ca legislative analyst's office report: california infrastructure spending

8/4/2019 CA Legislative Analyst's Office Report: California Infrastructure Spending

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A TYar Prspctiv:

CaliriaIrastrctr Spi

M A C T A y l o r l e g i s l A T i v e A n A l y s T A u g u s T 2 0 1 1


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A n L A O R e p O R t

2 LegislativeAnalystsOfcewww.lao.ca.gov


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ConTenTS

Itrcti ..............................................................................................................5

Trasprtati ........................................................................................................15

K12 Schls ............................................................................................................20

Rsrcs ................................................................................................................25

Hihr ecati ....................................................................................................30

Crimial Jstic .......................................................................................................35

Cclsi ...............................................................................................................40


www.lao.ca.govLegislativeAnalystsOfce 3


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InTRoduCTIon

or improved to meet current and uture needs.

Additionally, Caliornia will continue to need new

inrastructure to accommodate population growth.

Tis, in turn, will require additional resources oroperations and maintenance. Over the last decade,

One o the basic unctions o government is

to provide the public inrastructureland, streets

and highways, buildings, and utility systemsthat

is integral to delivering public services, osteringeconomic growth, and enhancing the quality o lie.

Te state and local govern-

ments in Caliornia have

developed an immense

inventory o public

inrastructure. As shown

in Figure 1, the states

inrastructure includes

a diverse array o capital

acilities associated with

such programs as water

resources, transportation,

higher education, natural

resources, criminal

justice, health services,

and general government

services. In addition to

the state government

inrastructure invest-ments shown in Figure 1,

the state historically has

provided some unding or

local public inrastructure:

K-12 schools, community

colleges, local streets and

roads, local parks, waste-

water treatment, drinking

water, ood control, and

jails.

Inrastructure

nance is an increasingly

important issue. Much o

the states inrastructure

is aging and needs to

be renovated, adapted,

Figure 1

Major State Inrastructure

Transportation

50,000lanemilesofhighwaysand12,000bridges

9tollbridges

11millionsquarefeetofDepartmentofTransportationofcesandshops

170DepartmentofMotorVehiclesofces

102CaliforniaHighwayPatrolofces

Higher Education

10UniversityofCaliforniacampuses

23CaliforniaStateUniversitycampuses

Water Resources

34reservoirs

25dams

20pumpingplants

4pumping-generatingplants

5hydroelectricpowerplants

701milesofcanalsandpipelinesStateWaterProject

1,595milesofleveesand55oodcontrolstructuresintheCentralValley

Natural Resources

278parkunitscontaining1.3millionacres,4,000milesoftrails,and3,000historicbuildings

226forestrestations,39conservationcamps,and13airattackbases

16agriculturalinspectionstations

Criminal Justice

33prisonsand44correctionalconservationcamps

5youthfuloffenderinstitutions

19millionsquarefeetofjudicialbranchfacilityspace

11crimelaboratories

Health Services

5mentalhealthhospitals

4developmentalcenters

2publichealthlaboratoryfacilities

General State Ofce Space

224state-ownedofcestructures

2,370leasesforstateofcespace




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the state took signicant steps toward conronting

this dual challenge o renovating and expanding

inrastructure, most notably through the autho-

rization by voters o approximately $92 billion in

inrastructure-related general obligation bonds

as well as the authorization o several large lease-revenue bond programs.

In this report, we summarize the states

inrastructure spending in order to provide a

better understanding o how the state invests in

inrastructure. (See the nearby box or a brie

description o how we dened and calculated

inrastructure spending.) Specically, the report

reviews the last decade to identiy (1) the types

o inrastructure in which the state has invested;

(2) how the state nanced these investments;

(3) achievements and challenges in planning,

unding, and implementing capital outlay projects;

and (4) considerations or planning and unding

uture inrastructure. Tis rst chapter provides

an overview o the states inrastructure spending

as well as the states inrastructure planning andnancing process. Subsequent chapters discuss

specic issues within the states major capital outlay

programs. In the nal chapter, we summarize the

major issues the Legislature will need to conront to

eectively address statewide inrastructure issues.

Majr drivrs Irastrctr Spi

Te state spent $102 billion rom state unds on

inrastructure rom 2000-01 through 2009-10. Tis

spending was largely driven by the ollowing actors:

What Is Irastrctr Spi?

In this report, we dene inrastructure spending as state spending or acquiring, planning,

designing, or constructing major physical assets. Tis includes spending or the major renovation

or rehabilitation o an existing asset. Other costs associated with the states inrastructuresuch

as acility leases, utilities, or routine annual maintenanceare not included. We exclude most o

these other costs because they are operating expenses rather than investments in the states inra-

structure. One exception, however, is the states lease costs. Ideally, lease costs should be includedin our inrastructure spending totals because leasing private space is a substitute or building

and maintaining state-owned space. We did not include lease costs because the states method or

budgeting rental payments makes it dicult to determine annual spending levels by program. As a

result, our spending totals understate the states total inrastructure spending by about $400 million

to $500 million annually. (Te Department o General Services estimates that the states rent or

leased space in 2010-11 was approximately $470 million.)

Even with the exclusion o lease costs, identiying the level o spending on inrastructure is

not straightorward. State spending is typically classied as either state operations, local assis-

tance, or capital outlay. While spending categorized in the budget as capital outlay is clearly or

inrastructure, portions o state operations and local assistance budgets also und the planning

and construction o inrastructure. Many state departments, or example, use part o their state

operations budgets to plan and oversee inrastructure projects. Similarly, many local agencies spend

part o their state local assistance unds building inrastructure. Whenever possible, we identied

the amount o inrastructure spending in each program, but in some cases we had to estimate the

percentage o operating budgets or local assistance used or inrastructure purposes.




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Maintaining Existing Inrastructure.

Investment is needed to preserve and

rehabilitate existing inrastructure as it

ages. Much o the states inrastructure was

built more than 30 years ago and requires

minor renovations or major upgrades tooperate eciently and saely.

Building New Inrastructure to

Accommodate Growth Demands. Te

states population grew at a rate o about

400,000 persons annually over the last

decade. Population growth increases

demand or inrastructure, such as schools

to accommodate higher student enroll-

ments, additional roadways and trans-

portation acilities to acilitate mobility,

and water supply and water quality inra-

structure to accommodate increased water

demands.

Responding to Legal Requirements.

Investment is also needed to improve

existing inrastructure to meet ederal

and state legal requirements put in place

afer the inrastructure was constructed.

Tese requirements include environmental

regulations, the Americans with Disabilities

Act, and improvements to prison healthcare

acilities under the control o the ederal

court-appointed Receiver.

Fullling New Priorities and VoterInitiatives. In addition to the states

traditional inrastructure programs, the

state has taken on new inrastructure

responsibilities within the last decade.

Some examples include the acquisition

o additional land or local parks and the

authorizations o general obligation bonds

to support childrens hospitals and high-

speed rail.

Irastrctr Fiaci

Te states inrastructure spending relies on

various nancing approaches and unding sources.

For example, uel tax revenues und a portion o

transportation inrastructure, water ees collected

rom water users und certain water projects, and

the General Fund pays or other inrastructure.

Some inrastructure has been unded through

director pay-as-you-gospending rom theGeneral Fund and special unds. As shown in

Figure 2, however, the majority o state inra-

structure spending

has been nanced by

borrowing through the

use o long-term bonds.

We discuss each o the

major nancing mecha-

nisms below.

Pay-As-You-Go.

Under the pay-as-you-

go approach, the state

unds inrastructure

up ront through the

direct appropriation o

taxes and ees. Over the

Figure 2

How Does the State Pay or Inrastructure?

2000-01 Through 2009-10 (Dollars in Billions)

Pay-As-You-Go

GeneralFund $1.9 2%

Specialfund 33.8 33 Subtotals ($35.7) (35%)

Borrowing

Generalobligationbonds $59.1 58%

Lease-revenuebonds 5.5 5

Traditionalrevenuebondsa 2.0 2

Subtotals ($66.6) (65%)

Totals $102.3 100%a Highereducationrevenuebondsexcluded.




