Addressing Capital Renewal at UC and CSU

AN LAO REPORT Addressing Capital Renewal at UC and CSU GABRIEL PETEK | LEGISLATIVE ANALYST | JANUARY 2023 SUMMARY Capital Renewal Needs at the Universities Are Large and Growing. Capital renewal refers to the replacement of building components (such as roofs and heating systems) that are at the end of their useful life. Over the next ten years, the University of California (UC) projects $12 billion in capital renewal needs will emerge across its academic facilities, while the California State University (CSU) projects $3.1 billion in emerging capital renewal needs. If these needs are not addressed, the segments’ existing backlogs of deferred maintenance will grow. These backlogs currently are estimated to total $7.3 billion at UC and $6.5 billion at CSU. No Plan Is in Place to Address Identified Capital Renewal Needs. Capital renewal spending at UC and CSU has been insufficient to keep pace with emerging needs. Some campuses designate little, if any, ongoing funding from their base budgets for capital renewal, instead relying heavily on one-time state funding to address backlogs. State funding has been episodic, with large amounts provided in some years and none in other years. In addition, as UC and CSU continue to expand their academic space, no process is in place to account for the future capital renewal needs of new facilities. Absent a plan to address these issues, backlogs very likely will continue to grow—leading to higher costs and greater risk of programmatic disruptions. Recommend Legislature Take Several Actions to Plan for Capital Renewal. First, we recommend the Legislature develop a plan to address anticipated UC and CSU capital renewal needs as they emerge. Such a plan would involve several key elements, including setting a funding target that is aligned with emerging needs, sharing the cost between the state and the segments, and phasing in funding increases over time. Second, we recommend the Legislature adopt a companion plan to reduce UC’s and CSU’s existing backlogs to a target level within a set time period. Third, we recommend requiring UC and CSU to identify funding for the future capital renewal costs of any proposed new academic facilities. Fourth, we recommend requiring UC and CSU to report annually on their facility conditions, among other related topics. Several Additional Issues for Legislature to Consider. Although the state likely will face budget constraints in 2023-24, the Legislature can take important steps to begin the capital renewal planning process. In doing so, we encourage the Legislature to consider the trade-offs between providing more funding for capital renewal versus other purposes—including the segments’ operating costs, the construction of new academic facilities, and support for nonacademic facilities (such as student housing). The Legislature could also consider reassessing the need for UC and CSU to maintain their current footprints, particularly given the recent expansion of online instruction. Finally, the Legislature may also wish to begin planning for the capital renewal needs of other state agencies in addition to UC and CSU. www.lao.ca.gov 1 AN LAO REPORT INTRODUCTION frequent. In this brief, we first provide background on capital renewal at the segments, next assess The University of California (UC) and California the current approach to addressing their capital State University (CSU) have many academic renewal needs, then make recommendations to facilities. As these facilities age, their building better plan and budget for capital renewal moving components eventually need to be replaced. forward, and finally raise other related issues for the Replacing these components is commonly referred Legislature to consider. to as capital renewal. When capital renewal needs are not addressed as they emerge, campuses BACKGROUND accumulate backlogs commonly referred to as deferred maintenance. Capital renewal costs at In this section, we introduce information needed UC and CSU are large and growing, with more to understand capital renewal at UC and CSU, projects added to their backlogs each year. provide the segments’ estimates of their capital Neither the state nor the segments currently renewal needs, and discuss how the segments have a plan for covering these costs. Without a currently budget for capital renewal. The nearby plan, facility conditions will likely deteriorate and box provides definitions of key terms used programmatic disruptions could become more throughout this brief. Glossary of Key Terms In this brief, we use the following facility-related terms. • Academic Facilities. Buildings that contain space supporting the segments’ core academic missions. Examples of such space include classrooms, laboratories, and faculty offices. • Infrastructure. Physical assets that support multiple facilities. Examples include central plants, utility distribution systems, and pedestrian pathways. • Capital Renewal. The periodic replacement of building components (such as roofs and heating systems) that have reached the end of their useful life. Campuses can address capital renewal in various ways, including replacing individual building components, renovating an entire facility, or demolishing a facility and constructing a replacement for it. • Deferred Maintenance. The backlog of capital renewal projects that accumulates when building components are not replaced at the end of their useful life. • Current Replacement Value (CRV). The estimated cost of replacing any given facility or group of facilities today. CRV is a common measure of the value of a campus’s physical assets. • Facility Condition Index (FCI). A measure of the condition of any given facility or group of