LAO 2006-07 Budget Analysis: Capitol Outlay

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

University of California (6440)

The Governorís budget proposes $340†million for University of California (UC) capital outlay. This amount includes $315†million from a proposed 2006 higher education general obligation bond fund and $25†million from lease-revenue bonds. The proposal would finance 18 projects ($140†million) not previously reviewed by the Legislature and $200†million to continue work on 12 projects previously approved by the Legislature. UCís current estimated future state cost to complete the 30†projects totals $383†million.

Telemedicine Proposal and Expansion of Medical School Enrollments. The Governorís Strategic Growth Plan includes $400†million from proposed higher education general obligation bonds to expand UC telemedicine programs. The telemedicine plan expects expenditure of these funds over the next eight to ten years. The Governorís budget summary states that ďÖthe funds will be used to provide facilities and state-of-the-art equipment, so that more physicians are trained and better qualified to meet health care needs in underserved areas, including rural and inner-city areas.Ē The summary also indicates that expansion of the medical school facilities will support about a 10†percent increase in medical school enrollments (250 to 300 medical students plus an equal number of medical residents) and will help with expansion of nursing programs. Neither the universityís five-year capital outlay plan nor the Governorís budget include any proposals to expand telemedicine.

UC Five-Year Capital Outlay Plan. The UCís five-year state-funded capital outlay plan (2006-07 through 2010-11) would require an estimated $2.4†billion to complete various capital improvements at each of its ten campuses. The Governorís budget proposal fully funds the first year of the current plan. This $2.4†billion total includes the $723†million UC indicates is needed to complete the projects in the budget plus $1.7†billion to complete a wide range of projects universitywide. Moreover, UC emphasizes in its five-year plan that the plan is based on its understanding of the level of state funding that may be available and does not address the universityís total funding need. While all projects included in UCís plan may not warrant legislative approval, the Legislature will be faced with annual funding requests in the hundreds of millions of dollars. To assure that capital improvement projects at UC address the highest priority needs and result in the ďbiggest bang for the taxpayersí buck,Ē it is critical that UC implement a cost-effective capital improvement program. Actions UC and the Legislature can take to improve the cost-effectiveness of the UC program include, but are not limited to: (1) reduce building costs to be in line with the California State University (CSU) and other research institutions, and (2) finance research to the maximum extent possible using research grant overhead funds that are available for capital outlay purposes. We discuss these issues further below.

University Construction Costs Are Too High

We recommend the Legislature fund current and future construction of buildings at the University of California based on building costs in line with those used by the California State University and other research institutions. For five projects in the budget, this would result in a budget-year savings of $5,967,000 and future savings of $26,258,000 (bond funds).

The UC capital outlay requests consistently include building construction costs that are higher than similar types of facilities at CSU and other research institutions. Figure†1 compares UCís proposed cost for several projects to the costs that would be expected for similar projects at CSU and other research institutions. For this comparison we used CSUís cost guidelines for spaces such as classrooms, teaching laboratories, libraries, and offices. For research space we compared the cost of nearly 400 research buildings throughout the nation that are comparable to those at UC, and used the cost at the 75th percentile (that is, the building that is costlier than 75†percent of the buildings in the group).

As shown in Figure†1, the state could reduce its cost for five UC buildings by $32†million (general obligation bonds) by providing funds at a level more consistent with costs for similar building at other institutions. Applying this level of funding to the projects in UCís five-year plan and beyond would significantly reduce state costs and result in a more cost effective use of state funds. If UC still wishes to pay for the more expensive buildings proposed, it has the flexibility to use other nonstate funds that are available to the university.

 

Figure 1

UC Building Costs Exceed the Cost of Similar Buildings At Other Institutions

(In Thousands)

Project

UC Proposed Building Cost

Comparable Building Cost

Potential State
Savings

Davis: Veterinary Medicine 3B

$68,092

$62,769

$5,323

Davis: King Hall Renovation and Expansion

12,410

9,495

2,915

Irvine: Humanities Building

17,378

15,185

2,193

Santa Barbara: Davidson Library Addition and Renewal

45,864

38,094

7,770

Santa Cruz: Biomedical Sciences Facility

57,188

43,164

14,024

    Totals

$200,932

$168,707

$32,225

 

Therefore, we recommend the Legislature fund current and future UC building costs based on the comparison costs discussed above. Figure†2 summarizes the actions necessary to realize savings in the amounts proposed in the Governorís budget for the projects in Figure†1. The savings identified in Figure†2 include savings in fees and contingencies related to the reduced building cost.