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last decade, direct appropriations rom General

Fund sources represented a small portion o the

states inrastructure spending (2 percent). In

contrast, pay-as-you-go spending rom special

undsprimarily transportation revenuesmade

up a signicant share o the states inrastructurespending (33 percent).

General Fund-Supported Bonds. Te state

traditionally has sold two types o bonds that are

typically paid o rom the states General Fund:

general obligation bonds and lease-revenue bonds.

Te process or authorizing, appropriating, issuing,

and repaying bonds is summarized in Figure 3.

Te Legislature has a signicant role in the earlier

stages o the process, while the later stages o

the process are mainly under the control o the

administration.

General obligation bonds accounted or almost

three-fhs o the states total inrastructure

spending over the last decade. Passing a general

obligation bond and placing it beore the voters

requires a two-thirds vote in the Legislature.

Alternatively, proponents can gather signatures

through the states initiative process to place a

general obligation bond beore voters. In eithercase, general obligation bonds must be approved by

a majority o voters in order to take eect. Te debt

service on most general obligation bonds is directly

paid or by the General Fund, although some bonds

are paid o rom designated revenue streams.

Lease-revenue bonds, which accounted

or 5 percent o the states total inrastructure

spending, are the second type o bond. Tese bonds

do not require voter approval and instead can

be authorized by the Legislature. During the last

decade, the state spent $5.5 billion in lease-revenue

bond proceeds. Lease-revenue bonds are paid o

rom payments (primarily nanced by the General

Fund) by the state agencies using the acilities they

nance, but their payment is not guaranteed by

the General Fund to the same extent as general

obligation bonds. As a result, they typically have

somewhat higher interest and issuance costs than

general obligation bonds.

raditional Revenue Bonds. Te state also

utilizes revenue bonds to nance inrastructure

projects. Rather than being supported by theGeneral Fund, these bonds are paid o rom a

designated revenue streamusually generated by

the projects they nancesuch as bridge tolls or

water contract payments. Tese bonds usually do

not require voter approval. Te State Water Project

and university systems issue most o the states

revenue bonds.

Irastrctr Plai a dcisi Maki

Planning, prioritizing, and developing the

states inrastructure is a long-term, multistage

process. As described below, the administration,

Legislature, and voters each play distinct roles in

this process.

Administration Leads Planning Process.

Te administration is responsible or identiying

statewide inrastructure needs and developing

proposals or their unding. Specically,

Chapter 606, Statutes o 1999 (AB 1473, Hertzberg),directs the Governor to annually submit a statewide

ve-year inrastructure plan and a proposal or

its unding. Te statewide plan is a consolidation

o individual ve-year plans developed by state

agencies. Departments are expected to evaluate

their inrastructure needs or the next ve years

and compare that with existing inrastructure

to determine their net inrastructure need. Te

Department o Finance (DOF) then consolidates

the departments plans to provide a coordinated

picture o the states capital investment needs.

Te administration has not provided a statewide

ve-year inrastructure plan since the Governors

2008-09 budget proposal.

Legislature Makes Inrastructure Investment

Decisions. Afer the administration makes its




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The Bond Spending Process

Figure 3

VotersLegislature Administration

Approves General Obligation

Bond Act

Approves Lease-Revenue

Bond Act

Governor Signs

Lease-Revenue

Bond Act

Continuously Appropriated

Funds Allocated to

Programs as Specified in

Bond Act

Requests Treasurer to Sell

Bonds Necessary to Carry Out

Appropriations

Department SpendsProceeds of Bonds

General Fund Pays

Debt Service for

25 to 30 Years

Approve Bond Act

Place Bond Act on

Ballot by Initiative

Governor Signs

General Obligation

Bond Act

Appropriates Funds in

Annual Budget Act




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inrastructure proposals, the Legislature is respon-

sible or prioritizing inrastructure investments

and authorizing unding in legislation and the

annual budget act. Te Legislature makes most

inrastructure investment decisions by authorizing

bond acts. As described above, the Legislature canauthorize general obligation bonds to go beore the

voters or directly authorize lease-revenue bonds or

special unds or inrastructure purposes. Trough

the process o passing bond acts, the Legislature

has signicant control over the amount and type

o inrastructure the state unds. Te statewide

ve-year inrastructure plan is meant to assist

the Legislature in making these inrastructure

decisions. For example, the 2006 ve-year inra-

structure plan (combined with the Governors

sel-initiated Strategic Growth Plan) provided the

Governors vision or the 2006 bond package. Some

elements rom the plan were not included in the

nal bond package and the Legislature added some

new programs, such as housing.

In addition to authorizing bond acts or

a general type o inrastructure (or example,

K-12 acilities, prisons, or water resources),

the Legislature typically also urther al locatesunding to specic purposes within a bond act.

For example, the most recent K-12 school bonds

dedicated specic amounts to new schools, existing

schools, overcrowded schools, charter schools,

career technical acilities, and high-perormance

or green schools. In total, the $42.7 billion 2006

bond package included 67 pots o money spread

across the ve bond acts.

Annual Budget Further Directs Inrastructure

Spending. Afer bonds are authorized, most bond

programs still require uture legislative action

to appropriate unding in the annual budget act

beore state departments can begin spending or

distributing the unds. Additionally, the Legislature

can direct General Fund and special unds to

inrastructure through appropriations in the

budget act. As such, the budget act allows the

Legislature to control when unds are spent and to

maintain oversight over inrastructure spending.

Te Governor begins the process by including

inrastructure proposals in his proposed budget

that should correspond to departments ve-yearplans. In some cases, the budget act appropriates

unding or individual projects while in others the

Legislature appropriates lump sum amounts or

state agencies or commissions to disburse based

on established criteria. Spending or a limited

number o inrastructure programs is continuously

appropriated, meaning that a legislative appro-

priation is not required beore designated revenues

or bond proceeds can be spent. In most cases, the

Legislature has little or no control over continu-

ously appropriated unds.

Administration Supervises Inrastructure

Development and Sale o Bonds. Afer the

Legislature appropriates inrastructure unds, the

administration is responsible or carrying out the

projects or distributing the unds to local govern-

ments. Te DOF estimates departments cash

needs or carrying out authorized projects andin

conjunction with the reasurerdetermines thenecessary amount o bonds to sell. Determining

the size o bond sales and the distribution o bond

unds to departments provides the administration

some control over the pace o bond expenditures

and projects. Once unds are provided, depart-

ments carry out the inrastructure spending with

varying levels o oversightincluding direct

reports to the Legislature and DOF, periodic audits,

and supplying inormation to the states account-

ability website.

Voters Also Have a Role in Inrastructure

Funding. In addition to considering general

obligation bonds placed on the ballot by the

Legislature, voters can authorize general obligation

bonds without the Legislatures involvement

through the initiative process. Initiative bond




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measures, however, are a relatively small part o

the states bond spending. Since 2000, voters have

enacted $14 billion in initiative bond measures,

compared with $82 billion in legislative general

obligation bond measures. Recent bonds authorized

through the initiative process include $980 millionor childrens hospitals (Proposition 3, 2008),

$5.4 billion or environmental protection and

natural resources (Proposition 84, 2006), and

$3 billion or stem cell research (Proposition 71,

2004).

Irastrctr Spi by Prram

Most Inrastructure Spending Is or

ransportation and Education. As shown in

Figure 4, transportation projects make up the

largest amount o state inrastructure spending.

Education acilities (K-12 and higher education)

also received a signicant share o the states

inrastructure resources. While spending uctuates

rom year to year depending upon the availability

o unding and the

timing o project

expenditures, spending

or transportation,resources and environ-

mental protection,

and criminal justice

trended upwards

over the decade. As

discussed in later

chapters, much o the

increased spending in

these programs came

rom the large bond

measures approved

since 2006.

