Introduction
Contemporary concerns, however, go beyond the cost effectiveness of individual property-related decisions. Many public-sector veterans and end-of-the century reformers believe the overall effectiveness of public programs will be determined in part by how well general service agencies provide for the mission-oriented agencies.
Office space is no longer merely a line-item in the budget. It is an ingredient of performance. Redefining the workplace can not only save money, but also can increase productivity and improve public service.
Over the years, the Little Hoover Commission has identified problems with how the State manages its properties -- some of which have been solved, some of which persist today. Solving these problems is more important now than ever. Fiscally, the State must stretch the resources at hand. Organizationally, a system must be created that encourages better decision making.
Many of these problems are inter-related. To take just one example, the success or failure of the Department of General Services' office space consolidation and construction effort will be influenced by the management framework by which the projects are conceived, by the economic and policy reviews through which they are scrutinized, and by the organizational structure in which they are implemented.
In conducting this review, the Commission and its staff interviewed dozens of past and present property management officials, including those in the Department of General Services and other agencies with significant landholdings. It interviewed private developers and property managers. It interviewed officials who are responsible for similar duties at the federal level and in other national governments, as well as a variety of consultants and experts who have been involved in property management reforms.
The Commission conducted a public hearing in Sacramento in August 1995. (Please see Appendix A for a list of witnesses). The hearing explored efforts by the Department of General Services to pro-actively manage the State's assets, and its program to consolidate far-flung state departments into centralized and often new facilities. The Commission heard testimony from representatives of the British Columbia Buildings Corporation, a former General Services Administration official, and a representative of the Urban Land Institute.
As a result of these efforts, the Commission concluded that it is unlikely that significant improvements will be made in how the State manages its property until significant structural changes are made to the bureaucracy. At the same time, it is clear that the State cannot wait to improve the system until there is consensus and political will to bring about the fundamental reorganization that property management programs warrant.
Therefore the Commission's recommendations include both short-term and long-term measures that could be taken to improve property management. The administrative remedies that are recommended will treat the symptoms, until support can be mustered for a real cure.
The Commission's report begins with a transmittal letter, an Executive Summary, this Introduction and a Background section. In the following three Chapters -- Limited Progress, Inadequate Review and Structural Woes -- three findings and three recommendations are made. The first chapter identifies chronic problems with the system. The second chapter identifies more recent problems related to the State's efforts to consolidate office space. The third chapter identifies significant problems that cannot be remedied without significant structural changes to the way the State manages its real property and meets its space needs. The report ends with a Conclusion, Appendices and Endnotes.
Background
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Background | |||||
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In symbol and stature, public property is one measure of government.
State buildings house government workers, serve the citizenry and
define public spaces -- the halls of justice, the pillars of democracy,
the bowels of the bureaucracy. Some buildings are ornate; some are
state of the technical arts; and some are battered edifices, the
beleaguered countenance of a government lacking public confidence. Beyond the physical, property is often a forgotten asset and unscrutinized expense of government. In most departmental budgets, space needs are deeply overshadowed by resources spent on personnel. But in a government the size of the State of California, even 1 percent of the budget represents hundreds of millions of dollars annually. As governments restructure, aggressive property management is critical to reform. From a budget perspective, effectively providing space needs can save millions of dollars a year. From an operational standpoint, property decisions influence how well an agency does its job: its accessibility to the public; its proximity to other agencies with related missions; its faculty to encourage internal efficiency and cooperation. And from a civic standpoint, state decisions affect investments made by private and other public landowners. The State's choices can bolster or erode urban revitalization efforts and a community's sense of place. This background describes the extent and breadth of the State's property holdings, recent developments in the State's management approach, the Commission's involvement in this issue, and some property management trends that create the context for the property management debate.
Property Defined: A Multitude of AssetsThe State owns 3,509 individual properties encompassing 2.4 million acres. Pieced together, they would comprise a land mass roughly equal in size to Los Angeles County. But as they are, the parcels reflect the diversity of the Golden State: windy hillsides populated by oaks and acorn woodpeckers, rocky cliffs pounded by the Pacific surf, rectangles of downtown San Francisco and Los Angeles that are valued by the square foot, sprawling suburban university campuses and patch-worked farm fields.The State owns 19,000 buildings, 158 million square feet of space, the equivalent of 16 New York World Trade Centers. The holdings are as diverse in their purpose as they are in their nature: highway maintenance stations, employment development offices, fish hatcheries, mental institutions, universities, prisons and the veterans home. This accounting is provided by the Statewide Property Inventory -- a basic and only recently developed management tool. The computerized listing took several years to compile, and the difficulty in collecting the data exemplifies the difficulty that state government has had in trying to manage its real estate assets effectively.
And despite years of effort, the inventory is incomplete. It does not
include rights of way, most holdings of the State Lands Commission,
property held by the Legislature, owned by the Lottery Commission or
leased by Community Colleges and the University of California,
tax-deeded and escheated properties held by the Controller, or
elementary and high school properties administered by the
Department of General Services (DGS), Office of Local Assistance. Yet
for the first time, in one place, the inventory provides to state decision
makers definitive information on what the State physically owns and
occupies -- from remote forest fire-fighting stations to downtown
high-rises.
Collectively, the land and buildings represent a multi-billion-dollar
portfolio. The actual investment is unknown because the State does
not routinely appraise even its urban holdings, let alone its expansive
rural holdings. This portfolio costs hundreds of millions of dollars a
year to maintain and operate. In addition to the challenges associated
with ownership, the State also is a significant renter. The State leases
19 million square feet of space at an annual cost of $291
million. Administering this portfolio requires thousands of judgment calls that over the years have created waves of controversy. And in response, the Legislature and various administrations periodically have attempted to make these decisions more strategic, more business-like, more pro-active. By their nature, property-related decisions are difficult to make and even more difficult to make right. But mixed with the external political process through which projects are approved and funded, and the internal political process in which departments vie for resources, property decisions become even more confounding.
