The budgeting chapter of SAM provides an overview of the state’s budget process as well as a description of the events, actions and documents that make up the state's Financial Plan. It also provides some instructions and examples for the preparation of the forms, documents, and schedules critical to the preparation and enactment of the annual financial plan and some instructions for its administration from day to day.

Because of the dynamic nature of budgeting in California, this manual does not provide all the instructions which are necessary for the development, enactment or administration of the budget. Budget policy and supplemental instructions are generally issued by the Department of Finance (DOF) through Budget Letters, budget related Management Memos, and other memoranda to supplement this manual. Electronic mail notices to departmental budget officers and the Internet are also used, with the expectation of increased usage in the future.

The Capitalized Assets sections of SAM reference policies and procedures on budgeting and financial administration of capital outlay projects and—more broadly—on programs for capitalized asset financing. These sections are divided into five parts:

1. An overview of capital outlay and capitalized asset financing (SAM Sections 680–6809);
   
   
2. Budgeting capital projects (SAM Sections 6810–6839);
   
   
3. The administrative approval process for implementing acquisition, planning, design, construction, and equipping of capital projects (SAM Sections 6840–6868);
   
   
4. Long-term financing of capitalized assets (SAM Sections 6870–6888); and
   
   
5. Glossary and cross-index of capital outlay terminology, acronyms, and forms (SAM Section 6899).

The Department of Water Resources for the State Water Project and the Department of Transportation for highway-related projects are not subject to the instructions contained in this chapter. In addition, this chapter does not address projects undertaken with funds not subject to legislative appropriation, such as higher education's housing, student union programs, and other auxiliary organizations.

As used in this chapter, the term capitalized assets refers to all processes which may result in the acquisition, new construction, alteration, renovation or betterment of real assets, regardless of character of appropriation for the expenditure. This includes capital outlay projects and budget change proposals, certain leases that meet the definition of a capitalized lease, long-range plans for infrastructure, and financing of projects and capitalized leases.

The term capital outlay refers to a subset of these activities, funded specifically under the capital outlay character of appropriation. See Section 6806 for a discussion of characters of appropriation.

The client department, the State Public Works Board (PWB), the Department of Finance (DOF), the Department of General Services (DGS), the Pooled Money Investment Board (PMIB), and the State Treasurer's Office (STO) all may perform key roles in carrying out an infrastructure program.

1. The client department manages the programs for which infrastructure acquisition, construction or improvement is a supporting activity. The department identifies program needs in a strategic plan, determines the related infrastructure requirements, prepares a five-year capitalized assets plan, prepares individual capital outlay budget change proposals, works with DOF and DGS to budget and implement the plan, and may work with PMIB and STO to provide interim and long-term financing for the project. At all stages of a capital outlay project or a capitalized lease project, the client department is responsible for justifying program needs, keeping the project within scope and cost, and meeting administrative requirements set forth in statute and SAM. Some departments have the authority to design and construct projects, exclusive of the control or oversight of DOF, PWB and/or DGS.
   
   
2. DOF reviews capital outlay budget change proposals (COBCPs) for inclusion in the Governor's Budget, reviews legislation proposing capital outlay projects and capitalized leases, has authority to adjust the scope of projects subject to legislative reporting requirements, chairs and provides staff to PWB in that board's oversight of project implementation, and has delegated authority from PWB to carry out certain of the board's tasks. DOF also participates in bond sales activities for capital outlay and capitalized lease projects.
   
   
3. PWB acquires property for the state, must approve the preliminary plans for capital projects, may set reasonable conditions for any project, and may issue debt instruments and authorize interim financing to construct facilities. PWB ensures that projects remain within legislatively approved scope and cost and are carried out with speed and diligence. The board has authority to augment projects by up to 20 percent, subject to legislative notification requirements and may terminate projects. In addition, the board holds the power of eminent domain (condemnation authority) for most projects. An overview of PWB's role and responsibilities is presented in SAM Section 6842.
   
   
4. DGS has broad authority for real property acquisition, sales, statewide property inventory, and energy efficiency services for state and K-14 school facilities. Its services are offered on a reimbursable basis. DGS determines whether departments are capable of carrying out minor projects directly. DGS is also staff to PWB for property acquisition and energy efficiency contracts.
   
   
5. PMIB has the authority to grant requests for Pooled Money Investment Account loans for projects needing interim financing before bonds are sold. Additional information on PMIB's processes is provided in Section 6878.
   
   
6. STO is the state's official agent for the sale of debt instruments. STO chairs PMIB and sits as a member on PWB. In addition, STO provides (or makes arrangements for) trust services for debt issuances. As agent for sale, STO holds the exclusive right to select financing teams for issuances. STO's agent-for-sale role includes all debt financings of joint powers authorities, regardless of whether the state is a member of the authority. Additional information on STO's role is provided in Sections 6870–6888.

The state appropriates funds in three broad classifications—state operations (support), local assistance, and capital outlay—referred to as the character of appropriation. Unless statutory language specifically allows otherwise, once budgeted as one of the three characters, a program or activity must follow that classification's expenditure rules.

Infrastructure management uses all three characters of appropriation, depending on the activity. The general rule is that the acquisition/creation/renovation of real assets is classified as capital outlay if the state holds ownership. Operation and maintenance of state real assets is classified as state operations. State-funded but locally-owned infrastructure is classified as local assistance.

Certain types of leasing activities—called capitalized leasing—which are funded as state operations can also result in a capital acquisition. As used in this chapter, the term capitalized assets covers both traditional capital outlay as well as capitalized leasing. (Reminder: Capitalized assets are to be reported to the DGS Statewide Property Inventory [SPI] Unit for inclusion in the SPI.)

Exception to the prohibition against using support funds for capital outlay: Section 6.00 of the Budget Act provides a limited exception to the rule that support funds may not be used for capital outlay purposes. This section allows up to $35,000 of support funds to be encumbered for preliminary plans, working drawings, or construction of any project for the alteration of a state-owned facility (Section 6.00 does not apply to leased facilities). This amount may be exceeded only if:

1. DOF determines the proposed alteration is critical and the use of a higher level of support funds is necessary; and
   
   
2. The maximum cost of the project does not exceed $250,000.

DOF must notify the Legislature not less than 30 days in advance when approving more than $35,000 in support funding for a capital project. Section 6807 on minor capital outlay describes the approval process for projects of more than $35,000.

Guidelines for determining character of appropriation: The following discussion and table are intended as a guide to assist departments in determining whether an activity should be budgeted as capital outlay, support, or local assistance.

Capital outlay: Section 3.00 of the Budget Act defines capital outlay as "acquisition of land or other real property, major construction, improvements, equipment, designs, working plans, specifications, repairs, and equipment necessary in connection with a construction or improvement project" (emphasis added). Administratively, capital outlay is defined as:

1. Any real property acquisition or new construction.
   
   
2. Any alteration, renovation, addition or betterment (including interior asbestos removal/remodeling) which extends the design life or alters/upgrades the function of a structure.
   
   
   1. This does not include repairs and maintenance, which are intended to keep a facility functional at its designed level of services and life expectancy.
      
      
   2. Alteration" means any modification of existing space (buildings, structures or other facilities) that changes the use as to function, layout, capacity, or quality. Typical alterations include demolition of fixed partitions and/or construction of new fixed partitions or initial installation of carpeting and movable partitions. However, there are two instances in which alterations may be done with state operations funding:
      
      
      1. In a leased space situation, the landlord generally makes the alterations and amortizes them through the lease. The lease, including increases for amortized alterations or lump-sum payment for alterations, is a state operations expense subject to the support budget review process; and
         
         
      2. As noted in preceding text, Section 6.00 of the Budget Act allows the use of the support appropriation for alterations, within specified limits.
         
         
   3. Betterment" means any modification that increases the designed level of services or life expectancy of a facility or other state infrastructure (e.g. seismic improvements, upgrades, etc.).
      
      

3. Fixed and movable equipment needed for initial occupancy of a new facility or space, but usually only if the new facility is not replacing an existing facility (see 6806 Illustration). Fixed equipment is referred to as Group 1 equipment, and movable equipment is referred to as Group 2 equipment (Section 6855).
   
   
4. A lease-purchase (installment payment) agreement because equity is built as payments are made. Although the actual lease payments will be budgeted in state operations, the transaction is a capitalized assets acquisition.
   
   

   All planned lease-purchases, whether authorized through the budget or special legislation, must be included in the department's five-year capitalized assets plan. If the lease-purchase will be authorized through the Budget Act, a COBCP is required to verify economic benefits, whether or not there is a related support BCP for lease costs. (For lease-purchase agreements authorized through special legislation, DOF may require information similar in content to a COBCP at the proposed legislation stage.) These requirements apply to lease-purchases for state infrastructure financed through a joint powers authority, another level of government, or a private developer (Sections 6818 and 6820).

5. Both the request for, and the exercise of, a purchase option. A lease with a purchase option gives the state the right, during the course of the lease, to purchase the asset for a predetermined price, if desired, which is a capital outlay acquisition. Adding a purchase option in a lease agreement is considered initiating a potential capital outlay acquisition. Although the lease payments prior to the exercise of the option are classified as state operations, the potential acquisition must be tracked as part of the department's overall capitalized asset plan. Therefore, if authorization is sought through the Budget Act, anticipated purchase options and their exercise must both be presented for review as COBCPs, subject to dollar thresholds noted in Sections 6818 and 6820. Regardless of method of authorization, the planned use of purchase options must be included in the department's five-year capitalized assets plan.
   
   
6. Generally, the following are not considered as capital outlay: relocation (including temporary "swing space" while a project is under construction) and moving expenses, although DOF may authorize moving expenses as a capital outlay cost on an exception basis.
   

State operations: The following facility-related expenses are classified as state operations:

1. Equipment not included in the complement necessary for initial operation of a new construction or renovation project.
   
   
2. Movable equipment for new employees or new programs that are not part of a capital outlay project. (Such equipment is budgeted as an operating expense in the department's support budget when the positions or programs are authorized.)
   
   
3. Replacement equipment items (regardless of amount).
   
   
4. Repair projects, including special repairs, not connected with a construction or improvement project. Examples of special repair projects include repainting, re-roofing, electrical rewiring, plumbing repairs, dredging of river or stream beds to restore original flow capacity, replacing old equipment items, and road repairs. (Regardless of amount, "special repairs" are budgeted in the client department's state operations appropriation.)
   
   
5. Maintenance, including deferred maintenance. Maintenance is budgeted as "facilities operations" in the client department's operating expense schedule.
   
   
6. Relocation—including temporary "swing" space—and moving expenses, whether or not related to a capital outlay project. (However, DOF may authorize exceptions to this rule.)
   
   
7. Lease or rental costs, and any associated budget requests. (However, as noted in the preceding text, capitalized leasing must be reflected in the five-year capitalized asset plan and COBCPs are required under specified conditions per Section 6818.)
   
   
8. Generally NOT alterations in state-owned buildings, except as provided in Section 6.00 of the Budget (see preceding). In leased facilities, support funds may be used for alterations.
   

Local assistance is: The following infrastructure-related expense is classified as local assistance:

1. Grants to local agencies for the operation, maintenance, and acquisition or development of facilities or land, provided the local entity retains ownership after completion of the project.

6806 ILLUSTRATION

Minor capital outlay is any project under $250,000 (except an acquisition project) which is scheduled in the Budget Act specifically under the heading "minors." However, Resources Agency capital outlay projects of up to $500,000 may be proposed as minor projects with the concurrence of DOF (Public Contract Code 10108.5). The $250,000 limit does not apply to district agricultural associations or the State Lands Commission.

Important budgeting points include:

1. Per Section 3.00 of the Budget Act, the term minor projects includes planning, working drawings, construction, improvements, and equipment projects not specifically set forth in the budget schedule. It does not include any acquisition project, regardless of amount.
   
   
2. Minor projects are generally scheduled together as a single "project" and must be labeled as "minors" in the client department's capital outlay Budget Act item. Any project not scheduled specifically as a minor project, regardless of amount, is a major project. (The decision on how to propose scheduling the project rests with DOF.)
   
   
3. DGS may delegate the authority to client departments to carry out a minor project directly, pursuant to the Public Contract Code Section 10808 and 10808.5.
   
   
4. Per Section 2.00 of the Budget Act, the period of appropriation availability for minor projects is one year, followed by a two-year liquidation period. (Major projects, on the other hand, have a three-year appropriation availability.)
   
   
5. A minor project is not subject to PWB oversight, and by practice PWB does not augment projects which are not subject to its approval processes.
   
   
6. DOF may increase the approved amount of a minor capital outlay project through a redirection within the minor program if the project is not scheduled individually and the amount of the increase does not result in a project of over $250,000. Substitution of minor projects is permissible with DOF concurrence, provided the project being replaced is not scheduled individually. Substitutions are based on critical need.
   
   
7. Minor projects may be subject to the California Environmental Quality Act (CEQA) as described in Section 6850.
   
   
8. Minor capital outlay proposals are due to DOF by July 1 of each fiscal year. Each proposed project must be submitted in the format for major projects outlined in Section 6818.
   
   
9. Reappropriation of minor projects is not generally permitted. Minor projects should therefore be projects where all funds can be encumbered in one year.
   
10. It is not permissible to "piecemeal" larger projects through several minor projects.
    

Minor projects created through Section 6.00 of the Budget Act: As described in Section 6806, a minor project may be created for alteration of a state facility using support funds, subject to DOF approval when the total project amount is between $35,000 and $250,000. When DOF approval is required, the request must be accompanied with all the information required in a COBCP (Section 6818). The request must be submitted at least 60 days in advance of proposed project implementation (30 days for DOF to review the request and notify the Legislature; 30 days for the Legislature's review), and no later than April 30 of each year. (Submit copies of the request to both the DOF support analyst and the Capital Outlay Unit, along with any related Form 22 for transfer of funds to DGS' Architecture Revolving Fund.)

The ten major phases of the capital outlay process, along with their supporting activities, are described in following text. For projects implemented through multiple or phase appropriations, parts of Phase 3 will need to be repeated for each appropriation.

Note that this description of the capital outlay process is based on the standard design-bid-build approach to project delivery. Other project delivery methods, such as the design-build approach, have slightly different project phases. Section 6842 discusses project delivery systems.

Reference to DGS in the following text applies to any department authorized to act as its own project manager.

1. Concept and documentation phase: 2 to 5 months (Sections 6816–6821)
   
   
   1. Client department defines problem and develops conceptual solution.
      
      
   2. Client department collects supporting data and documents how the project supports the department's strategic plan.
      
      
   3. Client department documents findings and conclusions in its five-year plan and COBCPs.
      
      
2. Historical resources phase: Usually coincides with phases 1 and 3 (Section 6822)
   
   
   1. Client department submits proposed project and Historic Resources Inventory to State Historic Preservation Officer for review if the project will impact a state-owned structure over 50 years of age.
      
      
   2. The State Historic Preservation Officer may propose mitigations which, if unacceptable to the department, must be mediated by Office of Planning and Research.
      
      
3. Budget approval phase: 17 months (Section 6814 describes the budget enactment timetable; Sections 6824–6832 gives detailed descriptions of processes).
   
   
   1. DOF reviews the five-year plan and COBCPs, including their relationship to the department's strategic plan.
      
      
   2. DGS prepares a technical feasibility review for the project, if requested by DOF.
      
      
   3. DGS develops budget packages, as requested by DOF.
      
      
   4. DOF conducts scope meetings, as required.
      
      
   5. DOF conducts Administration budget hearings and includes approved COBCPs in the Governor's Budget.
      
      
   6. The Legislative Analyst comments on selected projects in The Analysis of the Budget Bill.
      
      
   7. Policy or technical changes to capital outlay projects proposed in the Governor's Budget are submitted by Finance Letter to the Legislature.
      
      
   8. The Legislature holds budget subcommittee and conference committee hearings, and approves the capital outlay budget, with any revisions.
      
      
   9. After reducing or vetoing selected appropriations in the enrolled bill, the Governor signs the measure.
      
      
4. Site selection and acquisition phase: Up to 12 months (Section 6849)
   
   
   1. Client department and DGS make site selection.
      
      
   2. PWB approves site selection.
      
      
   3. As PWB's agent, DGS acquires property (through the exercise of eminent domain, if needed).
      
      
   4. PWB approves settlement price, if any.
      
      
5. Environmental review phase: May coincide with phases 1 through 4 (Section 6850)
   
   
   1. Department meets the CEQA requirements. By policy, if land is purchased as part of a project, CEQA requirements must be completed before acquisition. Otherwise, environmental review must be completed by the end of Phase 6.
      
      
6. Preliminary plan phase: 3 to 12 months (Section 6851)
   
   
   1. Design architect/engineer prepares schematic documents.
      
      
   2. Design architect/engineer prepares design development and estimate of project costs
      
      
   3. Environmental process certified by department.
      
      
   4. PWB approves preliminary plan design.
      
      
7. Working drawing phase: 3 to 11 months (Section 6852)
   
   
   1. Design architect/engineer prepares plans and specifications for bidding and construction work and refines the cost estimate.
      
      
   2. Responsible lead design agency obtains mandatory review and approvals (e.g., State Fire Marshal).
      
      
   3. DGS submits the design certification to DOF.
      
      
   4. DOF approves working drawings and proceeding to bid.
      
      
8. Bidding phase: 3 to 6 months (Sections 6852 and 6853)
   
   
   1. DGS advertises the project for construction bids.
      
      
   2. Interested bidders prepare and submit construction bids to DGS.
      
      
   3. DOF authorizes award (if within approved funding levels) and approves transfer of construction funds.
      
      
   4. DGS awards construction contract to contractor.
      
      
9. Construction phase: 3 to 36 months (Section 6854)
   
   
   1. Contractor constructs project.
      
      
   2. DGS processes construction progress payments and change orders within approved contingency amount.
      
      
   3. DGS files contract completion notice with DOF.
      
      
10. Claims and close-out phase: (Section 6856)
    
    
    1. Contractor files notice of claims.
       
       
    2. DGS and contractor resolve claims through arbitration, mediation, and/or court.
       
       
    3. DGS closes-out project per Government Code 14959.
       
       

Projects funded through bonds and financing leases have additional administrative steps addressed in Sections 6870–6888. Project changes for cost and scope are addressed in Sections 6861 and 6863, respectively.

Most citations for capital outlay planning, budgeting, and fiscal administration are contained in the Government Code and annual Budget Act. Citations for capitalized asset financing are also provided in the Government Code. However, the Public Contract Code, the Public Resources Code, and the California Code of Regulations provide significant instruction and constraints on project implementation. Statutory authorization for individual general obligation bond measures is placed programmatically in the code (e.g., prison authorizations are placed in the Penal Code), and are not cited in the following 6809 Illustration. In addition, individual project descriptions (called project scope), which are provided in supplemental language to the Budget Act, are not cited in the following table.

Because legal citations change periodically, this table is a only a guide. The citations are not comprehensive, and information should be checked against current publications.

6809 ILLUSTRATION

Sections 6812–6839 provide budget development highlights and information on the major activities which make up the concept and document phase, the budget package phase, and appropriation approval. An overview of capital outlay phases is provided in Section 6808. Acronyms, terminology and forms are defined and indexed in the glossary, Section 6899.

No base budget for capital outlay. Capital outlay budgets are zero-based each year. This means the client department must submit a written capital outlay budget change proposal (COBCP) for each new project or subsequent phase of an existing project for which the department would like funding. The requirements for COBCPs are presented in Section 6818.

When COBCPs are due. In general, COBCPs for major capital outlay projects are due in February of each year for the fiscal year commencing 17 months later (COBCPs for minor projects are due in July, 12 months prior to the budget year). This timing allows DGS to complete feasibility studies and cost estimates for the project and DOF to make site visits. Copies of the COBCPs are simultaneously due to DOF, DGS, and the Legislative Analyst's Office (LAO). See Section 6814 for an overview of the budget enactment timetable. See Section 6816 for a listing of documents in addition to COBCPs required to request capital outlay funding.

When COBCPs are updated. The client department submits technical updates (including cost index updates) to the COBCP and five-year plan, generally by September 1, prior to the budget year. New project proposals, unless of a truly urgent nature, are usually not accepted after initial submittal of the COBCPs and five-year plan in February. Cost updates received from DGS (based on budget package estimates) will be incorporated into the Governor's Budget if received by early December before the budget year. Otherwise, technical cost updates will be presented to the Legislature through a Finance Letter due to the Legislature no later than May 1, before the budget year. Scope changes to existing projects, or new projects justified on an urgency basis, may be presented to the Legislature in a Finance letter due no later than April 1. Departments' requests for technical and policy Finance Letters are generally due in mid-February; specific due dates are published annually by DOF Budget Letter. An updated or new COBCP is required for policy and technical Finance Letters.

COBCPs must clearly support the department's strategic plan. Each department, as defined in Section 6816, must have a strategic plan, and its budget change proposals—including COBCPs—must demonstrate the relationship and relevancy to the department's strategic plan.

Five-year capitalized assets plans, by project, are required annually. Each department submitting a COBCP must also submit, at the same time, a five-year capitalized assets plan by project. The requirements for this plan are set out in Section 6820. A copy of the five-year plan is due simultaneously to LAO. Exceptions to project-level plans must be approved by DOF.

Annual Budget Letters for COBCPs and five-year plans. DOF releases a Budget Letter each fall setting specific due dates for COBCPs and five-year plans, reiterating information requirements, and describing any form or processing changes. A separate Budget Letter is released in late Fall setting due dates for requests for Finance Letters the following Spring to make policy or technical changes to capital outlay projects proposed in the Governor's Budget. Another Budget Letter is released in July of each year publishing the annually-updated cost indexes used to adjust construction costs for inflation.

Ten-year capital outlay survey responses, by program and fund source, are required annually. All departments which anticipate needing funds for capital outlay or state-funded infrastructure in the next ten years must annually respond to a DOF survey questionnaire regarding those needs. A response is required whether or not the client department will be submitting a COBCP for the upcoming budget year. The requirements for the ten-year survey response are described in Section 6837.

The state uses the design-bid-build process for most projects; therefore, capital outlay projects are frequently budgeted in multiple phases. The design-bid-build process means that project specifications must be completely developed (i.e., through the working drawings phase) before construction is bid out. Consequently, working drawings and construction appropriations are often not provided until cost information from the previous phases is available. This can result in multiple, sequential appropriations for a single project. However, at the discretion of DOF and subject to legislative concurrence, more than one phase may be budgeted at a time , and in some cases all phases may be budgeted simultaneously. The typical phases for projects are described in Section 6808. A discussion of the design-bid-build process is provided in Section 6841.

No capital outlay deficiencies. The annual Budget Act includes control section language forbidding the Director of Finance to propose a deficiency for any capital outlay projects. If a project is anticipated to exceed its budget, the remedies are a scope reduction (subject to approval by DOF and legislative notification) and/or an augmentation of up to 20 percent (subject to approval by the Public Works Board and, when required, to legislative notification). If those remedies are insufficient, the remaining options are to terminate the project or halt it while seeking a new or supplemental appropriation. Augmentations and scope changes are discussed in Sections 6861 and 6863.