More Tan Hal

o Inrastructure

Spending Is Local

Assistance. Almost three-fhs o the states total

inrastructure spending over the last decade was

distributed to and administered by local agencies.

For example, nearly all o the state governments

spending supporting inrastructure or K-12

schools and community colleges is local assistance.Approximately 43 percent o the states transpor-

tation inrastructure resources are used by local

agencies or local streets or transit, and 43 percent

o state inrastructure spending or resources and

environmental protection programs is distributed

as grants to local agencies. In some cases, state

support is contingent upon matching unds rom

local sources, while other grants have no matching

requirements.

Additional Inrastructure Spending Planned.

Current bond authorizations would result in

increased expenditures or some programs over the

next ew years. For example, the Legislature has

authorized substantial spending rom lease-revenue

bonds to support inrastructure or state prisons

Most State Infrastructure Is for

Transportation and EducationInfrastructure Spending, 2000-01 Through 2009-10

Figure 4

a Other spending includes mental health hospitals; developmental centers; California Highway Patrol andDepartment of Motor Vehicles offices; veterans homes; general state office space; and state bondprograms in support of local housing development, childrens hospitals, and infrastructure for stem cellresearch.

Transportation

K-12 Education

Resources

OtheraCriminal Justice

Higher Education




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and trial court acilities, and voters have authorized

$10 billion or the development o a high-speed rail

system. o date, these programs have used only

small amounts o this bond authority, but many

projects are expected in the next ve years. Te

Legislature also has authorized placing a generalobligation bond measure totaling $11 billion

beore voters in 2012 to support the states water

inrastructure. Other programssuch as higher

educationhave essentially exhausted authorized

bond unds and would require additional autho-

rizations rom the Legislature or voters to pursue

more projects.

Btary ects Irastrctr Spi

Debt-Service Costs Have Increased

Substantially. Te major budgetary eect o the

states inrastructure investments is the debt-service

costs or principal and interest payments on the

states two types o General Fund bonds. We

estimate that General Fund costs or debt service

on these bonds will be about $5.5 billion in 2011-12

based upon anticipated bond sales. As shown in

Figure 5, General Fund debt-service costs have

almost doubled since 2000-01. As a result, the

growth o the states General Fund debt-service

costs has outpaced spending growth in most othermajor state programs during the last decade. I

viewed as a program, inrastructure debt service

is one o the most rapidly growing costs o state

government. Tis is partly the result o the states

increased use o bonds over the last decade as well as

the slowing o expenditures in most other programs

since 2007-08 due to the states scal shortall.

Inrastructure Investments Oen Lead to

Higher Operating Costs. Investments in new

inrastructure typically result in ongoing increased

operating costs or stang, utilities, and mainte-

nance o new acilities. For example, additional

prison acilities require more prison guards, and

the acquisition o park land requires additional

park employees to supervise the land and possibly

uture inrastructure

investments to develop

the parks or the

public. On the otherhand, some inra-

structure investments

(such as renovations

or replacements) can

improve operational

eciencyor

example, lowering

energy costs or

enhancing program

delivery.

Debt Service

Expected to Increase.

In addition to the

states debt-service

costs or bonds it has

already issued, voters

General Fund Debt Service Nearly Doubled

Over Last Decade

(In Billions)

Figure 5

1

2

3

4

5

$6

2000-01 2002-03 2004-05 2006-07 2008-09 2010-11

Lease-Revenue Bonds

General Obligation Bonds




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or the Legislature have authorized an additional

$46 billion o inrastructure bonds that have not yet

been sold. As these bonds are sold over the next ew

years, the states debt-service costs will increase.

One indicator o the states debt-service burden is

the debt-service ratio (DSR)that is, the ratio oannual General Fund debt-service costs to annual

General Fund revenues and transers. As shown

in Figure 6, Caliornias DSR has historically been

at or below 4 percent. Te sharp, recent all-o in

General Fund revenues due to the recession as well

as the sale o the large bond measures approved

in the last decade have pushed the DSR to about

6 percent. In Figure 6, we orecast the DSR will

peak at slightly above 7 percent. Te actual DSR in

the coming years, however, would be aected by a

variety o actors:

Pace o Sale o Authorized Bonds Could

Vary.Our orecast assumes that the

remaining $46 billion in authorized bond

unds are sold over the next decade, with

the majority sold in the next ew years. o

the extent the Legislature limited bond

appropriations or the administration

delayed bond sales, the DSR would not

increase as much as orecast. For example,

i no additional bonds were sold, then theDSR would start to decline.

Additional Bonds Could Be Authorized.

Our orecast assumes that no additional

bonds are authorized. o the extent

additional bonds are approved and sold

in uture yearssuch as the water bond

proposed or the 2012 ballotthe states

debt-service costs would be higher than

projected in Figure 6.

Policy Changes Could Increase General

Fund Costs.In recent years, the Legislature

has diverted transportation special unds

to cover debt service on transportation

general obligation bonds that would

otherwise be covered with

General Fund revenues.

Changes to this policy

or others could aect the

DSR.

General Fund

Revenues Could Grow at

a Dierent Pace.General

Fund revenues are a key

component in deter-

mining the DSR. I, or

instance, General Fund

revenues are less than

orecast, then debt service

as a percentage o General

Fund revenues would be

greater.

States Annual Debt-Service Ratio

Ratio of Annual Debt-Service Payments to General FundRevenues and Transfers

Figure 6

1

2

3

4

5

6

7

8%

1980 1985 1990 1995 2000

Estimated

2005 2010 2015 2020

Previously Sold

Authorized, but Unsold




14/48

Te States Borrowing Costs Could

Change.Te interest rate on the states

bonds is a unction o the supply and

demand or government bonds and the

states credit rating. Interest rates on

government securities are at historicallylow levels, but the states low credit rating

prevents Caliornias bonds rom receiving

the lowest rates. (See nearby box or urther

discussion o the states credit rating.)

Changes in the bond market or the states

credit rating could aect the interest costs

on the states uture bond sales.

Debt Service Involves Budgetary rade-Os.

Tere is no one right level or the DSR. It simplyprovides an indication o the relative priority o

debt service and inrastructure compared to other

spending rom the General Funda higher DSR

would appear to indicate an increased preerence

or inrastructure spending relative to other

programs. Tis is because the higher the DSR is

and more rapidly it rises, the more debt-service

expenses limit the use o revenues or other

programs. Tat is, or any given level o state

revenues, each new dollar o debt service comes at

the expense o a dollar that could be allocated to

another program area, whether education, health,

social services, or tax relie. Te trade-os have

become more acute due to the states ongoing

budget shortalls.

In addition to these General Fund impacts,

debt-service costs also limit revenues available or

special und programs. For example, the states trialcourts have increased ees in recent years in order

to raise revenue or debt service on new courthouse

construction and the state uses vehicle weight ees

to cover transportation debt service. Using these

revenues or inrastructure debt service means that

they are not available or other program purposes.

CrssCtti Irastrctr Isss

In the ollowing chapters, we provide a look

at major components o the states inrastructure

program: transportation, K-12, natural resources,

higher education, and criminal justice. Each chapter

ocuses on some issues that are unique to that

program, but also highlights issues that cut across all

state inrastructure programs. We discuss some o

these cross-cutting inrastructure issues below.

Inrastructure Data Are Limited. Te state

does not have a comprehensive inventory o its

inrastructure. Te level o available data variessignicantly by program, but typically does not

provide adequate inormation to evaluate acility

What Is Calirias Crit Rati?

