In response to legislative mandate, this report on current methods used to fund capital outlay projects in the California community colleges discusses the major problems with existing funding methods, analyzes various alternatives for improving these methods, and offers recommendations for legislative approval. Part 1 of the report traces the history of capital outlay funding in the community colleges, describing the major legislation that established the present system of capital outlay review. Part 2 describes five problems with the state's present method of funding community college construction, while part 3 analyzes seven different alternatives to the present system. Finally, part 4 proposes principles that should guide selection of specific methods; offers conclusions about the present system, and presents the following recommendations: (1) the state's method of funding capital outlay in the community colleges should be considered by the legislature and the Governor as part of a comprehensive approach to make the overall finance system of these institutions more congruent with their governance structure; (2) some funds beyond those provided in the state's project-by-project review should be allocated as a "block grant"; and (3) the Chancellor's Office should develop a formula to distribute these grants in ways that would take into account the size of all districts, their relative needs for campus construction, and other factors that would assess campuses' needs for additional capital outlay. (RO)