Some of the controversy has evolved over the management of property by dozens of special-purpose agencies. Controversy has evolved over when the State should own property and when it should lease property. And controversy has evolved over the appropriate role and authorities that should be granted the Department of General Services, often regarded as the State's landlord. The Department of General Services was formed to improve the State's ability to provide for itself -- to consolidate the provision of services and goods required by other agencies, to accrue for the State the savings associated with economies of scale and the product of specialized professionals. Most state departments and agencies must rely on DGS to negotiate leases for private-sector space. The Department also "owns" a substantial number of state office buildings, including nearly all of the multi-tenant buildings that contain branch or regional offices of state departments.
However, it is erroneous to think of DGS as the controller of state
property. Seventy-seven other departments own their own facilities,
some of them have extensive real estate portfolios, and all have
varying degrees of property
expertise. In the state of California, experience has shown that the diffusion of property ownership has worked against efforts to pro-actively manage property. While an agency may be good at acquiring and maintaining property central to its specific mission, the chances are that it lacks the expertise and incentives to manage under-used property for some other purpose. Property-holding agencies, which are often trying to increase services with fewer employees, also are reluctant to redirect staff and energy to producing revenue or selling off property when the proceeds go to the General Fund. Individual departments are discouraged from worrying too much about the money spent providing space for mission-oriented tasks. From a budget perspective, a department's "rent" is a line in the budget that is paid for from the General Fund or a variety of special fund sources. That "rent" may be paid in the form of private-sector lease payments, or the maintenance costs for a debt-free public building controlled by their agencies. In some cases, agencies are budgeted enough to pay for the debt and operational expenses of the building they occupy. And in the case of a DGS building, tenants pay a flat rate historically intended to cover occupancy costs. While that process allows for property expenditures to be considered as part of the budget process, it limits the ability for market-like cues to shape decisions. Reducing occupancy costs may allow a department to alleviate a budget crunch in a given year. But in general, departments that lower their property-related costs will be allocated less for that category of spending in future years. Departments seldom have the ability to reallocate long-term savings to other program needs. From a fiscal standpoint, the key decision is not made during the budget cycle, but when the department makes the decision of where it will locate. An essential variable in that decision -- and one that has caused perennial debate, particularly when it comes to office space -- is whether the State should own or lease property. The issue is predictably cyclical, with the volume of the debate rising any time state employment grows rapidly and that growth is accommodated with often-expensive, short-term leases.
While efforts have been made to reduce the State's dependence on leased space,
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| By 1994, DGS had plans to construct before the turn of the century more than 5 million square feet of office space, nearly doubling the department's owned inventory.
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The political context of the consolidation program includes a growing backlog of other unmet capital needs, such as new schools and universities. Meanwhile, a sagging real estate market and depressed lease rates diminished the benefits of constructing state-owned buildings. The soundness of any decision to lease or to own is based in large measure on the assumptions used in the analysis -- including the costs of financing, the availability of lease space, whether the economy is expected to boom or bust, the ability to maintain state-owned buildings, and the long-term need for office space in light of downsizing and telecommuting trends.
The ability of the Department of General Services to implement the consolidation program and be a pro-active manager of property it does not formally control, is limited by its legal authority and its political role in the bureaucracy. The Government Code and the State Administrative Manual describe DGS as a quartermaster -- striving to efficiently provide units with the material needed to fulfill their mission. But the organizational leadership has more recently tried to a create service-oriented culture, on the premise that government would be better served by a department that was responsive to the needs of its customers.
The conflict complicates even simple day-to-day transactions: Should DGS, for instance, find a department the best office space for the money it has budgeted, or should DGS find a department the least costly space that meets state standards? The conflict is further confused by the legal authorities: While DGS is directed to "assign" space in state buildings, "customer" departments can refuse such assignments.
And finally, whether the department is trying to act like a centralized provider of goods and services, or a private business-like organization, its ability to make decisions is limited by its interaction with the Legislature. As the appropriator of funds and the definer of policies, the Legislature expects to play a significant role in determining how the bureaucracy will be housed. At best, there is a tension between the laborious legislative process and the department's need to function effectively in the private sector. At worst, the personalities and politics of other issues distort the decision-making process.
The Commission's Long-Standing Concerns
The Little Hoover Commission has been active in reviewing the State's property management for many years. In 1985 and 1986, the Commission conducted a study modeled after the federal Grace Commission, which had successfully identified ways the federal government could better manage its property. The Little Hoover Commission, in its report California State Government's Management of Real Property, concluded that the State was not strategic in its planning, management and use of property: The State did not have a central inventory; did not know what it cost to maintain or operate buildings; did not evaluate its management efforts; did not provide incentives to reduce costs or dispose of surplus property; did not have an accountable authority for property-related decisions; and missed an abundance of opportunities to generate revenue from under-used or surplus parcels. To remedy this "undisciplined decentralization," the Commission recommended that the State:
- Establish a pro-active management pilot project. The project
would collect data on property for a specific geographic area,
determine its value, analyze alternatives, estimate revenue and
propose an asset management system.
- Centralize policy development. Individual departments should
prepare their own property management plans that would be approved
by DGS.
- Develop incentives. Both departments and individuals should
be granted incentives to increase revenue generated from property-
related activities and reduce occupancy costs.
- Reduce redundant staffing. Property management staffs in
those agencies with major property management duties should be
reviewed, and positions duplicative of DGS positions should be
eliminated.
- Create a centralized inventory. The inventory should contain
physical descriptions, uses and values of state-owned properties.
- Reconstitute the Public Works Board. The current Public
Works Board should be reconstituted to make it the central
administrative structure for a pro-active real property management
system.