Caliornias credit ratings or general obligation bonds currently are scored as A-, A1, and A-,

respectively, by the nations three major rating agenciesStandard & Poors, Moodys Investors

Service, and Fitch Ratings. Tere are ten investment-grade ratings, spanning rom AAA (highest) to

BBB (lowest). Caliornias ratings are currently the lowest o all states. Tese low ratings are princi-

pally related to the states ongoing structural decit rather than the amount o debt outstanding. It

would appear the main adverse eect o the low ratings has been the additional interest premium

the state has had to pay on its new bond issues compared with what AAA-rated states pay. For

example, according to the Caliornia State reasurers estimate in the 2010 Debt Aordability Report,

the states 30-year tax-exempt bonds sold at interest rates that were between 0.87 and 1.72 percentage

points more than the AAA average in 2009 and 2010.




15/48

conditions, calculate capacity, and analyze inra-

structure spending. Te lack o data makes priori-

tizing spending and measuring outcomes dicult.

Funding or Many Inrastructure Programs

Lacks Stability. As mentioned above, the state has

increasingly relied on general obligation bonds tound inrastructure projects. Tis unding approach

usually does not provide a stable unding source or

state inrastructure projects. Instead o being unded

on a relatively steady basis, inrastructure programs

must wait to see i a bond authorization is placed on

the ballot and voters approve the measure. Tis has

led to a boom-bust experience.

Policy Changes Could Reduce Demand or

Inrastructure. Te new inrastructure proposed in

most state plans generally assumes that programs

and services are provided in the same manner as

they are today. As we highlight throughout this

report, spending requirements or new inra-

structure can be reduced through various policy

changes that decrease demand or state-unded

inrastructure. Such demand management policies

include better utilization o existing acilities and

higher user ees. Altering or reducing the scope o

state services also could reduce the need or newinrastructure investments.

Assignment o Funding Responsibilities Could

Be Re-Examined. A basic consideration or the state

is which specic inrastructure programs should

be nanced with state resources. Currently, the

state pays or state-owned inrastructure, but also

provides substantial inrastructure unding to local

governments and the private sector. As noted above,

a majority o the states inrastructure spending

supports local government inrastructure. Te K-12

schools and local transportation programs receive

the most state inrastructure unding, but state

unds also support local projects or water quality,parks, and jails. Recent bond acts also have made

unds available or projects that typically are unded

with private resources such as certain water projects,

housing developments, and hospitals. Under certain

circumstances, it may be appropriate or the state

to provide unding assistance to local governments

and the private sector. In other cases, local govern-

ments or the private sector could be responsible or a

greater share o the cost o inrastructure. In order to

adequately address the states inrastructure respon-

sibilities within its limited resources, the Legislature

may need to reconsider the division o nancial

responsibilities between state and local government

and the public and private sectors.

Rehabilitation and Maintenance o Existing

Inrastructure Is Inadequate. Despite investments

over the last decade, the state aces a growing

backlog o deerred maintenance and aging inra-

structure due to several actors. Much o the inra-structure in Caliornia was built decades ago and is

approaching the end o its useul lie. Te need or

renovation has been exacerbated because o insu-

cient spending or routine maintenance and repair o

acilities. Lastly, policy and spending decisions have

tended to avor investments in new inrastructure

rather than rehabilitation o existing systems.

TRAnSPoRTATIonTe states transportation systemprimarily

highways, streets and roads, and transit opera-

tionshelps to move people and goods around and

through the state. Development and maintenance

o the highway system is primarily the states

responsibility, while streets, roads, and transit

systems are primarily controlled and maintained

by local entities. Historically, each o the systems

have been unded rom various ederal, state, and

local sources.




16/48

Fi Trs

Te state spends more on transportation than

it does on other types o inrastructure. Funding

or transportation inrastructure, however, has

changed over the past decade.

$81Billion Spent in Last Decade. State

spending on transportation inrastructure totaled

about $81 billion during the past ten years. As

shown in Figure 7, approximately hal o these

unds came rom state sources, including about

$33 billion rom special unds (such as the excise

tax on uels) and $8 billion rom bond unds. Te

remainder came rom non-state sources, including

$30 billion rom ederal unds. While the amount

o unding has uctuated rom year to year, it hasgenerally increased over time. otal unding has

averaged about $10 billion annually over the last

three years.

Various Factors Impact Special Fund

Spending on Inrastructure. Various ongoing

revenue sourcessuch as state taxes on uels

and vehicle weight eessupport transportation

inrastructure. As shown in Figure 7, the inra-

structure spending supported rom these special

und revenue sources is at about the same level in

2009-10 as it had been ten years beore. In 2007-08,

the state began using special unds to help outthe General Fund resulting in a decrease in inra-

structure spending rom this source. In addition,

over the past decade, special und spending or

programs that we have not categorized as inra-

structure have increased.

Increased Spending Provided Trough Bonds.

In recent years, a growing proportion o transpor-

tation unding has come rom general obligation

bonds passed by the voters. Funding rom bonds

has increased rom an average o 3 percent o

total transportation spending at the beginning

o the decade to an average o 21 percent in the

last three years. Tis increase is due mainly to

Proposition 1B, a $20 billion transportation bond

measure that was authorized by voters in 2006.

In addition, in 2008,

voters approved

Proposition 1A to

provide $10 billion inbonds or high-speed

rail and local transit

systems. Te states

increased reliance on

bond unds to nance

transportation projects

will put additional

pressure on the states

General Fund as these

bonds are sold. We

estimate that annual

debt service on trans-

portation bonds will

increase rom roughly

$700 million in 2010-11

to $2.3 billion in

Transportation Infrastructure Spending

Over the Past Decade

(In Billions)

Figure 7

2

4

6

8

10

$12

2000-01 2002-03 2004-05 2006-07 2008-09

General Fund

Local Fundsa

Federal Funds

Bond Funds

Special Funds

a Some local agencies contribute funding for state highway projects.




17/48

2020-21 i the state moves orward with selling

already authorized bonds at the projected rate.

(Currently most o transportations debt-service

obligations are paid with special unds, reducing

the eect on the General Fund.)

ransportation Funding Less Predictable.During the last ten years, there has been tension

among state and local entities over the competing

potential uses o revenues or state highway and

local roads projects and public transportation. Tis

tension arises because there is always more demand

or transportation projects than there are revenues

available or these purposes. In addition, due to the

states severe and ongoing scal problems, trans-

portation unds have been used to help balance

the states General Fund budget. Tis competition

or unds is evidenced by the series o legislation

and voter-approved initiatives that have been

enacted since 2000 which attempt to govern the use

o specic pots o transportation unding.

Tese abrupt shifs in unding have resulted in

an inconsistent level o

unding or transpor-

tation projects rom year

to year. Such instabilitymakes it dicult or the

state or other entities

to plan and deliver

projects, which in turn

can lead to project delays

that can ofen make

projects more costly.

Majr elmts

o Trasprtati

Irastrctr

Spi

Te state allocates

unding to our major

types o transportation

inrastructure. As

shown in Figure 8, most state transportation inra-

structure spending is or state highways and local

streets and roads. In addition, the state invests in

mass transportation inrastructure and Caliornias

proposed high-speed rail system. Below, we discuss

spending trends in these areas.Most Spending Is or Highways. Te states

highways carry 55 percent o all trac in Caliornia

(as measured in vehicle miles o travel). Te state,

thereore, directs the majority o its transportation

unding to highway inrastructure projects.

During the last ten years, the state has spent about

$56 billion on highway inrastructure. Tis includes

payments to contractors or construction work and

stang to design and oversee projects built as part

o the states highway system. Tis sum does not

include spending by the Caliornia Department o

ransportation (Caltrans) on routine maintenance

o the states highways. As shown in the gure,

spending on highway projects has increased in

recent years. Tis is mainly due to the inusion o

Most Transportation Infrastructure Spending

Is for Highways

(In Billions)

Figure 8

1

2

3

4

5

6

7

8

9

$10

2000-01 2002-03 2004-05 2006-07 2008-09

Highways

Local Streets and Roads

Mass Transportation

High-Speed Rail Authority




18/48

bond unds described above, which has augmented

traditional transportation unding.