No transfer of capital outlay funds between scheduled projects. The annual Budget Act includes control section language forbidding the transfer of funds between scheduled projects in a client department's capital outlay item. (There may be some exceptions on an item-by-item basis.) However, PWB retains the authority to augment a project's appropriation, provided there are sufficient revenues available in the source fund.

Period of appropriation availability. The Governor's Budget includes only those projects or project phases for which funds can be encumbered within the appropriation period. Section 2.00 of the Budget Act specifies that, in general, appropriations and reappropriations for capital outlay pursuant to that act are available for expenditure for three years (with an additional two years for liquidation), with the exception of appropriations for studies, preliminary plans, working drawings, or minor capital outlay which are available for encumbrance for a single year only. However, a construction appropriation reverts to its source fund at the end of the first year of appropriation availability if DOF has not allocated the funding through fund transfer or approval to proceed to bid.

A capital outlay appropriation provided through special legislation is also available for expenditure for three years (followed by a two-year liquidation period), unless otherwise specified or unless the chapter makes the appropriation continuous.

CEQA review required. The California Environmental Quality Act (CEQA) requires environmental review of any project undertaken in whole or in part by any public agency. See Section 6850 for more information.

Process exceptions for certain departments. The University of California, the California State University, the California Community Colleges, some Resources Agency departments, and the Department of Corrections' New Prison Construction Program (Penal Code 7003) may handle the design and construction of their own projects without using DGS' services. However, the instructions contained in this chapter are otherwise fully applicable unless waived by statute or Budget Act language. (The Department of Water Resources for the State Water Project and the Department of Transportation for highway-related projects are not subject to the instructions contained in this chapter.)

The following 6814 Illustration will help departments plan their capital outlay budget work. To meet statutory budget time frames, departments must submit requests for major capital outlay projects in early February, 17 months prior to the budget year for which funding is requested. Minor capital outlay requests are due in early July, one year prior to the budget year (Section 6807). Late requests will be accepted only if DOF has previously approved late submittal. Departments within agencies must have agency concurrence for their proposals, prior to submittal. Submission dates indicated are when documents are due to DOF, DGS, and usually the LAO.

References to DGS in the following table also apply to any department which is authorized to act as its own project manager. Due dates on the chart are approximate; actual dates are set by Budget Letter.

6814 ILLUSTRATION

A department must make a formal request to DOF by February 1 of each year to have a major capital outlay project included in the annual Governor's Budget presented to the Legislature the following January. The following documents are required:

1. A capital outlay budget change proposal (COBCP), as described in Section 6818.
   
   
2. The five-year capitalized assets plan, showing projected needs by project (or capitalized lease) for the budget year and four additional years, as described in Section 6820.
   
   
3. A current fund condition statement for the proposed fund source, if the department manages the fund. (Obtain the fund condition statement from the departmental budget officer.)
   
   
4. For departments planning to use prototypes, any proposed new prototypes or changes to existing prototypes (provide with the five-year plan per Section 6821.)
   
   
5. A copy of the facility inventory is optional, but departments must keep the inventories current in the event DOF or LAO requires a copy.
   

In addition, all departments within the Administration (which excludes constitutional officers, constitutionally created boards and commissions, and the higher education segments) must have a strategic plan approved by the Governor's Office before DOF will consider a COBCP.

The required items must be approved by the appropriate agency secretary before release to DOF. The department then submits the information package simultaneously to DOF (2 copies), LAO (1 copy), and DGS (2 copies). Minor projects are included in the five-year plan as a lump sum for each of the five years. This lump sum for minor projects must be detailed later—by July 1—as described in Sections 6807 and 6814.

A COBCP is required for all capital projects proposed for the Governor's Budget and for certain capitalized leases which do not have prior legislative authority. This section provides:

1. An overview of the purpose of the COBCP;
   
   
2. Under what circumstances a COBCP is required;
   
   
3. Timelines for submittal and updating;
   
   
4. Instructions for completing COBCPs, including a section on technical notes; and
   
   
5. A sample of the required COBCP format in the illustration for this section.
   

Additional documents which must accompany the COBCP are outlined in Section 6816 and explained in Sections 6820, 6821, and 6822. Terminology, acronyms and forms are defined and indexed in the glossary (Section 6899).

Purpose of the COBCP: In broad terms, the COBCP justifies the funding request. Specifically, the COBCP must:

1. Define the client department's problem and establish its significance;
   
   
2. Demonstrate that the client department has explored all reasonable alternatives to solving the problem and offered the most logical solution;
   
   
3. Provide detailed documentation for the proposed solution and its cost; and
   
   
4. Explain how the project supports the department's strategic plan.
   

DOF will consider only those proposals which convincingly meet all four of these requirements.

A COBCP (or an updated COBCP) is required for:

1. Any request for a capital outlay appropriation or reappropriation, whether for acquisition of land or structures or for construction. (Definitions of what cost elements are classified as capital outlay are provided in Section 6806.) A COBCP is also required for project augmentations which exceed PWB's authority (i.e., over 20 percent of the original appropriation). See Section 6861.
   
   
2. Requests for Finance Letters to adjust an existing project proposal, whether for technical or policy reasons, or to add an urgent new proposal.
   
   
3. Entering into a lease with purchase option. Although no capital expenditure is made when entering into a lease with a purchase option, the potential for a capital acquisition is created. At the time the client department submits a STD. 9 space action request for DOF review, it must demonstrate that it has analyzed the potential alternatives (state construction, lease-purchase agreement, pure lease) and selected the best alternative. For projects then seeking statutory authority for the purchase option through the Budget Act, the cost-benefit or economic analysis must be updated and presented as a COBCP. (A COBCP is required whether or not there is a related support BCP for lease costs.) For projects seeking purchase option authority through special legislation, similar information will be required as part of DOF's review of proposed legislation. For projects under $2 million, DGS has general statutory authority for purchase options (Government Code Section 14669).
   
   
4. Exercising a purchase option on capital assets. Exercising a purchase option (even a $1 purchase option) requires a capital outlay appropriation. (The exception is for trailers and relocatable or modular buildings.) At the time the acquisition appropriation is requested, the client department submits an updated COBCP with an economic analysis showing that the proposed purchase is still cost-beneficial, considering any changes in program need, lease market conditions, and state construction alternatives.
   
   
5. Entering into a lease-purchase agreement for capital assets. Although no capital expenditure is made under a lease-purchase agreement, a capital acquisition occurs. If the authorization for a lease-purchase is sought through the Budget Act, the department must submit a COBCP comparing alternatives to meeting its space requirements and demonstrating that a lease-purchase agreement is the most cost-beneficial.
   
   
6. Entering into any other lease which meets the definition of capitalized lease, and where authority is sought through the Budget Act. A lease agreement is a capitalized lease (an "in-substance purchase") when substantially all of the risks and benefits of ownership are assumed by the lessee. If a lease meets any one of the following conditions, it is a capitalized lease:
   
   
   1. Ownership of the leased asset is transferred to the state at the end of the lease period.
      
      
   2. The lease gives the lessee the option of purchasing the leased asset at a nominal value at some point during or at the end of the lease period.
      
      
   3. The period of the lease (a single term of a lease, not including renewals) is 75 percent or more of the estimated useful life of the leased asset.
      
      
   4. The present value of the sum of the minimum lease payments is 90 percent or more of the fair market value of the leased asset (i.e., the lease payments over a single term of the lease are substantially the same as the purchase price).
      
      

   Unless existing statute authorizes a capitalized lease (for example, Government Code Section 14669 for DGS), the lease requires specific authority. If the Budget Act will be used to provide that authority, a COBCP is required whether or not a capital outlay appropriation is needed.

7. Minor alterations projects authorized by Section 6.00 of the Budget Act. Section 6.00 projects which require DOF approval and legislative notification (i.e., those between $35,000 and $250,000) must be submitted for review to the DOF Capital Outlay Unit with substantially the same information as required in a COBCP, and no later than April 30 of the year of appropriation availability. See Section 6806.

Additionally, if a support budget increase is needed as a result of a capital outlay project—including for rent increases pursuant to a lease—a support BCP must also be submitted separately to the appropriate DOF support unit.

Timelines for submitting and updating COBCPs. COBCPs are due February 1, seventeen months before the beginning of the budget year, as part of a larger package of documents identified in Section 6816.

Project plans may be affected in timing or scope by enactment of the budget for the intervening fiscal year (i.e., the year prior to the budget year). Therefore, technical project updates are required for COBCPs by September 1, nine months prior to the budget year. However, new projects for the budget year are not accepted as part of this update, unless DOF agrees the program need is urgent. Updated fund condition statements are also due September 1 per Section 6816.

Project costs are adjusted in the fall prior to the budget year, using budget packages prepared by DGS at DOF's request. (See Section 6814 for time-frames.) This information is given directly to DOF by DGS.

Final budget package estimates are sometimes not available in time to include in the Governor's Budget. Therefore, DOF annually prepares a Finance Letter for technical adjustments to capital outlay projects which is due to the Legislature by the May 1 before the budget year. Client departments must request technical changes in writing, using a COBCP format, generally no later than mid-February (the specific date is published in a DOF Budget Letter). Finance Letters proposed by the Administration are reviewed by the Legislature in conjunction with the Governor's Budget.

The Finance Letter process may also be used to propose scope changes to projects in the Governor's Budget, to add new (urgent) projects, or to accelerate project phases. These are termed "policy changes" and are due to the Legislature by April 1. The due date for requests from departments is the same as for technical changes (i.e., mid February). An updated or new COBCP is required for policy Finance Letters.

An overview of the project phases—including the budget approval phase—is provided in Section 6809. A timetable for budget preparation and enactment is provided in Section 6814.

Instructions to complete a COBCP. Information required to complete a COBCP is presented as follows in the same order as required on the COBCP (see 6818 Illustration.)

Page 1 of COBCP form:

1. COBCP #: Assigned by department.
   
   
2. Priority #: This is the ranking the client department assigns the COBCP in relation to all its other COBCPs. Only one project per rank is allowed.
   
   
3. Organization code: Use the department's organization code per the Governor's Budget.
   
   
4. Department: Use the organization title per the Governor's Budget.
   
   
5. Project Title: If the COBCP is for a continuing phase of an existing project, use the same project title as in previous phases.
   
   
6. Phases Funded With This Request: The phase(s) to be funded in the budget year by the COBCP. Use the phase codes as defined in Section 6839.
   
   
7. Project Identification Code: See Section 6839 for instructions. If the COBCP is for a continuing phase of an existing project, use the same project ID as in previous phases.
   
   
8. Project Category: See Section 6839 for project category codes. Only one code is permitted. Use the code which is most descriptive of the overall project.
   
   
9. Location: The city, county, or other location description typically used by the client department for its capital outlay projects.
   
   
10. Congressional, Senate, and Assembly district numbers for the project: District information is available from the client department's legislative office.
    
    
11. Problem Statement: A brief synopsis of the problem the department needs to solve, taken from the information provided on Page 4, Part A of the COBCP.
    
    
12. Proposal: A brief description of the recommended alternative, taken from Page 4, Part D of the COBCP.
    

Page 2 of COBCP form:

1. Heading: The following fields should match Page 1: COBCP #, organization code, Department, Project ID code and Project Title.
   
   
2. Date: The date this page was prepared.
   
   
3. DGS Estimate: DGS job number for budget package, if applicable. This number may not be available for new projects at the time of initial COBCP submittal. However, it should be available for all continuing phases of existing projects managed by DGS.
   
   
4. Costs: Provide actual or estimated cost for each phase of the project (in thousands).
   
   
5. Funding Data: Provide the project's funding history by item of appropriation (or by chapter reference if funded through special legislation). Future year funding must include the balance of the funding necessary to complete the project, not simply the level of funding required for the following year. Costs and funding totals must tie for each column.
   
   
6. Schedule: The actual or estimated start or completion date as applicable for each phase of the project.
   
   

Page 3 of COBCP form:

1. Heading: The following fields should match Page 1: COBCP #, organization code, Department, Project ID code and Project Title.
   
   
2. Date: The date this page was prepared.
   
   
3. Project Related: If the COBCP requests funding for any of the following costs in the budget year, attach a detailed list identifying each item and associated cost. If the funding is to be requested in future years provide a descriptive narrative establishing estimated needs. These totals should match the corresponding lines on Page 2.
   
   
   1. Construction Detail - Agency Retained;
      
      
   2. Construction Detail - Group 2 Equipment (equipment included in construction funding); and
      
      
   3. Equipment (Group 2) Phase: (equipment which is to be funded in a separate phase).
      
      
4. Impact on State Operations: If the project will cause/necessitate changes to the department's State Operations budget, provide narrative, associated dollars and the fiscal year of impact in each of the following categories: One-time Costs, Future Costs, Future Savings, and Revenue.

Page 4 of COBCP form:

1. Heading: The following fields should match Page 1: COBCP #, organization code, Department, Project ID code and Project Title. The heading should appear on each page of the analysis narrative. (a blank form is attached.)
   
   
2. Date: The date this page was prepared.
   
   

Purpose of project: What is the problem? What is the underlying program need or infrastructure deficiency?

1. Explain a program-based need by relating the infrastructure request to the program that the real property serves. (The Capital Outlay Unit of DOF will verify program-driven needs with the client department's DOF support analyst.) At a minimum, address:
   
   
   1. The program change.
      
      
   2. The overall infrastructure requirement related to that change.
      
      
      1. Capacity requirements: Express capacity (total size) needs in terms of patients housed, inmates, full-time equivalents (FTEs), office space requirements, or other accepted "units" for the program. Some programs are required to use specific DOF-generated data for enrollment or growth, or to use "capacity" measurements approved by DOF and/or the Legislature. If reference is made to any space or cost studies, append these to the COBCP.
         
         
      2. Special space requirements: All special purpose rooms and offices must be fully described by purpose, square footage, and need (based on program requirements).
         
         
   3. What the project accomplishes towards that infrastructure requirement. For projects providing an increment towards an overall goal (such as total acreage of wetlands) specify:
      
      
      1. What portion of the requirement has already been met;
         
         
      2. How much the project would add; and
         
         
      3. What the remaining need will be and how the department proposes to meet that need.
         
         
2. If the need is not program related, explain the real property deficiency in terms of specific mechanical/electrical system inadequacies, code requirements, maintenance/repair difficulties, etc. Include copies of State Fire Marshal citations, Department of Health Services citations, surveys, or other documents to substantiate need.

Relationship of Project to Strategic Plan: Explain the project's relevancy to the department's strategic plan. Projects which lack a clear supporting relationship to the department's strategic plan will be returned.

Alternatives: Present all reasonable alternatives to solve the problem. In developing potential alternatives, address the following questions:

1. Program delivery: are there different ways to achieve the same program outcomes?
   
   
2. Is there more than one potential site? What are the required site characteristics?
   
   
3. Given a specific site, are there alternative facility solutions? For new construction or capitalized leasing proposals, submit an economic analysis comparing facility alternatives over a 25-year period (i.e., compare straight lease, lease-purchase, new building construction, renovation of existing facility, etc.).
   
   
4. What are the alternative funding solutions? Which state funds sources are available? Are funding partnerships feasible with other state agencies or other levels of government?
   
   
5. What other management factors are critical in selecting an alternative?
   
   
6. For each alternative, provide the following information in brief:
   
   
   1. Description of alternative;
      
      
   2. Overview of scope;
      
      
   3. Total cost of all phases of the project (use only approved cost indices, and identify both short term and life-cycle costs);
      
      
   4. Funding source, including project eligibility for that source;
      
      
   5. Summary of related program benefits and costs (include impacts on the support budget such as personnel years and operating costs specific to the program). Indicate if a support BCP will be required, and when; and
      
      
   6. Summary of facility management benefits, such as impact on the department's maintenance budget, extension of the facility's design life, etc.
      
      

Recommended Solution and Why:

Which is the best alternative, and why? Describe the recommended alternative in detail. This description is the basis on which initial scope will be defined.

1. All factors influencing site selection must be fully justified. For land acquisition projects where a specific site is already selected, identify why that site is critical. Address landscape character; existing resource values; existing access, utilities and structures (and how they would be used); and statewide significance.
   
   
2. If the recommended solution is not the least expensive, describe the factors/benefits that justify the extra cost. (This justification could address life cycle savings, support budget offsets, or other program/management factors.)
   
   
3. Provide a detailed scope description. Include:
   
   
   1. Specific program needs to be addressed through the project, including: proposed size (number of stories, gross and usable/assignable square feet, etc.); special features (food service, auditoriums, child care facilities, etc.); special Group 1 or Group 2 equipment needs; types of basic materials to be used if known; and any other items that will allow full understanding of the proposed project. Include any project drawings or renderings if available.
      
      
   2. Specific location of the project, including a vicinity map that describes the area served. If the project is for a replacement facility, explain how Group 2 replacement equipment will be funded.
      
      
   3. For land acquisition projects, an inventory of existing structures and the approximate appraised value of each parcel (or group of parcels), including the basis for the appraisal (staff appraisals, previous sales, AIA appraisal, etc.). Upon formal request, DGS will assist departments in preparing this information (specifically, parcel values, site selection factors and the economic analysis).
      
      
4. Provide a proposed project time schedule that takes into consideration the environmental review process. Section 6846 describes the required format.
   
   
5. Provide full cost information.
   
   
   1. Approximate cost by phase, indicating the basis on which the estimate was prepared. If costs are based on a previously developed budget package, append that package to the COBCP. Note if costs have been adjusted for inflation and on what basis, (i.e., which specific CCCI).
      
      
   2. A proposed funding source for each phase, including identification of any funding partners at the federal, state or local level.
      
      
   3. A complete funding history, including all previous submissions and any other data to completely describe past project history and future funding requirements. Section 6845 Illustration 2 describes the required format.
      
      
6. Describe the impacts on the support budget.
   
   
   1. Include an analysis that identifies future maintenance and operation costs (in operating expenses and personnel years). Identify the proposed source of funds. Note whether a support BCP will be needed concurrently or in the future.
      
      
   2. Identify potential cost savings and/or potential revenues or reimbursements with proposed disposition and the basis for calculation.
      
      
7. Identify and explain any project risks. If the project was previously rejected by either the Administration or the Legislature for any reason other than lack of funding, explain the basis of the rejection and any significant project changes from the previous submission.
   
   
8. List coordination responsibilities with other state agencies and levels of government, including any mandatory reviews and approvals.
   
   1. Impacts on other departments.
      
      
   2. Required coordination with the State Historic Preservation Officer (see Section 6822).
      
      
   3. CEQA requirements as described in Section 6850. Note any probable opposition to CEQA approvals (SAM sections 1000–1099).
      
      
   4. Clearances required from planning or review agencies such as the State Fire Marshal, the State Coastal Commission, local jurisdiction general plans, etc.
      
      
9. List all items proposed for agency retention. Agency-retained items are project elements which the department rather than the architect/engineer or contractor provides. Typical examples include movable equipment, installation, resource protection, etc. DOF approval of a DF-14D (Section 6845, Illustration 1) is required before the department may commence these activities. Identify whether this includes department personnel costs.

Technical Notes:

1. Capital outlay projects which include an information technology (IT) component must also comply with the IT reporting requirements contained in Sections 4800–5953 and Sections 6000–6965 of the State Administrative Manual. Examples of IT activities typically included in capital outlay projects include: the purchase and/or upgrade of IT equipment or software; the installation and/or upgrade of telecommunications equipment (excluding voice only); or the installation and/or upgrade of local area network equipment or software. The Department of Information Technology (DOIT) is responsible for the review and approval of IT activities from a technology feasibility perspective; the Technology Investment Review Unit of DOF reviews IT proposals from a business cost/benefits perspective. In both cases, the review vehicle is the feasibility study report (FSR). Questions regarding DOIT's IT reporting requirements should be directed to DOIT. All IT reporting requirements must be met before the IT component of a capital outlay project may be approved.
   
   
2. Group 2 equipment phases of projects. Group 1, fixed equipment, is incorporated into or attached to the facility and therefore is included in the construction phase of a project. Group 2, movable equipment, is budgeted as a separate phase. For a COBCP requesting the Group 2 equipment phase of a project, provide the project appropriation history, including the project name, budget act items, and project code. Definitions of Group 1 and Group 2 equipment are provided in Section 6855.
   
   

   For Group 2 equipment, identify how funding needs were determined. Show all items of equipment to be placed in a room, indicating whether the item is to be purchased by the agency or transferred from another building or location. Account for all equipment currently available in buildings to be replaced by the new structure. Final approval of equipment lists generally follows approval of preliminary plans. Exceptions to this rule are discussed in Section 6855.

   Movable equipment which does not meet the definition of capital outlay per Section 6806 is not proposed in a COBCP. These costs are proposed and funded in the state operations appropriation (i.e., they require a support budget change proposal).

3. Coordination of STD. 9s with COBCPs and BCPs: Departments submit space action requests (STD. 9s) for:
   1. New or additional space (including swing space), lease extensions, or renewals desired by an agency in noninstitutional buildings—whether state-owned or leased, and
      
      
   2. Relocatable buildings and trailers.

      DOF approval of a STD. 9 does not constitute approval for a support budget increase or a capital outlay appropriation, or approval to include authorization language for a lease-purchase, purchase option, or option execution in the Budget Act. If any of these is required, either a support BCP or a COBCP (or both) must be submitted to DOF. SAM Section 6453 provides additional information.

4. Architectural and engineering (A&E) fees: A&E fees (basic and nonbasic) are charged for architectural and engineering work performed either by the department or by consulting professionals. Expenses may also include project-related construction management support, such as construction inspection, travel, bidding expenses, and drawings. Generally, A&E fees do not exceed 13 percent of the proposed construction contract amounts (excluding construction contingencies). Special items exceeding 13 percent (such as services related to asbestos or seismic) should be separately identified in the COBCPs. Contact the DGS Customer Account Management Branch for assistance with budgeting A&E fees.
   
   
5. Swing space for capital outlay projects: Swing space, i.e., temporary accommodations during a facility remodel, is a state operations cost which should be noted informationally on the COBCP but requested separately as a support BCP.
   
   
6. Allowable cost indices: Departments must use the California Construction Cost Index (CCCI). Use of any other index requires DOF concurrence. Each July, DOF releases a Budget Letter identifying the approved CCCI to be used when updating COBCPs for the following fiscal year (Section 6812).
   

6818 ILLUSTRATION

The five-year capitalized asset plan is a planning tool to help DOF and the Legislature review capital outlay projects and capitalized leases proposed for the budget year within the context of a multi-year program. Any department submitting a COBCP must also submit a five-year plan. The plan relates the department's capital outlay program to its strategic plan, identifies needs by project (and by phase), and establishes priorities.

At a minimum, the five-year plan must include the following elements:

1. A narrative overview of the five-year plan addressing both:
   
   
   1. Program factors: What has created the need for capital outlay (from a program perspective), and what are the future trends? Discuss program population, enrollment, caseload, or other growth trends, including changing methods or locations of service delivery and new service requirements. Relate program needs to the department's strategic plan. Discuss those needs in at least as much detail as presented in the Governor's Budget (i.e., at the program, element, or component level, whichever is appropriate.) Cite DOF or other DOF-approved organization statistics and projections, and changes in statute driving program needs.
      