- Reinvest property-related revenue. Revenue generated from
pro-active management of real property should be reallocated to
capital outlay needs.
- Require capital outlay plans. Each state agency should be
required to submit a five-year and 10-year capital outlay plan, and the
Public Works Board should prioritize the projects.
- Step-up preventive maintenance. The Public Works Board
should establish a preventive maintenance program for state facilities.
- Review all property authorities. The Public Works Board should
review all property-related authorities and recommend legislative
changes to ensure thoroughness and consistency.
- Expand the inventory. The Statewide Property Inventory
should be expanded to include current and expected use, and the
estimated value for urban properties.
- Use savings as incentives. Legislation should be enacted to
allow state agencies to retain 20 percent of revenues from the
management of their property, and to create incentives for individuals
and groups to pro-actively manage property.
- Grant DGS short-term authorities. For a period of three to five
years, the Department of General Services should be granted the
authority to dispose of surplus lands, negotiate lease-purchase
agreements and negotiate long-term leases.
In recent years, two executive orders have declared the importance of
more strategic use of the State's property and have laid out principles
for reform. Those efforts resulted in the creation of an Office of Asset
Management and a high-level Asset Management Coordinating
Council. The game plan, as described by the director of the Office of
Asset Management, was to "inventory, cooperate, plan, consolidate,
refinance and
privatize."
The Department of General Services was directed by Senate Resolution 39 of 1991 to assess the long-term space needs of state agencies and to prepare a consolidation plan to best accommodate those needs. The Department of General Services also was directed by the Budget Act of 1993 to re-evaluate the Capitol Area Plan to assess the need for increasing the development of state office space in Sacramento.
The Office of Asset Management no longer exists. The duties of the director of that office have been reassigned to the assistant to the Secretary of the State and Consumer Services Agency. And the Asset Management Coordinating Council is dormant.
The consolidation plans have run into increasing trouble in the Legislature and within the administration. In an attempt to find a neutral authority to resolve some of these disputes, the State and Consumer Services Agency in early 1995 invited a panel of the Urban Land Institute (ULI) to review the State's plans and policies for consolidating state offices in Sacramento into multi-tenant state-owned structures.
The ULI panel found problems in both how the State was making its
decisions and the choices that it was making: It urged the State to give
greater consideration to the effect its decisions have on urban
policies. It urged it to give better consideration to the changing and
smaller space needs of the workplace of the future. And it
recommended that the State develop more value-oriented and less
political ways to make property-related
decisions.
Reforms Elsewhere: A World of Change
California is not alone in its need to manage property more effectively. In response to changing economic forces and technical innovations, some public and private sector organizations are radically changing how they manage property and satisfy their space needs.The federal government is working to eliminate the monopoly that the General Services Administration has had over its "customers," with the belief that competition will encourage efficiency and innovation. Other governments, including British Columbia, have set up separate corporations that operate like independent businesses, insulated from day-to-day politics yet accountable to elected officials.
Large private companies also are rethinking the role of their real property units: Rather than assessing value based on how well they support the production line, their value is assessed on what they contribute to the bottom line. That distinction requires managers to think of property as an asset with value separate from the firm's traditional production goals.
When the federal government set out on the path of reform, it looked to
those who had already blazed the trail. The U.S. General Accounting
Office (GAO), in examining reforms in Australia, Great Britain, Sweden
and Canada, found that property agencies in those nations all shared
common problems that precipitated reforms: Poor business
practices, inadequate strategies for managing real property assets,
conflicting roles as both the building service provider and oversight
agency, customer dissatisfaction, and barriers to the timely
acquisition, maintenance and disposal of real
property.
"Probably the most fundamental change these countries made was to give the customer departments and agencies the freedom to choose between a government agency or a private sector firm to provide building services". |
All four countries separated policy oversight and development from
the providers of government building services, eliminating the conflict
of regulating a customer. All of the governments introduced
competition as a mechanism for improving service, often without a
significant loss of "business" to the private
sector:
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Probably the most fundamental change these countries made
was to give the customer departments and agencies the
freedom to choose between a government agency or a private
sector firm to provide building services, such as maintenance
and alterations. In addition, the Australian and Swedish real
property organizations have to compete in the provision of
office space itself.
All of the nations identified savings, some turning deficits into profits. Most of them attributed the savings to fees that more accurately reflected the market rather than government's cost, and greater productivity by accomplishing the same tasks with fewer people.
The GAO report was considered when the National Performance
Review (NPR) examined the General Services
Administration.
- Eliminate GSA's monopoly. GSA's monopoly on
commercial space would be eliminated and other agencies
given the choice of where to spend their appropriations.
- Create competitive enterprises. GSA would be broken
into a number of competitive enterprises, such as property
management, leasing and asset management, to sink or swim
based on the ability to earn fees for their services.
- Commercialize practices. GSA would commercialize
more of its property and financial management activities to
make it better able to compete.
- Maximize yields. The asset management enterprises
would be run so as to maximize the yield of assets.
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There will be great temptation to become "competitive like,"
which must be avoided. The structure must be truly
competitive. We do not need bureaucracies managing artificial
systems to safeguard against the consequences of real
competition. The market effect is the goal. There should be a
date certain for the change to a competitive structure and it
should be made clear there is no going back. Gradual
approaches seem to lose their steam under the constant force
of resistance to
change.
The official said that federal reformers were trying to institute lessons
learned in other democracies as well as the private sector. For
instance, Corporate Real Estate 2000, a project of the Industrial
Development Research Foundation, found that some private
corporations are requiring their real estate arms to compete for the
company's business, and are expecting them to actively find ways to
save money and generate revenues. At Xerox, individual business
units are not required to use in-house real estate services. The real
estate staff competes with the private sector to provide and manage
the company's 40 million square feet of office
space.