Despite the signicant investment in the

states highways, the most important indicators or

measuring the outcome o highway expenditures

have not shown improvement. For example, thecapacity and congestion levels o the highway

system have not improved. rac congestion on

the states highways increased 11 percent rom

2000 to 2007. Tese investments also did not result

in a notable increase in the overall capacity o the

states highways. Tis is likely due to various actors,

including the planned highway system is close to

being ully built out, a ocus on operational improve-

ments over the addition o new highway miles,

and the relinquishment o some roadways to local

agencies. Highway expansions are costly and ofen

dicult to build due to limited available space in

developed areas. Because o these actors, the state is

no longer able to address trac congestion through

expansion projects alone. Caltrans has begun to use

other approaches to relieving trac congestion, such

as various operational improvements.

Additionally, the condition o the states

highways appears to have degraded signicantlyover the past decade. Specically, the estimated

annual cost to replace extremely degraded portions

o state highways has more than doubled rom

2005 to 2009 to over $6 billion. Caltrans, however,

is currently only spending roughly $1.5 billion

annually or these purposes. In addition, Caltrans

spends only about 10 percent o its budget on

routine maintenance o its inrastructure invest-

ments. As a result, as o 2007, only 28 percent o

the states highways were rated in good condition

by the Federal Highway Administration (based on

an annual International Roughness Index survey).

According to the same survey, 48 percent o the

states highways are in acceptable condition and

24 percent are in poor condition.

Funding or Local Streets and Roads

Continues to Increase. A portion o state and

ederal transportation unds goes to cities and

counties or local streets and roads inrastructure,

which carry the remaining 45 percent o vehicle

miles o travel in the state. Over the past ten years,about $19 billion has gone to local entities. During

this time, annual state unding or local roads has

increased. Despite these investments, local agencies

report that they have substantial unmet road needs.

Mass ransportation Capital Expenditures

Have Varied Over ime. Te amount o annual

state unds expended or mass transportation capital

projects has varied rom roughly $200 million to

$1.5 billion over the past ten years. Over this time,

the major source o unds has shifed rom special

unds to bond unds. However, it is likely that the

use o bond unds or capital projects will decline

over the next ew years as the Proposition 1B

resources diminish. As an alternative, transit

operators may use a greater share o the unds

provided by the State ransit Assistance (SA)

program or capital projects. Te SA is a state

subsidy allocated by ormula to transit operators

throughout the state that can be used or capitaloutlay or operations. Recent legislative changes

will provide increasing levels o unding or SA.

While only about 20 percent o SA has been used

or capital projects in the past, it is unclear whether

local transit operators will use more o this unding

or capital expenditures as the overall amount o

SA increases and other sources o capital unding

decrease.

Future Spending or High-Speed Rail Is

Uncertain, but Potentially Signicant. State

spending or the high-speed rail system has been

relatively minor over the past ten years compared

with other types o transportation spending.

Depending on the states progress in implementing

this large-scale project, high-speed rail expendi-

tures could potentially become a signicant portion




19/48

o total transportation spending. Te High-Speed

Rail Authority (HSRA), which is responsible or

implementing the project, expects spending to

grow to several billion dollars annually over the

next ew years. Because all state unding or the

project comes rom bonds, debt-service costs paidrom the General Fund could likewise grow signi-

cantly. At this time, however, HSRA is acing many

obstacles in beginning construction o this project

and the attainment o the unds needed to build the

high-speed rail l ine is highly uncertain.

Isss r Lislativ Csirati

Under the policies o the last decade, key

measurements indicate that perormance and

conditions o the state highway system have deteri-

orated. At the same time, increased bond spending

is expected to put additional pressure on the

General Fund, special und revenues available or

inrastructure have decreased, and there continues

to be more demand or transportation projects than

there are available resources. Te Legislature could

consider the ollowing issues.

Highway Spending Should Focus on

Maintenance and Repair. Existing highwayinrastructure is a valuable and necessary asset.

However, as noted above, Caltrans spends only

a small portion (10 percent) o its total budget

on maintaining the states transportation inra-

structure. Poor maintenance appears to be contrib-

uting to the increasing need to completely rebuild

portions o the states highways, which is signi-

cantly more costly than making routine repairs.

Te Legislature could place a higher priority on

routine highway maintenance and ocus on elimi-

nating the sizeable backlog o major road recon-

struction projects. For example, some available

transportation unding could be redirected rom

highway expansion projects to highway repairs.

Managing Demand Could Improve

Perormance o Existing Inrastructure. Better

management o the states transportation system

could help to maximize the use o the existing

system and potentially reduce the demand or

limited unds. Generally, such an approach is

reerred to as demand management. Specic

strategies can range rom congestion pricingto intelligent transportation systems (IS)

that use technology to smooth out trac ows.

Congestion pricing actors periods o heavy trac

ows into the cost o driving borne by a motorist.

For example, the toll on a road may uctuate

depending on trac conditions, going higher

in peak periods or lower in other times. Te IS

approach involves the use o ramp meters, trac

lights, and changeable message signs to ensure

more ecient use o roadways. In addition to

technological approaches, changes in land-use

policies could also be used to manage demand or

transportation. For example, current eorts to

implement Chapter 728, Statutes o 2008 (SB 375,

Steinberg), could encourage land-use patterns and

transit-oriented development that could reduce

uture trac demand.

Consider Dierent Sources o Revenue. In

the long term, we think the Legislature shouldevaluate new strategies to ensure that more stable

and adequate sources o transportation revenues

are available. Advancements in technology have

opened up new options or charging drivers or

the benet o using the states roads. For example,

motorists could be charged based on the number

o miles they travel rather than the amount o uel

they purchase. In this way, charges would more

closely match an individuals usage. Signicant

research is needed to determine i a mileage-based

unding system is easible or Caliornia, and i

so, how such a system would best be implemented

and its impact on individual motorists and the

Caliornia economy.

Consider aking Actions to Improve

Successul Development o High-Speed Rail. As




20/48

stated earlier, the dedication o billions o dollars

over the next several years to begin construction

o a new high-speed train system would add

to the states General Fund debt-service costs.

Notwithstanding the potential merits o the project,

the Legislature currently has the opportunity tomake critical decisions relating to the project. I

the project does move orward, a more eective

governance structure could help to remedy some o

the serious problems aced by the high-speed rail

project and improve its chances or success. For

more specic recommendations on high-speed rail,

see our recent publication, High-Speed Rail Is at aCritical Juncture (May 2011).

Figure 9

State Has Approved $29 Billion in K-12 Bonds Since 2000

(In Millions)

2002 2004 2006 Totals

Generalnewconstruction $6,250 $4,960 $1,900 $13,110a

Overcrowdedschools 1,700 2,440 1,000 5,140

Subtotals,NewConstruction ($7,950) ($7,400) ($2,900) ($18,250)Modernization $3,300 $2,250 $3,300 $8,850

Charterschools 100 300 500 900

Careertechnicaleducation 500 500

Jointuse 50 50 29 129b

Greenschools 100 100

Totals $11,400 $10,000 $7,329 $28,729a Doesnotinclude$1.3billiontransferredfromotherbondprogramstosupportnewconstruction.b Doesnotinclude$45milliontransferredfrompreviousbondactstosupportjoint-usefacilities.

K-12 SCHooLSTe state provides bond unding or K-12

school acilities through the School Facility

Program (SFP). Operated by the State Allocation

Board (SAB) and Oce o Public School

Construction (OPSC), SFP provides unding or a

variety o school acility projects. Most programs in

SFP require matching unds rom school districts.

In this chapter, we discuss the unding provided

rom SFP and the requirements or participation in

the program. We also discuss district demand or

acilities and highlight major school acility issues

or the Legislature to consider.