facilities. The FCI for a facility is calculated by dividing its deferred maintenance backlog by its CRV. For example, a facility with a $20 million backlog and a $100 million CRV would have an FCI of 0.20. The smaller the FCI, the better the facility condition, with an FCI below 0.05 commonly considered good and an FCI above 0.10 considered poor. • Routine Maintenance. Maintenance activities that occur on a regular basis, including inspecting, servicing, and undertaking minor repairs of building components. Inadequate routine maintenance can lead building components to reach the end of their useful life prematurely, thereby increasing capital renewal needs and costs. • Operations and Maintenance (O&M). The day-to-day activities required to use facilities and keep them in good condition. Examples of O&M costs include routine maintenance, utilities, and custodial services. 2 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Understanding Capital Renewal When campuses do not adequately address routine maintenance, building components can reach the UC and CSU Have Many Academic Facilities, end of their useful life prematurely, further increasing Along With Associated Infrastructure. capital renewal needs. Routine maintenance and Traditionally, the state has funded the segments’ other day-to-day facility costs (such as utilities and academic facilities, including classrooms, custodial services) are commonly referred to as laboratories, and faculty offices. UC has about “operations and maintenance” (O&M) costs. UC and 63 million square feet of academic facilities across CSU campuses fund O&M costs from their operating its ten campuses and other sites. The current budgets. Campuses often plan for increased O&M replacement value (CRV) of those facilities totals costs when adding new academic space. For about $39 billion. CSU has about 43 million example, CSU annually designates a portion of its square feet of academic facilities across its state General Fund base budget augmentation for 23 campuses, and the CRV of those facilities the O&M of new facilities, allocating these funds to totals about $23 billion. In addition to academic campuses based on their share of newly opened facilities, the state funds a notable amount of square footage. While UC does not centrally campus infrastructure, such as central plants, utility designate a portion of its base budget augmentation distribution systems, and pedestrian pathways. for O&M, campuses may choose to use some of (Though not a focus of this brief, campuses also their allocation for this purpose. have self-supporting facilities, such as student housing, parking structures, certain athletic facilities, UC and CSU Report Certain Information on and student unions. These types of facilities typically Capital Projects. Under state law, UC and CSU generate their own fee revenue, which covers are to submit capital outlay plans to the Legislature associated capital and operating costs.) by November 30 each year. Specifically, these plans are to identify the projects proposed for each Facilities Require Periodic Capital Renewal. campus over the next five years. Depending on UC reports that nearly 60 percent of its academic the segments’ objectives over any given five-year space is at least 30 years old. Similarly, CSU reports period, these plans might have a different mix of that more than half of its academic facilities are at capital renewal and new construction projects. least 40 years old. As facilities age, their building Though these plans specify projects proposed components eventually reach the end of their useful over the near term, they are not required to include life and need to be replaced. For example, within a comprehensive estimate of the segments’ a given facility, a roof might need to be replaced capital renewal needs, including their backlogs. after 30 years. The cost of capital renewal projects In addition to requiring the five-year capital outlay can vary widely, with costs ranging from tens of plans, state law requires UC and CSU to submit thousands of dollars for smaller projects to tens detailed proposals for any capital outlay projects of millions of dollars for larger projects. If aged they intend to fund in the next year using their main building components are not replaced, they can General Fund appropriation. The administration and start malfunctioning or stop working altogether. In Legislature generally review these proposals during some cases—such as a leaking roof—not replacing the annual budget process. an aged building component can result in new problems that increase costs. When campuses Identifying Capital Renewal Needs do not address capital renewal as the need UC Is Developing a Systemwide Facility emerges, they accumulate a backlog of deferred Condition Assessment Program. Historically, maintenance projects. UC campuses each measured their capital renewal Facilities Also Require Routine Maintenance. needs using their own approaches. Several years Whereas capital renewal refers to the periodic ago, UC began developing the Integrated Capital replacement of key building components, routine Asset Management Program (ICAMP) to obtain more maintenance refers to activities that tend to occur on comprehensive and consistent data systemwide. a more regular basis. For example, these activities Under ICAMP, both external consultants and may include inspection, servicing, and minor repairs. www.lao.ca.gov 3 AN LAO REPORT campus staff maintain UC’s facility condition assessment data, with the Figure 1 specific responsibilities of the external consultants and internal staff varying by Projected Capital Renewal Needs Vary by Campus campus. Though ICAMP currently includes Average Annual Renewal Needs (In