastructure deficiencies or require departments backlogs. In developing these lists, to identify projects prior to receiving funding as departments vary in what types of activities was the case under the process used in recent they consider maintenance. For example, years. Accordingly, the proposed approach for some departments have included projects 2019-20 provides departments with discretion over as deferred maintenance that are not how to define deferred maintenance as well as traditionally considered as such—for example, how and when to select specific projects. With the energy and water efficiency upgrades flexibility provided, departments are taking a variety and code compliance work. In contrast, of approaches to identifying potential projects, other departments have not included such prioritizing projects, and selecting specific projects activities when identifying potential deferred for the proposed funding: maintenance projects. • Identifying Potential Projects. Generally, • Prioritizing Projects. Some departments departments have developed lists of projects have identified a methodology for prioritizing that make up their deferred maintenance projects. Other departments have not yet www.lao.ca.gov 3 analysis full gutter 2019-20 BUDGET identified the process and criteria they intend underlying problem—the failure to consistently to use when deciding how they will allocate maintain state assets on an ongoing basis. As part funds. It is important for departments to be of the Governor’s budget, some departments have able to articulate how they prioritized projects put forward proposals to address deficiencies in because it will help the Legislature determine their ongoing maintenance programs. For example, whether the process used to select projects CDCR proposes modifying its methodology for initially—and change projects, as necessary— calculating its ongoing maintenance budget to is reasonable and likely to result in the better reflect the costs of maintaining prisons. completion of projects that are consistent Additionally, the California Department of with its priorities. For example, the Legislature Forestry and Fire Protection requests additional may wish to prioritize funding certain types maintenance staff and other resources to better of projects—such as those that address fire, support the department’s maintenance program. life, and safety issues or reduce future state Both departments indicate that their proposed costs—over other types of projects—such levels of resources are intended to prevent the as those that address aesthetic concerns or accumulation of deferred maintenance, and do not fit the standard definition of deferred these types of proposals represent positive maintenance. steps towards improving ongoing maintenance • Selecting Specific Projects. Some practices. However, it is unclear whether the departments have identified specific projects requested funding will be the correct level to they intend to support with the proposed prevent the accumulation of deferred maintenance. funding, while other departments have not yet Furthermore, for most other departments, the identified projects, and it is unclear when they budget provides these one-time funds for deferred plan to do so. The absence of an identification maintenance, but there is no plan or recent of specific projects makes it difficult for the proposal to address underlying causes. Without Legislature to evaluate whether, in practice, such strategies or proposals, there is no certainty the methodology the department is using for that departments will have the necessary tools or selecting projects will result in the completion other resources to address the underlying causes of projects that are of high priority to the of their deferred maintenance backlogs and ensure Legislature. that the problem does not get worse. Approach Does Not Provide Legislative LAO Recommendations Oversight of Changes to Projects. The proposed Require Departments to Report on Proposed process provides departments with authority to Projects and Approach. We recommend that change projects without legislative notification. the Legislature use its budget hearings this We find that it is reasonable for departments to spring to gather more information from individual have some flexibility to change projects after the departments. First, we recommend that the approval of the budget. Urgent maintenance needs Legislature require departments to report at budget may emerge after the completion of the budget hearings on the approach they are taking to process, which may necessitate a reevaluation prioritize projects if that information is not included of which projects to pursue. However, without as part of their proposals. This would enable the a reporting mechanism, the Legislature lacks Legislature to ensure that it is comfortable that the access to the information on which projects are department’s approach would result in the selection ultimately undertaken. This information is important of projects that are consistent with legislative for the Legislature to have to assess what was priorities. accomplished with deferred maintenance funds and Second, we recommend that the Legislature ensure that departments complete projects that are require departments to report at budget hearings consistent with its directives. with lists of the specific projects they plan to Underlying Causes of Deferred Maintenance undertake if this information was not included as Not Addressed Consistently. Providing one-time part of their proposals. These lists are important for funding is only a short-term response to the 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET the Legislature to have in order to assess whether hearings on each department’s plan for addressing the specific proposed projects are consistent with the accumulation of deferred maintenance on an its priorities—such as projects that prevent future ongoing basis. For example, this could include costs or address fire, life, and safety issues. If information on the level of resources that the the lists include projects that it deems to be of department currently devotes to maintenance, lower priority, we recommend that the Legislature as well as an estimate of the ongoing level of direct the department to reprioritize projects or maintenance funding that would be needed adjust the funding levels proposed for departments to prevent the future accumulation of deferred accordingly. If departments fail to provide lists of maintenance. This would provide the Legislature proposed projects or are unable to justify their with additional information on the status of the proposed projects to the Legislature’s satisfaction, department’s ongoing efforts to maintain their we recommend that the Legislature reject the facilities. administration’s proposed funding for those specific Additionally, we recommend that the Legislature departments. We note that it should generally adopt SRL that requires that, no later than not be difficult for departments to provide lists January 1, 2023, each department that is receiving of proposed projects, since the Department of deferred maintenance funding in 2019-20 identify Finance (DOF) issued a budget letter in July 2018 how their deferred maintenance backlog has directing departments to provide prioritized lists changed since 2019. We further recommend that of projects, to the extent possible, by September the SRL require that, to the extent that its backlog 2018 in preparation for the 2019-20 budget. (DOF has grown in the intervening years, the department also provided departments with similar direction in shall identify the reasons for the increase and previous years.) the specific steps it plans to take to improve its Require Departments to Report on Projects. maintenance practices on an ongoing basis. This We recommend that the Legislature adopt is because, if a department experienced a large Supplemental Report Language (SRL) requiring increase in its backlog, it might suggest that its DOF to report, no later than January 1, 2023, routine maintenance activities are insufficient to on which projects departments undertook with keep up with its annual needs and that it should the funds provided. This would provide greater improve its maintenance program to prevent the transparency and accountability of the funds by further accumulation of deferred maintenance. In ensuring that the Legislature has information on such cases, it will be important for the Legislature what projects were ultimately implemented and that to understand this, so it can direct departments the funds were spent consistent with any legislative to take actions to improve their maintenance directive given. Adoption of the following language programs. Adoption of the following language would be consistent with this recommendation: would be consistent with this recommendation: Item 8860-001-0001—Department of Finance. Item xxxx-xxx-xxxx. No later than January 1, No later than January 1, 2023, the Department 2023, [insert department name] shall submit to of Finance shall submit to the fiscal committees the fiscal committees of the Legislature and the of the Legislature and the Legislative Analyst’s Legislative Analyst’s Office a report identifying Office a report identifying the specific projects the total size of its deferred maintenance undertaken by each department that received backlog as of the 2018-19 fiscal year and deferred maintenance funding in 2019-20. This September 2022. To the extent that the total report shall include a brief description of each size of the deferred maintenance backlog has project as well as its cost. increased over that period, the department’s Require Departments to Detail Plans for report shall also identify the reasons for the Better Maintaining Facilities. For departments increase in the size of the backlog and the without plans or proposals to address ongoing specific steps the department plans to take deferred maintenance, we recommend that the to improve its maintenance practices on an Legislature seek additional information at budget ongoing basis. www.lao.ca.gov 5 analysis full gutter 2019-20 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. 6 LEGISLATIVE ANALYST’S OFFICE