      
   2. Infrastructure management factors: What structural corrections are required, and why? Discuss facility aging, code compliance, and structural deficiencies unrelated to program factors. As appropriate, cite changes in codes or statutes.

      If the department produces a real asset management plan, facilities management plan, or master facilities plan which provides the preceding information, a copy of that plan may be substituted for the narrative overview.

2. An overview of real estate used/owned by department which shows the total of acres/square feet (both gross and usable/assigned) for state-owned versus leased space. Categorize leased space by:
   
   
   1. Leased space under lease-purchase agreement;
      
      
   2. Leased space with purchase options; and
      
      
   3. Pure (straight) leases.
      

   Use the format provided in 6820 Illustration 1 of this section. Separate instructions apply for the higher education segments; contact the DOF Capital Outlay Unit.

3. Leasing information:
   
   
   1. A list of leases due to expire in the next five years by location, facility type, square footage, annual lease payment, and year of expiration. Note which of these leases has a purchase option and the amount of that option. Use the format in 6820 Illustration 2 Chart A of this section.
      
      
   2. A list of any proposed new purchase options or lease-purchase agreements within the next five-year period, by location, facility type, and square footage. Use the format in 6820 Illustration 2 Chart B and 2 Chart C of this section.
      
      

   DGS has a data base called the State Property Inventory (SPI) which departments may find helpful in developing information on leases. This data base is accessible through the Stephen P. Teale Data Center. For further information, contact the Business Operations Policy and Planning Branch in DGS' Real Estate Services Division.

   Separate instructions apply for the higher education segments; contact the DOF Capital Outlay unit.

4. A map showing the location of the department's statewide operations (major facilities and land holdings).
   
   
5. A listing, by project, showing basic project background information. Use the format in 6820 Illustration 3 (Cont. 1) Chart C of this section. An explanation of the headings is provided in the following:
   
   
   1. Rank means priority order of projects for the entire department, with no more than one project per ranking.
      
      
   2. Location of Project: Name of county, city, etc.
      
      
   3. Type of Facility/Lands: Office space, warehouse, laboratory, academic building, park, wetlands, etc.
      
      
   4. Project Name: If this is an ongoing project, use the same project name as in previous phases of the project.
      
      
   5. Project Identification Code: This code is assigned by the department according to rules established in Section 6839. If this is an ongoing project, be sure to use the same project identification code as in previous phases of the project. All COBCPs for the budget year must have a project identification code; project codes are optional for new projects proposed to begin after the budget year.
      
      
   6. Proposed Action Codes:
      

      CN	construct new
      CR	construct replacement
      R	renovate
      A	acquire
      D	demolish
      E	equipment
      O	other

   7. Project category: These codes indicate project function as defined in Section 6839.
      
      
6. TWO listings of all proposed capital outlay appropriations for the next five years. The first listing is by project priority ranking. The second listing is by project location. Use the format in 6820 Illustrations 3 Chart A and 3 Chart B of this section. An explanation of the headings is provided in the following:
   
   
   1. Rank means priority order, department-wide, and must be the same ranking as on the project background table.
      
      
   2. Location of project: name of county, city, etc. Use the same location names as on the project background table.
      
      
   3. Funding history and projections: by year, list project dollars by amount and phase. Some columns also require fund source information. Use additional lines, (as many required per project) for reporting multiple phases in a single year.
      
      
      1. Round project dollars to the nearest thousand.
         
         
      2. List amounts for each project phase separately, and indicate the phase using the coding rules in Section 6839.
         
         
      3. For proposed funding sources, use the appropriate fund code. Contact the departmental budget officer for fund code listings.
         
         

   Be sure to include in the project listing any existing purchase options which the department plans to exercise within the five-year period.

7. Estimating costs for the five-year plan. When estimating costs for COBCPs and five-year plans, departments must use the current California Construction Cost Index. Use of other indices requires prior DOF approval. See "Technical Notes" in Section 6818.

6820 ILLUSTRATION 1

6820 ILLUSTRATION 2

6820 ILLUSTRATION 3

DOF encourages the use of prototype plans in construction programs. The process for authorizing a facility prototype has three steps:

1. Assessing whether a department's construction program would benefit from development of a prototype;
   
   
2. Development of the budget package for the prototype by DGS; and
   
   
3. Evaluation and adoption of the prototype for capital outlay planning and budgeting purposes.
   
   

DOF participates in the first and third step; LAO participates in the third step only. Any department planning to propose the use of prototype plans, or to amend an existing prototype, should contact its DOF capital outlay budget analyst to determine specific information needs. In general, submit requests to use or change prototypes along with the five-year capitalized assets plan (Section 6816). This allows DOF and LAO to review the proposed change within the context of the overall program. DOF may authorize exceptions to this submittal time-frame for projects on critical time paths.

The State Historical Building Code (Title 24, California Code of Regulations) allows alternatives to any and all prevailing codes as they relate to qualified historical buildings.

An historical resource is defined as any state-owned structure, over 50 years of age which is listed—or could be listed—either on the National Register of Historic Places maintained by the United States Department of the Interior or as a state historical landmark. Under Public Resources Code 5024, each department must:

1. Prepare and annually update its Historic Resources Inventory (DPR-523) listing the structures under its jurisdiction which are over 50 years of age:
   
   
   1. Contact the State Historic Preservation Officer at the Office of Historic Preservation, Department of Parks and Recreation for the latest version of the inventory form and instructions on how to complete it.
      
      
   2. Each department should assign a staff member as a cultural resources coordinator to prepare and maintain the inventory.
      
      
2. Submit the inventory annually to the State Historic Preservation Officer.
   
   
3. Notify the State Historic Preservation Officer of any capital outlay or special repair project which proposes any alteration, transfer of ownership, or demolition of any structure on the inventory, prior to requesting funds for the project.
   
   

The State Historic Preservation Officer has 30 days to comment on the project (Public Resources Code 5024.5). Based upon review of the inventory, if the officer determines the structure is potentially eligible for the National Register of Historic Places and that a proposed project will have an adverse effect, the officer may propose measures to eliminate or mitigate adverse impacts. If a department and the officer cannot concur on mitigations or alternatives, the Office of Planning and Research mediates the issue.

Requirements for COBCPs: The department must note on the COBCP whether the project potentially affects a structure which is on, or could be on, the inventory. If the outcome of the historical resources review process affects project costs or scope, the client department must notify the DOF Capital Outlay unit.

Technical consultant assistance: Departments may need professional input from consulting architects, facilities planners, engineers, or contractors in the development of a potential COBCP. For example, such assistance may be solicited to prepare a needs assessment or facilities plan which examines current and future space and employee data, transportation issues, etc. DGS can assist in preparing such plans. In addition, DOF's Technology Investment Review Unit (TIRU) is a resource for technology phases of projects. Services from both offices are available on a reimbursable basis.

Program management consultants: For large/complex projects, or a series of related projects which comprise a program, a department may need the services of a program management consultant to provide expertise in the unique needs of the agency. In this case, the consultant assists in the preparation of a long-range, multiple-year program in order to:

1. Establish facilities planning criteria and objectives;
   
   
2. Develop time-lines for designing and constructing the various facilities; and
   
   
3. Estimate the design, construction, and related costs for each facility.
   
   

The consultant may also help prepare a multiple year budget for the total program, work with DGS in obtaining the services of design and other consultants, and assist in preparing construction bid data and obtaining construction management services.

Funding technical or program management consultants: Technical or program management consultants may be funded from either the client department's state operations appropriation or as a capital outlay project, depending on the timing and scope of the services. The client department should discuss budgeting alternatives with DOF before submitting a support BCP, a COBCP, or using existing support funding. COBCPs which include funding for these services should clearly identify these costs and provide a cost-benefit analysis.

After a preliminary review of a department's COBCP and five-year plan, if DOF has questions about the project's feasibility it may request DGS to review the project. If DGS determines the proposal is incomplete, not technically feasible, or inadequate as a solution, DOF will either withdraw the project from budget year consideration or request the department to modify and resubmit it immediately for reconsideration.

Departments may also ask DGS to prepare a feasibility study for a project before deciding whether to propose a project through a COBCP. At this stage, i.e., before a project proposal is made, feasibility studies may be paid from the support budget (Section 6806).

For larger or more complicated projects, departments (or DOF) may propose that a feasibility study be performed as the first budgeted phase of a capital outlay project. A separate COBCP is required (Section 6818) and a separate appropriation is requested from the Legislature for this phase.

Departments may be requested to schedule meetings and/or arrange site visits to help DOF clarify and evaluate project necessity and scope. Participants usually include DOF capital outlay staff, department staff, DGS, and LAO, and may also include other legislative staff. The scope meeting establishes a common understanding among all parties about project scope and priority. Scope is defined in Section 6863.

The budget package refines the department's estimate of the project's total cost as presented in the COBCP. DOF then uses this refined estimate to prepare the Governor's Budget. An example of a budget package (comprised of a cost estimate summary and a statement of cost by phase) is presented in 6828 Illustrations 1 and 2 of this section.

DOF authorizes DGS to prepare budget packages only for those projects with a strong likelihood of funding. (The following entities are authorized by statute to prepare their own budget packages: the higher education segments, the Department of Water Resources, and the California Department of Corrections for new prison construction.) Payment for DGS' services typically is provided by departments or—for those agencies without capital outlay programming funds—from a project planning appropriation administered by DOF. Transfer of funds to DGS is made through a Form 22, (6868 Illustration 1.)

As DGS completes the budget packages, it submits them to DOF for final policy and cost review, with a copy to the department. At that time, DOF may schedule additional meetings with the department and DGS to complete its review. (See Section 6814 for a budget enactment timetable.)

For construction projects, budget packages consist of a project description, a project schedule, pre-schematic plans, outline specifications, and a cost estimate. DGS prepares these items from information provided by the client department in the COBCP, in scope meetings, during the environmental review process, and from data compiled during the feasibility review process (if any). Any department authorized to act as its own project manager is required to provide equivalent information using the same format and time-frames.

For real property acquisition projects, a budget package refines the purchase value figure. DGS updates the value figure upon formal requests by the department.

6828 ILLUSTRATION 1

6828 ILLUSTRATION 2

Following review of the budget packages, DOF may conduct budget hearings on capital outlay proposals with departmental staff, and as applicable, with agency secretaries and the Governor's Office. Upon completion of these hearings, the client department must:

1. Adjust any approved COBCPs to reflect final decisions;
   
   
2. Post decisions in its capital outlay budget galley and supporting budget schedules; and
   
   
3. Distribute copies of final COBCPs to DOF and legislative staff in accordance with instructions issued by DOF in its annual Budget Letter.
   

The Governor's Budget and related budget bill are presented annually to the Legislature on January 10th. Following the formal submission of the budget, LAO prepares its analysis of the projects included in the budget bill. The results of this analysis are usually published the third week of February. Using the findings of the LAO and any independent subcommittee analysis, the Legislature then conducts formal hearings involving the LAO, DOF, departments, and agencies, as appropriate. During this time, it is the client department's responsibility to work closely with DOF to answer legislative questions on proposed projects. Based on the outcome of these hearings, the Legislature revises the Senate and Assembly versions of the budget bills. The Budget Conference Committee is held to resolve differences between these versions, and a single bill is passed by both houses and sent to the Governor. After making line item vetoes, the Governor signs this bill. The final product is referred to as the Budget Act.

DOF reviews the need to reappropriate funding for capital outlay projects during the annual budget development process. Reappropriations, when appropriate, are proposed in the annual budget bill.

Appropriations for capital outlay included in the Budget Act are available for expenditure pursuant to Control Section 2.00 of that act unless otherwise noted. Funding authority for studies, preliminary plans, working drawings, or minor capital outlay is generally available for expenditure for one year unless reappropriated. Construction appropriations that have not been allocated through fund transfer or approval to proceed to bid by June 30 of the fiscal year of appropriation are reverted to the fund from with appropriated unless reappropriated.

The availability period for expenditure of reappropriations is consistent with the original appropriation. For instance, reappropriations of studies, preliminary plans, and working drawings are generally available for expenditure for one year. Minor capital outlay is not generally eligible for reappropriation (Section 6807).

The client department must monitor project status to determine if a project will require reappropriation. Department project liaisons should consult with DGS project managers to maintain current schedule information and to determine (in consultation with DOF Capital Outlay Unit staff) the need for reappropriations.

Departments must submit a COBCP outlining the need for reappropriations consistent with COBCP and finance letter deadlines, as discussed in Section 6818. Use the COBCP form, Page 1 as a cover sheet for all reappropriations and provide narrative using COBCP form, Page 4, for the follow questions for each reappropriation requested:

1. Original Budget Act Year, Item, Schedule and Project ID;
   
   
2. Project Title and narrative description;
   
   
3. Dollars to be reappropriated; and
   
   
4. Reasons why the reappropriation is needed.
   
   

DOF annually surveys departments to determine ten-year needs for state capital outlay and state-funded local infrastructure, by program and fund source. Specific instructions and timetables are issued annually by Budget Letter. Surveys are typically due at the end of summer. Summary results are shared with the Legislature for capital outlay and bond financing planning purposes.

The first five years of capital outlay needs reported on the ten-year survey must match the annual totals and fund source break-out for the department's five-year capitalized assets plan (Section 6820). However, for most departments the second five years will be based on a general assessment of program need, rather than on specific projects.

This section addresses coding structures for project identification codes, project categories, and phase codes.

Project Identification Codes

1. The objective of project identification codes is to:
   
   
   1. Provide consistency in project identification across fiscal years and in the various automated state budgetary and accounting systems;
      
      
   2. Provide unique project identification from start to finish, eliminating the need to assign different codes to phases or appropriations of a specific project; and
      
      
   3. Eliminate code duplication.
      
      
2. Project definition for purposes of assigning codes. Phases of work necessary to implement projects are not separate projects and are not given separate project identification codes. Land acquisitions associated with capital outlay projects use the same code as the balance of the project. However, a general acquisition for habitat or recreation may be treated as a separate project.
   
   
3. Project identification code structure. The project identification code, as shown in the Governor's Budget and Budget Act, and as utilized by SCO and departments, is generally a seven-digit numeric code comprised of the first seven digits (program-element-component) of the ten-digit Uniform Codes Manual program field. The only exception to this rule is when a project has more than one phase scheduled separately in the same appropriation time (normally separate phases in a single budget act would be scheduled together). Although this situation is rare, the Legislature does sometimes appropriate in this manner. When this occurs, the additional three digits of the program field (also called the task code) are used to distinguish between the separately scheduled phases.
   
   

   The assignment of the last three digits is made by the DOF Capital Outlay and Financial Operations Units, when necessary. The three digits of the task field are used to identify the year of appropriation (two digits) and as a "sequencer" for the phases as follows:

   Project Identification Code		Task Code
   		Year of
   Program	Element Component	Appropriation	Sequencer
   XX	XX	XXX	XX       X

   Except for the task code, the responsibility for code control and assignment lies with the departmental accounting office which should establish and maintain an ongoing log of numbers so that codes will not be duplicated. When working on the five-year capital outlay program or the budget year projects (Governor's Budget, Finance Letters, and Change Book), the client department's budget office and the DOF Capital Outlay Unit staff should coordinate with the client department's accounting office for the assignment of codes.

4. Meaning of Statewide Code
   
   1. Program: The two-digit agency specific program code denotes the capital outlay program within a department's overall program structure (this is not applicable to the Departments of Transportation and Water Resources).
      
      
   2. Element: The two-digit element code denotes the applicable locations for major capital outlay projects for institutional and non-institutional departments with location breakdown. (The Department of Parks and Recreation is authorized to use an alpha-numeric code.) For those projects of a general nature not identified to a specific location, an agency specific code for "statewide" will be used. A separate element code is to be assigned for minor capital outlay. When developing the location codes, departments need to allow for expansion, i.e., plan for any new locations in the coding structure.
      
      
   3. Component: The three-digit component code denotes the projects. If possible, numbering should be in increments of five or ten to allow for expansion. These should be unique to each location (element).
      
      
   4. Task: The three-digit task code can be assigned only by the DOF Capital Outlay and Financial Operations Units when a project has more than one phase scheduled separately in the same appropriation item (reference number and fund).
      
      

   Project Categories

   Project categories describe functional purpose. Use the following coding structure for COBCPs (Section 6818) and in the five-year capitalized assets plans (Section 6820).

   FLS	Fire/life safety. Projects required to avoid imminent danger to state employees or the public from physical characteristics or facility siting.
   CRI	Critical infrastructure deficiencies which impair program delivery, such as replacement of aging mechanical systems.
   CD	Code deficiencies. Non-critical fire/life safety projects, and all other code deficiencies except Americans with Disabilities Act (ADA)requirements.
   SC	Security.
   SM	Seismic.
   ADA1	ADA compliance for 24-hour care facilities and institutions only.
   ADA2	All other ADA compliance.
   PS	Public safety. Any project needed to deliver critical public safety benefits.
   ECP	Enrollment/caseload/population (ECP). Usage is limited to changes to existing programs for recognized ECP departments.
   WRK	Workload-driven projects. For non-ECP departments, these are projects for existing programs resulting from workload (i.e., non-policy) changes.
   ECON	Projects justified primarily by economic impacts. Examples include savings, cost avoidance, or revenue generation.
   O	All other.

   Phase Codes

   Phase codes describe the activity to be funded within the sequences of activities, from project inception to completion. Not all projects require studies, acquisition, or equipment to complete the project. Some projects are solely for acquisition (either property—such as wetlands or a park—or improvements).

   S	Studies.
   A	Acquisition.
   P	Preliminary plans.
   W	Working drawings.
   C	Construction.
   E	Equipment (i.e., Group 2 equipment).
   O	Other.
   M	Minor project.

Sections 6840–6869 address policy and procedures for fiscal administration of funded capital outlay projects. The primary oversight entities are PWB, DOF, and the Joint Legislative Budget Committee (JLBC). Although long-term and interim financing for capital outlay projects are part of project implementation, they are addressed in a separate financing portion of the chapter (Sections 6870 et seq.). An overview of capital outlay is provided in Section 6801 to 6809. Acronyms, terminology and forms are defined and indexed in the glossary, Section 6899.

The state traditionally uses the design-bid-build method of procuring design and construction services for most of its capital outlay projects. In addition, the state also uses various lease methods to obtain the use of facilities, both with and without facility acquisition at some point in the lease. The following discussion briefly outlines standard procurement methods in the building industry and the resulting budget implications.

Design-bid-build. The state's contract law and budget processes for capital outlay are based on design-bid-build processes because that approach allows the state to determine the exact product before it begins construction. Projects are not bid on by construction contractors until working drawings are completed by a separate architect-engineering firm.

In the traditional design-bid-build process, preliminary plans, working drawings, and construction are all separate phases; an overview of all typical capital outlay phases is provided in Section 6808. Funds are not normally committed to a phase unless there is a strong assurance that they can be encumbered within a single fiscal year. Consequently, most design-bid-build projects are budgeted in several phases over two to three years (sometimes longer). Each separate appropriation requires a COBCP (Section 6818) and must be included in the client department's five-year capitalized assets plan (Section 6820).

In addition, PWB and DOF perform an oversight role for design-bid-build projects by reviewing and approving the design phases of a proposed project (Sections 6842 and 6851).

Design-build. In design-build projects, design work is performed by the same entity that constructs the project, and the design-build contract award is made in a lump sum. Consequently, there are no separate phases—or appropriations—for preliminary plans, working drawings, and construction. The client is responsible for providing a project definition which the design-build firm uses as the basis for its bid. The advantage of the design-build approach is that the project delivery team has single-point responsibility for the project. This helps expedite construction time-frames and may reduce the number of change orders.

There are variations of design-build in which the project definition is elaborated through more detailed narrative specifications and/or drawings. This modified approach is called bridging design-build and for some projects may result in project performance specifications that are nearly as detailed as preliminary plans. Greater specificity is helpful when program needs reduce the range of acceptable design solutions or materials. From a budget perspective, the development of performance specifications may require a separate phase appropriation since the level of detail required could substantially exceed that of a budget package (Section 6828).

State contract law currently does not support the design-build process, except for the California State University and the University of California which have specific design-build authority. Similarly, the PWB process does not presently recognize an alternative to preliminary plans approval.

Turnkey, Design-Build-Lease, Lease-Purchase. These are financing methods in which an owner retains an entity which has single-point responsibility for developing a project. In addition to design and construction, the selected entity is responsible for providing one or more other project development functions, such as selecting and acquiring a site, financing, and even owning or operating the facility which is leased to the client department (with or without an option to purchase). From a budget perspective, these financing approaches are subject to this chapter if they meet the definition of a capitalized lease (Section 6818), or if—when being financed—an obligation for continuing state disclosure is created (Sections 6876 and 6884).

The following discussion on capital outlay administration (Sections 6842–6869) deals with design-bid-build state construction projects—i.e., excludes leased facilities. Leasing alternatives are addressed in the capital asset planning and budgeting portion of the chapter (Sections 6810–6839) and as part of capital asset financing (Sections 6870–6888).

The following summarizes statutory and administrative provisions relating to PWB.

Origin/Role: PWB was created by the Legislature in 1946 to offset any economic decline due to the cessation of a wartime economy, with two major areas of responsibility:

1. Approving plans, allocating funds and determining the timing of major construction projects of state agencies after appropriations for such projects have been made by the Legislature; and
   
   
2. Selection and acquisition of real property for location or expansion of state facilities and programs.

Over the past 50 years, the role of PWB has changed to:

1. Providing a review and approval process for adherence to the Legislature's intent in its appropriation of funds for capital outlay projects;
   
   
2. Carrying out various statutory control provisions relating to capital outlay projects;
   
   
3. Selecting and acquiring real property for location or expansion of state facilities;
   
   
4. Approving sales of surplus property pursuant to annual statutes authorizing the disposal of surplus real property; and
   
   
5. Acquiring property and constructing facilities from the proceeds of revenue bonds (also called lease-revenue bonds) issued by the board.
   
   

Membership: Voting members are the:

1. Director of Finance, who historically has chaired PWB;
   
   
2. Director of Transportation;
   
   
3. Director of General Services;
   
   
4. State Controller (for revenue bond matters only); and
   
   
5. State Treasurer (for revenue bond matters only).
   
   

In addition, PWB has the following advisory members: The Director of the Employment Development Department when PWB is engaged in contingency planning for emergency public works per Government Code Section 15799.2; and non-voting legislative advisors (three Senators appointed by the Senate Rules Committee and three Assembly members appointed by the Speaker).

PWB staff: The DOF Capital Outlay unit administers the functions of PWB and provides whatever assistance the board may require. DGS provides staff support for real property acquisitions and sales, and for energy assessment programs.

Meetings: The PWB process, including monthly meetings, is described in Section 6844.