Millionsª) data on UC’s academic facilities, UC remains in the midst of collecting data Different Scales Used for UC and CSU Charts on related infrastructure (such as central UC plants). In December 2021, UC submitted Berkeley a one-time report to the Legislature on Los Angeles its capital renewal needs for academic Davis facilities. The UC data in this section San Diego comes from that report. Irvine Santa Barbara CSU Also Has a Systemwide Facility Santa Cruz Condition Assessment Program. Riverside CSU has measured its systemwide capital San Francisco renewal needs for many years. In 2017-18, Merced it improved its approach by incorporating 50 100 150 200 250 300 $350 more granular data on facility conditions. CSU Under this approach, consultants from an external vendor are expected to conduct San Jose on-site facility condition assessments Long Beach at each campus once every five years. Northridge Between external assessments, campus Fullerton staff are expected to update their San Diego facility condition assessment data on San Luis Obispo a regular basis. In contrast to UC, CSU Pomona already has collected data not only on San Francisco San Bernardino its academic facilities but also on related Fresno infrastructure. CSU annually reports Sacramento its capital renewal needs for academic Sonoma facilities and infrastructure in its five-year Los Angeles capital outlay plan. The CSU data in this Chico section comes from the five-year capital San Marcos outlay plan submitted to the Legislature in Humboldt November 2022. Dominguez Hills UC and CSU Project Large Capital Channel Islands Renewal Needs Emerging Annually. Stanislaus UC projects $12 billion in capital renewal Monterey Bay needs will emerge across its academic Bakersfield facilities over the next ten years, equating East Bay to an average of $1.2 billion in capital Maritime renewal projects emerging each year. 5 10 15 20 25 30 35 $40 CSU projects $3.1 billion in capital a The segments calculate their average annual renewal needs across the next ten years. We use the most recently renewal needs will emerge across its available data from each segment. UC data comes from a December 2021 report and it includes academic facilities only. (UC's infrastructure assessment is still in progress.) CSU data comes from a November 2022 report, and it academic facilities and infrastructure includes both academic facilities and infrastructure. over the next ten years, equating to an average of $313 million annually. Figure 1 4 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT shows projected annual renewal needs by campus. Across all UC and Figure 2 CSU campuses, annual renewal needs range from about $1 million (at UC Many UC and CSU Campuses Merced) to $318 million (at UC Berkeley). Have Poor Facility Conditions This variation likely reflects differences Estimated Facility Condition Index by Campusª among campuses in the number, size, age, complexity, and location of their UC facilities, among other factors. For example, a large campus with older San Francisco facilities and extensive research space is Los Angeles likely to have costlier renewal needs than Irvine Riverside a small campus with newer facilities and Santa Cruz little research space. Santa Barbara UC and CSU Also Have Large Davis Existing Backlogs of Capital Renewal San Diego Projects. At both segments, the renewal Berkeley Merced needs emerging each year are on top of large backlogs of deferred maintenance 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 Good Fair Poor projects. UC estimates it has a $7.3 billion backlog associated with its CSU academic facilities and infrastructure, East Bay while CSU estimates it has a $6.5 billion San Francisco backlog. Figure 2 shows each campus’s San Jose backlog for academic facilities, Humboldt divided by the CRV of those facilities. Bakersfield This metric is commonly known as Sacramento the facility condition index (FCI), with Chico a lower index score reflecting better Fresno facility conditions. We estimate more Los Angeles Pomona than half of UC campuses and nearly San Diego all CSU campuses have an FCI above San Luis Obispo 0.10, which is typically considered an Sonoma indication of poor facility conditions. Long Beach Backlogs Have Grown Significantly Fullerton in Recent Years. From 2017-18 to Northridge 2022-23, CSU’s backlog for academic Maritime facilities and infrastructure grew by San Bernardino Dominguez Hills $2.4 billion (60 percent). UC indicates Stanislaus that its backlog has also grown over San Marcos time, though data tracking these Monterey Bay changes was not available. In recent Channel Islands years, three main factors have driven 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 growth in the segments’ backlogs. Good Fair Poor First, additional building components a Reflects deferred maintenance backlog for academic facilities divided by their current replacement value (CRV). have reached the end of their useful life. The backlog and CRV estimates exclude infrastructure. We use the most recently available data from each segment. UC data comes from a December 2021 report. CSU data comes from a November 2022 report. Second, as the segments improve their facility condition assessment programs, some building components that were www.lao.ca.gov 5 AN LAO REPORT not previously tracked have been newly added UC and CSU Also Debt Finance Capital to their data systems. Third, the backlogs have Renewal Projects. Since 2013-14 and 2014-15, been adjusted upward to reflect construction cost respectively, the state has authorized UC and escalation, which—reflecting broader inflationary CSU to issue university bonds for capital outlay pressures—has been particularly high over the projects, then pay