The Corporate Real Estate 2000 task force review of cutting-edge companies indentified five stages of real estate unit evolution:
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But moreover, the task force found that private-sector property managers were trying to find ways to put those company assets to better use. The trend is away from viewing real estate operations as a "cost center" to increasingly considering it as a "profit center," meaning that those managers are actively working to reduce costs and increase efficiencies -- by redefining work space, creating shared facilities and developing opportunities for telecommuting.
To make that transition, property managers have to change their mind-set from procurement and accounting to production. Their relationship with other units in the corporation must change from bureaucratic to collaborative; from waiting for requests from other business units to offering solutions to problems that those units may not have recognized as being related to space or property.
The State's Challenge
The Director of the Department of General Services likened the task awaiting the State's property managers to taking apart a modern jet liner in mid-air, redesigning it, and putting it back together -- without harming a passenger or losing a piece of luggage.The challenge may be formidable, but it is not unique to California. As federal and international studies show, the problems associated with property management are pervasive and persistent in many large organizations. Finding new solutions to these problems is a large part of recent efforts to reinvent government. Historically, the solution was to create central control agencies that doubled as monopolistic providers. That model yielded the federal General Services Administration and the State's Department of General Services. While experience may provide different answers today, the questions of a generation ago remain:
- Who should do this work? Public agencies, either centrally
controlled or decentralized? Private enterprise under contract with
public agencies? Public agencies in competition with private
agencies? Quasi-public agencies that function like private
enterprise?
- Who should be in control? Should the public agencies that
provide the service also be controlling their clients. Should an
independent control agency oversee and approve the decisions of
individual departments. Should individual departments be held
accountable for the outcomes of their programs, and be left free to
derive those outcomes any way they chose?
- How can policy makers and executives best ensure efficiency? Are central controls and rigid regulations the only way to ensure compliance with procedures? Are incentives appropriate and effective in the public sector? Where should incentives be applied -- to individual departments, programs, workers? What is the role of competition?
The success of reforms made to those systems that provision
government -- procurement, property management, civil service and
fiscal oversight -- are expected to have a large effect on how
successful other government agencies will be in their attempts at
reinvention. In the quest to develop better expertise, to be more
responsive and decisive, those agencies that directly serve the public
need to be served by internal organizations that possess those same
attributes.
Limited
Progress
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Limited Progress
Finding 1: The State is still not pro-actively managing property.
The State has tried to evolve from a caretaker of its vast real estate assets to a pro-active manager. At the highest level, the State Office of Asset Management and the short-lived Asset Management Coordinating Council, tried to create a government-wide interest in pro-active management, and the Department of General Services (DGS) has tried to implement these reforms in its daily activities. The creation of the Pro-active Management or PAM unit within DGS was inspired by the belief that money invested in aggressively managing property would pay big returns. Legislatively-directed efforts to search for under-used property, efforts to renegotiate leases, to reconfigure workplace standards, and to consolidate offices are all the product of this collective ambition.To their credit, state property managers maintain they are saving money over what is often described in analyses as "the status quo" -- that is, if management continued as it used to be. But the Commission found that none of these efforts are unqualified successes. And in fact, their track record reveals the untapped potential for managing the State's property. The renegotiating of leases, the accounting of costs through the Building Rental Account, the problem of deferred maintenance, the surplus property and the future planning efforts are all examples of places where still more energy needs to be expended to make the State's management more pro-active.
Pro-Active Defined
The State has had a tradition of being a custodial manager of its property, doing the minimum necessary to provide and maintain space and seldom taking advantage of opportunities, to the extent they are appropriate, to generate revenue or otherwise maximize the use of the State's real property assets.
| "Asset Management is the comprehensive, planned management of the State's diverse portfolio of real estate to assure optimum use for the State's operations and maximum value from the surplus." |
The alternative to that, as defined in past reviews of the state's system
and as used elsewhere in the world, is pro-active management.
Pro-active management means making sure property is being put to
the highest and best use. Pro-active management recognizes that the
present use or exchange value of real property can be increased,
maintained or diminished depending on market conditions and the
availability of resources to maintain or improve the
property.
Some systemic factors have worked against efforts to improve property management, such as the Department of General Services' limited authorities and sometimes confusing role in a system that can be derailed by the slightest legal ambiguity.
Renegotiating Leases: Missed Opportunities
The Department of General Services manages more than 2,300 leases for other public agencies occupying privately-owned space. While that does not represent all of the leases held by the State, the vast majority of state agencies are required to use DGS to locate and negotiate leases on their behalf. Even those agencies that own their own facilities must rely on the department to handle their leasing needs.
DGS has saved the State millions by renegotiating leases, but has renegotiated
less than 2 percent of the leases that it manages.
During the
recent economic recession, the State, like all renters, particularly
those in the commercial market, were presented with the opportunity
to renegotiate leases. With vacancy rates in many markets in the
double digits, large lease holders had significant leverage in
redefining the terms -- most commonly, the monthly rent. Landlords
to the extent that they could seek anything in return, preferred to renew
or extend the lease -- willing to trade less rent for a longer period to
prevent a vacancy for the term of the soft market. Representing
tenants, the Department of General Services took just that action, with
the goal of saving 15 percent on the leases it renegotiated. Over the
next three years, the department averaged 20 percent savings on the
leases it renegotiated, but it was only able to renegotiate 53 rental
agreements, less than 2 percent of the State's
leases.
- In fiscal year 1992-93: The department renegotiated 13 leases
that over the term of the new agreements are expected to save the State
$15.9 million.
- In fiscal year 1993-94: The department renegotiated 16 leases
that over the term of those new agreements are expected to save the
State $6.7 million.
- In fiscal year 1994-95: The department renegotiated 24 leases
that over the term of the new agreements are expected to save the State
$7.5 million.