Certifications/notifications to the Legislature that the project is within scope and cost: Prior to board action on any capital outlay appropriation, DOF certifies in writing to the Chairperson of the JLBC, the chairpersons of the respective fiscal committees, and the legislative members of PWB whether the requested action is in accordance with scope and cost as approved by the Legislature. If DOF approves changes to the legislatively approved scope or cost, or both, it must detail the changes and associated cost implications. Such reports also include all proposed or potential augmentations, as well as anticipated recognized deficits in excess of ten percent of the amount appropriated for the capital outlay projects. See additional procedures for certifications/notifications in Sections 6844, 6861, and 6863 of this chapter.

Approval of preliminary plans: Per Government Code Section 13332.11, funds appropriated for capital outlay may not be expended by any state department until DOF and PWB have approved preliminary plans for the project. PWB's approval of preliminary plans ensures that a project proceeding into the working drawing and construction phases is consistent with legislatively approved cost and scope. This requirement does not apply to the Department of Transportation, to higher education segments' non-state funded capital outlay, to the California Exposition and State Fair, or to any project specifically exempted from Section 13332.11. In addition, this provision does not apply to acquisitions, equipment, minor projects, or amounts appropriated specifically for preliminary surveys, studies, or program planning. Finally, PWB processes in general do not apply to the State Water Project.

Project augmentation: Sections 16352, 16352.5, 16354, and 16409 of the Government Code make appropriations and authorize PWB to approve allocations of additional funds to augment construction and acquisition appropriations when projects cannot be undertaken because the cost exceeds the funds available for the projects.

PWB's authority to augment projects is limited to the following by Government Code Section 13332.11:

1. PWB must defer any augmentation in excess of 20 percent of the amount appropriated for a capital outlay project until the Legislature makes additional funds available for the specific project;
   
   
2. Augmentations in excess of 10 percent (but no greater than 20 percent) of the amount appropriated for each capital outlay project must be reported to the Chairperson of the JLBC, or his or her designees, 20 days prior to PWB approval.
   
   
3. PWB must defer approval of preliminary plans or any portion of an acquisition project if the estimated cost of the total project exceeds 20 percent of the amount appropriated, unless in the case of an acquisition project the board determines that a lesser portion of the property is sufficient to meet the objectives of the project approved by the Legislature.
   
   

By resolution, PWB has authorized the Director of Finance to augment projects within the following limits:

1. 10 percent of the total of the official estimate for that portion of the work, including related overhead and contingency expenses for such portion, or $50,000 whichever is the lesser; or
   
2. The anticipated deficit previously recognized by the board; or
   
   
3. $1,000 or less.

See Section 6861 for further discussion of PWB practices in interpreting Government Code Section 13332.11.

Property acquisition law: The Legislature enacted the property acquisition in 1944, which is now set forth in Government Code Sections 15850–15866. Principal provisions include:

1. PWB selects and acquires real property for state departments when funds are appropriated by the Legislature, except for acquisitions for the following entities: Department of Water Resources; the State Reclamation Board; the Wildlife Conservation Board; the Department of Transportation; the Public Employees Retirement System; the Department of Fish and Game; the State Teachers' Retirement System; the Department of Housing and Community Development; and the State Lands Commission. In addition, PWB approval processes for real property transactions do not apply to projects for the University of California and the California State University which are not funded through state appropriations. (Limited exemptions for the state conservancies have been authorized in statute.)
   
   
2. All proposed acquisitions are brought to PWB for site selection and acquisition by negotiation or, if unable to purchase by negotiation, by filing an eminent domain action (Government Code Section 15853). Sites for lands acquired on behalf of the State Park System are selected by the Director of Parks and Recreation (Section 5006, Public Resources Code).
   
   
3. Government Code Section 15853 also requires PWB to make reports on the status and timing of park acquisitions to the Legislature. The essential feature are:
   
   
   1. For any park acquisition not completed through negotiations and/or condemnation, or abandoned by the Department of Parks and Recreation within six months of commencement of purchase negotiations, notice is given to appropriate fiscal committees and legislative members whose districts are affected; and
      
      
   2. Six months after the notice set forth in the preceding text, the same legislators are given the status of the projects, if parcels have been abandoned or not acquired. DGS prepares this report for PWB.
      
      
4. PWB may acquire any interest in real property it deems advisable.
   
   
5. PWB may purchase furnishings contained with any acquired improvement if the owner agrees to sell.
   
   
6. PWB has eminent domain (condemnation) authority as described in Section 6866. Pursuant to Government Code Section 15855 (b), the board is the only state agency that may exercise this authority, with the exception of the following entities:
   
   
   1. The Department of Transportation,
      
      
   2. The Department of Water Resources,
      
      
   3. The State Lands Commission,
      
      
   4. The State Reclamation Board,
      
      
   5. The Department of Fish and Game,
      
      
   6. Hastings College of the Law, and
      
      
   7. The University of California.
      

   Current law and procedure require that certain "evidences" (discussed in Section 6849) must be provided before an acquisition is submitted for board consideration. Until the property acquired is actually needed, jurisdiction lies with DGS (Government Code Section 15862).

   As staff to PWB on acquisition matters, DGS obtains the information needed to assure PWB that:

• The location of the proposed site meets the requirements of the department for which it is being acquired;
  
  
• The site is suitable for the project's purpose and will not result in increased project costs;
  
  
• The site can be acquired within the funds available and is in accordance with the intent of the Legislature; and
  
  
• The price paid for the property is fully supported by an appraisal.
  
  

Sale of surplus property: DGS sponsors an annual bill to authorize disposition of excess state-owned real property (Government Code Section 11011). The legislation typically provides that PWB approves final disposition. However, DGS does not handle the sale of property for the Department of Transportation and the Department of Water Resources, or for properties of the University of California, the California State University or the California Community Colleges acquired through non-state funds.

PWB lease-revenue bonds: PWB is authorized to issue revenue bonds (commonly referred to as lease-revenue bonds). The board administers four lease-revenue programs: public building construction, new prison construction, high technology educational and research facilities in public universities, and energy conservation. For additional information on these programs, see Section 6873.

Contingency plan for emergency public works: If conditions warrant, PWB may develop a contingency plan for emergency public works pursuant to Sections 15799.2 and 15799.4 of the Government Code. The plan consists of capital outlay or maintenance projects that have not been included in the Governor's Budget or otherwise presented for legislative review but which PWB believes would serve a useful public purpose if implemented. PWB then submits the plan to the Governor for incorporation into the annual economic report to the Legislature required by Section 15901 of the Government Code.

Public land trusts: Section 831.5 of the Government Code allows non-profit public land trusts to enter into agreements with the state to preserve open space and allow public access to natural resources and, in return, receive certain immunities from liability for injuries caused by natural conditions of unimproved property. The State Coastal Conservancy can enter into such agreements for projects in the Coastal Zone, and the Tahoe Conservancy can enter into agreements in the Tahoe Basin. PWB is responsible for agreements in the rest of the state.

Department of Parks and Recreation concessions agreements: Public Resources Code Section 5080.20 requires PWB to approve any proposed concessions agreements with a total investment or estimated annual gross sales in excess of $500,000, which has not been approved by the Legislature in the Budget Act. The agreement may not be advertised for bid, negotiated, or amended in any way until PWB has notified the Legislature that:

1. The proposed concession agreement could not have been presented to the Legislature for review and approval or that it is necessary to revise the terms after legislative approval; and
   
   
2. It would be adverse to the interests of the public to defer the review and approval to the time the Legislature next considers a budget bill.
   
   

PWB may approve the proposed concession after giving at least 20 days written notice to the JLBC and the appropriate fiscal and policy committees.

Long-lead capital outlay equipment: Pursuant to Government Code Section 15792, PWB approval is required for state departments to incur obligations, to be met during the fiscal year following the year of project completion, for the purchase of equipment related to capital outlay projects for which the Legislature has approved construction funds. See also Section 6855, "long-lead equipment."

Quarterly reports: Client departments must submit quarterly reports to PWB on each project's progress with respect to schedule, scope, and actual and projected expenditures (Section 6864).

Board meetings: PWB meets monthly to consider proposed capital outlay expenditures. Meetings are normally held in Sacramento on the second Friday of each month. The meeting notice and the agenda are distributed at least ten days in advance of the board meeting (Government Code Section 11125). To be placed on the mailing list, contact the Capital Outlay Unit of DOF. Agenda package requirements for proposed board actions are described in Section 6845.

The chairperson may call special meetings to consider projects of an emergency or high priority nature. For example, a special meeting might be called if a critical project milestone cannot otherwise be met, such as awarding of low bid or acceptance of a time-limited acquisition settlement. Special meetings are held to a minimum and require a ten-day notice, except for emergency meetings due to the disruption or threat of disruption of state facilities.

Screening meetings: PWB staff conducts a screening meeting for proposed agenda items, usually three Wednesdays prior to the monthly meeting. The purpose of the screening meeting is to verify the accuracy of all information contained in the proposed agenda and resolve any open questions the board's staff may have. Departments must attend the screening meeting if they have submitted an agenda item, unless attendance is waived by PWB staff.

Annual calendars: PWB approves an annual calendar showing planned board meetings as well as staff screening meetings. The annual calendar and its updates are distributed to all departments with active capital outlay programs and to interested parties who request inclusion on the mailing list.

Key monthly time-frames:

1. Proposed board actions requiring legislative notification: Prior to any board action, DOF reviews projects with proposed scope changes or cost increases and, if concurring, may need to notify the Legislature. (Section 6861 describes which project cost increases require legislative notification.) Capital outlay legislative notifications are referred to as "20-day letters," meaning the Legislature has twenty calendar days to respond before PWB will take action on the project. For requests which require a 20-day letter, departments must submit PWB agenda items 30 working days in advance of the scheduled board meeting.
   
   
2. Proposed board actions NOT requiring legislative notifications: All items except scope changes and certain project cost increases may be approved by the board without waiting for a legislative response. These items are due at least 20 working days prior to the board meeting.
   
   
3. Certification letters: In conjunction with each PWB agenda, DOF must certify to the Legislature whether proposed PWB actions are within legislatively approved limits. Although minimum time requirements are not specified in law, DOF submits this certification letter to the Legislature not less than seven calendar days prior to the scheduled PWB meeting. (See also Section 6842.)
   
   

Delegated agenda items (reportables): By resolution, PWB has delegated to DOF approval for selected non-policy actions. These actions, referred to as "reportables", include:

1. Lesser augmentations, described in Section 6842 under the heading "Project Augmentations,"
   
   
2. Reversions of a non-policy nature (Section 6862),
   
   
3. Cost increases within appropriation (Section 6861),
   
   
4. Settlements related to real estate transactions of a non-policy nature,
   
   
5. Revisions of previous board actions of a non-policy nature.

PWB and DOF information needs related to capital outlay projects are very similar. Both require an action request called the DF-14D, Request for Approval to Proceed or Encumber Funds, as well as standardized project cost and history information. This chapter refers to that common block of information as "standard fiscal reporting requirements." In addition, PWB requires an agenda package made up of a specifically-formatted agenda item, a briefing document, and additional information depending upon the type of proposed board item.

This section describes the standard reporting requirements used by both PWB and DOF, and the PWB agenda package.

Standard fiscal reporting requirements: When submitting a request for an action or approval by either PWB or DOF, the department must provide completed versions of the following standard reporting forms. (Only one set of standard reporting forms is required if submitting a request for multiple actions on the same project.)

1. DF-14D, Request for Approval to Proceed or Encumber Funds: The DF-14D, shown in 6845 Illustration 1 of this section, is the official request document which identifies the project and the requested action, and serves as the official, signed certification by the department related to scope, cost and CEQA compliance. For projects managed by DGS, the "Project Manager" signature is the DGS project manager, otherwise it is the department's project manager. The "Department Director or Designee" signature is the department requesting the action (submitting the DF 14D). DOF's signature on the returned DF-14D is evidence of PWB/DOF approval of the request. Any conditions of approval will be noted on the document.
   
   
2. Project Cost, Funding and Schedule Summary: This summary, shown in 6845 Illustration 2 of this section, is a chronological history of costs, funding and schedules. Each submittal requires a new column with the most recent totals and dates. The cost summary is provided in the same manner as in the project's COBCP. A section is provided to detail construction costs. The funding data includes all approved appropriations and executive orders, changes included in this request, and future funding requirements. "Total funding" must equal "total costs". The schedule reflects the same events as those in the initial budget package. The first column must reflect the project as initially approved. Additional columns reflect the project at the time of the submittal of the requested action.
   
   
3. Project Cost Detail Worksheet: The department must provide cost information in sufficient detail to communicate and support the request. The level of detail should be consistent with the budget package detail displayed in 6828 Illustration 2. The total costs must tie to the Project Cost, Funding and Schedule Summary, 6845 Illustration 2.

PWB agenda package:

1. Who submits an agenda package: The project manager—either DGS or the client department if it is authorized to act as project manager—submits the agenda item. However, if DGS submits the agenda item, the client department is nonetheless responsible for the accuracy of program information and for providing all required supporting documents to DGS in a timely manner.
   
   
2. What comprises the agenda package:
   
   
   1. An agenda item, which is the legal action the client department is asking the board to take.
      
      
   2. A briefing document, which is used as part of the staff analysis for the board agenda. Briefing documents must include all the information described in the following text and in general should fit on one page.
      
      
   3. All pertinent backup material. Different types of agenda items have different information requirements. See the various sections on site selection and acquisition, preliminary plans, construction, bond items, augmentations, and project scope.
      
      
   4. A draft 20-day notification letter for items which must be noticed to the Legislature (scope changes and certain augmentations). See Section 6861 for augmentations and Section 6863 for scope changes. Examples of notification letters to the Legislature are available from the DOF Capital Outlay Unit.
      
      
3. Format for agenda items: Departments must use a specific format for each type of agenda item. Because there are a number of possible board actions, formats are not included in this chapter. Obtain format guidelines from the DOF Capital Outlay unit and use only those guidelines when preparing agenda items for PWB action.
   
   
4. How to submit agenda packages: For all agenda items and briefing documents, provide both an electronic copy on disk as well as a hard copy. The rest of the agenda package is submitted only in hard copy.
   
   
5. When to submit agenda packages: See "key monthly time-frames" in Section 6844.

Briefing document for agenda packages: As noted in the preceding text, a board briefing document must accompany each agenda package requesting a board action. This information is used in the staff analysis for the board meeting. Present information in the following format:

1. Project title, matching agenda item.
   
   
2. Project authority (all phases).
   
   
3. Purpose of project and nature of proposed action:
   
   
   1. For preliminary plan approvals:
      
      
      1. Square footage by program use, and
         
         
      2. Number and type of buildings and landscaping etc.
         
         
   2. For site selection approvals:
      
      
      1. Estimated dollar amount,
         
         
      2. Acreage, and
         
         
      3. Ultimate purpose.
         
         
   3. For reversions, the reason for the reversion and the fund source reverted monies will be returned to (Section 6862 describes types of reversions).
      
      
4. Statement of scope and cost:
   
   
   1. Identify any legislatively-imposed restrictions on the project;
      
      
   2. If the project is within scope and cost, a statement of consistency is adequate;
      
      
   3. If the scope has changed, provide a brief description of change, its necessity and the date that the request for JLBC notification was submitted;
      
      
   4. If the cost has changed, cite the dollar amount of the change. For increases, also provide the percentage of increase based on the legislatively approved cost for that phase. (Section 6861 provides instructions for computing augmentations.) If the increase exceeds 10 percent, provide the date that the request for JLBC notification was submitted to DOF; and
      
      
   5. Identify any previously approved augmentations and the total cumulative costs in both dollars and percentages.
      
      
5. Depending upon the type of item, certify that funds are available. If the fund is managed by another department, provide a certification from that department that funds are available. If the appropriation is not project-specific, the department should declare that use of these funds for this project is consistent with the department's expenditure plan for the appropriation. Fund certification is not required for funds managed by DOF (e.g., the General Fund, Public Resources Account, etc.).
   
   
6. For construction projects, departmental certification per Section 6850 that CEQA requirements have been met.
   
   
7. For site selections and acquisitions, departmental certification per Section 6849 that:
   
   
   1. CEQA has been complied with, including date final review period will be completed. (Provide a copy of the dated State Clearinghouse document.)
      
      
   2. Implied dedication has been considered in the property value.
      
      
   3. If necessary, a relocation study has been prepared and adequate funds are available for relocation costs.
      
      
8. Project identification code (Section 6839).
   
   
9. Summary of the construction/implementation schedule.
   
   
10. Identify and discuss any other risks, concerns, controversy or other information that the board may need to make a fully informed decision.
    
    

Examples of briefing documents are available from the DOF Capital Outlay unit.

6845 ILLUSTRATION 1

6845 ILLUSTRATION 2

Sections 6848–6856 describe project phases and processes for a design-bid-build project approach. This discussion relates primarily to securing DOF/PWB budget approval to initiate new phases and for project changes; it is not intended to address other project administrative requirements, such as state procedures related to contract law or project accounting. For assistance with capital outlay administrative requirements other than budget authorizations, contact DGS. Section 6841 provides further information on the design-bid-build process.

No PWB action is required to start projects. However, DOF or DGS must authorize release of funds and give approval to proceed, depending upon the phase of the project and the task. Unless the project involves an acquisition, the first (and frequently only) formal PWB approval normally occurs at the preliminary planning stage.

Major projects: Once the Legislature authorizes funding for studies, site acquisition, or preliminary plans in the Budget Act or separate statute, DGS initiates a Form 22 (or for bond funds a GS-OSA 220) requesting that funding for this phase be transferred to the Architectural Revolving Fund. DGS forwards the form to the department for approval, which then submits it to DOF for approval. See Section 6868 Illustrations 1 and 2 for samples of the fund transfer forms. The form is then forwarded to SCO.

Minor projects: A STD. 23 is used to request approval for departmental supervision of a minor capital outlay project. The client department initiates the form and sends it to DGS for final approval. Examples of the form are available from DGS.

Reminder to departments on "project" per State Contract Act: Before beginning a project, departments are reminded to verify whether the project is governed by the State Contract Act. Section 10105 of the Public Contract Code sets a specific dollar threshold for projects, beyond which the act has governance. That dollar threshold is updated periodically by DOF in a Management Memo.

As a separately-funded phase, project studies are most frequently used for an extended site selection process, to help establish program infrastructure needs or scope for a specific project, or to clarify project feasibility. (Environmental studies are normally funded as part of the preliminary plans phase.)

Upon budget enactment, the study phase is initiated with a request to DOF to release funds, as described in Section 6847. For studies addressing program needs, project scope, or feasibility, no PWB action is required at the conclusion of the phase since the results of the study are typically used to prepare budgetary requests for subsequent phases. For site selection studies, PWB action is required to authorize actual site selection and acquisition (Section 6849).

As discussed in Section 6823, feasibility studies and needs assessments may be funded from either the support or capital outlay budget, depending upon the timing and scope of the services. Site selection and scope studies are project-specific and therefore a capital outlay expense.

PWB's role: Using DGS as its agent, PWB selects and acquires real property for most departments when the appropriation is subject to the Property Acquisition Law (Government Code Sections 15850–15866). Exceptions are listed in Section 6842. Even if a specific site is designated for acquisition by the Legislature, PWB must approve the site before any purchasing activities can begin, including negotiating with the prospective seller. DGS prepares all land acquisition and related agenda items for consideration and approval by the PWB.

Overview of site selection and acquisition: The phase has two major steps:

1. Site selection, CEQA compliance, and PWB approval of the chosen site with authorization to proceed to purchase; and
   
   
2. Site purchase with subsequent PWB approval of the settlement price only if it exceeds the previously reported appraisal price.
   
   

This phase starts when the client department makes a written request to DGS to prepare a formal appraisal for the approved project. The request must be made by a department manager authorized to commit project funds and must give the Budget Act appropriation citation or statutory authority.

After the appraisal, but before beginning any formal acquisition activities, DGS obtains PWB approval for a specific site consistent with the requirements of the Budget Act or enabling statute. (Where a specific site is not designated in the appropriation, DGS first assists the department in selecting a site).

After PWB approves the site, DGS negotiates a settlement with the owner. If the settlement price exceeds the appraised value DGS reported to PWB at the time acquisition was authorized, DGS returns to the board for approval of the higher settlement price (and may, as necessary, request augmentation). Typically, the property acquisition phase must be completed before DOF releases design and construction funds to improve the site. Site selection and acquisition costs include:

1. Investigations,
   
   
2. Surveys,
   
   
3. Title costs,
   
   
4. Appraisal fees,
   
   
5. Staff time, and
   
   
6. Relocation assistance (depending upon DOF's assessment of need; requires specific justification).
   
   

Evidence required by PWB: Current law requires that before a project is submitted to PWB for concurrence on site selection, there must be evidence that:

1. Implied dedication has been considered in the appraised value. Implied dedication refers to a public easement which has been created through a history of use. (Determination of implied dedication is case-specific and based on facts involved in a given situation.) Implied dedications may reduce the value of a property.
   
   
2. The project has complied with CEQA, as described in Section 6850.
   
   
3. If improved property is to be acquired, a relocation study has been prepared and adequate funds are available for relocation costs.
   
   
4. A legal description and title report covering each parcel to be selected has been completed.
   
   
5. Notice has been given of the time and place of the PWB meeting and an agenda has been mailed to interested parties.
   
   

Types of board action to acquire property: There are three types of board actions associated with this phase (not including any possible augmentations or scope changes):

1. Approval of site selection and authorization of acquisition;
   
   
2. Possibly approval for acquiring less property than originally contemplated;
   
   
   1. Submit this item only if the project is solely an acquisition project, the reduction in property exceeds 20 percent of the legislatively-approved acquisition value, and the client department believes that a lesser portion of the property is sufficient to meet the objectives of the project approved by the Legislature (see Section 13332.11 [g] of the Government Code);
      
      
   2. Legislative notification is required; therefore the item must be submitted 30 working days in advance of the proposed PWB meeting date.
      
      
3. Possibly approval of the settlement price, but only if it exceeds the appraisal price previously reported at the time PWB authorized the acquisition.

In all cases, DGS is responsible for submitting the agenda package to DOF for those departments which must acquire property through PWB (for exempt departments, see Section 6842). However, client departments are responsible for meeting DGS' information needs to prepare the agenda packages.

Agenda information:

1. Site selection and acquisition. The following information is required:
   
   
   1. All elements specified in Section 6845 for both the agenda package and standard fiscal reporting requirements;
      
      
   2. CEQA documents per Section 6850.
      
      
2. Acquiring less property pursuant to Government Code Section 13332.11 (g). The agenda package includes:
   
   
   1. All the elements specified in Section 6845 for both the agenda package and standard reporting requirements. However, if this request is made at the same time as the board item for site selection and acquisition, it is handled as a sub-item and uses the agenda package and standard reporting requirements for the main item;
      
      
   2. A written statement explaining why the purchase of lesser property fulfills the Legislature's intent; and
      
      
   3. A draft notification letter to the Legislature.
      
      
3. A settlement price which exceeds the appraisal. The agenda package includes:
   
   
   1. All elements specified in Section 6845 for both the agenda package and standard reporting requirements. However, if this request is made at the same time as the board item for site selection and acquisition, it is handled as a sub-item and uses the agenda package and standard reporting requirements for the main item;
      
      
   2. An explanation for the increase in the settlement price;
      
      
   3. If an augmentation is required, a separate agenda package is not needed but the submittal must include the additional information outlined in Section 6861.
      