the associated debt service past two years. Growth from these three factors from their main General Fund appropriations. has outpaced the rate at which the segments are These debt-service payments are in addition to completing capital renewal projects, as this is other base funding that the segments decide to limited by available funding and other factors. As use for capital renewal projects in any given year. a result, the segments have seen net increases in While the segments may use debt financing for their backlogs over time. smaller projects (such as roof replacements), they often also use it for larger projects. For example, Budgeting for Capital Renewal the segments typically debt finance entire facility Campuses Have Discretion Over Capital renovation projects as well as projects that entail Renewal Budgeting. State law does not require demolishing an aging facility and replacing it. UC and CSU to budget certain amounts for capital Such projects often address capital renewal while renewal each year. Moreover, UC does not have also making other facility improvements, such as an internal systemwide policy on how much its seismic upgrades or classroom enhancements. campuses are to budget annually for capital We estimate UC has used university bonds to renewal, effectively leaving these decisions to finance roughly $1.1 billion in projects that renew or the discretion of the campuses. Under CSU’s improve existing facilities since 2013-14, equating internal systemwide policy on facility maintenance, to an average of about $110 million in projects campus presidents are responsible for ensuring annually. Similarly, we estimate CSU has used that “appropriate resources” are directed toward university bonds to finance roughly $1.8 billion in capital renewal. The long-term goal of CSU’s policy projects that renew or improve existing facilities is to eliminate deferred maintenance. CSU’s policy, since 2014-15, equating to an average of about however, does not set a minimum level of spending $200 million annually. Based on the available data, for capital renewal or otherwise specify what we cannot determine the share of these funds that amount of resources is considered appropriate at went specifically for capital renewal versus other each campus. facility improvements. Campuses Use Some Ongoing Base Funding UC and CSU Also Use Reserves for Capital for Capital Renewal Projects. Some campuses Renewal. UC and CSU maintain reserves for choose to designate annual funding for capital various purposes, including to save for large future renewal projects from their base budgets (that is, expenses and prepare for economic downturns. their ongoing, unrestricted core funding). At both Campuses commonly use a portion of their segments, these funds primarily consist of state reserves to support capital renewal. Campuses General Fund and student tuition revenue, with may use their reserves to pay for a planned capital a small portion coming from other fund sources. renewal project or an emergency repair. They also Systemwide data is not available on how much may use their reserves to provide matching funds UC and CSU campuses are spending annually from for a major project financed through university their base budgets on capital renewal projects. bonds. (CSU encourages campuses to cover about Based on conversations with both segments, the 10 percent of the cost of these projects using amounts vary from campus to campus and tend reserves.) Systemwide data is not available on how to be much smaller than their emerging capital much UC and CSU are spending annually from their renewal needs. The amounts that campuses reserves on capital renewal. dedicate to capital renewal also can fluctuate with CSU Recently Began Using Investment fiscal conditions. Notably, campuses may choose Earnings for Capital Renewal. UC and CSU to reduce capital renewal spending from their base place some unspent funds in various investment budgets in years when the state reduces funding for accounts. In 2018, CSU established a new UC and CSU. 6 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT investment account called the Total Return maintenance projects in 2020-21, when it was Portfolio (TRP). Funds in this account are invested anticipating a significant budget problem due to in certain types of assets (such as mutual funds) the COVID-19 pandemic. The state then provided in which CSU did not previously invest. Under $325 million in one-time funds to each segment just state law, CSU may only use TRP earnings for one year later in 2021-22, when it had a significant one-time capital expenses, including renewal. budget surplus. Since CSU began distributing TRP earnings in 2019-20, it has allocated an average of $40 million ASSESSMENT annually to campuses for capital expenses, In this section, we assess the current approach with distributions varying somewhat from year to addressing capital renewal at UC and CSU. to year based on investment performance. UC Data on UC and CSU Capital Renewal Needs has a similar investment account called the Total Has Improved. Over the past several years, Return Investment Pool (TRIP). However, state law both segments have taken steps to improve the does not restrict the use of UC TRIP earnings to consistency and comprehensiveness of their facility capital expenses, and data is not available on how condition assessment data. The state now has data much funding from this source has gone toward from UC and CSU quantifying their capital renewal capital renewal. needs for academic facilities and (to a lesser extent) State Has Provided Significant One-Time infrastructure. Compared to the previously available Funding to Address Backlogs. Despite the data, the current data is more