But by 1995, the State's leasing costs were again on the rise. And property managers concede that the number of leases renegotiated was not limited by the market. Instead, they offered three reasons why more of the leases have not been renegotiated.
- Lack of tenant agency cooperation. Officials in the DGS Office
of Real Estate and Design Services (OREDs) said the most successful
renegotiations are those where the tenant will extend the term of the
lease. In several cases, attempts by OREDs to renegotiate leases were
rebuffed by tenant agencies that wanted to preserve the flexibility of
moving in the short-term.
- Limited staff. The Pro-Active Management (PAM) unit of
OREDs maintains that the number of leases renegotiated has been
limited by the staff time available to commit to that effort.
Renegotiations, officials said, vied for staff attention with other
cost-saving and revenue-generating projects, such as the review of
surplus property and the planning needed to make unused parcels
marketable.
- Uncertainty resulting from consolidation projects. PAM
officials also reported that some leases were not renegotiated
because renting agencies were candidates for consolidation projects
that would move them into large, usually new and state-owned
facilities. In some cases, however, the agencies are not even aware
they are being considered for consolidation.
It is equally understandable that property managers who are already overworked would lack the time to systematically review and renegotiate every lease where the State could save money. But the department could have contracted out the task or sought the help needed to lock in savings. DGS already has a pilot project in which brokerage services are contracted out to two private firms. The project is considered a successful move toward the long-term goal of relying more on private firms to provide private-sector-like services.
That some leases were not renegotiated because the tenant agencies
were candidates for consolidation also is understandable. In
Sacramento, for instance, the department plans to consolidate 18 of
the largest state departments into new buildings sized to
accommodate their needs for 20 years. That will require "backfilling"
some of the temporarily empty space in those new buildings with
smaller departments. In addition, some of the 18 "anchor tenants" will
be moving out of existing state-owned space. So some state agencies
also will be needed to move into the more than 1 million square feet of
existing state office space that will be vacated by those agencies
moving into new "consolidated" facilities.
Even if the department is successful over the next several years in consolidating offices, most small agencies will not move. But DGS does not know which of the more than 50 "consolidatable" small agencies will move, or the timing of those moves. As a result the vast majority of them are candidates for consolidation and "off the table" for renegotiated leases. In Sacramento -- where the State has the largest presence, the largest number of leases and the biggest plans for consolidation -- the least amount of renegotiating has been done. Of the 53 leases that were renegotiated, only six were for offices in Sacramento. Nearly all of the reworked leases were for offices, including the DGS itself, that are not expected to move.
Fishing For A TenantIn some consolidation proposals planned for Sacramento, agencies will move out of older state-owned buildings into newer state-owned buildings, requiring DGS to find departments to move into the old state buildings
In the case of the planned Cal-EPA building, the State Water Resouces Control Board will vacate the Paul Bonderson Building in Sacramento. In a 1993 planning document, DGS identified the California Department of Fish and Game as a good candidate to fill the water board's building.
Fish and Game is scattered throughout Sacramento in seven different leased offices with combined monthly rent of $86,446. That is in addition to the department's headquarters in the Resources Building. Moving the department to the Bonderson building would provide two consolidations for the price of one.
None of the Fish and Game's leases were renegotiated, fitting with DGS' explanation that those agencies that may move were not candidates for longer renegotiated leases. In 1995, however, DGS officials said they did not know which agency would move into the Bonderson building, and said the Department of Fish and Game was only one of several candidates.
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The department attributes some of this uncertainty to its inability to direct an agency to move. Rather, it can only request a department to occupy a different space -- a structural issue addressed in Finding 3 of the report. Also, for many of these smaller departments, consolidation actually means higher rental costs, which translates into a reluctance to move. And finally DGS has not planned the details of projects that are months or years away from approval, let alone construction. The consequence of these variables, however, has been a reluctance to renegotiate leases. And despite a turnaround in some rental markets, department officials believe there are still opportunities to find savings in renegotiated leases.
The Building Rental Rate: One Rent Fits All
Even the Government pays the rent. Those departments that "own" the buildings they occupy, pay the costs of that occupancy. In some cases that includes financed construction costs, as well as operational costs. Agencies that occupy privately owned lease space pay the negotiated monthly rent.But tenants in the 44 office buildings controlled by the Department of General Services pay a uniform rate into the Building Rental Account (BRA). For the most part, tenants in modern urban high-rises pay the same as those in nearby buildings that are old, are inadequately maintained and in some cases do not meet contemporary fire or safety codes. Similarly, tenants in big cities pay the same rate as agencies in small state building in rural communities.
The building rental rate has its foundation in a 1945 law that
established a revolving fund to record income and expenses resulting
from the operation of buildings. The law allows for the collection of
rents to cover maintenance and operational costs. And the law
requires funds left in the revolving account at year's end to be
transferred back to the General Fund. The Government Code and the
State Administrative Manual give DGS authority to fix rental
rates.
The uniform monthly rate charted to state agencies in DGS-controlled buildings
has escalated rapidly as capital expenditures have been added.
For the first two decades, the Department of General Services set individual rents based on the costs of providing a particular space. By the late 1960s, however, a considerable variation had developed in the rates. That variation complicated the process of adjusting budgets when departments moved in the middle of the fiscal year. To make the bookkeeping easier, the department in 1967 established a uniform rate. A variety of property experts -- including present and former DGS officials -- now believe that the decision to establish a uniform rate has distorted the way that DGS, its clients and the Legislature make space-related decisions.
When the Commission studied this issue in 1986, the BRA rate was 70
cents a square foot. At the time, the rate was lower than the market rate
for office space in Sacramento, Los Angeles and San Francisco, where
rents varied anywhere from $1.10 to $2.50 a square foot. At that time,
the Commission was critical that the rental rate had not been set high
enough to generate the revenue needed to properly maintain
buildings, "and therefore is not a true indicator of actual
costs."