      

Interim property management by DGS after acquisition: Until property acquired under the Property Acquisition Law is needed, jurisdiction lies with DGS:

1. The Director of General Services may transfer jurisdiction to the client department if in his opinion early transfer is in the best interest of the state (e.g., the department requires interim use for parking);
   
   
2. DGS may lease all or any part of the property;
   
   
3. DGS may remove or demolish structures;
   
   
4. DGS may sell or dispose of the improvements; and
   
   
5. Rentals received are deposited in a special account in the General Fund and, when appropriated by the Legislature, are available to DGS to maintain, improve or care for the property until needed for the purpose acquired (Government Code Section 15863), with the exception of lands acquired for the State Park System (Public Resources Code 5003.17). However, proceeds of sale of improvements are not deposited in the special account or available for maintenance.
   
   

PWB requires satisfaction of environmental concerns in accordance with the California Environmental Quality Act (CEQA) before it will approve preliminary plans for a project and generally prior to approval of site selection as well. Legal statutes and related regulations covering CEQA can be found in Public Resource Code Section 21000 et seq. and its accompanying regulations, California Code of Regulations (CCR) 15000 et seq. Many actions brought before PWB for consideration and approval are "projects" within the definition of CEQA. These statutes and regulations set out the environmental review requirements for such projects.

Key definitions: For assistance on understanding the documents and notices required by CEQA, see the Guidelines for California Environmental Quality Act, Section 15000–15387, CCR, Title 14, Chapter 3. The guidelines provide an explanation of the environmental process and the definition of many common terms. The following summarizes a few frequently used terms and describes what CEQA documents include:

1. Project per CEQA: The term project per CEQA is defined in CCR Section 15378(a) (3) as an activity involving a lease, permit, or license issued to a person or entity.
   
   
2. Environmental impact report: An environmental impact report (EIR) is one of the three basic types of environmental documents that may be prepared by a lead agency to disclose the potential environmental consequences of an action. An EIR consists of draft and final documents. There are several types of EIR (focused, supplemental, program, etc.). An EIR "…is an informational document which will inform public agency decision-makers and the public generally of the significant environmental effect of a project, identify possible ways to minimize significant effects, and describe reasonable alternatives to the project" (Section 15121, Title 13, Chapter 3 of the CCR). An EIR is required when a project will have one or more significant environmental effects that cannot be either avoided or reduced to a level of insignificance through the use of mitigation measures or changes to the project.
   
   
3. Negative declaration/initial study: A second type of environmental document is a negative declaration. A negative declaration may be used if the project is not expected to have one or more significant effects on the environment. A negative declaration typically is supported by an initial study or initial study checklist.
   
   
4. Categorical exemption: A categorical exemption is an exemption from CEQA based on one or more classes of actions/projects established in regulation. Each class of projects has been determined to not have a significant effect on the environment.
   
   

Related notices include:

1. Notice of determination: A notice of determination is a brief notice filed by the lead or responsible agency after it approves or determines to carry out a project or action that was subject to CEQA. For state projects, the notice is filed with the State Clearinghouse, Office of Planning and Research. Filing of this notice starts a 30-day litigation period. See Sections 15075 and 15094 of CCR, Title 14, for the contents of this notice. A notice of determination is used for both EIRs and negative declarations.
   
   
2. Notice of exemption: A notice of exemption is a brief notice that may be filed by the lead agency after it approves or determines to carry out a project or action that was exempt from CEQA because the project was ministerial, categorically exempt, etc. For state projects, the notice is filed with the State Clearinghouse. Filing of this notice starts a 35-day litigation period.
   
   

Client department's role: Environmental review is typically required for construction projects, projects funded through multi-year capital programs, land acquisitions, and land transfers. Other PWB actions may also be subject to the CEQA environmental review process. The lead agency in each case has the responsibility for determining whether the project is subject to CEQA.

The client department is responsible for meeting the requirements of CEQA. Departments must certify to the PWB that CEQA requirements have been met, including successful completion of the litigation period on each respective project approval, and must provide corroborating evidence (such as a date-stamped notice of determination or categorical exemption). In addition, departments must notify DOF of any developments, subsequent to completion of CEQA, that may indicate environmental contamination or other environmental issues that may require additional activities and/or costs.

Changes in the project: The client department as lead agency ensures that there have been no changes in the project, site conditions, or other factors that may make it necessary to prepare additional environmental documentation. The need for additional documentation could arise for a variety of reasons, especially if there has been a substantial period between completion of the environmental review process and project submittal to the board. For example, if information becomes available that there is an unexpected problem of soil contamination within the project site, the lead agency may need to revise the previously approved environmental document. Other examples include the adoption of new regulatory standards that impose constraints on the project, changes in the setting of the project site such as the reduced availability of on-site utilities (water supplies, sewer service, etc.), increased traffic congestion, or the development of adjacent land uses that conflict with the project.

The client department must also ensure that all projects remain in compliance with the environmental document prepared and adopted for each respective action. In some cases, it may be necessary to provide additional documentation to support the finding that the original environmental process remains valid. Both state and federal environmental review processes provide guidance on when supplemental or revised environmental documentation may be needed subsequent to the approval of a project.

PWB practices: Because resolution of CEQA concerns should generally precede PWB's approval of state funds for a project, PWB follows these practices:

1. When processes should be completed: Departments must provide PWB with evidence that the state's environmental review process has been completed by the lead agency (the public agency with primary authority for carrying out the action) prior to the required PWB action.
   
   
   1. For construction projects, this means prior to approval of preliminary plans; and
      
      
   2. For acquisition projects, this means prior to approval of site selection and acquisition.
      
      
2. Notice of determination, categorical exemption: In most cases, completion involves filing of the applicable project approval notice by the lead agency—either a notice of determination or a categorical exemption, as required by state regulation.
   
   
3. Litigation period: The litigation period (described in the preceding text) on the notice must have expired without a valid challenge before PWB will consider the item. The litigation period for a notice of determination is 30 calendar days; the litigation period for a categorical exemption is 35 calendar days. Consult the regulations for litigation periods for other types of notices.
   
   

Evidence of the completion of this process assures the board that it has minimized risk in committing state funds to a particular project or undertaking.

CEQA compliance outside the PWB process: CEQA requirements are not limited to projects reviewed by PWB. Actions not reviewed by PWB, such as minor capital outlay projects, may nonetheless constitute "projects" within the definition of CEQA and its accompanying regulations. Again, in each case the lead agency is responsible for determining the application of CEQA to each project and fulfilling the relevant requirements.

Sections 6849 and 6851 describe how CEQA compliance should be presented in the PWB agenda package.

What are preliminary plans? Preliminary plans are the initial design phase in preparing the construction bidding documents. The discussion in this section applies to the design-bid-build process used for most state projects (Section 6841).

These documents are developed from the information contained in the budget package. Typically the preliminary plans are developed in two distinct steps referred to as schematics and design development. The two-step process allows the department and architect/engineer to interact before the design is developed, helping to ensure a mutual understanding of the design objectives, limitations and budget.

1. Schematic documents: Schematic documents are the initial architectural and engineering plans prepared during the preliminary plan phase, depicting the designer's conceptual solution to project needs. The major difference compared with design documents is the amount of detail.
   
   
2. Design documents: These are the final documents which result from the preliminary plan phase, defined by Section 3.00 of the Budget Act as a site plan, architectural floor plans, elevations and a cost estimate. For each utility, site development, conversion, and remodeling project, the drawings must be sufficiently descriptive to convey accurately the location, scope, cost, and the nature of the improvement being proposed.
   
   

Beginning and end of phase: If a department contracts with DGS for project management, the preliminary plans phase starts with the request to DOF to release funds for preliminary plans funds using a Form 22 or a GS-OSA 220 for bond items (6868 Illustrations 1 and 2). Upon approval of the release of funds, the design/construction administrator has the design prepared either by state personnel or through contracts with private sector architects/engineers. This phase ends when PWB approves the preliminary plans. An overview of all capital outlay phases is provided in Section 6808.

Client department's role: The client department is responsible for obtaining PWB review and approval of preliminary plans prior to expenditure of appropriated funds for subsequent phases. When requesting approval of preliminary plans, the client department must either:

1. Certify on the DF-14D that all present and future phases will be within scope and cost per supplemental budget language and legislatively-approved COBCPs; or
   
   
2. Request adjustment through the appropriate change process (Section 6861 discusses cost increases; Section 6863 discusses scope changes).
   
   

In addition, the client department must demonstrate that it has met environmental requirements for the project before PWB will approve preliminary plans (Section 6850).

Departments are reminded not to start preliminary plans (or any other phase) with any funds other than the approved phase appropriation or in advance of DOF authorization of a DF-14D.

PWB's role/restrictions related to preliminary plan approval: Section 13332.11 (a) of the Government Code requires both DOF and PWB to approve all preliminary plans to ensure that projects proceeding to working drawings and construction are consistent with legislatively approved cost and scope. Section 13332.11 (g) requires the board to defer action with respect to approval of preliminary plans if the estimated cost of the project exceeds 20 percent of the amount appropriated.

If construction has not yet been appropriated, there is no requirement under statute for the board to defer action on the preliminary plans. However, PWB will calculate the project's estimated percentage increase based on the last legislatively recognized project cost. Depending upon the circumstances, it is generally board practice to defer action and notify the Legislature when such increases are estimated to exceed 20 percent.

Value engineering may be required before PWB considers a request for a recognized deficit: If a project is expected to exceed cost based on the preliminary plans, PWB may require value engineering to determine cost savings strategies before it will recognize a potential deficit. The principal concepts which underlie the value engineering methodology are function, cost, and worth. The approach is to analyze the functional requirements of a project's materials, methods, components and subsystems in order to explore alternate solutions which improve project efficiency without reducing program value. During this process, all expenditures relating to design, construction, maintenance, operation, replacement, etc., are considered.

Mandatory review approvals: Various statutes require that certain elements of preliminary plans and working drawings be reviewed by oversight agencies before proceeding to bid. Examples of possible mandatory reviews at the preliminary plans stage include the State Fire Marshal, the California Coastal Commission, and the State Historic Preservation Officer. (Note: mandatory review approvals must be identified in the COBCP per Section 6818.)

PWB agenda package for preliminary plans: When submitting requests for approval of preliminary plans, provide the following:

1. All information requested in Section 6845, including both the standard fiscal reporting requirements and the agenda package;
   
   
2. A completed, dated set of preliminary plans, outline specifications, and a cost estimate (note: all department-retained funds and federal or other non-state funds contributing to the total project costs must be accounted for);
   
   
3. For proposed cost increases, the information required in Section 6861;
   
   
4. For proposed scope changes, the information required in Section 6863;
   
   
5. A "Public Works Project Authorization and Transfer Request"—Form 22 (6868 Illustration 1) for the working drawings phase. Projects financed from bond funds use a different transfer form (GS-OSA 220, 6868 Illustration 2); and
   
   
6. Evidence of CEQA compliance per Section 6850, such as a copy of the filed Negative Declaration.
   

Preliminary plans presentation meeting: Client departments must present their preliminary plans to PWB staff in a plans review meeting before PWB staff will consider a request for plans approval. This meeting must occur prior to the screening meeting for that month's agenda. The purpose of the meeting is to verify that the project is within scope based on document review.

After the board has approved preliminary plans: DOF will sign copies of the DF-14D and Form 22 and return them to the client department for distribution to DGS and SCO. Time-frames for submitting requests for preliminary plans approval to board staff are presented in Section 6843.

Approved preliminary plans become the final definition of project scope: For most projects, scope is initially defined in the COBCP and published in supplemental language to the Budget Act. The preliminary plans and specifications, as approved by the PWB, later become the final definition of the approved scope of the project. Scope changes to these documents must be specifically approved by DOF in writing before the department can make additional expenditures to revise the plans or to redesign the project, unless such changes are authorized in the Budget Act or other subsequent legislation (Government Code Section 13332.11 [b]). Scope changes are discussed in Section 6863.

What are working drawings? Working drawings are the final design phase in preparing the construction bidding documents. Section 3.00 of the Budget Act further defines working drawings as "a complete set of plans and specifications showing and describing all phases of a project, architectural, structural, mechanical, electrical, civil engineering, and landscaping systems to the degree necessary for the purposes of accurate bidding by contractors and for the use of artisans in constructing the project. All necessary professional fees and administrative service costs are included in the preparation of these drawings." Documents also include a dated final cost estimate. The discussion in this section applies to the design-bid-build process used for most state projects.

This phase starts with the approval by DOF to release working drawing funds and ends with DOF approval to proceed to bid. Both approvals use a Form DF-14D as shown in 6845 Illustration 1.

Before the working drawing phase can begin, PWB must approve the project's preliminary plans (see Section 6851). A Form 22 is used to authorize transfer of working drawings funds to the Architectural Revolving Fund (ARF) (Section 6868). Departments use a DF-14D to request authority to spend working drawing funds. The architect/engineer then prepares the documents described in the preceding text along with any approved bid alternates as described in the following text.

NOTE: Requests for Approval of Working Drawings and Approval to Proceed to Bid are generally submitted concurrently if the construction funding has been appropriated. The requirements are separated in the following discussions for clarity. If submitted simultaneously, duplicated requirements should be combined.

Approval of working drawings: Government Code Section 13332.11 (b) requires PWB to approve working drawings and also authorizes DOF to approve working drawings. PWB delegates it's approval to DOF and therefore an agenda package is not required. However, if the drawings result in cost or scope changes, those changes must be approved by DOF and then submitted as an agenda item the PWB (see Sections 6861 and 6863). To obtain DOF's approval of workings drawings, the client department must:

1. Develop adequate working drawings: Demonstrate that the working drawings are adequate for bidding and construction of the proposed project:
   
   
   1. For most projects, DOF requires a letter attesting to the adequacy of the working drawing documents (as defined in Section 3.0 of the Budget Act), and summarizing the estimated construction, contingency, and project support costs.
      
      
   2. DOF may elect to review actual working drawings. If requested, departments must provide DOF with a complete, dated set of working drawings, bid specifications, and a final cost estimate with a statement from the department Director/designee that the documents are adequate for constructing the proposed project.
      
      
2. Evaluate changes: Attest that any changes from the preliminary plans have been evaluated for scope changes as defined in Section 6863 and funding changes as defined in Section 6861.
   
   
3. Obtain mandatory review approvals: Various statutes require that certain elements of preliminary plans and working drawings be reviewed by oversight agencies before proceeding to bid. Examples of mandatory reviews which may be required at the working drawing phase include the State Fire Marshall, the State Historic Preservation Officer, and the California Coastal Commission.
   
   
4. Information requirements for approval of working drawings:
   
   
   1. Standard fiscal reporting defined in Section 6845;
      
      
   2. Working drawing completion letter or set of working drawings as detailed in the preceding text; and
      
      
   3. If the request includes changes in scope and/or costs, an agenda package as defined in Section 6845 and reporting requirements as defined in Section 6861 and/or 6863.
      
      

Obtaining approval to proceed to bid: Prior to initiating the bidding process, the client department must request approval to proceed to bid. To obtain DOF approval to proceed to bid after working drawings are completed, the client department must:

1. Have a construction appropriation: A construction appropriation for the project must be authorized (chaptered budget act and/or legislation) prior to advertising the project or issuing the bid .
   
   
2. Obtain approval of bid alternates: Public Contract Code Section 10126 allows bids to be accepted on alternates, additions or deductions from a basic project bid, not to exceed 10 percent (10%) of the estimated cost of the base project. Government 13332.11(b) requires DOF approval of bid alternates.
   
   

   The purpose of bid alternates is two-fold. If a project comes in over budget, deductive alternates can help avoid the need to re-bid the project. Conversely, if bids come in under budget, additive alternates can allow project improvements. Bid alternates (which must be bid separately from the main contract) must include all proposed deductive items in priority order followed by all additive items in priority order. DOF encourages submittal of at least three deductive alternates to ensure a successful contract award in the event that all bids submitted exceed budget.

3. Obtain PWB/DOF approval for combined bids: Public Contract Code 10127 authorizes DGS to receive bids for construction of several projects, treated as a single project for bidding purposes. PWB must first approve combined bids. Departments are required assign costs to the various projects and appropriations and to maintain separate cost accounting for each project.
   
   
4. Reporting requirements for approval to proceed to bid:
   
   
   1. Standard fiscal reporting requirements as defined in Section 6845;
      
      
   2. If proposed, a list of bid alternates, deductive and additive, in priority order;
      
      
   3. If the request includes a request for combined bids, an agenda package as defined in Section 6845 and an explanation of the benefits of combined bids in this situation; and
      
      
   4. If the request includes a change in scope and/or costs, an agenda package as defined in Section 6845 and reporting requirements as defined in Section 6861 and/or Section 6863.
      
      

As soon as DOF signs the DF-14D, the client department notifies DGS to proceed to bid. Typical activities during the bidding process include advertising the project in construction trade papers, submission of bids by interested parties, analysis of those bids, and selection of the lowest responsible bidder.

Awarding the construction contract is the first step in the construction phase. The construction phase consists of awarding the bid (this section) and the actual construction (Section 6854). Please note that the discussion in this section applies to the design-bid-build process used for most state projects. Projects built under the design-build process use different phases.

What occurs during the bidding step of the construction phase? Typical activities during the bidding step are advertising the project in construction trade papers, submission of bids by interested parties, analysis of those bids, selection of the lowest responsible bidder, contract execution, and delivery of a formal notice to the contractor to begin the construction work.

Information requirements to release construction funds. After bids have been received and DGS certifies that a valid low bid exists, the client department requests DOF to authorize award of the contract and to transfer construction funds to the Architecture Revolving Fund (ARF). The client department provides the following information with this request:

1. The standard fiscal reporting requirements specified in Section 6845;
   
   
2. Form 22, Request to Transfer Funds (6868 Illustration 1). Projects financed with bond funds use a different transfer form—GS-OSA 220—also discussed in Section 6868;
   
   
3. A copy of the bid tabulation (see 6853 Illustration); and
   
   
4. A PWB agenda item and briefing document for reversion. These are required only if there are savings in the appropriation because of a favorable bid. The item must request reversion of savings and a proportional reduction in contingency funds at the next regular PWB meeting. Formats and examples for PWB agenda items are available from the DOF Capital Outlay unit. Include all information required in Sections 6845 and 6862.
   

Steps following release of construction funds: Upon approval of the DF-14D and related documents, DOF signs the Form 22 and returns all documents to the client department for transmittal to SCO and DGS. With this approval, an official award of the contract may be made to the low bidder. Following execution of the construction contract, DGS gives the contractor formal notice to proceed with construction.

Construction without bid/contract: If a department is authorized to construct a major project in-house, either by statute or provisional language in the Budget Act, the department may submit the standard fiscal reporting requirements specified in Section 6845 to request release of funds to proceed to construction. The option "other" should be selected on the DF-14D and write: "in-house construction."

6853 ILLUSTRATION

The actual construction is the second step in the construction phase: As noted in Section 6853, the construction phase consists of two steps: awarding the bid (previous section) and actual construction (this section). Section 3.00 of the Budget Act stipulates that "construction, when used in connection with a capital outlay project, shall include all such related things as fixtures, installed equipment, auxiliary facilities, contingencies, project construction, management, administration and associated costs." Construction may also include departmental staffing costs for agency-retained construction work.

Construction cannot begin until the contractor receives a notice to proceed from the project manager (which occurs after DOF has approved the DF-14D and released construction funds as described in Section 6853). Construction occurs in accordance with contract requirements. Any changes must be by contract amendment, and in some cases, DOF must concur with those changes (see following change orders). The phase ends when construction is complete and the contractor files a Notice of Completion with DGS or other project manager.

Competitive versus non-competitive construction: In a competitive bid situation, work during the construction phase is accomplished under a contract. In non-competitive situations, the work is done by either the DGS, the California Department of Corrections inmate labor, or departmental staff, as appropriate.

What are the contract documents? The contract documents consist of the agreement between the state and the contractor, notices to contractors, instructions to bidders, the written specifications and drawings prepared by the architect/engineer for constructing a project, general and supplementary conditions, contract bonds, addenda, change orders, and supplementary agreements.

What are the cost elements of construction?

1. Construction support: The terms construction support or project administration are applied to all project expenses incurred during the construction phase other than actual construction costs. The major construction support/project administration cost items are inspection, construction management, architect/engineer review, and special consultants—primarily for materials testing and asbestos abatement monitoring. Project soft costs include costs for all pre-construction phases, plus construction support expenses.
   
   
2. Construction contract: This is the actual amount of the construction bid award, plus any approved change orders (referred to as "hard costs").
   
   
   1. Change orders are formal contract amendments executed during the course of construction as required to address unforeseen site conditions, errors and omissions in the contract documents, and changes in the work resulting from client department requests. When a proposed change order potentially modifies project scope or would require a project augmentation, the client department must discuss the desired change with DOF before executing the change order to determine if the matter requires DOF/PWB action. (See Section 6863 for scope changes.) Change orders are funded from the contingency line item of the project budget, discussed in the following text. Approved scope changes may be funded partially or entirely from the contingency line-item, depending upon cost and how close the project is to completion. DOF makes this determination, in consultation with the client department, on a case-by-case basis.
      
      
3. Construction contingency: The construction contingency is a set percentage of the construction contract amount budgeted for unforeseen emergencies or design shortfalls identified after a construction project commences.
   
   
   1. Construction contingencies are limited to 5 percent of the construction estimate/bid for a new facility and 7 percent of the construction estimate/bid for remodeling/renovation projects.
      
      
   2. A construction contingency is included in the budget so the project can proceed with minimal interruption for small (non-scope) changes or cost overruns. The typical construction contract includes a specific completion date or working days to complete clause, and the contractor can be assessed liquidated damages if the work is not completed within this specified time. Concurrently, the contractor is entitled to proceed with the work without interruption. To minimize state-caused delays, the client department must be able to implement minor (i.e., non-scope) changes without administrative delay.
      
      
   3. Generally, the project manager approves the use of contingency funds. However, if the project requires an augmentation or a scope change, DOF may require that contingency funds be used in part to meet that need. This decision is made on a case-by-case basis. (Likewise, if an augmentation is requested and a review of change orders reveals that contingency funds were used for a non-essential purpose, PWB may disapprove the request for additional funds and direct the client department to identify alternative solutions.)
      
      

Construction augmentations: See Section 6861.

Group 1 and 2 equipment: Capital outlay equipment is categorized either as Group 1 or Group 2 equipment:

1. Group 1 equipment is installed equipment such as heating and air conditioning units and is budgeted as part of the construction phase.
   
   
2. Group 2 equipment is movable equipment, such as tables and chairs (but not replacement equipment) and is budgeted as its own project phase, typically following construction.
   
   

Not all equipment is classified as capital outlay: See Section 6806 for the difference between equipment budgeted through the support appropriation versus capital outlay equipment.

How to request funds for capital outlay equipment: Specific information is required when requesting funding for capital outlay equipment. See Section 6818 for budgeting instructions.

