This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
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Today, Californians face the twin challenges of rehabilitating existing infrastructure and building new public facilities to meet the state's growing population. Our future prosperity demands the kind of infrastructure investment made during the last generation. That infrastructure, much of which was built several decades ago, established the foundation for economic prosperity during the last generation. According to a recent report by the Legislative Analyst, "(t)he state faces a significant challenge over the next decade and beyond to address both the deficiencies of an aging public infrastructure and the need for new infrastructure to sustain a growing economy and population."

The California Business Roundtable estimates the state's 10-year capital facilities need at more than $90 billion, with public schools, higher education, and highways in greatest need. California cannot continue at this pace and remain the Golden State. And the people agree. In a recent joint poll by the Roundtable and the California Chamber of Commerce, 76 percent of the state's business leaders and 80 percent of voters are concerned about the need for increased public investment.

More money is not the only answer to the infrastructure financing challenge. Better management of these resources is imperative to justify any higher spending levels. This means that any infrastructure financing package must assure that taxpayers will get the most timely, cost-effective project management and delivery. In fact, in his State-of-the-State address, Governor Gray Davis highlighted the need to improve infrastructure project management and administration to expedite project delivery.

In a 1995 report on the state's civil service system, the Little Hoover Commission, the state's "watchdog" agency responsible for investigating government inefficiency, found that:

Contracting out has become a battleground between unions and state managers. The long-standing tension has resulted in a complex set of judicial decisions, statutes and administrative rules to narrowly define what work can be contracted. The issues have become a major stumbling block in the relations between labor and management, and are ultimately tying the hands of managers trying to find new ways to stretch tax dollars.

Numerous national studies have shown that contracting out for design and engineering services is widely used throughout the country, and provides distinct advantages for project management and delivery, as well as for accountability to taxpayers. These studies also found that:

Half of states are using consultants to accomplish 50 percent or more of preconstruction engineering.

States with the lowest preliminary and construction engineering costs are states that contract out 50 to 70 percent of the capital work.

The Department of Transportation (Caltrans) is not using the most efficient mix of in-house and consultant engineers. It has the highest preliminary and construction engineering costs of any state - 35 to 50 percent over the 1979 to 1989 period, compared with about 15 percent average for all other states.

Caltrans should promote managed competition between contractors and in-house staff, and use a series of performance measures that will encourage managers to use the most cost-effective mix of in-house and contract resources.

Loren Kaye is principal of the Polis Group, a policy research and consulting firm based in Sacramento. He is a former undersecretary of the California Trade and Commerce Agency.

Richard Kreutzen is a public affairs consultant who recently retired from the Kahl/Pownall Company.

 Historically, Caltrans staff has planned and designed state freeways and highways; private firms have performed the construction, and Caltrans has inspected the work. During the past 15 years, state transportation managers have tried to use private sector architects and engineers to supplement Caltrans design staff, mainly to meet project workload peaks and to inject some competition into the process.

However, these efforts have been largely rebuffed in several court cases interpreting Article VII of the state Constitution, which establishes the state civil service. With over 60 years of case law, courts have concluded that contracting work threatens the civil service system in violation of the California Constitution if it can be adequately rendered by a state agency or it duplicates existing functions of an agency.

Contracting out of government services is obviously not banned by the civil service mandate. But the past dozen years have seen extensive litigation further defining the limits of contracting out, especially as it applies to design and engineering of transportation services. The effect of the decisions - and especially overturning statutes that would provide a process for contracting out these functions - makes the practical use of contracts for design and engineering services very difficult. In fact, the lack of a statutory scheme has left most of the decisions on proper contracting procedure (at least in the case of Caltrans contracts) in the hands of a superior court judge.

Responding to recent court decisions and an increasing project backlog, Caltrans has hired thousands of permanent staff and is terminating many of its consultant contracts - taking the work in-house - when prudence suggests they should do the opposite. The effect of these court decisions is to require Caltrans to endure the difficulty and expense associated with hiring, training, and ultimately laying off civil service employees. Ideally, Caltrans or any state agency should have the flexibility of setting stable staff levels. They should employ the appropriate mix of contractors to accommodate fluctuating workloads and to deliver projects in the most cost-effective, timely manner.