The Commission also was concerned about a proposal to make the Building Rental Account responsible for paying for the construction of a new Public Utilities Commission building in San Francisco. That decision would have made all DGS tenants effectively responsible for that debt by raising the monthly rate by 10 to 12 cents a square foot. In the end, the PUC picked up the costs of its building. But the Commission's concern was well-founded.
Even before the PUC building, the Building Rental Account had been
looked to as a source of paying off construction-related debt.
Historically, the State paid for buildings with cash through the capital
outlay process. As the State's ability to pay cash eroded, it turned to
bonds. And in the 1970s, several state buildings were constructed and
all or some of the bond payments were made from the Building Rental
Account. Collectively, however, those charges added less than a dime
to the monthly
rate.
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In 1990, the State completed construction of the Ronald Reagan Building in downtown Los Angeles, a large and expensive building with an annual debt service and maintenance bill of $18 million -- which broke down to a monthly occupancy cost of $3.14 a square foot. After some controversy -- and with few other alternatives at the time that the 1991-92 fiscal-year budget was crafted -- the Building Rental Account was made responsible for the bond payment, which raised the monthly rate for all DGS tenants by 34 cents a square foot, increasing the rate by about one-third.
The reliance on the rental account to cover construction-related debt reflects the breakdown of the capital outlay process and the difficulty some agencies have in paying the higher costs of newly constructed buildings. DGS in its 1992 strategic facilities plan, recognized the complications of capital funding through the BRA:
- Debt financing for the construction or purchase of multi-tenant
buildings or the renovation of existing state-owned buildings
usually requires an increase of the BRA if the facility is to be
owned by the DGS. Under current practice, inclusion of new
space in the BRA affects the operating budgets of agencies
statewide that occupy any DGS-owned space. This has
resulted in agencies in non-major metropolitan areas
occupying older state-owned facility at inflated costs. In some
areas, those inflated costs may exceed lease rates for new
privately owned space or may even exceed the cost of acquiring
and/or building new state facilities in the area.
The new Attorney General's building is Sacramento represents a shift for DGS and for the Building Rental Account. While the Attorney General is the anchor tenant and is expected to some day occupy all of the building, the Sacramento mid-rise currently houses several smaller departments. The higher costs associated with occupancy are being paid for by those tenants. While that arrangement was not derived at without some consternation, the ultimate arrangement is neutral in terms of its effect on the BRA.
Leaning on the Building Rental Account
When times get tough, the Building Rental Account gets tapped. For instance, the Legislature historically relied on the General Fund each year for the $7 million needed to maintain the Capitol and the nearby office space of its staff.
However, as the Legislature in the early 1990s looked for ways to trim its budget, it turned to the BRA. Beginning with the 1990-91, fiscal year, the monthly rate charged to DGS tenants was increased by 14 cents a square foot to cover the Legislature's costs -- requiring a relatively small percentage of state agencies to pick up the property costs of the Legislative Branch.
In addition, the BRA also includes $6000,000 for renovating legislative offices: $3000,000 for the Senate and an equal amount of the Assembly. About half of that money is used within the Capitol -- although that is only a portion of the money spent to renovate Capitol offices. The other half is used to improve the district offices of lawmakers.
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While the department has not crafted a financing strategy for all of the construction it has planned, the economic analyses for those projects assumes that the Building Rental Account will not be counted on to absorb construction costs. Those studies generally assume the BRA will go up 3 percent a year. At that rate, the department could barely expect to keep up with the costs of inflation, let alone make up for a backlog in maintenance projects or take on any debt. The integrity of those analyses rests in part on whether that assumption is practiced as policy.
Since the Ronald Reagan Building was completed, the capital costs of only one other building has been blended into the BRA rate -- the new home for the DGS Office of Buildings and Grounds, which added $700,000 a year to the account's expenditures.
Even if no other capital costs were blended into the BRA, the uniform rate distorts the actual cost of occupying space and discourages tenant agencies and DGS from making decisions based on those underlying economic conditions, or even comparing their costs to private-sector equivalents. A uniform BRA rate creates several problems:
- Unfair Rents. The State Administrative Manual (SAM) outlines a
Fair Rent Policy, stating that in securing private space, DGS should
secure space that provides a fair rent for the geographic area. While
the regulation applies to lease space, the spirit of that policy is violated
by a statewide uniform rate for DGS
buildings.
22 -
Disadvantaged tenants. The Building Rental Account does not
allow for individual tenant improvements to be amortized in rent, and
instead DGS clients are required by the SAM to go through the capital
outlay process to pay for remodels. For state agencies leasing private
space, however, the SAM allows and encourages improvements to be
amortized over the term of the lease, making leased space more
desirable.
23 - Disadvantaged DGS. If DGS is to evolve into a more competitive organization, it has to be able to make decisions based on costs, and its tenants will have to be able to make decisions based on market rates. Neither is compatible with a uniform rate.
The uniform rate is not established by law or the State Administrative Manual. An internal policy change could allow rents to be set reflecting actual costs or market rates. Such a system could be phased in to ease the transition.
If market-based rates were established, both DGS and its tenants could begin to resolve some of the other problems that occasionally spoil the relationship between landlord and tenant. For instance, market rates -- and flexibility in the regulations -- could allow DGS to amortize into those rates the improvements needed for an agency to reconfigure its workplace and take up less space as units downsize, are automated or allow telecommuting. A market-based approach to rents also could provide the mechanisms for more seriously dealing with a growing problem -- putting off until tomorrow maintenance projects that should have been done yesterday.