Expenditure of equipment funds requires DOF approval: Government Code Section 13332.11(c) limits the cumulative expenditure of project funds for equipment to $2,000 without prior approval by DOF. This refers to the purchase of Group 2 equipment budgeted in the equipment phase of a project. The project manager requests approval by providing the standard fiscal reporting requirements specified in Section 6845.

Long-lead equipment: Although final equipment lists are generally not approved for purchase until after PWB has approved preliminary plans, there are instances when equipment must be ordered in advance because of installation problems or extended manufacturing time. Subject to DOF and PWB approval, Government Code Section 15792 allows departments to incur equipment obligations to be paid during the fiscal year following the year of a project completion. This authorization:

1. Is limited to the purchase of equipment related to capital outlay projects for which the Legislature has appropriated construction funds;
   
   
2. Applies to both Groups 1 and 2 equipment, although in practice the request is made generally for the latter; and
   
   
3. Is subject to the determination of future year equipment funding needs based on the project schedule.
   
   

See also Section 6842 on PWB's role and responsibilities related to capital outlay equipment.

Agenda package for approval of long-lead equipment. Provide the following:

1. All information required in Section 6845, including the standard fiscal reporting requirements and the agenda package; and
   
   
2. Identification of which equipment needs to be ordered early and why.
   
   

Project Occupancy: DOF must be notified by the department when the project is ready for occupancy (the date of final inspection, beneficial use or occupancy of the project, whichever is earliest). For lease/revenue funded projects, this is typically the date when insurance must be in place and triggers when lease payments begin.

1. Information requirements related to notification of project occupancy:
   
   
   1. The standard fiscal reporting requirements described in Section 6845; and
      
      
   2. The project occupancy letter. For projects managed by DGS, DGS sends a letter to the client department attesting to the project occupancy including project occupancy date. The department must forward a copy to DOF. Departments exempt from DGS project management must prepare a letter attesting to project occupancy. (For lease/revenue funding projects, this letter must also be sent to the STO.)
      
      

Modifications after occupancy: If the client department has determined that there are modifications necessary to complete the project after occupancy, and savings are available or an augmentation can be justified, the department may submit an item to the board for either a "cost increase within appropriation" or an augmentation (Section 6861). The board item should include a list of proposed modifications to be completed under the existing contract and, for each modification, a justification narrative including cost estimates and scheduled completion date. This board item should be submitted with the Project Occupancy Letter.

Project Completion: When the contract has been accepted and completed by both the contractor and DGS (or exempt department) and claims have been settled, the DGS (or exempt department) prepares a "Notice of Completion" pursuant to Section 3093 of the Civil Code. A copy of this notice is sent to DOF and for lease / revenue funded projects a copy is also sent to the STO. This notification must be prepared within 1 year of the date of occupancy as described in the preceding text. Extensions to the deadline (i.e. for scheduled completion of approved "modifications after occupancy") must be approved by DOF.

1. Information requirements related to notification of completion:
   
   
   1. The standard fiscal reporting requirements described in Section 6845; and
      
      
   2. A copy of the "Notice of Completion."
      
      

Project Close Out: "Project close out" reflects the closing of the financial records related to a project. Final project financial statements are reportable to DOF within three months of project completion unless an extension has been approved by DOF.

1. Return of Funds Transfer: Government Code, Section 14959 requires that DGS transfer the unencumbered project funds out of the Architectural Revolving Fund to the originating appropriation within three months of project completion. The client department must submit a Return of Funds Transfer form (available from DGS) to effect that transfer.
   
   
2. Financial statements: Departments shall provide final project financial statements to DOF. These statements should include an accountability for agency retained authority. Outstanding claims should be treated as encumbrances.
   
   
3. Reversion of remaining project funds: Departments must submit an item to the board for reversion of any remaining project appropriation authority to the originating fund (Section 6862). Reversion items should include an accountability for agency retained authority. Outstanding claims should be treated as encumbrances.
   
   

Interim financing: For projects funded from PWB lease-revenue or energy efficiency bonds, departments may need financing for expenses incurred in the interim period before a bond sale is conducted. The board must approve the use of interim financing, and simultaneously authorize a future bond sale to ensure that the interim financing will be repaid. The board action includes the approval of various supporting documents (indenture, site agreements, facility agreements, energy contracts, etc.). This is all presented in a single board item, with several sub-items.

1. Agenda requirements for interim financing. Provide the following information for the board:
   
   
   1. Standard fiscal reporting requirements specified in Section 6845. Also submit the agenda briefing package. However, PWB staff will format the agenda item itself;
      
      
   2. A completed PMIB loan application or loan renewal application;
      
      
   3. Anticipated project schedule;
      
      
   4. The date planned to go to PMIB; and
      
      
   5. The anticipated amount and duration of the loan.
      
      
2. When ready for the actual sale: The actual bond sale will require a subsequent bond item. This request is initiated by STO rather than the client department, and PWB prepares the agenda item. The client department may be asked to provide a briefing document, however.

   See Section 6878 for additional information on interim financing.

PWB's authority to augment: PWB's authority to augment capital outlay projects, and the appropriations for those augmentations, are set out in Government Code Sections 16352, 16352.5, 16354, and 16409. Section 13332.11 of the Government Code limits that authority as follows:

1. Augmentations are limited to 20 percent of the amount appropriated;
   
   
2. PWB must defer approval of preliminary plans or any portion of an acquisition project if the estimated cost of the total project exceeds 20 percent of the amount appropriated. (A limited exception is provided for acquisition projects—see Section 6849.) If construction has not yet been appropriated, there is no requirement under law to defer action on preliminary plans, but PWB will nonetheless calculate the project's estimated percentage increase based on the last legislatively recognized cost. As appropriate, it is generally board practice to defer action and notify the Legislature when such increases exceed 20 percent;
   
   
3. Any single augmentation or cumulative augmentation exceeding 10 percent of the funds appropriated requires a 20-day notification to JOBC prior to action by the PWB;
   
   
4. Augmentations of construction phases have specific limits discussed in the following text under "How to compute an augmentation;" and
   
   
5. PWB may recognize a potential augmentation of a future project phase, which the board terms a recognized anticipated deficit.
   
   

In addition, by board policy and practice:

1. Recognition of anticipated deficits is generally limited to the construction phase.
   
   
2. Augmentations of less than 10 percent may be treated as a delegated item to DOF, and at DOF discretion may be approved prior to the PWB monthly meeting.
   
   

The balance of this section describes PWB procedures in implementing Section 13332.11. A broad overview of PWB authority is provided in Section 6842.

Compelling need: While PWB is authorized to augment capital outlay projects, augmentations are not approved unless there is a compelling need, and only after:

1. Non-committed project funds (contingencies) have been considered as a possible source of funding;
   
   
2. Cost reductions which do not affect scope are evaluated. PWB staff may request the client department to evaluate and include deductive alternates before proceeding to bid (see Section 6852); and
   
   
3. For higher education projects, use of non-state funds is evaluated.

PWB authority to augment projects in no way relieves departments of the responsibility to keep projects within approved cost and scope to the maximum extent possible. PWB will not use its augmentation authority to fund client revisions for "nice-to-have" items.

How to compute the augmentation:

1. If an appropriation is for a single project phase—such as preliminary plans, working drawings or construction—the amount of the phase is used to calculate the allowable augmentation (i.e., no more than 20 percent).
   
   
2. If the appropriation funds both preliminary plans and working drawings, PWB staff has the option to use the total of these two phases to determine the allowable augmentation for any one phase. However, PWB does not normally entertain augmentations for preliminary plans or working drawings.
   
   
3. Augmentations for construction are based on the total amount appropriated for the construction phase and are calculated on construction contract costs and A&E costs (Government Code Section 13332.11 [e]).
   
   
   1. Construction contract costs include the principal construction contract or bid packages, agency-retained activities, landscaping, change orders and contingencies to the principal contract or bid packages.
      
      
   2. A&E services are interpreted to mean architecture and engineering services including architectural supervision, project administration and/or management, testing, inspection, specialized consultation and other similar line items in support of the actual construction of the project.
      
      
   3. Amounts for planning, working drawings or equipment will not be used to calculate the allowable augmentation to the construction phase.
      
      
4. All other existing restrictions, such as policy limits on contingency (Section 6854) and A&E fees (Section 6818, "Technical Notes") are to be observed.

PWB agenda item requirements for augmentations, anticipated deficits, and cost increases within appropriation: A PWB agenda item is required for any augmentation or departmental request for PWB to recognize an anticipated deficit or cost increase within appropriation. If the request requires formal board action (i.e., not delegated to PWB staff), it must be submitted to DOF 20 working days preceding the PWB meeting. Those requests for augmentation and recognition of anticipated deficits which require legislative notification (i.e., those in excess of 10 percent) must be submitted to DOF 30 working days prior to the scheduled PWB meeting. Formats and examples for agenda items are available from the DOF Capital Outlay unit.

Agenda packages for augmentations:

1. Construction augmentations to award bid. Provide the following:
   
   
   1. All information requested in Section 6845, including the standard fiscal reporting requirements and the agenda package;
      
      
   2. A draft legislative notification if the augmentation exceeds 10 percent;
      
      
   3. A copy of the bid tabulation for construction augmentations (see the illustration in Section 6853); and
      
      
   4. A narrative description justifying the need for such augmentation. This must address efforts to include deductive alternates, value engineering, contingency reductions or scope modifications to address augmentations needs, and the consequences if the request is not approved.
      
      
2. Construction augmentations during construction. Provide the following:
   
   
   1. All information requested in Section 6845, including the standard fiscal reporting requirements and the agenda package;
      
      
   2. A draft legislative notification if the augmentation exceeds 10 percent;
      
      
   3. A complete narrative description justifying the need for such cost increases, including the following:
      
      
      1. Status of the project and percentage complete;
         
         
      2. Full description of the unanticipated items, their cost, why needed, and alternative solutions;
         
         
      3. Reason(s) why costs were not included in the original bidding documents and/or as deductive or additive alternatives to the bid, as appropriate;
         
         
      4. Reason(s) why deductive alternates cannot be change ordered to cover the additional costs;
         
         
      5. Reasons why these items cannot be funded within the construction contingency;
         
         
      6. Explanation of efforts to value engineer remaining project components;
         
         
      7. Consequences if not approved; and
         
         
      8. Whether the additional items are within the scope approved by the Legislature.
         
         
3. Agenda package for augmentations of land acquisition projects. Provide the following:
   
   
   1. All information requested in Section 6845, including the standard fiscal reporting requirements and the agenda package;
      
      
   2. A draft legislative notification if the augmentation exceeds 10 percent;
      
      
   3. A listing of all budgeted parcels and a description of the acquisition status of each parcel (acquired, in negotiation, etc.);
      
      
   4. A complete narrative description of alternative solutions, including why the augmentation is the correct solution, and consequences if not approved; and
      
      
   5. A parcel map showing the relationship of the parcels requiring augmentation to the total funded acquisitions.
      
      

Agenda packages for recognized anticipated deficits: At the end of the preliminary plans or working drawing phase, if the project is estimated to exceed its construction budget, the client department may request PWB to approve the preliminary plans or working drawings and to recognize an anticipated deficit. PWB notifies the JLBC of the anticipated deficit if it exceeds 10 percent of the construction appropriation. In the absence of a construction appropriation, PWB generally interprets these limits and notification requirements based on the last legislatively recognized estimate for construction.

1. When requesting a recognized deficit as part of preliminary plans approval, provide:
   
   
   1. A sub-item recognizing the anticipated deficit including a complete narrative description justifying the need for the cost increase in the briefing text as follows:
      
      
      1. A full description of the unanticipated items and estimated cost;
         
         
      2. The need for the items, the reasons why those items were not included in the original proposal, alternative solutions, and consequences if not approved;
         
         
      3. Discussion of alternatives such as value engineering, deductive alternates, or reworking the preliminary plans or working drawings; and
         
      4. Whether the additional items are within the scope approved by the Legislature (if not, a separate scope change item is required with the information specified in Section 6863).
         
         
   2. A draft legislative notification if the anticipated deficit exceeds 10 percent.
      
      
2. When requesting a recognized deficit at the working drawings stage, prepare a full agenda item in accordance with Section 6845, plus all information noted immediately preceding.
   
   

   When the bid is awarded, if the augmentation actually needed is equal to or less than the anticipated deficit as recognized by PWB, PWB does not notify the JLBC again. However, the client department must submit the formal augmentation request to PWB as outlined in the preceding text.

Agenda packages for cost increases within appropriation: Occasionally a department may need PWB to approve additional project costs for items not anticipated in the bidding documents. If there are bid savings to cover the costs (i.e., revised project cost remains within the original appropriation), and the additional items are within approved scope, PWB may approve the increase without notifying the Legislature. (Otherwise, such a request must be for an augmentation and/or scope change). For cost increases within appropriation, provide the following information:

1. All information requested in Section 6845, including the standard fiscal reporting requirements and the agenda package;
   
   
2. A complete narrative description justifying the need for such cost increases. At a minimum, include the following:
   
   
   1. Full description of the unanticipated items;
      
      
   2. Reasons why they were not included in the original bidding documents;
      
      
   3. Reasons why these items cannot be funded within the construction contingency;
      
      
   4. Consequences if not approved; and
      
      
   5. Whether the additional items are within the scope approved by the Legislature
      
      

There are five potential reasons for project reversions:

1. The construction bid came in lower than budget (i.e., experienced bid savings) permitting reversion of surplus funds. (Bid savings are reverted at time of award; any other use of bid savings requires DOF review and concurrence.) This is a non-policy reversion delegated to DOF for approval.
   
   
2. The project is complete and there are project savings (which would be net of any bid savings previously reverted). This is also a non-policy reversion delegated to DOF for approval.
   
   
3. The project failed to meet requirements of Section 2.00 of the annual Budget Act. This is a policy reversion which the board considers.
   
   

   Section 2.00 provides that appropriated funds shall revert if DOF has not allocated them (either through a fund transfer or approval to proceed to bid) on or before June 30 of the fiscal year. This means that DOF must approve Form 22 requests for either the preliminary plan phase or the working drawing phase by June 30, or, in the case of construction, approve the Form DF-14D to proceed to bid by June 30. A client department must be familiar with these requirements and with the time-frames laid out in DOF Budget Letters. The client department is advised to discuss deadlines for submitting these forms with its DOF capital outlay analyst to determine whether there will be a need to reappropriate project funding.

4. The project has a proposed scope change which will result in savings to be reverted. This is a policy reversion which the board considers.
   
   
5. The project has been terminated by statute or for a policy reason. This is a policy reversion which the board considers.
   
   

Agenda packages for reversion items. Submit the following information for proposed reversions:

1. All information requested in Section 6845, including the standard fiscal reporting requirements and the agenda package;
   
   
2. The type of reversion (see preceding);
   
   
3. If the reversion is of a policy nature as defined in the preceding text, an explanation of the cause; and
   
   
4. The fund to which savings will be reverted.
   
   

What is scope? The scope of a project is what will be constructed (or acquired) and why. Thus, scope encompasses both the physical characteristics of the project and the intended program use. Scope is established initially in the COBCP, with key elements reiterated (or restricted) in supplemental language to the Budget Act. The preliminary plans—and later the working drawings—refine scope in terms of the physical characteristics of the project. The various information sources for a project's scope are discussed in more detail in the following text.

Scope changes require DOF approval. Section 13332.11 (b) of the Government Code states that "no substantial change shall be made from the preliminary plans or working drawings as approved by the State Public Works Board and the Department of Finance without written approval by the Department of Finance." This approval must be granted before the department can make any expenditures to redesign the project or to revise the plans, unless those revisions are authorized in the budget act or other subsequent legislation.

Subparagraph (9) of Section 13332.11 (b) requires DOF to report approved scope changes to the Legislature. In practice, this restriction and related notification requirement begins with project authorization, even before preliminary plans are considered by PWB.

After DOF approves a scope change and the Legislature has been noticed, PWB "recognizes" the scope change in a board item, incorporating it into the board's official record for the project. As appropriate, PWB may also require that a formal revision to the preliminary plans be submitted for approval.

When is a proposed change substantial? DOF determines whether a proposed change is substantial and therefore a scope change, based on a review of the facts on a case-by-case basis and in consideration of legislative intent. Therefore, it is not practical to publish absolute definitions for scope. However, administrative guidelines follow for determining which project changes should be discussed with DOF to assess their significance.

Guidelines to determine which project changes are potentially substantial: The client department is required to report to DOF any proposed project change as outlined in the following text. DOF will work with the client department to assess whether the change meets the definition of substantial. (The initial report can be made by phone or e-mail; DOF may require written follow-up for its records. For changes deemed to be scope adjustments, the client department must submit all information required at the end of this section.)

A client department must discuss the following with its DOF capital outlay analyst to determine whether a scope change would result:

1. Changes to the approved program use, as defined by:
   

1. Assigned program space for facilities. Any change which would add space for a new function, increase capacity for a program activity, use space for a function or activity different than originally intended, or alter the ratios in multi-use space, is reportable to DOF for evaluation as a potential scope change;
   
   
2. Land use purpose for acquisition projects; and
   
   
3. Any other expectations or restrictions regarding program use set forth in the authorizing statute.
   

In this context, program is defined at the activity level (i.e., a more narrow definition of program than typically used in the Governor's Budget or the budget act).

1. Changes to the physical characteristics of the real asset as it relates to:

1. Facility size, shape, major structural characteristics, and location.

1. Size generally may be described in either gross square feet or assignable square feet. For some projects, such as sewer, electrical or HVAC, size may be a function of capacity.
   
   
2. Shape is a function of both the footprint and elevation of a structure. Footprint includes the interior arrangement as well as the facility perimeter.
   
   
3. Major structural characteristics will vary by project, but may include the structural system, architectural style, construction materials, and major mechanical, electrical or utility systems.
   
   
4. Location may be as specific as parcel number, or more generally city, county or region, depending upon initial definition in the COBCP, statutory language, or supplemental language.
   
   

2. Acreage size, land type, and location; and
   
   
3. Any other expectations or restrictions regarding the physical characteristics of the real asset as set forth by authorizing statute.
   

Changes which meet the reporting requirements to DOF, as described in the preceding text, are not necessarily scope changes unless DOF so determines. Reasonable judgment is required in contacting DOF; however, because the consequences of unapproved scope changes can be severe (including project termination), client departments and project managers should err on the side of caution.

Generally, the following project changes are not reportable to DOF (as potential scope changes):

1. Cost, although the impact of a scope change on project and related operational costs must be carefully considered (cost changes may or may not result in scope changes; conversely, scope changes can occur with or without associated cost changes). See Section 6861 for instructions on approval processes for project cost changes.
   
   
2. Changes to correct minor errors and omissions in the construction documents or to respond to minor unforeseen site conditions (i.e., substitution of fixtures when products are no longer manufactured, corrections required by code authorities, minor demolition of materials not foreseen during design, addition of electric services to motors, etc.). However, when such changes cannot reasonably be categorized as minor, or if they alter programmatic capability or requirements, the matter must be discussed with DOF to assess impact on project scope.
   
   

Construction contingency funds should be reserved for correcting problems in achieving approved scope and for essential scope changes. Construction contingency funds should be used to pay for the cost of resolving problems arising from design errors/oversights, unforeseen conditions, code requirements, and the cost (if any) for approved scope changes. Non-essential client change orders should be avoided. See Section 6854.

Source references for project scope: As noted in the preceding text, a project's scope is defined in several source documents.

1. For budget act projects, the COBCP: A detailed description of project scope is required in the COBCP (Section 6818). This description becomes one of the primary references for later interpretation of potential scope changes.
   
   
2. For budget act projects,the supplemental language report of the Legislature: This language summarizes the COBCP for each specific project and outlines costs for studies, acquisition, preliminary plans, working drawings, construction and equipment using the California Construction Cost Index (CCCI) as published in Engineering News Record for the year of the original project appropriation. While a proposed schedule for the commencement and completion of various phases of each project is contained in the scope language, this project schedule is not considered part of the project scope for purposes of scope changes.
   
   
3. For non-budget act projects, special legislation: For projects approved through special legislation, where preliminary program guides and budget packages are not available, the language in the legislation may provide initial definition of approved scope. Other documents used to support the need for the legislation, such as project descriptions, which may be included or supplemented in master plans, special reports, and costs estimates, may provide more detailed scope definition. Also, subsequent documents submitted to and approved by the Legislature (if applicable), further define legislatively approved scope.
   
   
4. Preliminary plans and working drawings as approved by DOF and PWB. Once preliminary plans have been approved by the board, the specific plans and specifications become the final definition of the scope of the project, as it pertains to physical characteristics.
   
   

Agenda packages for scope changes: Provide the following information:

1. All information requested in Section 6845, including the standard fiscal reporting requirements and the agenda package; and the following additional information:
   
   
   1. Any mandated reviews and approvals required related to the project change;
      
      
   2. Any required CEQA compliance related to the change;
      
      
   3. What design corrections were required, and why;
      
      
   4. What programmatic changes were required, why, and when those changes were approved by the DOF support analyst; and
      
      
   5. What the change's savings or cost implications are, and why.
      
      
2. If an augmentation is also required, a sub-item must be attached consistent with Section 6861 (and also noticed to the Legislature, if necessary).

Each department with an active capital outlay appropriation must submit a quarterly report to DOF no later than April 15, July 15, October 15, and January 15 of each calendar year as shown in 6824 Illustration 1.

The fiscal data should include all funding (appropriations and executive orders) related to the project plus any transfers related to each appropriation. Comments should describe the status of the current phase. Detail of change orders should recap any scope changes and construction change orders issued or pending. The schedule, at a minimum, should reflect the original dates (at time of project funding approval), and the latest revised dates and actual dates. In addition, it is helpful to enter into a history of schedule changes.

6864 ILLUSTRATION

Public Contract Code Section 10103.5 provides an exclusion to the State Contract Act for work performed by prisoners pursuant to an order by the Director of the Department of Corrections. If the total cost of a project for the construction of new, previously unoccupied prison facilities or additions to an existing facility exceeds $50,000, use of inmate day labor must first be approved by PWB.

If the project budget was not estimated using inmate day labor, there should be bid savings. This savings should either be reverted, or—if proposed for redirection within the contract—be approved by DOF.

Agenda package for inmate day labor: The request to use inmate day labor for services exceeding $50,000 is normally presented as a sub-item under the request for approval of preliminary plans, although it can be presented later. Assuming that the main item (approval of preliminary plans) has been prepared with all the information requirements specified in Section 6845, the only additional information required is:

1. Check "other" on the DF-14D and write: inmate day labor;
   
   
2. Indicate whether the use of inmate day labor was assumed in the original project cost estimate; and
   
   
3. If not, indicate the anticipated savings, and whether it is to be reverted or redirected contingent upon DOF approval. If no savings are anticipated, explain why.
   
   

PWB holds the power of eminent domain under property acquisition law. Prior to commencing condemnation proceedings, PWB must first adopt a resolution of necessity authorizing condemnation in accordance with the Code of Civil Procedure (CCP) Sections 1245.220 and 1245.230. At least 15 days notice of the board hearing is given in writing to the property owner (CCP 1245.235). Also, the board must have made a good faith offer to purchase the property or, if an offer has not been made, must determine that the property owner cannot be located (Government Code Section 7267.2).

