Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

California Community Colleges (6870)

The Governor’s budget proposes a total of $586 million from several higher education general obligation bond programs for the California Community Colleges capital outlay program in the budget year. The total amount includes $31 million from 1998 bonds, $19 million from 2002 bonds, $44 million from 2004 bonds, and $492 million from a proposed 2006 general obligation bond program. The proposal would finance various phases of 68 projects throughout the statewide system.

Community College Five-Year Capital Outlay Plan. The community college’s five-year, state-funded capital outlay program would require an estimated $8.4 billion to complete the projects in the plan. The plan also includes an additional $1.9 billion in nonstate funds for projects that either would receive state funding or would be funded entirely with nonstate funds. The Governor’s budget proposal fully funds the first year of the state-funded portion of the plan.

Budget Amounts Include Excess Cost Factors

We recommend the Legislature reduce the community college capital outlay request by a total of $74 million because project costs have been increased for excess contingency amounts and for an unsubstantiated 30 percent increase in building costs.

The community college state-funded, five-year (2006-07 through 2010-11) capital outlay program originally called for a total of $512 million for 2006-07. This amount was increased by $74 million (14 percent) in the Governor’s budget. (The costs in the plan’s remaining years in the state-funded program and the entire nonstate funded portion have not been increased.) It is our understanding that this increase is related to two factors: (1) an added contingency amount and (2) increased building cost guidelines.

Unnecessary Added Contingency Funding. One factor increasing the community college capital budget includes the addition of an unspecified amount for each project that varies based on when the project is expected to start construction. This action increases the amount set aside for construction contingency beyond the normal contingency amount of 5 percent of construction cost. (The contingency covers unforeseen changes during construction of the project and, in most cases, is sufficient for these purposes.) In addition, the state has procedures that allow departments to augment project appropriations by up to 20 percent when additional funds are justified. To add extra contingency to a project beyond these amounts is both unnecessary and not a prudent budgeting practice.

Increase in Building Cost Guidelines. To their credit, the community colleges use building cost guidelines to develop state supported costs for proposed capital improvements. The cost guidelines are generally based on the experience of building many similar facilities throughout the statewide system. These guidelines are helpful in getting the maximum benefit in the use of state funds and providing a degree of equity among districts receiving state capital outlay funds for similar types of buildings. (Individual districts also have the ability to finance higher building costs with nonstate funds in the event the district desires to include local enhancements to a project.) Based on information received from the community colleges in January 2006, they have increased their building cost guidelines by roughly 30 percent. This recent increase contributed to the $74 million increase in the budget-year request. The community colleges have not substantiated the need for this significant increase. The guidelines have been successfully and appropriately used in prior budgets. Moreover, the guidelines are adjusted each year to reflect cost increases in the construction industry. If the community colleges believe cost adjustments are needed for certain types of projects and/or for specific reasons, they should provide data and details to substantiate any proposed adjustments.

Community Colleges Need to Provide Details on Cost Increases. The $74 million cost increase apparently was made late in the budget preparation process. Consequently, it is unclear how individual project costs were affected. We recommend that the community colleges provide the Legislature the amount added to each project for additional contingency and increased building cost, respectively. We recommend that the Legislature reduce each project by the amounts added for these purposes.