Deferred Maintenance: Leaking Equity
In recent years, the ability of DGS to complete routine maintenance projects has quickly eroded -- from a chronic, yet low-grade problem to one that threatens to undermine the department's plans for reducing property costs. The former deputy director of the Department of General Services testified:
- The State must address the tens of millions of dollars of
deferred maintenance which continue to accrue. For
years, funds for deferred maintenance have been cut
from the State's budget. The resulting accumulation of
liabilities simply cannot continue to be
ignored. 24
While keeping up with maintenance is a problem for many governments, the State's problem was considered small, even manageable, until the last decade -- and by some accounts, until the Ronald Reagan Building was constructed.
Routine maintenance is paid for from the Building Rental Account.
Special repairs -- those needed to restore a building to its intended
performance -- are paid for with annual appropriations from the
General Fund. As with many expenditures, the State's ability to fund
special repairs, or to allow the BRA to increase as needed, was stymied
by the gradual budget squeeze that began after Proposition 13. But
beginning in 1991, when the BRA was saddled with the $18
million-a-year payment on the construction bonds for the Ronald
Reagan Building, the ability of DGS to pay for needed repairs out of the
rent collected from its tenants was seriously eroded. Not only was that
higher rent hard for many departments to accommodate, but it
increased the pressure in future years to hold the rate steady,
preventing DGS from gradually increasing the rate to cover routine
repairs. At the same time, fiscal pressures resulted in cuts to the
special repairs
budgets.
Many repairs to DGS-controlled buildings are paid for out of the General Fund,
which in recent years has been an unreliable source of funds.
Since much of the BRA expenditures are relatively fixed and are necessarily immediate -- paying utility bills and janitorial salaries -- one of the only ways to keep the BRA in the black has been to defer maintenance projects. And with the General Fund appropriations for special repairs also cut, those projects began to back up, as well.
Further aggravating the decision to defer maintenance was the list of projects itself, which swelled in the late 1980s and early 1990s as many of the buildings that were constructed in the 1970s -- the last state building boom -- began to show their age. On the list of projects the department has not gotten to: fixing the handicap door on the California Energy Commission building and reinforcing the air conditioners on the Water Resources Control Board building. By December 1993, the Department of General Services, responding to a budget directive, estimated that for its 44 buildings alone, it had a backlog of 445 maintenance projects with a bill exceeding $30 million. The department offered several options for raising the funds needed to fix the repairs and restore a stream of money to allow the buildings to be better maintained in the future:
- Redirect savings. DGS should retain BRA funds not spent
during the fiscal year for repairs, rather than returning that money to
the General Fund.
- Reallocate Capitol costs. The nearly $8 million spent annually
on the Capitol and legislative offices should be pro-rated to all state
agencies based on the space they occupy.
- Establish a minimum budget. Maintain a baseline special repair
budget of $2.2 million.
buildings alone it had a backlog of 445 maintenance projects with a bill exceeding $30 million. |
The department believed those adjustments would provide enough revenue to eliminate the repair backlog and to allow it to reduce the rental rate, passing back to its customers the benefits of pro-rating legislative expenditures. The department also considered selling revenue bonds to pay for the projects, which would have added the costs of financing. As an alternative, it suggested raising the monthly rental rate by six cents a square foot, which would allow the projects to be completed over a 10-year period. The department's proposal was not advanced by the administration or the Legislature. Meanwhile, the department's cost estimates have grown old. The estimates are in 1993 dollars and did not allow for the extra costs likely to result from putting projects off for 10 years.
Many of these maintenance problems are a matter of public health and
safety. Some of the buildings are dangerous and others do not comply
with the Americans with Disabilities Act and current building codes.
The Department of Food and Agriculture building in Sacramento lacks
an adequate emergency stairway. DGS believes "fire and life safety"
improvements are need for the Energy Commission, Bateson, Unruh
and Bonderson buildings in
Sacramento.
In some cases, the lack of an adequate maintenance strategy has resulted in buildings becoming undesirable and prematurely obsolete. For instance, plans to construct a new state building in Long Beach are premised on the need for a building that will accommodate more agencies in less -- and safer -- space. But property officials say the need for such a facility in Long Beach was accelerated by the poor construction and maintenance of the existing building.
The fix that the State finds itself in has a number of causes: The rental rate has not been set at a price needed to maintain and renovate buildings. And difficult economic times have prompted officials to put off repairs to save money. But by not funding maintenance projects in tight years, the State borrowed from its equity -- and no one knows at what cost. While building officials assert that a $10 problem that is not fixed becomes a $20 repair, they have not estimated the higher costs resulting from deferred projects.
In some cases, state property managers concede, maintenance has been deferred on the assumption it would be cheaper to build new buildings than renovate existing buildings, and as a result long-term maintenance has been undervalued. But that strategy has fallen apart -- as the State lost its ability to pay cash for buildings, adding financing costs, and more abruptly, as the bottom has fallen out of the real estate market and leasing rates have tumbled. Now the State owns buildings that it did not maintain and cannot afford to fix. And it cannot afford to build new ones. In some places it may be able to rent for less, but state officials believe that even in the current market it is better over the long-term for the State to own its office space.
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The mounting deferred maintenance problem calls into question the
wisdom of the State's consolidation and construction program. The
economies of ownership are based on the premise, that given the
State's long-term presence, it should pay the additional early costs of
ownership for the savings available in later years. But if buildings are
prematurely abandoned because they are not updated to meet new
building standards, or renovated to provide comfortable and safe
working environments, that strategy is undermined. As the
department stated in its 1992 facilities plan: "Maintenance is currently
under-funded, resulting in the deterioration of state assets."
The Urban Land Institute, in its review of the State's Capitol Area Plan,
concluded the State needed to adopt a long-term investment
perspective, which meant protecting and enhancing existing
investments before spending money on new buildings. The ULI panel
also urged the State to explore other management arrangements --
including privatization -- to ensure that existing facilities were kept
current: "The panel recommends contracting out the
building-management services for future projects and existing
properties, where possible, to ensure an appropriate level of building
maintenance."