PWB may reach agreement with the owner of part or all of the property being condemned on the price to be paid, and may incorporate the agreement in a stipulation in the condemnation proceeding (Government Code Section 15857). PWB may abandon a condemnation proceeding (CCP Section 1268.510). Upon completion of condemnation proceedings, PWB has the right to immediate possession (CCP 1255.010).

Agenda packages for proposed condemnations: When requesting that the board condemn a property, the client department (and/or DGS) must provide all the following:

1. All information requested in Section 6845, including the standard fiscal reporting requirements and the agenda package;
   
   
2. A statement of the property's proposed public use;
   
   
3. A description of the general location and extent of the property to be taken, with sufficient detail for reasonable identification;
   
   
4. An analysis of necessity showing that:
   
   
   1. The public interest and necessity require the proposed project;
      
      
   2. The proposed project is planned or located in the manner that will be most compatible with the greatest public good and the least private injury; and
      
      
   3. The property is necessary for the public good;
      
      
5. Chronology of attempts to purchase the property and/or contact the owner; and
   
   
6. Certification that 15 days advance notice has been provided the owner.

PWB's resolution is conclusive evidence that the elements of necessity have been met.

Program overview (see also Section 6873): Cost-effective energy conservation projects reduce the cost of running state government. When PWB issues Energy Efficiency Revenue Bonds (see Section 6873), the proceeds are loaned to state agencies to build projects that conserve energy at state institutions. Loans made to state institutions are structured so that the energy savings generated are always greater than the loan payment. The savings that remain after the loan payment is made are split equally between the General Fund and the department conducting the project.

The facility's share of savings must be dedicated to maintenance, energy projects or infrastructure improvements. This approach reduces the overall cost of state government, allows institutions to modernize facilities without using capital funds, and funds continued infrastructure improvement. DGS' Office of Energy Assessments (OEA) staffs this PWB program. OEA identifies energy-savings projects, performs technical and financial analyses, and structures the loans.

In the development of projects for potential financing, two important guidelines are followed: 1) conservative financial and technical assumptions are used, and 2) only proven energy-savings technologies are implemented. These guidelines help ensure that the projects produce the anticipated energy and dollar savings. They also eliminate the requirement for expensive project metering since projected energy-saving assumptions can be accepted with confidence.

The energy service contract: The energy service contract is the legal loan agreement that defines the project and ensures repayment of the borrowed monies. The department is required to repay the loan regardless of the success of the project. This is necessary to assure bondholders they will be repaid.

The contract contains the "boiler plate" contract language, a project description, cash flow, payment schedules and the department's intention to apply for benefit sharing. It is signed by the participating department, OEA and PWB. Once the contract is in final form, it must be submitted to the Legislature for comment at least 45 days prior to PWB taking action to approve the loan. When the project is completed, the department applies for benefit sharing by submitting a BCP to request retention of half of the projected savings (intended use must be described).

Agenda requirements: PWB agenda requests are prepared by OEA on behalf of participating departments. In addition to information required in Section 6845, OEA reports the contract amount by cost component, the payment structure (amounts and due dates), and the net benefit to the state over the life of the contract.

Section 14957 of the Government Code establishes ARF which receives, through transfer, funds for the construction, alteration, repair, and improvement of state buildings, including:

Studies,

New construction,

Major construction and equipment,

Minor construction,

Maintenance,

Improvements,

Equipment, and

Other building and improvement projects.

Transfers require approval from DOF. Construction funds transferred for major capital outlay projects may not exceed the amount necessary based on competitive bids. Any excess amounts must be transferred immediately back to the source fund through the reversion process. DOF also approves the use of ARF to advance the cost of federally or locally reimbursed projects, provided assurances specified in statute are received from the federal government. Money in ARF is available for the purposes transferred without regard to fiscal year; however, funds in ARF will revert to the originating fund source if they are not encumbered within three years of being placed in ARF or within three months of a project's completion (see Section 6856) in accordance with Government Code Section 14959. DGS tracks expenditures in the ARF and generates a Return of Funds Transfer for any unencumbered balance that remains beyond the earlier of these time frames. Time extensions may be approved by DOF. DGS estimates upon receipt of bids are considered valid encumbrances for determination of the amount of an unencumbered balance.

Forms used to transfer funds to ARF:

1. Transfer of non-bond funds: Client departments use Public Works Board Authorization and Transfer Request form, STD. 22,, to move non-bond funds into of ARF. This form is initiated by DGS when it serves as project manager. This form is available from DGS.
   
   
   1. Departments use STD. 22 to transfer funds to ARF for each budgeted phase of a capital outlay project. This type of transaction is approved by the DOF capital outlay analyst for the department.
      
      
   2. Departments also use STD. 22 to transfer support funding for those facilities expenses (such as carpeting or modular furniture) which are classified as state operations. This type of transaction is approved by the DOF support analyst for the client department.
      
      
   3. Since the same form is used to transfer either support funds or capital outlay funds into ARF, the client department must correctly identify the nature of the transaction—i.e., support or capital outlay. Section 6806 identifies how facilities expenses are classified by character of appropriation.
      
      
   4. Except as allowed in Section 6.00 of the Budget Act, transfer of support funds to ARF for capital outlay purposes is not allowed. See Section 6806 and 6807 of this chapter. Section 6.00 transfers of support funds to ARF must be approved by both the DOF support analyst and the DOF capital outlay analyst. Submit the original STD. 22 to the support analyst, with a copy to the capital outlay analyst. The last day to submit a STD. 22 for a Section 6.00 purpose is April 30. Allow 30 days for DOF review and 30 days for review by JLBC, as needed.
      
      
   5. Due to the volume of proposed STD. 22s at the end of the fiscal year, and the potential for incorrect classification of the request, departments must allow extra time for verification by DOF of the nature of—and need for—the transaction. Proposed transfers to ARF which cannot be verified in the time available will not be approved.
      
      
2. STD Form 22 Instructions Related to Capital Outlay Transfer Requests:

   To complete STD. 22 related to Capital Outlay transfers, provide the described information for each of the following fields:

   1. Work Order Number - The DGS/RESD work order number.
      
      
   2. Description of Project - "Request transfer of $_ _ _ _ _ _ _ to complete the __ _ _ _ _ _ _ _ _ Phase for the following project:" followed by a brief project description. This block may also contain any restrictions and or qualifications on the use of funds, i.e. "these funds will not be utilized prior to _ _ _ _ _ _ _." (Note: departments cannot request transfer of funds for more than one phase at a time.)
      
      
   3. Date of Public Works Board Approval - The intended date of PWB approval (blank if prior action did not require PWB approval).
      
      
   4. Prior Expenditures for Preliminary Plans -
      
      
   5. Fund - Title of fund(s) from which the preliminary plans were funded; and
      
      
   6. Amount - Total amount of the preliminary plans.
      
      
   7. Total Estimated Project Cost - Latest reported and approved total project cost (as displayed on the Project Cost, Funding, and Schedule Summary).
      
      
   8. Source of Funds -
      
      
   9. Fund - Title of fund(s) from which the transfer will occur;
      
      
   10. Appropriation - Appropriation authority related to each source of funds; and
       
       
   11. Dollar Amount - Amount to be transferred.
       
       
   12. Unencumbered Balance Before Posting This Estimate - Funding available for this project from prior transfers.
       
       
   13. Amount to be Transferred - Dollar amount to be transferred. This amount must match the request in the Description of Project.
       
       
   14. Approved By - The signature of the client department's project manager.
       
       
   15. Funding Certification - The signature of the client department's Accounting Officer.
       
       
   16. Approved By - The signature of the client department's Director or designee.
       
       
3. Transfer of bond funds: For bond-funded projects, a Public Works Project Authorization Bond Proceeds Funded Projects (GS–OSA 220) accomplishes the same purpose as a STD. 22 This form is available from DGS. The form is used to request SCO to reserve a portion of the department's project appropriation authority in a separate account within the appropriate bond fund. This reserve is used to reimburse ARF for actual expenditures.
   
   
   1. All transfer requests from lease-revenue bond funds must be submitted first to DOF's Capital Outlay unit to determine whether the purpose of expenditure is lawful under the bond indenture and state/federal tax law. This applies whether or not the transfer is for a support purpose. The Capital Outlay unit will then coordinate the request with the appropriate support unit in DOF.
      
      
   2. For budgetary purposes (as distinguished from cash flow purposes), GS-OSA 220 is treated as an encumbrance recorded in the fiscal year in which approved by DOF. Departments which manage their own projects—such as the higher education segments and the Department of Corrections for the new prison construction program—do not use GS-OSA 220.
      
      
4. Form GSA-OSA-220 Instructions Related to Capital Outlay Bond Transfer Requests

   To complete form GSA-0SA-220 related to bond transfers, provide the described information for each of the following fields:

   1. Work Order Number - The DGS/RESD work order number.
      
      
   2. Description of Project - "Request transfer of $_ _ _ _ _ _ _ to complete the __ _ _ _ _ _ _ _ _ Phase for the following project:" followed by a brief project description. This block may also contain any restrictions and or qualifications on the use of funds, i.e. "these funds will not be utilized prior to _ _ _ _ _ _ _." (Note: departments cannot request transfer of funds for more than one phase at a time.)
      
      
   3. Date of Public Works Board Approval - The intended date of PWB approval (blank if prior action did not require PWB approval).
      
      
   4. Amount Requested - Total amount to be transferred.
      
      
   5. Cumulative Authorization - Total (net) amount transferred to date including this request.
      
      
   6. Signature/Title/Date - The signature of the client department's project manager.
      
      
   7. Amount to be Transferred - Dollar amount to be transferred. This amount must match the request in the Description of Project and the Amount Requested fields.
      
      
   8. PMIA Loan No. - Loan Number of the loan from the Pooled Money Investment Account prior to bond sale.
      
      
   9. Agency Certification - The signature of the client department's Accounting Officer.
      
      
   10. Authorized Signature/Date - The signature of the client department's Director or designee.
       
       

This portion of the Capitalized Assets chapter addresses the methods used by most state departments for long-term financing of the ownership and/or use of infrastructure. In addition, this chapter addresses interim (short-term) financing needs for projects. Please note that nothing in this chapter is intended to commit either the STO or PWB to policies or practices.

Capitalized assets may be paid by direct appropriation—sometimes called "pay-as-you-go"—or financed over multiple years. Long-term financing follows one of five paths:

1. If the client department has project authority with a GO bond appropriation, the state issues GO bonds to finance the project. Debt service is paid automatically by the General Fund without the need for an annual appropriation.
   
   
2. If the client department has project authority with a lease-revenue appropriation, lease-revenue bonds are issued by PWB or—in some cases—by a state-membership joint powers authority (JPA). A separate lease rental payment item is included in the annual Budget Act under the client department's organization code.
   
   
3. When the client department has obtained authority to acquire real assets through leasing, it may execute a tax-exempt financing lease using an installment sale agreement or lease-purchase agreement. Payments may be budgeted as a separate appropriation or in some cases in the rent line-item of the department's support appropriation.
   
   
4. If the client department has only operating lease authority, a vendor or other third party provides the facility and may finance it on a taxable basis using the client department's lease as the security for a debt offering. Payments will normally be budgeted in the rent or contract line of the department's support appropriation.
   
   
5. For departments with projects which generate their own enterprise fund revenue streams, projects may be financed with tax-exempt enterprise revenue bonds (e.g., the Department of Transportation's toll bridges and the Department of Water Resources' State Water Project).
   
   

Because most departments do not use enterprise revenue bonds, this type of financing is not discussed in detail in this chapter. Debt instruments other than those referenced in the preceding text may be used, but the principles will be similar. Acronyms and terminology are defined and indexed in Section 6899.

For an understanding of other forms of debt financing, refer to the California Debt and Investment Advisory Commission's Debt Issuance Primer. The Commission also offers a course entitled Fundamentals of Debt Financing.

Definition: GO bonds are a form of long-term borrowing in which the state issues municipal securities and pledges its full faith and credit to their repayment. Bonds are repaid over many years through semi-annual debt service payments. The California Constitution requires that GO bonds be approved by a majority vote of the public and sets repayment of GO debt before all other obligations of the state except those for K-14 education.

Key statutory authorities: Article XVI, Section 1, of the California Constitution prohibits the Legislature from creating debt or liability which exceeds $300,000 without a majority vote by the people, except in case of war.

Government Code, Title 2, Division 4, Part 3 (Section 16650 et seq.) sets out the statutory framework for GO bonds. Statutory authorization for individual GO bond measures is placed programmatically in the codes (e.g., prison authorizations are located in the Penal Code).

Fiscal highlights:

1. GO debt is a key component considered in the overall debt load of the state. The most commonly used measure of debt is annual debt service (for non self-liquidating bonds) as a percentage of General Fund revenues or receipts.
   
   
2. Self-liquidating GO bonds are backed by project-generated revenue streams and therefore the bond market does not include them when calculating debt service ratios. An example is the veterans' home loan program where expenditures are reimbursed through mortgage payments.
   
   
3. There is no California statutory or constitutional limit on the absolute level (or any other measurement) of state debt, other than that specified in Article XVI referred to in the preceding text.
   
   
4. GO debt repayment is continuously appropriated and therefore not included as a separate appropriation in the annual Budget Act.
   
   
5. GO issues have the highest credit quality in the state and therefore the lowest tax-exempt rates.
   
   
6. Debt service consists of both principal and interest payments.
   
   
7. GO debt repayment is frequently structured as level principal payments, i.e., the initial payments are the highest, decreasing as principal balances and therefore interest decline.
   
   
8. The California Constitution authorizes GO bonds with up to 50-year maturities, but the economics of the bond market usually dictate that bonds be issued on a 20- to 30-year basis. Some bond acts also limit the maximum maturity to 20 years. To meet cash needs before bonds are issued, GO programs may require interim financing through loans from the Pooled Money Investment Account or the General Fund, or through the issuance of tax-exempt commercial paper or other short-term negotiable instruments. See Section 6878.
   
   
9. Various GO finance committees must approve the use of interim financing and authorize the sale of bonds.
   
   
10. STO is the agent for sale and the registrar and/or paying agent for state GO bonds. GO bonds are normally sold using a competitive rather than negotiated process.
    
    
11. DOF provides fund condition statements and participates in sales preparation, due diligence, rating agency presentations and continuing disclosure.
    
    
12. Client departments are responsible for informing STO of program cash flow needs so that bond sales can be scheduled or interim financing arranged.
    
    

Definition: Revenue bonds (or enterprise revenue bonds) are a form of long-term borrowing in which the debt obligation is secured by a revenue stream produced by the project. Because revenue bonds are self-liquidating and not backed by the full faith and credit of the state, they may be enacted in statute and therefore do not require voter approval. .

Lease-revenue bonds are a variant of revenue bonds used in the state's capital outlay program. The revenue stream backing the bond is created from lease payments made by the occupying department to the governmental financing entity which constructs the facility. Generally, this entity is PWB or occasionally a joint powers authority (JPA) of which the state is a member. The financing authority constructs the facility, issues financing bonds, and retains title to the facility until the debt is retired.

Lease-revenue bonds do not require voter approval because the transaction is set up to mirror a typical financing lease (discussed in Section 6876), i.e., lease payments are due on a year-to-year basis and required only if the facility can be occupied. The California Supreme Court has reviewed and determined that the lease-revenue financing mechanism does not create constitutional debt. The court's decision framework is referred to as the Offner-Dean rule.

Nonetheless, bond rating agencies include lease-revenue payment obligations when calculating the state's bonded indebtedness burden. Thus, there is a distinction between the concept of California constitutional debt and debt as defined by the municipal bond market.

PWB's lease-revenue program is described in Section 6873. Lease-revenue programs for state capital outlay can also be implemented through JPAs, as described in Section 6874.

Fiscal highlights:

1. In contrast to GO bonds, annual appropriations are necessary for lease-revenue debt service. However, the obligation to pay is not extinguished if appropriations are not provided.
   
   
2. Government Code Section 15848 provides for debt service payment in the event of no budget.
   
   
3. Lease-revenue bonds pay interest at tax-exempt rates which are slightly higher than tax-exempt rates for GO bonds.
   
   
4. Lease-revenue payments are due only if there is "beneficial use and occupancy." If the facility cannot be occupied, no lease payment is due (i.e., abatement is a required element of the underlying lease). Because payments would still be owed to bondholders, rental interruption insurance is required for lease-revenue projects. In addition, lease-revenue bond issuances are sized larger than actual project needs primarily for:
   
   
   1. A capitalized interest account to pay debt service during the construction period until the facility can be occupied; and
      
      
   2. A debt service reserve fund. A reserve fund is created by the indenture or trust agreement and is usually funded from bond proceeds. Reserve funds are generally required by rating agencies for bonds other than GO bonds as a prerequisite for investment grade rating. A reserve fund is used to replenish the interest and principal accounts in case of deficiency or to pay debt service if no other money is lawfully available (i.e. insurance proceeds). Drawing on a reserve fund is absolutely a last resort and is an event frowned upon by the financial markets. The amount of the reserve fund is governed by tax law and, for state lease financings, is generally one-half of the maximum semi-annual debt service.
      
      
5. Lease-revenue debt service is structured as level debt payments (as opposed to level principal payments for GO debt service) because the repayment schedule must be similar to that for a commercial operating lease.
   
   
6. The term of the bonds cannot exceed the useful life of the facility.
   
   
7. Lease-revenue bonds are typically sold on a negotiated basis because the bond market has greater information requirements about the security underlying lease-revenue issues. A financing team, in place before the bond sale, helps meet these information needs.
   
   

Lease-revenue bonds may not be issued for any project for which a lease cannot be created. (Without a legally enforceable lease, there is no security for the issue.) .

8. Lease-revenue projects may require interim financing for costs incurred before the bonds are issued. Interim financing for preconstruction costs for lease-revenue programs requires substantial assurance that the loan will be repaid in another manner in the event bonds authorized for the project are not sold. For PWB projects, this is generally in the form of Budget Act or statutory language which authorizes repayment of interim costs from a department's support appropriation.
   
   
9. DOF, STO, the client department (and in some cases DGS) all have roles in the successful completion of lease-revenue project financing. For further discussion, see Sections 6873 for PWB lease-revenue bonds, Section 6874 for JPA lease-revenue bonds, Section 6880 for preparing for a bond sale, and Section 6884 for continuing disclosure. Client department responsibilities are summarized in Section 6886.
   
   
10. Other lease requirements are set forth in Section 6876 under the heading "financing leases."

PWB is authorized to issue lease-revenue bonds to finance acquisition and construction projects when such projects are authorized by the Legislature.

In a typical project, the client department leases the site for a nominal fee to PWB, although for some projects the board may acquire the site directly. The client department then constructs the project as PWB's agent. The board leases the completed facility back to the client department for a rental fee equal to the amount needed to provide for the debt service on the revenue bonds and associated administrative expenses. Leases can be for periods up to 35 years, although 20 to 25 years is typical. The lease term cannot exceed the useful life of the capital asset.

Although there are limited exceptions, under federal tax laws arbitrage rebate penalties will be incurred or any arbitrage profits have to be rebated to the federal government if construction proceeds of revenue bond financing are not expended within two years. ("Arbitrage" refers to interest earnings on the investment of bond proceeds that result in a return in excess of borrowing costs.) To avoid this rebate, PWB may defer long-term bond sales and instead authorize loans from PMIA or the General Fund to cover interim financing needs, with a commitment to subsequently sell bonds (Section 6878). Long-term bonds are later sold in an amount sufficient to repay interim financing and to provide for the balance of construction costs, required debt service reserves, the capitalized interest account, and administrative expenses.

PWB's lease-revenue programs:

Public Buildings Construction Fund. Government Code Sections 15815 et seq. establish a financing program for the acquisition of sites and construction of public buildings. PWB issues lease-revenue bonds for acquisition of sites and construction of public buildings when such projects are specifically authorized by the Legislature. The fund contains a construction account for the project, and a revenue account from which principal and interest on the bonds are paid, and into which is deposited any revenue derived from the operation of the facility.

New Prison Construction Revenue Fund. Government Code Section 15819.3 authorizes PWB to finance prison facilities by the issuance of revenue bonds. Authorizations for specific prison projects have been enacted in legislation and codified in the Penal Code. These authorizations mirror those contained in the Government Code. Certain terms of the bonds must be reported to the appropriate legislative committees at least 20 days prior to bond sale (Government Code Section 15819.8).

High Technology Educational and Research Facilities in Public Universities. Government Code Section15820 et seq. authorizes PWB to finance the construction or renovation, and the equipping of facilities for lease-purchase to the University of California, the California State University, and the California Community Colleges for educational and research purposes related to specific fields of high technology. This has been expanded to also be used for instructional or library purposes.

Energy and Water Conservation Revenue Bond Projects. PWB may issue revenue bonds pursuant to Government Code Section 15814.15 to finance the cost of alternative energy equipment and for energy and water conservation measures in state public buildings, defined to include local school districts' (K-12) buildings. The total amount of revenue bonds authorized to be issued is $500 million through January 1, 2000. The client department is responsible for payment of debt service on issued bonds under an energy service contract. Proposed energy service projects, agreements and leases must be reported to the appropriate legislative committees at least 30 days prior to PWB action. DGS implements this program on behalf of PWB. See also Section 6867.

Fiscal highlights:

1. PWB issues the bonds. The board adopts resolutions authorizing sales/interim financing and setting policy guidelines for the issuance, works with STO in preparing for the bond sale and sizing the bonds, executes sales documents, has responsibility for providing certain disclosure information on an initial and continuing basis, and periodically reviews balances in bond fund accounts to determine surplus status.
   
   
2. DOF has general powers of fiscal supervision pursuant to Government Code Section 13070, works with STO in preparing for the bond sale, may participate in rating agency meetings, prepares fund condition statements as required for the bond sale and for continuing disclosure, and evaluates (in conjunction with STO) the disposition of surplus bond funds, if any. In addition, DOF includes appropriations in the annual Budget Act for lease-revenue rental payments based on calculations of need provided by STO.
   
   
3. SCO and the State Auditor participate in the due diligence process and provide certain financial information necessary for General Fund disclosure.
   
   
4. The State Attorney General's Office also participates in the due diligence process and, together with bond counsel, provides a legal opinion required for the issuance of the bonds.
   
   
5. If the bond sale is for a DGS-managed project, DGS provides project time tables, makes recommendations to PWB/DOF on bond sizing, participates in due diligence meetings, and keeps PWB, DOF and STO informed of any events with material impact on project status or budget. If DGS manages the facility after construction, it is responsible for obtaining rental interruption, casualty (fire) and liability insurance. (Otherwise, the owning department is responsible for obtaining this insurance.)
   
   
6. STO is the agent for sale and the trustee of PWB bonds, with all associated rights and responsibilities including appointment of the underwriting team, setting the bond sale date, organizing meetings and due diligence associated with the sale, securing ratings and bond insurance, and pricing. STO coordinates continuing disclosure for PWB issues. By policy, the board has delegated to STO the appointment of bond counsel and the selection of financial advisory services related to sales activities.
   