Fi Trs

Voters Have Approved $29 Billion in StateBonds Since 2000. As Figure 9 shows, bonds

have provided about $18 billion to construct new

schools and classrooms and nearly $9 billion to

modernize school acilities. Most o the unding

or new construction and modernization is

provided on a rst-come, rst-serve basis to any

eligible school district. In addition to unding

or new construction and modernization, each o

the ballot measures set aside unding or specic

types o school acility construction, such as green

schools and career technical education. Tese

unds or specialized purposes can be used or new

construction or renovation.

Largest Program Is New Construction.

Te largest piece o spending in the SFP is or

construction o new acilities. (In addition to the

$13 billion authorized by voters or general newconstruction, the SAB has transerred $1.3 billion

rom other bond programs to meet the demand

or new school acilities.)

State unding is intended

to cover 50 percent o

project costs, with school

districts responsible or

unding the remaining

costs. o qualiy or

new construction bondunding, school districts

must demonstrate that

existing classroom

space is insucient to

house projected student

enrollment over the next




21/48

ve years. State grants to school districts are made

on a per-pupil basisdependent on the number

o unhoused students the new acility will accom-

modate. Per-pupil grants are annually adjusted or

ination using the Caliornia Construction Cost

Index. As we discuss in the nearby box, demand ornew construction unding is primarily driven by

population growth in inland counties. In addition

to unding general new construction, the state has

provided $5billion or the construction o new

schools in districts experiencing overcrowding (as

measured by the number o students per acre o

space).

State Provides Larger Match or

Modernization Projects. Te second largest piece

o state spending is or the modernization o

existing schools. o provide a greater incentive or

school districts to modernize rather than build

new schools, the state provides a higher match ormodernization projects (60percent rather than

50percent). School districts qualiy or modern-

ization unding i their acilities are more than

25 years old. As with new construction, the state

provides per-pupil grants. Te state aid per pupil is

greater i the renovation is or a acility that is more

than 50 years old.

nw Cstrcti dma driv by Pplati Shits

Te demand or new school acilities in Caliornia exists despite relatively little overall growth

in K-12 enrollment over the past ten years. (Average annual growth was less than 1 percent between

2000-01 and 2009-10.) Te average overall growth rate, however, masks changes in population

growth among the various regions o the state. Specically, while many o the larger urban areas

experienced signicant

declines in enrollment

over the past ten years,

several areasprimarily

suburbs and inland

countiesexperienced

signicant population

increases. Tis gure

shows that enrollment

growth trends across

the state are expected to

ollow the same pattern

into the next decade.

Tese shifs in thepopulation increase the

demand or new acilities

to accommodate the

enrollment growth in

certain areas o the state.

K-12 Enrollment Trends Vary Greatly by County

Projected Population Growth 2009-10 to 2019-20

< -5%

-5% to 0

0 to 5%

5 to 15%

> 15%

Percent Change




22/48

State Also Provides Incentives to Undertake

Specic ypes o Facility Projects. Over the past

ten years, state bonds or K-12 acilities also have

set aside unding or specic types o school acility

construction. Te state has provided $900million

or the construction o new charter school acilities,$100 million or school districts to build environ-

mentally riendly (or green) schools, $500 million

or the construction o career-technical education

acilities, and $130 million or joint-use acilities.

With the exception o unding or green schools

and joint-use acilities, participants receive

per-pupil grants or each project. Participants

in these programs are also subject to the same

matching requirements that apply to other new

construction and modernization projects.

Districts Rely on Local Bonds to Provide

Matching Funds. Although school districts have a

number o options or obtaining matching unds

or acility projects, the majority o matching

unds come rom local general obligation bonds

approved by voters in school districts. Approval o

these bonds has become easier due to the passage

o Proposition 39 in 2000, which reduced the

threshold or the approval o K-12 and communitycollege general obligation bonds rom two-thirds to

55 percent. As Figure 10 shows, since 2000 voters

statewide have approved about $61 billion in local

general obligation bonds or school acilities.

Some Districts Use Other Local Revenue

Options. Local communities can also approve

general obligation bonds or acilities using School

Facility Improvement Districts (SFIDs). When

school districts have acility needs in a portion

o a school districts territory, the district can

create an SFID consisting o the specic areas

with acility needs. Te voters in the SFID can

then vote to approve a general obligation bond

or acilities in that specic area. As Figure 10

shows, voters approved almost $2 billion in SFID

general obligation bonds or acilities since 2000.

(Local communities can also create a Mello-Roos

district to issue bonds or inrastructure in the

community. In the past ten years, however, no

Mello-Roos bonds have been approved by voters

or school acilities.) In addition to local general

obligation bonds, some districts rely on othersources o revenue to provide a local match. Most

notably, some districtsparticularly those in areas

with signicant new residential developmentrely

heavily on developer ees as a source o acility

revenue. On rare occasions, school districts also

use parcel tax measures to raise unds or school

acilities. School parcel taxes require approval

by two-thirds o the districts voters. Since 2000,

our school districts have approved parcel taxes

dedicating some portion o the unds or modern-

ization or expansion o school acilities.

Financial Hardship. School districts that are

unable to provide a local match or the construction

or modernization o a school acility can apply

or nancial hardship unding and receive up

to 100 percent unding. In order to qualiy or

this unding, school districts must be audited by

Figure 10Local General Obligation Bonds orSchool Facilities Since 2000

(In Millions)

SchoolDistrict

School FacilityImprovement

District Total

2000 $2,464 $2,464

2001 2,275 2,275

2002 9,812 $260 10,072

2003 573 573

2004 7,757 49 7,8052005 5,517 28 5,545

2006 6,707 249 6,956

2007 388 750 1,138

2008 20,937 592 21,529

2009 69 69

2010 4,323 35 4,358

Totals $60,822 $1,963 $62,785

Source:EdSource.




23/48

OPSC to veriy that the district has insucient

unds to meet its ull local match. As a condition

o receiving nancial hardship unds, projects

are subject to strict budget constraints to prevent

districts rom enhancing projects.

Districts Use Operations Funding orMaintenance o Facilities. As part o the require-

ments o receiving state bond unding, districts

typically must set aside 3 percent o their general

und expenditures annually or routine mainte-

nance o their acilities. In acknowledgement

o limited operating budgets, however, districts

are required to set aside only 1 percent o their

general und expenditures rom 2008-09 through

2014-15. For many years, the state also has provided

roughly $300 million annually to pay or deerred

maintenance. o receive deerred maintenance

unds, school districts must provide matching local

unds. Te deerred maintenance requirements

also have been modied rom 2008-09 through

2014-15. During this period, school districts are

not required to provide a local match and can use

deerred maintenance unds or any educational

purpose.

Williams Settlement Created AdditionalState Program. In 2004, the state settled the

Williams v. Caliornia

case, a class-action lawsuit

led on behal o public

school students. Te

lawsuit argued that the

state was responsible or

insucient instructional

materials, a lack o

qualied teachers, and

poor acility conditions in

many schools across the

state. In response to the

settlement, the Legislature

created the Emergency

Repair Program (ERP),

which provides grants or critical health and saety

repairs in certain low-perorming schools. Te state

is required to provide $800 million to ERP to meet

the requirements o the settlement. Te state has

provided $343 million or the program so ar.

Spi Trs

Most State Bond Funding Allocated, but Some

Unspent Funds Remain. Demand rom school

districts or bond unding has been consistent over

the past ten years, but some unds remain unspent

in several program areas. As shown in Figure11, as

o June 2011, a total o $1.9billion in bond authority

remained unallocated by SAB. Te programs

with relatively high levels o unallocated unds

are modernization, overcrowded schools, charter

schools, and green schools. (As shown in Figure11,

SAB has awarded an additional $2.1billion to

approved school projects, but these allocations

remain on hold until the state sells additional

bonds to ully und the projects.)