useful for planning various fund sources the segments are using for and budgeting. Opportunities remain for both the capital renewal projects each year, backlogs have state and the segments to use the data for these accumulated over time. Over the years, the state purposes. For example, the state could use the has sometimes provided General Fund to UC data to better align funding with identified needs as and CSU to address these backlogs. In 2015-16, well as monitor the segments’ progress in improving after several years of providing no new funding facility conditions. for deferred maintenance projects, the state State Lacks Comprehensive Data on Capital resumed providing one-time funds for this purpose. Renewal Spending. In contrast to the improved Since then, the state has provided an average data on UC and CSU capital renewal needs, the of $86 million annually to UC and $98 million segments’ data on capital renewal spending still annually to CSU for deferred maintenance projects has notable limitations that make it difficult to use and related purposes (such as energy efficiency for planning and budgeting. Most significantly, projects and seismic upgrades). As Figure 3 the segments do not comprehensively track their shows, these allocations have varied significantly capital renewal spending across all fund sources. from year to year, partly reflecting changes in the For example, CSU’s data on capital renewal state’s budget condition. For example, the state spending does not include bond funding for major provided no funds to UC and CSU for deferred capital renewal projects, while UC’s data does not Figure 3 State Funding for Deferred Maintenance Projects Varies From Year to Year One-Time General Fund (In Millions) 2015-16 2016-17 2017-18 2018-19 2019-20a 2020-21 2021-22b 2022-23c UC $25 $35 — $35 $144 — $325 $125 CSU 25 35 — 35 239 — 325 125 a Amount for CSU was provided for deferred maintenance or campus-based child care facilities. The 2020-21 budget package allowed UC and CSU to repurpose unspent 2019-20 deferred maintenance funds for other operational purposes. b Amounts for UC and CSU were provided for deferred maintenance or energy efficiency projects. c Amounts for UC and CSU were provided for deferred maintenance, seismic upgrades, or energy efficiency projects. www.lao.ca.gov 7 AN LAO REPORT include smaller projects supported by one-time Without Additional Planning, Backlogs Will state funding or campus base budgets. Without Very Likely Continue to Grow. Although the this information, the Legislature cannot measure data on capital renewal spending at UC and CSU the gap between the segments’ emerging capital is limited, it suggests that current spending is renewal needs and their current spending. Because insufficient to keep pace with capital renewal needs the spending data is not tracked by fund source, as they emerge. Moreover, the continued expansion the Legislature also cannot determine how much of academic space will further add to capital campuses are relying on one-time state funding for renewal needs in the long term. Absent a plan to capital renewal versus ongoing amounts designated address the future capital renewal costs associated from their base budgets. Moreover, the segments’ with both existing and new facilities, backlogs very spending data does not allow the Legislature likely will continue to grow moving forward. to separate spending on capital renewal from As Backlogs Grow, Fiscal and Programmatic spending on other facility improvements (such as Consequences Could Become More Serious. seismic upgrades or classroom enhancements). At campuses with growing backlogs, aged building No Plan Is in Place to Address Identified components could require more frequent servicing, Capital Renewal Needs. Although both segments as well as costly emergency repairs. Moreover, have notable capital renewal needs in any given building components past their useful life can year, neither the state nor the segments have a create poorer learning and working conditions, plan to address these needs as they emerge. with the potential for programmatic disruptions Some campuses indicate little, if any, ongoing funds when systems fail. Based on conversations with the are dedicated in their base budgets for capital segments and stakeholders, some programmatic renewal, suggesting they rely heavily on one-time disruptions already are occurring. Recent examples state funding. Meanwhile, one-time state funding include inadequate ventilation leading to overheated for capital renewal has been episodic, with large classrooms as well as frequent flooding within amounts sometimes provided when the state buildings affecting faculty research. These types budget has a surplus versus no funds provided in of facility issues could affect the recruitment other years. With such volatility, campuses have and retention of students, faculty, and staff. Left difficulty planning for capital renewal projects in unaddressed, these types of issues could also pose advance and putting in place adequate staffing to health and safety concerns. implement those projects. No Process Is in Place for Assessing RECOMMENDATIONS the Full Cost of New Facilities. The current In this section, we make recommendations process for proposing new academic facilities at related to planning and budgeting for UC’s and UC and CSU does not fully account for the future CSU’s ongoing capital renewal needs, existing costs associated with those facilities. Although backlogs, and future needs associated with new campuses commonly plan for the increased facilities. We then focus on improving how the day-to-day O&M costs of opening new academic Legislature monitors progress in addressing UC’s space, they generally do not