   
7. The client department has responsibilities as summarized in Section 6886.

Fiscal information generic to lease-revenue bonds is found in Section 6872. PWB oversight of lease-revenue projects is described in the portion of this chapter on project administration (Sections 6840–6869). Lease requirements for lease-revenue bonds are described in Section 6872 and in Section 6876 under the heading "financing leases."

Government Code Section 6500 et seq. provides for the joint exercise of powers by public agencies. Public agency is broadly defined to include the federal government and its agencies and departments, the state, another state or any state department or agency, as well as cities, and counties and other districts.

The joint powers agreement, which is approved and signed by all government participants, states its purposes and how that purpose will be accomplished or joint powers will be exercised. The agreement may be administered by one or more of the parties, or by a board or commission created specifically for this purpose.

The entity created by the joint powers agreement is separate from the parties to the agreement. When vested with specified powers, such as the power to make contracts, hire employees, or construct or operate buildings, the entity may sue and be sued in its own name. However, in general the debts, liabilities and obligations of the JPA will be those of the parties to the agreement, unless the agreement specifies otherwise.

JPAs have the power to issue revenue bonds—including lease-revenue bonds—for the acquisition, construction, maintenance and operation of specified infrastructure. The power to issue such bonds is described as an "additional" power of the agency, but one to which each of the member agencies must specifically agree. Further, the revenue bonds issued pursuant to this authority are not obligations of the participating members unless there is a specific assumption of liability.

State building construction accomplished through state-membership JPAs: State building construction and acquisition accomplished through JPAs (where the state is a member of a JPA established specifically for such a purpose) is usually exempted from PWB oversight by the authorizing statute. However, such construction and related financing is subject to DOF's general powers of financial supervision pursuant to Government Code Section 13070.

Fiscal highlights:

1. State funds expended through any JPA may not be used to accomplish a state capital outlay purpose that has not been authorized by the Legislature.
   
   
2. DOF may require that an economic analysis be performed on state projects financed by a JPA to ensure that cost/benefits are favorable. By a memorandum of understanding between DOF and DGS, such an analysis is required for all DGS office building projects. DOF also works with STO to prepare the bond sale, reviews proposed bond sizing, may participate in rating agency meetings, prepares fund condition statements as required for the bond sale and for continuing disclosure, and reviews JPA proposals for disposition of surplus bond funds, if any.
   
   
3. If the state is a member of a JPA which has been created specifically by the Legislature to accomplish a state construction purpose, the capital project is generally eligible for interim financing through the PMIB or other short-term mechanism such as a General Fund loan.
   
   
4. The JPA issues the bonds. It adopts resolutions authorizing sales and setting policy guidelines for the agent for sale, appoints bond counsel, prepares estimates of cash flow needs, works with the STO in preparing for the bond sale, executes sales documents, and (together with the participating state agency) coordinates responsibility for providing all required disclosure information—on an initial and continuing basis—to STO.
   
   
5. If DGS is the project manager (or the state liaison to the project), DGS provides project time tables, calculates cash flow needs on behalf of the JPA, provides recommendations to DOF on bond sizing, participates in due diligence meetings, and keeps DOF and STO informed of any events with material impact on project status or budget.
   
   
6. STO is the agent for sale of the bonds and acts as the trustee or selects the trustee, with all associated rights and responsibilities including appointment of the underwriting team, setting the bond sale date, organizing meetings and due diligence associated with the sale, securing ratings and bond insurance, and pricing. STO is also dissemination agent for continuing disclosure for the bonds.
   
   

7. The credit underlying a state-membership JPA bond issuance (for a state capital outlay project) will be the same as for a PWB issuance, i.e., the state lease and the state fund from which the lease payments are being made. Financial statements for that fund may be included in the official statement and are subject to continuing disclosure.
   
   

8. The key client department responsibility is to notify DOF and STO, at least eight months in advance (preferably one year) of a proposed sale for any project outside the normal budget process which may require the services of STO as agent-for-sale or continuing disclosure agent. The department must meet as necessary with STO to clarify the agent-for-sale-role and may not make commitments regarding financing structure, underwriters, or timing of sale until concurrence is received from STO. Since the leases associated with the bonds include financial terms, the department should consult the STO before final financing terms are negotiated. The client department has other responsibilities summarized in Section 6886.
   
   

Fiscal information generic to lease-revenue bonds is found in Section 6872. Lease requirements for lease-revenue bonds are described in Section 6872 as well as in Section 6876 under the heading "financing leases."

Financing leases:

1. Background: If a client department has the authority to acquire real assets, a financing lease provides an alternative to finance capital assets over a multi-year period. A tax-exempt financing lease typically falls into one of two general categories:
   
   
   1. A capital asset may be financed by leasing it directly from the vendor or leasing entity, with the lessor receiving a portion of each rental payment as tax-exempt interest; or
      
      
   2. Certificates of participation (COPs) may be sold to the public. COPs are similar to lease-revenue bonds but represent undivided interests in the rental payments under the tax-exempt lease.
      
      

   If statute does not clearly create financing lease authority for a transaction, the client department is limited to an operating lease (see following).

2. Statutory reference: Government Code Section 14669 authorized DGS to hire, lease, lease-purchase, or lease with the option to purchase any real or personal property for the use of any state agency, subject to specified restrictions.
   
   
3. Requirements for a financing lease: The tax-exempt obligation may be structured as an installment purchase agreement, installment sale agreement or lease-purchase agreement. As with lease-revenue bonds, the state's debt obligations under the lease must be structured consistent with the Offner-Dean exception, i.e., cannot be structured in a way which would classify them as constitutional debt:
   
   
   1. Rentals are paid only for those periods in which beneficial use and occupancy of the leased property is available to the lessee;
      
      
   2. If there is no annual appropriation for rent when the leased property is available for use and occupancy, the state will be in default under the lease, and remedies may be available against the state. These remedies may include the vendor's or lessor's right to continue the lease in existence and sue the state for each installment of rent as it becomes due.
      
      
   3. Acceleration of rental payments is not permitted;
      
      
   4. The obligation to pay rental payments may be from any lawfully available funds of the client department, which may covenant to place in its annual budget and seek appropriation of the rentals that are due and payable during the fiscal year;
      
      
   5. The terms and conditions in the lease must be similar to the lease terms found in a commercial context for similar types of facilities;
      
      
   6. The lease term should not extend beyond the anticipated useful life of the leased property, and fair market rental should be paid;
      
      
   7. Termination provisions must match the underlying capital financing (such as certificates of participation). Usually the lease may be terminated only if the remaining unpaid rental payments are prepaid and title to the leased property vests in the client department (or other state agency, such as DGS); and
      
      
   8. The credit underlying the transaction is the state lease and the fund from which lease payments are made. Financial statements for that fund may be included in the official statement and are subject to continuing disclosure.
      
      
4. Other fiscal highlights:
   
   
   1. Per Government Code Section 5700, STO is the agent for sale of any state or JPA debt issuance, including those over $10 million, unless statute specifies otherwise. This provision includes debt issuance for a financing lease. In this context, "JPA" means any joint powers authority, whether or not the state is a member. If the issuer for bonds for a state financing lease is neither a JPA nor a state entity, STO may nonetheless reserve the right to be the agent for sale if continuing state disclosure is required. Other STO roles are as described for JPA issuances (Section 6874).
      
      
   2. The roles of DOF and DGS are as described for JPA issuances. The client department, DOF, and/or DGS may consult with the Attorney General to ensure that the underlying lease has all appropriate provisions to ensure that the transaction is not constitutional debt.
      
      
   3. The key client department responsibility is to notify DOF and STO, at least eight months in advance (preferably one year), of any pending financing lease project outside the normal budget process which may require the services of STO as the agent for sale or continuing disclosure agent. The client department will meet as necessary with STO to clarify what entity is the agent for sale. DOF may require an economic analysis for the project. The client department needs to consult with the STO before final lease terms are negotiated and, until concurrence is received from STO, the client department may make no commitments to local government entities or private vendors regarding: financing structure; timing; selection of underwriters, financial advisors, or bond counsels; or use of state credit. DOF may schedule lease payments as a separate Budget Act item. In this case, the client department's budgeting and accounting requirements are the same as for lease-revenue debt service. Other responsibilities of the client department are summarized in Section 6886.

Operating leases/contracts used as security for third-party financings:

1. Background: A client department may be limited to entering into an operating lease or contract for the use of real assets (i.e., no authority to enter into a financing lease to acquire assets). Typically such operating leases or contracts may be terminated before their maximum term if there is no legislative appropriation for their payment. In some cases, the vendor may elect to use the operating lease or contract as security for borrowing funds to acquire or construct those real assets. However, in this situation there is no authority to commit the state legally or morally to any obligation to appropriate funds beyond the current fiscal year.
   
   
2. Statutory reference: same as for financing leases described in the preceding text.
   
   
3. Fiscal highlights for operating leases/contracts :
   
   
   1. The provisions of the lease must include:
      
      
      1. All restrictions applicable to a financing lease as stated in the preceding text; and
         
         
      2. Termination provisions, including the right of the state to terminate the lease before the end of the term. For example, the state may include the right to terminate the lease if the state is not satisfied with the condition of the building or the lessor's compliance with the lease terms, may no longer need the space, or for any reason applicable in a commercial context. The exact terms will depend upon the specific factors applicable to each lease. Termination provisions may be short-term—i.e., the useful life of the leased property (e.g. 20 years) may be substantially greater than the stated maximum lease term (e.g. 10 years). In addition, the operating lease or a contract typically will terminate if there is no appropriation of rentals for a fiscal year (hence the name nonappropriation lease is sometimes used to describe these operating leases or contracts).
         
         

         Upon termination, the leased property must be returned to the vendor, who may sell or relet the leased property to someone else. In this case, however, the vendor or lessor cannot have the right to continue the lease in existence and sue the state for each installment of rent as it becomes due.

   2. The borrowing may not represent itself as an obligation of the state. Therefore, disclosure of state fund financial statements in an official statement or offering memorandum is generally not desirable since this may carry an implication of a state commitment greater than that of an operating lease. The official statement or offering memorandum must specifically acknowledge that the state's commitment or credit relationship to the transaction is limited to what is appropriate for an operating lease. However, tax-exempt financing of operating leases may require State General Fund disclosure. In those cases, the financing becomes very similar to financing leases and the involvement of the DOF, STO and other state agencies is necessary (refer to financing leases in preceding text.)
      
      
   3. All financing needs, including interim needs, must be provided by the vendor (i.e., the project is not eligible for state-funded interim financing).
      
      
   4. Most long-term operating leases require legislative notification before a lease can be executed. Because the state can terminate an operating lease/contract more easily than a financing lease, the market risk is greater, and financing costs charged back through the lease rates will be correspondingly higher.
      
      
   5. STO is not typically the agent for sale. STO, DOF and DGS all have an interest in ensuring that non-state financings using a state lease or contract as security do not misrepresent the state's credit relationship to the transaction.
      
      
   6. The key client department responsibilities are:
      
      
      1. Verify authority to enter into the specific operating lease or contract;
         
         
      2. Verify that the public or private vendor has no expectations that the state will provide continuing disclosure relating to the financing transaction; otherwise, contact STO and DOF at least eight months in advance of the anticipated issuance sale date (preferably one year) to determine whether such disclosure requests are appropriate and whether STO will require being the agent for sale. As with financing leases, the client department needs to consult with the STO before final financing terms are negotiated in the lease;
         
         
      3. Include in the lease or contract all provisions required to prevent the creation of constitutional debt;
         
         
      4. If the operating lease or contract is to include a tax-exempt interest component in the rental payments, be sure that a nationally recognized bond counsel firm has reviewed the terms of the operating lease or contract to confirm that it qualifies as "debt" for purposes of federal income tax laws and that appropriate arrangements have been made to satisfy the ongoing federal income tax requirements concerning arbitrage rebate and other tax rules; and
         
         
      5. Include in the lease or contract all termination provisions appropriate for an operating lease. Contact the Attorney General, as necessary, for direction on appropriate contract or lease requirements.
         
         

      Depending on the nature of the lease or contract, the client department may also be responsible for verifying project cost and financing information used as the basis for lease or contract payments. (For example, the agreement with the vendor may be that the state pays only actual construction costs, financing costs, or both.) In this situation, the client department should participate in financing meetings and/or the preparation of audit financing documents. Depending upon the complexity and cost of the transaction, the client department may benefit from the services of a financial advisor to protect the state's interests, especially to assess what is included in the financing costs.

      Other client department responsibilities are summarized in Section 6886.

The purpose of interim financing is to meet project cash flow needs for expenses incurred after project authorization, but prior to the issuance of long-term debt instruments. Unless statute provides otherwise, projects eligible for state-funded interim financing are those financed through:

1. GO bonds;
   
   
2. PWB lease-revenue bonds; and
   
   
3. Lease-revenue bonds issued by a joint powers authority, of which the state is a member, with state construction authority.
   
   

Most GO bond programs are eligible for commercial paper interim financing.

Interim financing for lease-revenue bonds may be necessary for preconstruction costs (preliminary plans, working drawings) as well as a portion or all of construction costs. Lease-revenue bonds are typically sold after the construction bids are received and awarded and, for small projects, after several projects are grouped together to make a sizable sale. When long-term bonds are sold, proceeds are used in part to repay interim financing costs.

General Fund loans: Section 15849.1 of the Government Code authorizes loans from the General Fund for PWB lease-revenue projects (within the Public Building Construction program) to be repaid from the proceeds received from the sale of bonds. Government Code Section 15819.13 includes similar provisions for PWB prison facilities construction. Government Code Sections 15820.12, 15820.19, 15820.41 and 15820.61 provide General Fund loan authority for PWB higher education projects; however the Legislature must specifically approve such loans.

Pooled Money Investment Account loans: Government Code Section 16470 et seq. establish the Pooled Money Investment Board (PMIB) and Pooled Money Investment Account (PMIA) for investment of surplus state and local government funds. Government Code Section 16312 permits PMIB to make loans to projects otherwise eligible for interim financing through a General Fund loan. PMIB may also make loans to any special fund for a project authorized to be debt-financed.

PMIB meets monthly (usually the third Wednesday of each month).

1. Loans are made at taxable rates set by PMIB in accordance with policies set forth in Government Code Section 16314.
   
   
2. Requests for interim financing for GO projects must first be approved by the appropriate bond finance committee. PWB projects must first be approved by PWB. Requests for state-membership JPA projects must be approved by resolution of the JPA's governing board.
   
   
3. For preconstruction costs of lease-revenue bond programs, PMIB requires substantial assurance that the loan will be repaid. This is generally met for PWB lease-revenue projects with the following Budget Act language:
   
   

   In the event the bonds authorized for the project are not sold, the Department of ___________ shall commit a sufficient portion of its support appropriation provided for in this act to repay any loans for interim financing. It is the intent of the legislature that this commitment shall be included in future Budget Acts until outstanding loans for interim financing are repaid either through the sale of bonds or from an appropriation.

4. PMIA loans for interim financing generally do not exceed 12 months in length. If a project requires a longer loan, it must apply to PMIB annually for loan renewal.
   
   
5. A PMIB loan application form is available from STO.
   
   

Commercial paper program: Commercial paper notes are short-term negotiable instruments which may be used to meet a project's interim financing needs. Government Code 16731.6 authorizes the use of short-term negotiable instruments for interim financing needs for general obligation projects; Government Code Section 15809 does the same for PWB projects. Commercial paper has maturities ranging from 1 to 270 days. Borrowing is at variable, tax-exempt rates. ("All-in" financing costs historically are lower than PMIA loans.) Principal and interest are paid at maturity or refinanced by issuing new commercial paper notes.

The bond sale process begins months in advance of the actual sale. Throughout the process, the framework for the sale is developed and the legal interests of the client department, the state, the prospective bondholders, and potential third-party financing entities (such as a vendor or local government entity) are reviewed and safeguarded. The brief discussion that follows assumes that the Legislature has authorized a financing, interim financing needs have been met, and the project is ready for a bond sale. For further information, contact the California Debt and Investment Advisory Commission which offers a course entitled Mechanics of a Bond Sale.

When STO is agent for sale: Pursuant to Government Code Section 5700, STO is the agent for sale for all state and JPA debt issuances, including those over $10 million, unless statute specifies otherwise. In this context, JPA means any joint powers authority whether or not the state is a member. By policy, STO reserves the right to be agent for sale for any issuance in which ongoing disclosure is required relative to state credit.

Bond sales calendar/timing restrictions: Each spring and fall, STO prepares a sales calendar for the following half of the calendar year. Bond sales usually require a minimum of eight weeks of preparation before pricing is conducted. Closing (which is when funds become available) is typically two to four weeks following pricing. No sales using state General Fund disclosure (appendix A of the Official Statement) are conducted during the "blackout periods"—from January 1 to the issuance of the Governor's Budget and the time between the May Revise and the enactment of the annual budget bill. In addition, certain holiday periods are avoided when scheduling sales due to slack market interest. Considering these timing factors, requests for a bond sale should be made at least eight months in advance of the proposed sale date, and preferably one year in advance.

Although STO routinely contacts client departments to determine sales needs, the responsibility for requesting a sales date lies with the client department (or DGS for projects it manages, and PWB for its projects). STO sets sales dates at its discretion, considering overall program priorities for access to the municipal bond market. See also Section 6860 for instructions on preparing PWB agenda requests bond sale.

Appointment of members to the financing team; kickoff meeting: For negotiated sales, the issuer appoints bond counsel and financial advisors; STO appoints the underwriters. PWB has delegated to STO the appointment of bond counsel and the selection of financial advisors for pricing of bond sales. These parties, the issuer, the client department, STO, DOF and other state agencies (and DGS for projects it manages) convene at a kickoff meeting to initiate the sale formally and to establish a time and responsibilities (T&R) schedule for the project.

Document review and due diligence: Bond sales involve the preparation of a number of documents. STO, other state agencies, department representatives, DOF and the financing team jointly review bond sales documents throughout a series of meetings, ensuring that the documents are properly drawn and that disclosure requirements are fully met. Brief definitions of key documents are provided in the following text:

1. Authorizing resolution: Authorizes the issuance of bonds, the execution of major legal documents, and delegates the authority to close the issue and administer the program. The resolution is executed by the governing body of the issuer (e.g., GO finance committee, PWB or a JPA).
   
   
2. Indenture: Pledges certain revenues and other property as security for the repayment of the issue, sets forth the terms of the bonds, and contains the responsibilities and duties of the trustee and the rights of the bondholders. (The responsibilities of the trustee are discussed in Section 6882.) The indenture may be in the form of bond and sales resolutions or trust agreement and typically contains the text to be printed on the bond. A supplemental indenture is an indenture that amends or supplements a prior indenture, whether that prior indenture stands by itself, is a general indenture, or a series indenture. The indenture is executed by an issuer and the trustee (who may be the STO). The client departments administering lease-revenue bond programs should review the indenture carefully because it establishes the disposition of surplus project funds, if any.
   
   
3. Official statement (including preliminary official statement): Provides all information that would be "material" to a prospective purchaser of the bonds, including descriptions of the issuer, terms of the bonds, security for the bonds, major legal documents, risk factors and tax matters, and financial statements.
   
   

   The preliminary official statement is a version used by the issuer or underwriters to inform the marketplace of the terms of the bonds being issued prior to receipt of bids at a competitive sale or prior to the determination of interest rates and purchase price in a negotiated sale. The official statement is of particular interest to the client departments administering lease-revenue bond programs because it contains departmental disclosure requirements and project descriptions, as well as debt service requirements and the cost of issuance. However, not that because GO bonds are backed by the full faith and credit of the state, disclosure about the client department(s) is not necessary.

4. Bond purchase agreement/contract: In a negotiated sale, an agreement between an issuer and an underwriter or group of underwriters, i.e., a syndicate who has agreed to purchase the issue. The agreement sets forth the purchase price, interest rates and other terms of the bonds (often by reference to the official statement), date and time of closing, representations and warranties of the issuer, conditions to underwriters' payment for bonds, and underwriter duties. In a competitive sale, the notice of sale serves the same function, specifying the factors used to determine the winning bid; the notice, the underwriter's bid, and the issuer's acceptance of the bid together constitute a bond purchase agreement.
   
   
5. Continuing disclosure agreement: Sets procedures for continuing disclosure, the contents of the annual report, and specific events to be disclosed. Parties to the document may include the issuer, trustee, dissemination agent, client department, and bond holders as third-party beneficiaries. See Section 6884 for a more complete discussion of continuing disclosure. The client department, if an obligated party, should review its disclosure responsibilities carefully. Failure to disclose material events as required under the agreement can result in liability.
   
   
6. Tax certificate or agreement: Certifies to the facts and expectations necessary for the tax-exempt treatment of interest on the bonds. Those signing the document include the issuer, and other obligated parties. For GO bonds, the client department signs a department tax certificate.
   
   
7. Reimbursement agreement: If applicable, provides: the terms of the repayment of credit enhancement (e.g., a letter of credit); the terms of obligation to reimburse, including the maturity and interest rate; the pledge of security for reimbursement obligation; and covenants and security. Parties to the document are the issuer, other obligated parties and the credit enhancement provider.
   
   
8. Revenue source agreements: The following descriptions are written from the perspective of PWB, but they apply to other lease-purchase financings. The revenue source agreements require careful review by the client department because they outline departmental obligations to PWB.
   
   
   1. Site lease: The client department leases the site on which the project will be constructed to PWB for the term of the bonds. The rental fee is generally nominal and paid through the financing. PWB agrees to use the site solely for the purpose of constructing the project. It then leases the facility and site back to the department (see following facility lease). The term of the lease is the same as the debt repayment.
      
      
   2. Facility lease: PWB leases the facility, defined as the project and the site, to the client department including, without limitation, the terms and conditions of the site lease. The department covenants to use the facility during the term of the lease solely for public purposes and to take no actions related to the facility that would jeopardize the tax-exempt status of the bonds. The term of the lease is the same as that of the debt related to the project. The rental amount is equal to the annual principal and interest on the bond debt, plus any additional rental amounts ordered by PWB (such as trustee fees, accounting fees, PWB costs, etc.). The lease includes a requirement for the department to maintain replacement insurance for loss, damage, and earthquake (the latter only if available at a reasonable cost), liability insurance, and rental interruption insurance (normally to cover an interruption of up to two years).
      
      
   3. Equipment lease: PWB leases the facility equipment acquired with proceeds of either interim financing or the long-term bonds. The department covenants to use the equipment solely for public purposes. The term of the lease is consistent with the debt for the equipment (generally shorter than the facility lease). The rental amount is calculated in a manner similar to that for the facility lease. The lease contains a requirement that the department maintain both the equipment and insurance on it.
      
      
   4. Construction agreement: PWB and the client department enter into an agreement wherein PWB finances the facility and the department—acting as PWB's agent—performs all activities required to plan, construct and equip the facility, in accordance with the applicable provisions of the State Building Construction Act and the Budget Act.
      
      
9. Closing documents: Documentation of satisfaction of closing conditions, receipts, and legal opinions.