Difcult to Determine Future Need. Despite

the signicant investments in K-12 school acilities

over the past decade, the lack o statewide data

makes determining uture need very dicult. Testate has no comprehensive inventory o school

Figure 11

$1.9 Billion in State Bond Funding Still Available

(In Millions)

AllocatedApproved

Projects on Holda Available

Newconstruction $13,615 $556 $503

Modernization 7,489 611 750

Overcrowdedschools 2,781 376 425Charterschools 258 509 133

Careertechnicaleducation 377 91 33

Jointuse 174 1

Greenschools 21 6 73

Totals $24,715 $2,148 $1,917a TheStateAllocationBoardhasawardedauthorizedbondfundstotheseprojects,buttheprojects

remainonholduntilfuturestatebondsalesprovidesufcientbondproceedstocoverthefullprojectcosts.

Source:OfceofPublicSchoolConstruction.




24/48

acilities, their capacity, and unmet need. Reporting

rom school districts on existing capacity occurs

only when districts apply or unding. As a result,

it is not clear i state and local spending over the

last decade on K-12 inrastructure has substantially

reduced K-12 inrastructure needs. Based on thepace o recent expenditures, however, it appears

many districts continue to seek and qualiy or

state acility unding. For example, at the close

o 2007, $2.7 billion in state new construction

bond unds remained unallocated. By the close o

2010despite the states severe economic downturn

and the reezing o state bond undsonly

$500 million o these unds remained unallocated,

and $178 million in new construction projects were

awaiting review by SAB.

Isss r Lislativ Csirati

In the last decade, the state spent over $30 billion

on K-12 school acilities. As described above, it

is dicult to measure whether this spending has

substantially addressed K-12 inrastructure needs in

Caliornia or (as appears more likely) i acility needs

remain high. Assuming signicant need remains,

the Legislature may want to reconsider Caliorniasschool acilities unding model because the states

capacity to provide a similar level o bond support

to K-12 schools over the next decade likely will be

constrained due to the states scal problems. Given

that K-12 inrastructure spending accounted or

almost 50 percent o the states general obligation

bond spending rom 2000-01 through 2009-10, any

eort to control the escalation o state debt-service

costs likely will have to include some reduction in

the pace o K-12 inrastructure spending. As a result,

the Legislature may want to consider some o the

options described below or prioritizing state K-12

inrastructure spending.

Whether the Legislature continues with

the status quo or adopts some o these alternate

policies, however, the state needs better data on

K-12 acilities. Te lack o a reliable estimate o the

need or K-12 inrastructure and the associated

costs makes it dicult to determine the best

options or state unding. Without such data,

policymakers and stakeholders cannot determine

the proper size o uture general obligationbond proposals or the specic amounts or

various programs such as new construction or

modernization. Some estimate o inrastructure

demand and costsuch as a sampling o district

needswould provide better data than the state

currently utilizes in making unding decisions.

With some acility data, the state would have better

inormation to project uture needs and determine

reasonable estimates or the amount o uture


Reducing State Share o Cost. Te Legislature

could reconsider the share o costs it currently

covers (50 percent or new construction, 60 percent

or modernization). Contributing a smaller share

to each project would allow limited state unds

to support more projects. Given local support

or school acility unding, a decrease in state

spending could be oset by more local spending,

thereby minimizing the impact on school districts.Local voters have been willing to approve local

school acility bonds. Since the enactment o

Proposition 39, 83 percent o school aci lity bonds

requiring a 55 percent vote have been approved.

Te high approval rate has continued during the

economic recession: 77 percent o school acilities

bonds requiring a 55 percent vote were approved in

2009 and 2010. Realigning more unding responsi-

bility to the local districts would also create incen-

tives or districts to better maintain and manage

existing acilities.

Develop a System or Prioritizing Funding.

As stated above, the state generally oers its bond

money on a rst-come, rst-served basis. Tis

process worked adequately over the past decade

when bond unds typically have been available to




25/48

support all eligible projects submitted to SAB. I

smaller bond amounts are available or K-12 schools

over the next decade, however, school districts

will likely exhaust the states bond proceeds beore

all school projects have been unded. Under this

scenario, a rst-come, rst-served system wouldnot necessarily allocate construction aid to districts

where the need is greatest. Te Legislature instead

could establish broad categories or awarding uture

bond allocations on a priority basis. For example,

the rst allocation o bond unds could be reserved

or school districts with the oldest buildings, the

most overcrowding, or the largest percentage o

unhoused pupils. Te state could also reserve

unding or nancially needy school districts that

have insucient local revenues to build essential

acilities. In this way, state unding would support

projects that otherwise would not have been built

absent a state acility program. A broad prioriti-

zation system would ensure that limited bond unds

are reserved or the most critical projects.

Explore Dierent Financing ools or School

Facilities. Given the problems inherent in evalu-

ating and prioritizing the inrastructure demands

o over 9,000 schools, the Legislature could take a

dierent approach to acility nancing. One such

approach would be to provide equal per-pupilunding to all school districts. Tis approach would

provide school districts with a predictable and

stable unding source and more control over how

these unds are used. In adopting this approach,

the state probably would need to provide transition

unding to districts with large unmet acility

needs in order to bring district acility conditions

to a level that could be accommodated within the

ongoing per-pupil unding amount. In our 2001

report,A New Blueprint or School Facility Finance,

we outline one way to transition rom the current

bond-unded program to a program unded on

a per-pupil basis using ongoing General Fund

appropriations.

ReSouRCeSOver the last decade, the state has provided more

than $13 billion or state and local resources-related

inrastructure. Most o this unding has come rom

bond unds. Inrastructure spending in the resources

area covers a wide array o programs and projects.

For example, unds were spent on land acquisition

and restoration or resource conservation purposes,

inrastructure to improve environmental quality,

ood management and water supply projects, state

park acilities, orest re stations, and sh hatcheries.

Fi Trs

Major Reliance on General Obligation Bonds.

As shown in Figure 12 (see next page), about

three-ourths o the $13 billion in spending over

the last decade came rom general obligation bond

unds. Most o the remainder came rom water user

ee special und revenuesthe primary means o

support or the State Water Project (SWP) operated

by the Department o Water Resources (DWR).

Signicant Increases in Debt-Service Costs.

Voters have authorized close to $20 billion in general

obligation bonds or resources since 2000 (about

one-third o these bonds remain unsold). Unlike

bond measures issued in prior decades, recent bond

measures have been larger (typically several billion

dollars) and wider in scope (covering a broad arrayo resources issues in a single measure, such as

parks, wildlie conservation, ood management,

and water quality). Te large bond measures

have increased state debt-service expenditures

considerably, as shown in Figure 13 (see next page).

General obligationbond debt-service costs are

now the largest single General Fund expenditure




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or resources, totaling

over $700 million in

2009-10. Tese debt-

service expenditures

are estimated to

increase to approxi-mately $900 million in

2010-11a our-old

increase in these expen-

ditures since 2000-01.

Major Portion o

Spending Is or Local

Inrastructure. Over

two-fhs o state

spending on resources

inrastructure over

the last decadewas or

local assistance, with

that amount unded

almost entirely rom


Tese monies support

a variety o program

areas, including local

park projects, landconservation activities,

wastewater treatment

and sae drinking water

inrastructure, and ood

management and other

water management

inrastructure. Reecting

largely the variability

o available bond unds

rom year to year, the

proportion o spending

on state projects versus

local assistance in any

given year is also highly

variable.

Bond Funding Drives Resources Spending

(In Billions)

Figure 12

a Includes State Water Project, which makes up 90 percent of total special fund expenditures.b Includes lease-revenue bonds, which make up 2 percent of total bond expenditures.

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

$1.8

2000-01 2002-03 2004-05 2006-07 2008-09

General Fund

Special Fundsa

Bond Fundsb

Debt Service for Resources General Obligation BondsIs Increasing

(In Millions)

Figure 13

100

200

300

400

500

600

700

$800

2001-02 2003-04 2005-06 2007-08 2009-10




27/48

Spi Trs a otcms

Inrastructure Spending Covered a Disparate

Set o Programs. Figure 14 breaks down resources-

related inrastructure spending over the last decade

into six programmatic areas. As the gure shows,

no one program area predominates.

