Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

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Oversight of Lease-Revenue Bond Projects

The 2003-04 Governor's Budget proposes to fully fund all phases of eight major capital outlay projects that use lease-revenue bonds as their source of funds. To the extent the Legislature approves any of these projects, we recommend adding budget bill language requiring the Department of Finance to notify the Legislature of proposed project augmentations or scope changes.

The 2003-04 Governor's Budget proposes $500 million to fund all project phases of eight major capital outlay projects financed with lease-revenue bonds (see Figure 1). Below, we discuss our concerns with funding all phases of a capital outlay project at one time, and the particular problems with lease-revenue bond financed projects.

Why the Legislature Has Funded Major Capital Outlay Projects in Phases

Capital outlay projects generally consist of three major phases: (1) preliminary plans, (2) working drawings, and (3) construction. In the past, it was common practice for the Legislature to appropriate funds for preliminary plans in one budget act (with accompanying supplemental report language specifying the project's scope and future costs) and then—after reviewing completed preliminary plans—appropriate funds in the subsequent budget act for the remaining project phases.

Why Preliminary Plans Are Important. Preliminary plans contain important information for the Legislature in overseeing projects. Specifically, these plans include a detailed project scope description (exactly what will be built and why), a site plan, architectural floor plans, building elevations, outline specifications, and a detailed cost estimate. Preliminary plans are the initial design documents that are used to prepare the construction documents. Without completed preliminary plans, any project cost estimate presented in the Governor's budget is merely a "best guess" estimate concerning the final scope and cost of a project.

Preliminary Plans Generally Should Be Reviewed Before Proceeding to Construction. Historically, our office has recommended the Legislature only approve funding of working drawings and construction phases for larger and/or complex projects after it has had an opportunity to review preliminary plans for these projects. This helps ensure that they remain within scope and budget as approved by the Legislature. In other words, after reviewing preliminary plans, the Legislature can be assured that it is getting the project it was promised, for the agreed price. It also allows the Legislature to consider whether the project continues to be a legislative priority before funds for subsequent phases have been appropriated.

History has shown that projects for which subsequent project phases were funded before preliminary plans were completed, often required cost and scope revisions during construction. These revisions have been for a variety of reasons—unanticipated environmental issues, unforeseen site conditions, unforeseen soil conditions, inadequate cost estimates, and inaccurate project scope—such as the wrong size or type of facility.

Concerns With Proposed Projects

The eight proposed projects represent large, complicated projects and/or unique projects where there are significant unknown issues. The projects consist of both new construction and renovation of old structures. New construction projects require definitive site plans and scope descriptions, whereas renovation projects may have many unknown issues related to past design and construction practices.

We note that three of the projects require funds to acquire a site on which to construct the facility. Without a specific site for construction, the project cost estimate is unsupportable because it cannot account for costs related to various site issues. For example, how facilities will need to be positioned, the type of soil conditions, and the location of utility connections are all site-related issues that will have an effect on the cost of project design and construction. These types of issues are addressed in a site plan included in completed preliminary plans.

In the case of the Department of Corrections' project for a new death row facility, the Governor's budget requests funds for a study phase. We assume that this study may involve site investigations, a review of environmental mitigation issues, soils testing, and a validation of estimated project costs. The fact that the department needs to conduct a study on the project clearly indicates that the scope and cost of the project are not final, but rather, conceptual estimates.

Given the types of issues noted above, the proposed projects ideally should not receive appropriations for working drawing and construc tion at this time. We believe it is highly likely these projects will need revisions to their cost estimates and/or scope descriptions before construction is completed.

Lease-Revenue Bond Projects Cannot Be Funded in Phases

The reason the Governor's budget proposes to fully fund all phases of the projects in Figure 1 is due to their use of lease-revenue bonds. Recently, the Attorney General's Office concluded that the state cannot issue lease-revenue bonds until the Legislature has appropriated the total amount of the lease-revenue bonds to be issued for a project. Consequently, in the case of those projects that are fully financed with lease-revenue bonds, the budget act appropriation must include all project phases.

How Should the Legislature Respond?

In the case of capital outlay projects that are complex and/or unique, we continue to support the concept of reviewing preliminary plans before appropriating funds for subsequent project phases. Given the situation with lease-revenue bonds, the only practical way to fund such a project in phases would be to appropriate General Fund monies for the preparation of preliminary plans for these projects. To the extent these projects represent critical infrastructure needs, it is not unreasonable to expect the administration to prioritize its use of General Fund dollars to include the preparation of preliminary plans for critically needed projects. In fact, for future budgets, we recommend that the Legislature do just that—set aside enough General Fund money to fund the preliminary plan phase of any lease-revenue bond project.

Given the current fiscal condition, however, we realize that funding the planning phase with General Fund monies for the eight projects may not be possible. To the extent, however, the Legislature approves these projects as proposed, we believe some enhanced legislative oversight is needed. Specifically, we recommend that the Department of Finance (DOF) be directed to notify the Legislature within ten days of receiving notification that any of the eight projects is in need of an augmentation of project cost or a change in project scope. Such notification would provide the Legislature with advance notice of potential problems. We recommend the following language be added to the corresponding budget items for any approved projects in Figure 1:

The Department of Finance will provide written notification to the Joint Legislative Budget Committee, within ten days of receipt, of any requests for an augmentation of project costs, change in project scope, and any related change in project schedule, for projects identified in Schedule(s) (XX).

While the administration may assert that such information and notice is already provided by the State Public Works Board (SPWB), we note that the Legislature generally receives written notification after the SPWB staff (DOF) has determined that an augmentation is needed and/or a project's scope needs to be changed. As such, the Legislature is not kept current on developments with complex projects and therefore is unable to present recommendations on project issues before SPWB staff has decided on a course of action.