plan for the capital and CSU’s capital renewal needs. renewal costs that will emerge in future years as building components age. This contrasts with the Addressing Ongoing approach taken with self-supporting facilities. When Capital Renewal Needs campuses propose new student housing facilities, Adopt Funding Plan to Address UC and for example, they are often expected to develop CSU Capital Renewal on Ongoing Basis. a plan to cover future capital renewal costs using We recommend the Legislature develop a plan for project revenues. In recent years, a few other states the state and the segments to fund capital renewal (including Florida and Nebraska) have also begun needs as they emerge. Below, we describe the to require public universities to identify funding for key elements of such a plan. Figure 4 shows an the future capital renewal costs of academic capital illustrative plan incorporating these elements. outlay projects. 8 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Set Ongoing Funding Target. The Legislature UC projects its average annual renewal needs could consider setting the annual ongoing funding are $1.2 billion, which is somewhat higher than target based on the CRV of each segment’s the illustrative target. CSU projects its average facilities—a metric that UC and CSU are already annual renewal needs are $313 million, which is tracking. Under a commonly cited best practice, somewhat lower than the illustrative target. The campuses are to allocate an amount equal to main advantage of using a funding target linked to 2 percent to 4 percent of their CRV annually for a percentage of CRV is the consistency it provides capital renewal and routine maintenance. In the not only across the segments but also over time. illustrative plan in Figure 4, we set the annual Linking to a percentage of CRV also would better funding target for capital renewal at 2 percent of facilitate planning activities and could reduce each segment’s CRV. (We assume the segments volatility in capital renewal funding from year to year. would fund routine maintenance separate from Share Cost Between State and Segments. this target.) We estimate that 2 percent of CRV Given the magnitude of their capital renewal needs, is $839 million at UC and $474 million at CSU in UC and CSU very likely would need additional state 2023-24, with the amount increasing annually due support to address these needs as they emerge. to construction cost escalation. (Our estimates After setting a capital renewal funding target, the assume 3.4 percent annual cost escalation, based Legislature could provide ongoing General Fund on the historical annual average growth rate in the augmentations to cover a certain share of that California Construction Cost Index since 1979, target, then set an expectation that the segments a sufficiently long period to encompass spans cover the remaining share from other sources. of high and low inflation rates.) For comparison, Figure 4 Illustrative Funding Plan for UC and CSU Capital Renewal (Dollars in Millions) 2023-24 2024-25 2025-26 2026-27 2027-28 UC Funding Level Funding target (2 percent of CRV)a $839 $868 $897 $928 $960 Phase-in percentage 20% 40% 60% 80% 100% Totals $168 $347 $538 $742 $960 Funding by Sourceb General Fund augmentation (45 percent) $76 $156 $242 $334 $432 UC share (55 percent) 92 191 296 408 528 Totals $168 $347 $538 $742 $960 CSU Funding Level Funding target (2 percent of CRV)a $474 $490 $507 $524 $542 Phase-in percentage 20% 40% 60% 80% 100% Totals $95 $196 $304 $419 $542 Funding by Sourceb General Fund augmentation (60 percent) $57 $118 $182 $251 $325 CSU share (40 percent) 38 78 122 168 217 Totals $95 $196 $304 $419 $542 a Assumes CRV increases by 3.4 percent annually, based on historical average growth in California Construction Cost Index. b These illustrative cost shares are based on the approximate share of each segment’s total ongoing core funding that comes from state General Fund versus other sources. CRV = current replacement value. www.lao.ca.gov 9 AN LAO REPORT Any current ongoing funding designated by the from the building industry to perform the design and segments from their base budget or other sources construction work. The illustrative plan in Figure 4 could count toward the segments’ share. To meet phases in funding increases evenly over five the remaining expectation, the segments could years—reaching the funding targets the last year increase the amount designated from their base of the period. (Though the illustrative plan phases budget, either by (1) allocating new revenue from in funding increases beginning in 2023-24, the General Fund base augmentations and any tuition Legislature could schedule the phase in to begin at increases or (2) redirecting existing funding from a later time.) Once the funding targets are reached, other purposes. The segments could use these the illustrative plan assumes the state would ongoing funds to pay for capital renewal projects maintain funding for capital renewal (with annual in cash or to debt finance these projects using adjustments for cost escalation) moving forward. university bonds. In addition, the segments could To avoid future funding reductions, the state could continue to fund some projects using reserves, build up its reserves sufficiently such that it could investment earnings, or other sources (such as continue providing its share of the capital renewal donor funds). funding target even during a recession. Consider Various Factors When Setting Cost Provide Guidance on Project Prioritization Shares. In determining an appropriate expectation During Phase In. During the phase-in period, for the segments’ share of the capital renewal annual funding for capital renewal would not keep