The 2021-22 Budget: University Capital Outlay

analysis full gutter The 2021-22 Budget: University Capital Outlay MARCH 2021 In this post, we focus on university capital outlay provide a small campus match from their reserve projects. We first provide background on university funds to support their academic facility projects.) capital financing and project review. We then review Review Process Designed to Give Legislature capital outlay proposals for the California State Opportunity to Assess Proposals. At the same University (CSU) and the University of California time the state changed how it funded university (UC). Next, we raise some concerns with the academic facilities, it also changed the process it previously authorized UC Merced medical school used for approving projects. As Figure 1 on the project and make an associated recommendation. next page shows, the former approval process was We end the post by offering several other closely connected to the annual budget process. recommendations intended to strengthen legislative The new process commences at about the same oversight of university projects. time (in the fall), but then the time line veers somewhat from the budget process. In the fall, CSU Background and UC are required to submit “the same level of New Financing System Put in Place Several detail” as a capital outlay budget change proposal, Years Ago. Whereas the universities fund their or COBCP. (A COBCP contains information about nonacademic facilities (such as their dormitories a project’s scope, cost, and schedule.) The and bookstores) using nonstate funds, the administration, in turn, is required to submit to the state historically has funded the universities’ Legislature a letter by February 1 that identifies the academic facilities (such as their classrooms and projects it preliminarily approves for each segment. laboratories). To finance these academic facilities, State law requires the administration to provide a the state traditionally sold bonds and directly paid final approval letter to the Legislature no sooner the associated debt service from the General Fund. than April 1. The period between February and April Beginning in 2013-14 for UC and 2014-15 for is intended to give the Legislature a minimum of a CSU, the state altered this arrangement by making couple of months to review projects and signal to university bonds, rather than state bonds, the main the administration its consent or concerns. source of financing for academic facility projects. Annual February Report Intended to Give Under this approach, the universities finance their Project Updates to the Legislature. State law projects using their main General Fund support requires CSU and UC to submit an annual capital appropriations. To prevent capital financing from outlay progress report by February 1 to the overwhelming the universities’ operating budgets, Legislature and administration. This report must state law limits General Fund spending on debt include information about all university projects service and pay-as-you-go projects. Specifically, supported by state General Fund, either through CSU’s limit is 12 percent of its annual General university bonds or on a pay-as-you-go basis. The Fund support appropriation, whereas UC’s limit report must provide detail on the scope, cost, and is 15 percent. (In addition to state funds, the current status of each project. universities, particularly UC, commonly receive CSU Proposals private donations to support the construction of certain academic facilities. The universities, Governor Preliminarily Approves Two CSU particularly CSU, also encourage campuses to Proposals for 2021-22. On November 30, 2020, CSU submitted its final 2021-22 capital 2021-22 LAO Budget Series 1 analysis full gutter outlay request, which consisted Figure 1 of two proposals. (CSU’s Old and New Time Line to Approve University Projects preliminary request submitted in September 2020 had included Old Process New Process 17 proposals.) On February 1, September 2021, the Department of Finance CSU and UC submit CSU submits preliminary proposals (DOF) submitted a letter to the preliminary proposals and UC submits final proposals to to the administration. Legislature and administration for Legislature providing preliminary initial review. approval of both proposals. As Figure 2 shows, these proposals have a total cost of $299 million, November consisting of $284 million from CSU and UC submit final project proposals university bonds and $15 million to the administration. from campus reserves. The December associated annual debt service CSU submits final proposals is estimated to be between to Legislature and administration. $16 million and $19 million. CSU January anticipates it would be able to Governor submits cover this cost within its existing proposed projects to the Legislature. budget for debt service because February of lower-than-expected interest Administration submits rates and savings in certain list of projects it intends to approve. Legislature previously approved projects. It reviews projects. estimates its total debt service and pay-as-you-go spending on academic facility projects would Legislature April be $197 