Spending Highly Variable Over Past Decade.

Te percentages spent on each programmatic

area varied signicantly year to year, again largely

reecting the availability o bond unds. As shown

in Figure 15 (see next page), or example, spending

on parks and recreation was considerably less

towards the end o the decade due to substantial

depletion o available bond unds or that purpose,

while spending on ood protection increased withthe passage o ood prevention bonds in 2006.

What Has the State Received From Its

Investments?Te outcomes rom the states invest-

ments in resources-related inrastructure can be

summarized as ollows:

Land Acquisition, Preservation, and

Restoration.

Over the last

decade, resources

departments

have acquired

a combined

1.5 million acres

o land at a cost

o $2.8 billion.

Land acquisi-

tions generally

preserve or

rehabilitateenvironmentally

sensitive areas

or habitats

or expand

state parks.

Restoration

primarily entails reconstruction o wildlie

habitat, but may include the removal o

pollution and other orms o rehabilitation

o ecosystems. Departments with the

largest total land acquisitions include

the Wildlie Conservation Board (WCB),the Department o Parks and Recreation

(DPR), and the State Coastal Conservancy.

Te WCB has also unded the restoration

o 200,000 acres during this time period.

Repair/Upgrades to Existing

Inrastructure.Very ew new resources

acilities (levees, dams, re stations, and

state park structures) have been built during

the last decade. Te ocus instead has been

on the repair and replacement o existing

inrastructure. In addition to the ongoing

repair and upgrade program or SWP, DWR

has repaired and upgraded 116 critical ood

management sites and 117 non-critical sites,

acilitated by a major inux o bond unds

Resources Infrastructure Spending

Supports Many Programs

2000-01 Through 2009-10

Figure 14

Forestry and Fire Protection

Land and WildlifeConservation

State Flood Capital Outlay

Water-RelatedLocal Assistance

State Water Project

Parks and Recreation




28/48

or ood control authorized in 2006. Te

DWR also operates a local levee assistance

grant program. Similarly, since 1990, the

Caliornia Department o Forestry and

Fire Protection (CalFire) has substantially

replaced about 60 o its 476 buildings andstructures.

Meeting Federal Requirements.Much o

the water-related inrastructure spending

has been in response to increasingly

stringent ederal environmental regula-

tions. Key regulations relate to the local

management or treatment o stormwater

runo and wastewater. Te State Water

Resources Control Board has unded 296

local wastewater treatment new acilities

or upgrades and 62 non-point source

treatment constructions or upgrades in

the past ten years. Te SWP has likewise

made substantial repairs and upgrades

to its dams and hydroelectric acilities to

comply with

Federal Energy

Regulatory

Commission

licensing

requirements.

Isss r Lislativ

Csirati

As noted above, the

increased spending on

resources inrastructure

over the last decade has

resulted in signicant

land acquisitions,

repairs to existing inra-

structure, and improved

regulatory compliance.

However, the state still

aces a growing backlog o deerred maintenance

and aging inrastructure. For example:

CalFire estimates that $2.5 billion will be

needed over the next ve years and that

roughly 20 projects need to be completed

every year or the next 20 years in order

to replace aging re stations and other

acilities.

Te Department o Fish and Game (DFG)

operates 21 sh hatcheries that are 50 years

old on average. Tere is also a growing

backlog o deerred maintenance at DFG

or maintaining the roads, parking lots,

dams, water delivery systems, and buildings

necessary to provide the public with access to

its wildlie conservation sites.

Te local wastewater inrastructure in the

state is similarly aging, requiring the states

local assistance to ocus on repairs and

upgrades to existing inrastructure.

Annual Resources Spending Highly Variable

Across Programs

(In Millions)

Figure 15

100

200

300

400

500

600

700

$800

Land and Wildlife Conservation

Parks and Recreation

State Flood Capital Outlay

2000-01 2002-03 2004-05 2006-07 2008-09




29/48

Te states aging levees require signicant

upgrades in the next ew years to meet

ederal and state standards. Upgrades or

six cities in the Central Valley alone are

estimated to cost $5 billion.

Te DPR estimates a backlog o $1.3 billion

in deerred maintenance projects that is

projected to grow to $2 billion by 2020.

As noted earlier, recent resources bonds have

been considerably larger compared with earlier

measures. Based upon the above examples o

inrastructure deciencies, however, even i the

state were to prioritize resources inrastructure

investments and maintain the current pace o

expenditures, it is likely demand would exceed

available unds. Moreover, given the states scal

concerns and growing debt-service obligations, the

Legislature may not wish to maintain the recent

level o bond expenditures or resources programs

in order to accommodate other budget priorities.

In response to this challenge, we recommend that

the Legislature consider the ollowing options or

prioritizing spending and identiying alternative

nancing tools or resources inrastructure.Setting Priorities or Bond Expenditures.

As noted above, resources-related inrastructure

spending has relied heavily on general obligation

bonds. In a constrained scal environment,

proposals to spend the proceeds o state general

obligation bonds warrant extra scrutiny by the

Legislature. It will be important that the resources

bond expenditures in the annual budget act be well

justied, reect a programmatic need, be an appro-

priate unding source or the activity in question,

and reect legislative priorities.

For example, the Legislature may wish to prior-

itize available unding to some o the renovation

and deerred maintenance backlogs described

above while redirecting spending rom new land

acquisitions and new construction. In this way,

the state would address immediate and existing

inrastructure demands rather than creating new

inrastructure responsibilities or which there is

no dedicated unding available to pay or ongoing

operations and maintenance. Or the Legislature

may want to prioritize available unding orprojects which provide direct saety benets, or

or those that create opportunities or the state to

generate additional revenues to help support state

park operations.

Applying the Beneciary Pays Funding

Principle. On a number o occasions, the

Legislature has stated its policy intent that the costs

o a resources-related program or project should,

to the extent possible, be paid by its direct bene-

ciaries. Expenditures with broad public benets, on

the other hand, are appropriately unded with state

public unds (such as General Fund monies and

general obligation bond unds). Where the benets

o an activity are shared between public and private

beneciaries, the application o the beneciary

pays unding principle would allocate the unding

responsibility or its costs proportionally between

these two sets o beneciaries.

Te unding o SWP projects oers a goodexample o the application o this unding principle.

As reerenced earlier, about 96 percent o SWPs

costs have been paid rom revenues raised rom

water users directly benetting rom the project.

Outside o SWP, there are additional opportu-

nities to apply the beneciary pays principle to

achieve substantial state savings. Revenues rom

beneciaries could support direct inrastructure

spending or provide an ongoing revenue source

or debt-service obligations. For example, private

beneciaries have not been charged their share o

costs or CALFED Bay-Delta Program projects,

including some costs related to ecosystem resto-

ration and conveyance. Te Legislature could also

review the way costs are split between the state and

local governments or inrastructure that benets




30/48

local residents. For example, while many levees

provide signicant direct benets to local popula-

tionssuch as public saety and the acilitation o

economic developmentthe state currently pays

or up to 70 percent o the nonederal share o

construction costs or ederally authorized oodcontrol projects and up to 100 percent o the costs

or Delta levee improvements. Recent bond acts

also provide bond unding or local parks, which

primarily benet local residents.

State-Local Realignment o Some Functions.

Some current resources-related state services

provide primarily local rather than broad statewide

public benets. In such cases, the Legislature

should evaluate the potential o realigning the

responsibility or these unctions rom the state

to local governments, thereby reducing the states

inrastructure responsibilities. For example, certain

state parks predominantly serve local recreational

needs rather than statewide needs and thus could

be candidates or realignment to local enti

ca legislative analyst's office report: california infrastructure spending

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