funding target, the Legislature could consider pace with emerging needs, and some projects each segment’s capital renewal needs, other cost would continue to be added to the backlog. To pressures, access to nonstate funds, and debt mitigate the negative consequences of a growing capacity. Based on these factors, the state could backlog, the Legislature could direct UC and potentially set different expectations for UC and CSU to prioritize certain types of projects with CSU. In the illustrative plan in Figure 4, state available funding. For example, the segments General Fund augmentations cover 45 percent could be directed to prioritize projects that address of the funding target at UC and 60 percent of the potential health and safety issues, reduce the risk funding target at CSU, with the segments covering of programmatic disruptions, avoid the need for the remaining share from other sources. These costlier repairs in the future, and reduce ongoing illustrative amounts are based on the approximate operational costs. share of each segment’s total ongoing core Addressing Existing Backlogs funding that comes from state General Fund versus other sources. Use Additional One-time Funding to Reduce Existing Backlogs. Beyond developing a plan to Phase In Funding Increases Over Several address emerging capital renewal needs at UC and Years. In light of broader budget conditions and CSU, we recommend the Legislature adopt a other cost pressures, the state and the segments companion plan to reduce the existing backlogs to very likely will not have sufficient resources to reach a target level within a set time period. For example, the capital renewal funding targets in the first year the Legislature could set the target level at an of the plan. The Legislature could phase in funding FCI of 0.05—the threshold below which facilities increases to reach the targets over several years. are commonly considered to be in good condition. Such an approach would give the state and the To reduce the backlogs to this level, the Legislature segments more time to identify available funding could continue using one-time state funding. If the and make other budget adjustments. Phasing in UC and CSU backlogs were reduced to a target funding increases gradually would also allow the FCI of 0.05 over a ten-year period, we estimate the segments more time to build the administrative average annual cost would be about $935 million capacity to complete a higher volume of projects and $750 million, respectively. (Consistent with each year. This additional capacity would likely our illustrative ongoing funding plan, our one-time entail campuses increasing their staffing for project funding estimates assume 3.4 percent annual cost management as well as identifying additional labor 10 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT escalation, as well as growth in the backlog due to • Projected additional capital renewal needs the ongoing funding target being phased in over over the next ten years, by campus. five years.) These costs to address the existing • Total annual spending on capital renewal, by backlogs would be on top of the ongoing funding fund source. target. As with the ongoing funding target, costs • Total reserves for future capital renewal, by to address the existing backlog could be similarly fund source. shared between the state and the segments. Require UC and CSU to Report Annually on Addressing Capital Renewal Use of State Capital Renewal Funds. As the Needs of New Facilities Legislature provides additional funding to UC and CSU to address their capital renewal needs, Require UC and CSU to Plan for Future Costs we recommend it adopt provisional language of New Facilities. We recommend the Legislature requiring the segments to report on the projects require the segments to identify funding for the they undertake with those funds. The Legislature future capital renewal and O&M costs of proposed typically has adopted this type of language when new academic facilities. These components providing funding for deferred maintenance could become a required part of the capital outlay projects. Adopting similar language moving forward project proposals that the segments submit to would help the Legislature ensure that state funds the state each year. The segments might plan to go towards what it deems the highest priority cover capital renewal costs of new facilities in projects. This is particularly important if funding for various ways. For example, a campus could plan capital renewal remains insufficient to fully address to reserve funding annually from its base budget needs, as the segments would need to triage during the lifecycle of the facility, or it could raise among potential projects. additional donor funds at the outset of the project. Beyond requiring the segments to identify funding, OTHER ISSUES TO CONSIDER the Legislature could further consider requiring campuses to deposit the funds into a restricted In this section, we raise a few additional issues account to ensure they are available when building for the Legislature to consider. components need to be replaced. Even With Constrained State Budget, Legislature Could Take Important Steps in Monitoring Progress on Capital 2023-24. In The 2023-24 Budget: California’s Renewal Fiscal Outlook, we project the state faces a Require UC and CSU to Report Annually $24 billion budget problem. Although this means on Facility Conditions. We recommend the the Legislature would not have budget capacity to Legislature require UC and CSU to annually report provide more funding to UC and CSU for capital the data listed below for their academic facilities renewal, it still could take steps toward addressing and infrastructure. This data