Proposition 224 | Text of Proposed Law | Proposition 224 | Argument in Favor |
State-Funded Design and Engineering Services.
Initiative Constitutional Amendment.
Analysis by the Legislative Analyst
Background

Under California law, services provided by state agencies generally must be performed by state civil service employees. These services cover a broad range of activities--such as clerical support, building maintenance and security, and legal services. In some cases, however, the state may contract with private firms to obtain services. Such contracting is allowed, for example, if services needed by the state are: (1) of a temporary nature, (2) not available within the civil service, or (3) of a highly specialized or technical nature. Unlike the state, local governments are not subject to constitutional restrictions on contracting for services.

The state and local governments frequently contract with private firms for construction-related services, which include architecture, engineering, and environmental impact studies. State and local governments enter into these contracts through a process of advertising for the service, selecting the firm that is determined to be best qualified, and negotiating a contract with that firm. Neither the state nor local governments competitively bid for these services. By comparison, competitive bidding generally is used to acquire goods and for construction of projects.

Proposal

This proposition, a constitutional amendment, requires public entities to use a new process prior to awarding a contract for the following construction-related services: engineering, architecture, landscape architecture, surveying, environmental studies, and geologic studies. (The proposition would not affect contracting out for other types of services.) The new process would apply to:

What Is Involved in This New Contracting Process?

The Cost Comparison. Under the process established by the proposition, the State Controller would be required to prepare an analysis for each proposed contract and compare the following:

Generally, the service could be contracted out if the Controller's analysis indicated that the contract was less costly than using state employees. On the other hand, the work would have to be done by state employees if the analysis showed they could do it at lower cost.

Competitive Bidding. As noted earlier, public entities currently negotiate contract terms for construction-related services. This proposition requires that such contracts costing more than $50,000 be competitively bid to select the lowest qualified bidder. Competitive bidding would not have to be used if it would delay a project and the delay would endanger public health or safety.

What Contracts Are Covered Under the Proposition?

Direct Contracting by the State. State agencies would have to use this new process if they wanted to contract for construction-related services. In recent years, state agencies have averaged about $150 million annually in spending on these types of contracts. This amount varies annually depending on the state's level of construction activity.

Contracts Awarded by Local Governments and Private Entities. Local governments and private entities would also have to use this new process in the following situations:

Fiscal Effect

The potential fiscal effects of this proposition on the state and local governments are discussed below.

Impact on the Cost of Providing Services

The fiscal impact would depend in large part on the determination of which cost factors to use in comparing the cost of contracting out a service with the "additional direct cost" of the state providing the service. The cost of contracting for a service would be determined from the bid submitted by the private firm. On the other hand, because the term "additional direct costs" is not defined in the proposition, the Controller would have to determine which cost factors associated with using state employees should be included in order to prepare the required analyses.

What Are "Additional Direct Costs?" Because the proposition does not define "additional direct cost" there is not a clear answer to this question. Figure 1 lists some of the cost factors the Controller would need to review to determine if they should be counted as additional direct costs.

Cost Analysis on Contract-by-Contract Basis. A cost analysis would be required on each individual contract basis. Thus, a cost analysis may not reflect the accumulation of administrative costs if the state workforce increases to meet workload demand. For example, additional clerical and managerial positions or additional office space for state employees may not be needed for any one contract, but could be needed if work on many projects were assigned to state employees rather than private firms.

Fiscal Effect Depends on Cost Comparisons. The impact of the proposition on state and local costs would depend on the extent to which the cost analyses include all state costs associated with providing these services using state employees. For example:

Because of the uncertainties discussed above, it is difficult to predict the fiscal effect of this proposition. However, a strict interpretation of additional direct costs (for example, only those identified in Figure 1 as "likely to be counted") could result in significant costs to state and local governments.

   Figure 1   
What Cost Factors Might Be Counted As "Additional Direct Costs?"
Cost Factors Likely to Be Counted
  • Salaries and benefits of additional state employees needed to perform a service.
  • Office space, furniture, equipment, and travel expenses for the additional employees.
Cost Factors Likely Not to Be Counted
  • State agency overhead costs ("top management").
  • Other state agency overhead costs--such as payroll, accounting, and personnel functions.
May or May Not Be Counted
  • Hiring and training costs for any additional state employees needed to perform a service.
  • Increased construction costs due to project delays caused by time needed to hire and train additional state employees.
  • Costs of maintaining excess state staff if workload declines.

Other Fiscal Impacts

The proposition would have other fiscal effects on the state and local governments. For instance, the Controller would have costs to perform the required cost analyses. These costs would depend on the number of requests from state agencies and local governments. We estimate the Controller would have both one-time costs of probably less than $500,000 and ongoing costs of up to $2 million annually.

The proposition would affect the state and local governments in other ways. For example, it would take time to develop and implement the new process for evaluating contracts. This would lead to one-time delays in certain public sector construction projects, resulting in possible added inflation-related costs for those projects.

Proposition 224 | Text of Proposed Law | Proposition 224 | Argument in Favor |