In November 1998, the Wilson Administration settled another lawsuit with the Professional Engineers in California Government (PECG) union over the use of private consulting engineers for 80 projects in the seismic retrofit program. In return for PECG's halting litigation over the retrofit of these top-priority safety projects and not seeking attorney's fees for prior lawsuits, the Administration agreed to terminate and transfer 24 contracts currently held by private engineering firms, and halt many other contracts planned but not yet undertaken. Caltrans will continue and complete 50 contracts, including those for which a substantial amount of work has already been completed. Among them is the design of the new East Span of the San Francisco-Oakland Bay Bridge.

The Legislative Analyst's Office (LAO) reported that, even though this settlement ensures that the seismic retrofit program will not be delayed further by litigation, "Caltrans delivery of highway projects may still face some delays." In particular, Caltrans must immediately hire at least 222 staff to have sufficient personnel to perform all of the construction inspection and bridge design work that otherwise would have been performed by private consultants. According to the LAO, Caltrans has indicated that if it is unable to hire sufficient additional staff for the seismic program, it will redirect existing engineering staff to perform the retrofit projects to minimize delays. "This would in turn delay the delivery of other non-seismic retrofit projects, including highway rehabilitation and expansion projects," the LAO wrote.

Regional and local transportation agencies, on the other hand, have historically contracted out both the design and construction of their large transportation projects. However, there have been some recent challenges, and there may be some vulnerability for these agencies to use private sector contractors. Recent legislation has vested local and regional agencies with setting priorities for 75 percent of the funds that are programmed through the state transportation system. This change comes on top of the 15-year-old trend of "self-help counties" to raise significant funds from local sales tax overrides for transportation purposes. As a result, substantial amounts of transportation funding are raised and controlled by local or regional agencies.

The proliferation of new locally generated transportation projects gave rise to an informal policy used by Caltrans that permits counties to contract out for design, engineering, and environmental services for state highways, if the state contributes less than half the money to the project. This "50 percent" rule enabled many self-help counties to accelerate projects on the state highway system that otherwise would have been subject to Caltrans design, engineering, environmental analysis, and project management. Unfortunately, the Supreme Court decision and pressure from within Caltrans to influence local projects may result in erosion of the 50 percent rule.

Senior managers at several self-help counties with successful project delivery records have expressed concern that a more emboldened PECG will pressure Caltrans to bring more design and engineering work back to state engineers, rather than continuing to allow local and regional agencies to contract out the work. The effect of this action would be devastating on project delivery. Following are some examples of well-known California projects using creative and flexible project management and delivery methods that may wither away if the constraints on contracting out are extended to local transportation agencies:

Santa Clara County Transportation Authority. Caltrans initially estimated a 17-year completion for design, engineering, environmental clearance, and construction of three state highways in the county to relieve traffic congestion. Since the authorization for the sales tax was only 10 years, and believing they could improve on the Caltrans estimate, the authority assumed control of the projects. Instead, using a then-unique partnership of Caltrans oversight, project management by Bechtel, and administrative and financial responsibility by the authority, some seven years were carved off the project delivery.

Contra Costa County. The county transportation authority was prepared to finance more than half of this project to close gaps on State Route 4. As a result, the local agency was able to control the project and conduct the engineering design and environmental reviews aggressively and creatively - with private sector consultants - and save six to nine months in delivering the project, compared with the Caltrans schedule.

Santa Barbara County. The original plan after the sales tax override was adopted in 1989 was to deliver 15 projects in 20 years - the life of the tax override - but county officials wanted to complete delivery in just 10 years. As of the end of last year, 10 projects have been completed. Of the 11 private contracts, six are on time or accelerated; five are delayed. All three projects designed by Caltrans were delayed by at least a year. Ten years ago, the cost of these projects was estimated at $133 million; now the cost is estimated at $125 million. Agency staff give credit to consultants, who they believe are more motivated to work within budgets and find value engineering.

The Little Hoover Commission's 1995 recommendation to place a constitutional amendment before California's voters to assure state agencies are able to fairly balance the interests of both the civil service and taxpayers is as pertinent now as it was four years ago. Agencies like Caltrans must be given the flexibility to establish workforce levels that meet long-term, base needs, and supplement that workforce with private consultants and labor to assure that infrastructure projects are delivered in the most timely, cost-effective manner, using the best project delivery technologies.