 

Figure 2

Budget Bill Reductions to Bring UC Building Costs in Line With Similar Buildings at Other Institutions

(In Thousands)

Project

Budget Bill Amount

LAO
Recommended Funding Level

Budget Bill Reduction

Davis: Veterinary Medicine 3B

$3,100

$2,858

$242

Davis: King Hall Renovation and Expansion

17,925

14,225

3,700

Irvine: Humanities Building

1,749

1,528

221

Santa Barbara: Davidson Library Addition and Renewal

1,250

1,038

212

Santa Cruz: Biomedical Sciences Facility

6,490

4,898

1,592

    Totals

$30,514

$24,547

$5,967

 

Use Research Overhead Funds for Research Space

We recommend the Legislature finance University of California research space using research overhead funds to the maximum extent possible.

In our 2004 report Funding UC Faculty Research Facilities, we point out that UC has a large revenue source in the facilities and administration overhead it charges sponsors of faculty research. Most of this revenue comes from the federal government and private for- and not-for-profit entities. This annual revenue has increased steadily for the past 20 years and is now around $3†billion, of which about 55†percent is from the federal government.

About 13†percent or roughly $390†million of the annual research revenue is provided specifically to cover the facilities costs associated with the research. We believe the Legislature should take into consideration the availability of these funds when deciding the state funding level for UC capital improvements.

Figure†3 includes four science/engineering projects that have not been previously reviewed by the Legislature. The figure shows the total cost of each project (which the administration proposes to be entirely state funded), the share of the projectís costs that could be covered by research overhead, and the remaining share of costs (which would be state funded). As the figure shows, over 80†percent of the cost of these proposed buildings could be financed by research overhead funds instead of state funds.

 

Figure 3

Projects for Which UC Could Share Costs Using
Research Overhead Revenue to Finance Research Space

(Dollars in Thousands)

Project

Percent
Research Space

UC Proposed State Project Cost

Costs
Recoverable From Research Overhead Funds

Remaining Costs (State)a

Davis: Veterinary Medicine 3B

87%

$65,500

$56,985

$8,515

Riverside: Boyce Hall and Webber Hall Renovations

84

31,000

26,040

4,960

San Diego: Structural and Materials Engineering Building

81

78,057

63,642

14,415

Santa Cruz: Biomedical Sciences Facility

84

74,200

62,330

11,960

    Totals

$248,757

$208,997

$39,760

 

a  The state's share would be less than the amount shown if the Legislature funds the nonresearch space based on CSU building cost guidelines.

 

Faced with multibillion capital improvement programs statewide and within higher education, we believe the Legislature and the administration need to consider all options for financing these programs. As discussed above, one option is to increase UCís share in the cost of their capital improvement program by more fully using research overhead funds that are available for capital outlay purposes. UCís share in the projects shown in Figure†3 could be met in two ways. UC could finance the research space up front by selling bonds backed by a pledge of the overhead revenue. This method would reduce the stateís upfront appropriation of bond funds. An alternative would have the state finance the project cost using its bonds, with UC pledging to the state the overhead revenue to pay the annual General Fund debt payment costs for the associated research space. Under either method, assuming a 25-year bond repayment period for the four projects, UC would have an annual payment of about $17.5†million. This is less than 5†percent of the annual overhead revenue available for capital outlay. In turn, the state would realize a reduction in its annual General Fund debt payments.

In view of the increasing demand for capital improvements statewide and within higher education, coupled with the availability of UC research overhead revenue, we recommend the Legislature finance UC research space using the overhead revenue to the maximum extent possible.

Delete Funding From More Costly Lease-Revenue Bonds

We recommend the Legislature fund the seismic safety correction of Giannini Hall on the Berkeley campus from general obligation bonds rather than the more costly lease-revenue bonds. (Delete Item 6440-310-0660[1] in the amount of $24,616,000 and add Item†6440-302-6048[1.5] in the amount of $24,616,000).

Giannini Hall is a four-story, 46,009 square foot building housing various programs and three general assignment classrooms on the Berkeley campus. Last year, the Legislature provided $1.5 million from 2004 higher education general obligation (GO) bonds to prepare preliminary plans for seismic corrections to the building. The budget request would fund the working drawing and construction phases of the project using lease-revenue bonds. The UCís project schedule calls for completion of working drawings by March†2007, with construction starting in August 2007.

The current project cost and schedule is consistent with the project as approved by the Legislature in 2005. Consequently, we recommend the Legislature provide funding for the project in the budget year. However, there is no benefit to the state to use the more costly financing mechanism of lease-revenue bonds. These bonds are more costly than GO bonds and the debt payment on both types of bonds comes from the stateís General Fund. Based on UCís project schedule, there should be no delay in the project by using the proposed 2006 GO bond fund (assuming these bonds are approved by the Legislature and the voters). In addition, we recommend the Legislature add the Giannini Hall project to UCís budget item that provides for ďfast-trackingĒ the design and construction. Based on UCís schedule, this should save at least three months. Thus, any potential delay in securing funds under the 2006 bond program should be offset by the ďfast-trackĒ process.


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