million in 2021-22, reviews projects. Administration submits equating to about 5 percent final list of approved of its General Fund support projects. Legislature can take further action if desired. appropriation. First Proposal Would Support Systemwide Infrastructure June Improvements. This proposal would authorize CSU to undertake Legislature approves or rejects projects in $200 million in infrastructure annual budget act. projects across the 23 campuses. The projects would address building systems deficiencies, energy efficiency, and code Figure 2 compliance, among other issues. Governor Preliminarily Approves Two CSU Proposals CSU would select the projects 2021-22 (In Thousands) from a list totaling $1.2 billion Campus Project Phases State Cost Total Costa in infrastructure improvements that it has submitted to the Systemwide Infrastructure improvements Various $195,000 $200,000 administration and Legislature for Chico Butte Hall replacement P,W,C 89,012 98,663 Totals $284,012b $298,663 review. (Some projects on this list a also appear on a separate list of Campus reserves are often used for facility projects. b The associated annual debt service costs are estimated at $16 million to $19 million. deferred maintenance projects for P = preliminary plans; W = working drawings; and C = construction. 2021-22 LAO Budget Series 2 analysis full gutter which CSU has requested one-time General Fund process. UC must certify compliance with this in 2021-22. We cover the deferred maintenance requirement each year before DOF may approve UC request in our report, The 2021-22 Budget: projects. According to DOF, UC is still developing a Analysis of the Major University Proposals.) The process to use to demonstrate its compliance. CSU Chancellor’s Office indicates that being able UC Is Requesting Approval of One Project to select projects from among this list provides in 2021-22. In September 2020, UC submitted flexibility to respond to changes in campus one project for state approval totaling $117 million priorities, as developments arise between the time in new university bond authority. The project campuses initially submit their project lists for state would construct a replacement building for Evans approval and when the funds become available. Hall on the Berkeley campus. Evans Hall has a Under the Governor’s proposal, the Legislature relatively poor seismic rating (Level VI, with Level would receive information on the specific projects VII being the poorest rating), and the campus has selected when CSU submits its annual capital determined constructing a replacement building outlay progress report due February 1, 2022. would be a more cost-effective approach for Second Proposal Would Modify a Previously making seismic upgrades than renovating the Approved Project at Chico. In 2019-20, the existing building. The replacement building would state authorized the renovation of Butte Hall at contain around half of the assignable square feet the Chico campus at a total cost of $90 million. of Evans Hall, with the reduction in space primarily Since then, the campus has discovered additional due to fewer faculty offices, research laboratories, hazardous waste remediation needs that would and library/study spaces. According to UC, the bring the cost of renovation to $106 million. Rather campus plans to accommodate any displaced than renovating the building, the 2021-22 proposal functions by improving utilization of other existing would instead replace the building at a total cost of campus spaces. Assuming the administration’s $99 million. preliminary letter does not make any changes to the No Major Concerns With Two Proposals. September proposal, we do not take issue with this Though we do not have major concerns with project. either CSU proposal, we believe the Legislature UC Merced Medical Education Project could provide more meaningful oversight if it had a list of the specific infrastructure improvement UC Received Authority for Merced Project in projects CSU plans to undertake in 2021-22. We 2019-20. The 2019-20 Budget Act authorized UC recommend the Legislature direct CSU to provide to pursue medical school projects at the Riverside this list in the spring, along with an explanation campus and at or near the Merced campus. regarding the criteria it used to prioritize among Provisional budget language stated intent that the projects. projects be financed by state-supported university bonds. In September 2019, UC submitted to the UC Proposals state a proposal for the Riverside project, which Governor Has Not Yet Submitted Preliminary totaled $100 million in associated bond authority. Approval List of UC Projects. Though statute Riverside is the newest of UC’s six medical schools. requires the administration to submit its preliminary UC Merced (along with Berkeley, Santa Barbara, approval list for UC by February 1, the Legislature and Santa Cruz) does not have a medical school. had not yet received that list at the time of this UC Recently Submitted Information on writing. According to the administration, it could not Merced Project. In September 2020, UC make the February 1 submittal deadline because submitted information on the proposed project