would allow the the segments’ capital renewal needs. Without Legislature to monitor the segments’ progress in up-front state costs, the Legislature could begin addressing capital renewal as well as determine requiring UC and CSU to report annually on whether the associated state funding is having their facility conditions so that it has up-to-date the intended effect. The segments could report information for planning and oversight purposes. this information as part of their existing five-year The Legislature also could begin requiring UC capital outlay plans. (Though UC and CSU currently and CSU to plan for the future cost of any new report some of this information, neither segment academic facilities that they propose to fund using provides all this information regularly as part of its their main General Fund appropriations moving five-year plan.) forward. Moreover, the Legislature could begin the process of developing plans to address UC’s and • Facility square footage and CRV, by campus. CSU’s ongoing capital renewal needs and existing • Deferred maintenance backlog and FCI, backlogs, as this process would involve making by campus. www.lao.ca.gov 11 AN LAO REPORT several key decisions (including setting the ongoing Legislature Could Revisit UC and CSU funding target, the segments’ share of costs, the Footprints. Throughout this brief, we assume the phase-in time line, and the target FCI) before any Legislature wants to keep UC’s and CSU’s existing funding is provided to implement the plan. In the academic facilities in good condition—replacing coming months, if the budget outlook were to their components at the end of their useful life. improve such that some funding could be allocated The Legislature, however, could take a different for new purposes in 2023-24, the Legislature approach and carefully reassess the need for each could consider providing one-time funding to academic facility as it ages. Some of the impacts UC and CSU to address their existing backlogs. of the pandemic on higher education, including the Given the size of the backlogs and the growing greater reliance on online courses, will likely have potential for programmatic disruptions, we would long lasting impacts on how UC and CSU use their encourage the Legislature to make the segments’ facilities. Given these impacts, campuses might deferred maintenance projects a high priority for not require the same amount or types of academic one-time funds. space moving forward. (Beyond impacting capital Funding UC and CSU Capital Renewal renewal costs, revisiting the amount and type of Involves Difficult Trade-Offs. Even when the academic space at UC and CSU could lead to state has budget capacity for new commitments, changes in the campus experience for students.) the Legislature faces several key trade-offs in Decisions about future growth are particularly planning for capital renewal. One trade-off involves significant given the magnitude of the outstanding providing more funding for capital renewal versus capital renewal needs at UC and CSU. Just as the segments’ other operating costs. These other adding new space eventually leads to increased operating costs, including employee compensation, capital renewal costs, reducing existing space can are also increasing. Importantly, decisions about lead to lower capital renewal costs in the long term. both capital renewal and employee compensation Other State Agencies Also Have Capital can affect student, faculty, and staff recruitment Renewal Needs. Like UC and CSU, many other and retention. Another trade-off involves providing state agencies have notable deferred maintenance more funding for projects that renew existing backlogs as well as emerging capital renewal needs facilities versus add new space. This trade-off is in the coming years. Similar to UC and CSU, these heightened because adding new space leads to other agencies likely will face higher costs, poorer increased capital renewal needs and operating working conditions, and programmatic disruptions costs over the long term. The Legislature also if their capital renewal needs go unaddressed. faces a trade-off between funding academic The Legislature may wish to begin planning and facilities versus traditionally self-supporting budgeting for the capital renewal needs of these facilities, such as student housing. While funding other agencies too. With limited funding, the facilities such as student housing can promote Legislature faces a trade-off between prioritizing valuable policy objectives (such as a reduction in capital renewal at UC and CSU versus at other student homelessness or an increase in student agencies (such as court houses and prisons). engagement), it leaves less budget capacity to This trade-off is heightened because some other support academic facilities. This trade-off is state agencies have less access to nonstate heightened because academic facilities, unlike funding, suggesting an even greater reliance on self-supporting facilities, do not directly generate state General Fund in addressing their capital revenue to cover their capital and operating costs. renewal needs. Given these trade-offs are difficult and perennial, the Legislature will want to take them into account when developing a long-term budget plan like the one we lay out in the “Recommendations” section of this brief. 12 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT www.lao.ca.gov 13 AN LAO REPORT 14 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT www.lao.ca.gov 15 AN LAO REPORT LAO PUBLICATIONS This report was prepared by Lisa Qing, 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. 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, California 95814. 16 LEGISLATIVE ANALYST’S OFFICE