it was awaiting certain information from UC. at the Merced campus. UC plans to construct a Specifically, the 2020-21 budget package included 116,750 assignable square foot building intended a new ongoing requirement that UC only use to support education and research-related spaces. service unit employees for maintenance work on UC anticipates the project will cost $210 million. facilities supported through the new capital outlay To date, UC has identified funding for $12 million 2021-22 LAO Budget Series 3 analysis full gutter of this cost ($7.8 million state cost and $4.2 million funding plan is particularly concerning given in campus reserves), covering the project’s the fiscal challenges facing the state, the UC preliminary planning phase. According to UC, it is system, and the Merced campus. For Merced still determining which fund sources would cover specifically, staff noted to us in a discussion the remaining $198 million in project costs. The during the fall that the campus already has administration has not signaled whether it plans relatively high debt service levels following the to include this proposal in its preliminary letter or completion of the Merced 2020 project. whether it believes the project does not require • Planning Phases Are Costlier Than Is any additional authorization beyond the language Typical. The combined preliminary planning included in the 2019-20 Budget Act. and working drawings phases would total Merced Project Raises Four Concerns. Each $34 million. This equates to 16 percent concern is described below. of total estimated project costs—higher • Project Scope Includes a Significant than the average of around 10 percent of Amount of Research Space. The provisional projects costs. The Merced project’s size and language in the 2019-20 Budget Act focused complexity may be a factor that is driving up on authorizing a “medical school project.” costs for these initial phases. Riverside’s project focused primarily on adding Recommend Requesting UC Provide Stronger more instructional space for its medical school Justification for Specific Project Proposal. We students. The proposed space at Merced, think overseeing the UC Merced project at this however, also includes a significant amount of early phase is especially important for ensuring that research space and adds many more faculty key legislative objectives are met in both the near offices, as shown in Figure 3. The inclusion of and long term. Though the Legislature already has research space is what makes the overall cost indicated interest in approving a medical school of the project ($210 million) so high—more building at or near the UC Merced campus, several than double the Riverside medical school aspects of the specific project proposal may not project. align with original legislative objectives. In particular, • Project Scope Also Includes Substantial the Legislature might have intended for (1) more of Space for Behavioral Sciences. Though the proposed space to be dedicated to instruction, the language envisioned a medical school (2) more of the proposed space to be focused building, the September proposal notes that directly on medical education, (3) an explicit plan much of the research space would support to secure funding for the project, and (4) planning faculty in psychology and public health, two costs that were at a more typical level. To the academic fields separate from professional extent the Legislature shares these concerns about medical education. According to Merced, the project, we recommend it ask UC to respond, these academic departments lack adequate space on the campus. This is despite the Figure 3 campus having recently completed the Merced 2020 project, a public-private UC Proposes Much Larger Building at partnership that doubled the amount of its Merced Than at Riverside academic space. Assignable Square Feet • Project Financing Is Uncertain. Despite Merced Riverside proposing to undertake such a costly project, Instruction 37,870 52,100 UC has not identified a funding plan for Research 40,070 — most of the project (any of the costs beyond Academic offices 23,582 7,700 preliminary plans). Initiating a capital project Student support 3,200 5,200 without a funding plan is highly irregular Other 12,028 — and is poor budget practice. The lack of a Totals 116,750 65,000 2021-22 LAO Budget Series 4 analysis full gutter either by providing stronger justification for the the exact projects that would be undertaken. We existing proposal or adjusting the project proposal think advance notification of which projects will be so that it is more in line with original legislative undertaken is a fundamental aspect of meaningful objectives. legislative review. We recommend the Legislature amend statute to clarify that the administration is to Recommendations to Improve Project submit a list of specific infrastructure improvement Review Process and deferred maintenance projects that it approves as part of its preliminary and final approval letters. Four Recommendations Designed to Improve (In this recent university budget report, we make a Project Review Process. In the years since the similar recommendation regarding pay-as-you-go state established the new project review and deferred maintenance proposals.) To offer CSU approval process, we have observed several and UC some flexibility to respond to changing weaknesses with this process. Below, we offer four infrastructure needs, the Legislature could consider recommendations that would increase transparency further modifying statute in two ways. First, it and strengthen legislative oversight, thereby could allow CSU and UC each to change a certain potentially improving the overall quality of university percentage (such as 10 percent) of the projects projects. The recommendations would apply to identified on their respective final approval letter, both CSU and UC projects and entail statutory as long as the originally approved debt level is amendments. We recommend adopting the not exceeded. Second, it could require that CSU statutory changes this session but not making them and UC document any of these changes in their operative until the next capital outlay review cycle February capital outlay progress reports to the (for 2022-23 project proposals). Legislature. Recommend Requiring Public Posting of Recommend Requiring Submission of Final COBCP Material and Approval Letters. Currently, Approval Letter No Later Than May Revision. the administration does not publicly post the While current law specifies that the administration’s COBCP material that CSU and UC are required final letter is to be submitted no sooner than to submit for each project, nor does it post its April 1 (to allow some time for the Legislature to February and April project approval letters. In review the preliminary approval letter), it does contrast, DOF posts COBCPs for other agencies, not specify a deadline for final submission. We including for the community colleges. The state also recommend the Legislature modify statute to records approved projects for those agencies in require the administration to provide final project the annual budget act. Publicly posting information approval no later than the May Revision. We also about proposed and approved projects increases recommend that the final approval letter contain transparency, ensuring that the Legislature and only minor revisions to the preliminarily approved the public have ready access to key details about projects, rather than significant new proposals. (As each project. Consistent with these state practices, discussed further below, significant new proposals we recommend the Legislature amend statute to still could be introduced through legislation, even if require the administration to publicly post COBCP disallowed through the section letter process.) As material for CSU and UC projects, as well as its the May Revision is close to the end of the budget February and April project approval letters for the process, the Legislature very likely would not have universities. time to undertake meaningful review of new or Recommend Clarifying Requirement to substantially changed proposals. Equally important, Provide List of Certain Projects. Like CSU’s having a final approval list no later than the May infrastructure improvement proposal this year, UC Revision would ensure the Legislature is aware has also submitted proposals in previous years of CSU’s and UC’s new debt-service obligations that requested funding for an unspecified package before it adopts its final university General Fund of deferred maintenance projects. In these cases, support appropriations in the annual budget act. the administration’s preliminary and final letters Knowing the level of these debt service obligations also have authorized funding without specifying 2021-22 LAO Budget Series 5 analysis full gutter for CSU and UC is particularly important as those these changes until June 30—after the Legislature obligations are being paid using the universities’ had enacted the budget. Proposing such notable support appropriations. changes so late in the budget process gave Recommend Significant, Substantive the Legislature effectively no time to review Changes to Project Proposals Be Made Through them publicly. To ensure the Legislature has a Legislation. Under the new project approval meaningful opportunity to review future project process, the administration has sometimes proposals, we recommend the Legislature amend introduced significant new proposals after it statute to require that any significant changes submitted its preliminary approval letter to the the administration proposes after the February Legislature. For example, for CSU in 2020-21, preliminary approval letter be introduced in the administration proposed notably increasing legislation. (“Significant changes” could include total project costs from the initial February proposals that add projects, significantly expand letter, primarily by adding one new project and the scope of projects, or substantially increase significantly changing the scope of another project. project costs and associated state-funded debt.) Moreover, DOF did not notify the Legislature of LAO Publications This report was prepared by Lisa Qing and Jason Constantouros and reviewed by Jennifer Pacella and Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. 2021-22 LAO Budget Series 6