Surplus Property: In the Eye of the Landholder
With large and diverse portfolios, many governments struggle to determine which property is no longer needed, will not be needed in the foreseeable future, and should be sold, or some other way put to a better use. Despite years of effort, the right mechanisms for making these decisions reliably have not been found.With thousands of pieces of property in the California inventory, there is no doubt that some of the property can be used better. But identifying those lands and figuring out what to do with them has been hard. And without a comprehensive, organizationally supported effort, the State has not been able to resolve the dispute in this issue: How much land is really under-used and how could that land be put to better use to provide resources for other State functions.
The job is made difficult by the fractured property ownership that discourages a variety of systematic management decisions. And for the most part, landholding agencies have no incentive to divest themselves of property. Recent reforms have not addressed these problems.
| The revenue from the sale of surplus property has been sporadic -- from a high of $13 million in 1989 to $1.67 million in 1992. |
Each year, all departments are required to review their holdings and
designate surplus lands. DGS presents that list to the Legislature,
which can declare the land
surplus.
Most agencies have little reason to divert scarce resources to this
process. The Government Code specifies that with a few exceptions
revenue from surplus property sales shall go to the General Fund. The
code also requires proceeds from the lease of state property to be
placed in the General Fund. And yet another section of the code
requires that net proceeds from the sale or lease of state property must
go to the General
Fund.
The ability of the Department of General Services to deal with under-utilized land is stymied by the reluctance of agencies to cooperate, by the fact that some property is legally off limits, by the belief that some land -- such as conservancy land -- is not intended to be put to the highest and best economic use, and by its limited authority to lease out state land without legislative approval.
In 1993, DGS reported that it had identified 125 properties that were under-used or surplus, and had a "good potential for revenue generation." The department, however, dropped its efforts on more than 70 of those properties because it felt the it lacked jurisdiction, because the "nature" of the properties limited economic potential, or that further development was not economical.
The most recent strategic effort to review property was mandated by AB 2384 (Chapter 150, Statutes of 1994), which directed DGS to review state lands and identify properties that were surplus or under-used by January 1, 1995. The law directed DGS to sell or lease out 10 percent of the land each year until the list of properties had been exhausted.
The review by DGS excluded nine out of 10 acres owned by the State. Some of the departments were excluded by legislation,
while some were excluded because the "nature" of their mission is to preserve undeveloped land.
The law was amended to specifically exclude from the review land owned by the California State University System. The department determined that since previous sections of the Government Code gave it no jurisdiction over the State Coastal Conservancy, the State Lands Commission, the Department of Transportation and the University of California, land owned by those agencies would not be reviewed.
DGS officials then decided that land held by five other state agencies
should not be reviewed because the "nature" of their programs were to
provide recreational opportunities, or to preserve land for their
ecological or historical value. As a result, DGS did not review lands
held by the Department of Housing and Community Development,
Department of Parks and Recreation, Santa Monica Mountains
Conservancy, the California Tahoe Conservancy or the Department of
Fish and Game (except for hatcheries and offices). Between the two
lists, the department eliminated from review 2,633 of the State's 3,509
properties -- 75 percent of the properties, which accounted for 90
percent of the State's
acreage.
In its January 1995 report to the Legislature, DGS reported 68 properties that were not being used for any state program. It found 24 instances where a portion of a property was not being used, and 68 sites where a portion of a property was being under-used. The unused properties include: the Long Beach Marina, which is leased to the City of Long Beach; the Central Valley fish hatchery; the Crystal Creek Conservation Camp; the Cottonwood Pass Forest Fire Station, the Black Mountain Conservation Camp; two homes near Clear Lake, the Bolinger Canyon Pest Management Facility, the Columbia Armory, a maintenance yard owned by the Department of Water Resources, and 59 properties in downtown Sacramento managed by the Capitol Area Development Authority (CADA).
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Some of these properties had already been declared surplus or the department owning the property intended to do so. In some of those cases, the agency refuted the finding that the property was surplus. The vast majority of the properties, however, were 59 CADA properties, mostly condominium and apartment projects in downtown Sacramento. CADA, a joint powers authority between DGS and the city of Sacramento, manages the properties in accordance with state law. The Capitol Area Plan, as originally crafted in 1960 and subsequently updated, called for buying land that will be needed for future office space, managing that land to protect the State's existing assets in downtown, and developing and managing residential and commercial properties to support a mixed-use neighborhood around the Capitol.
The DGS plan ignited a controversy that has since subsided. But the issue has not been resolved. The experience demonstrates how difficult it can be for DGS, even when it has ownership of land, to declare it surplus and use it to generate revenue. It also shows that cooperation and planning are required to determine what, when and how the State should divest itself of unneeded assets.
The 1994 surplus property law did give the DGS expanded authority to
lease out land that it found to be under-used. While DGS may enter
into long-term leases for those properties on its surplus list, it must
still seek legislative approval for all other state properties that it wants
to lease out for longer than five
years.
Finally, just because land is not intended to be developed for urban
uses does not mean that the land is fulfilling the role the Legislature or
taxpayers intended. For instance, the Department of Fish and Game
owns land throughout the state intended to provide wildlife habitat.
The department has not done a systematic review to evaluate the
effectiveness of that land. Property managers recognize that in reality
some of the land the department holds may no longer provide the
habitat value once thought. That land could be traded for land that
could provide the desired benefit, or sold and the proceeds used to buy
land that could better provide those
values.
Only recently, the Department of Fish and Game has been given the authority to work with the Wildlife Conservation Board to engage in land transfers to this end. Still, department officials maintain there is little incentive for field personnel to get involved in pro-active management of department facilities that could generate revenue or save money, because that money would go to the General Fund rather than to benefit their particular programs.
Familiar Problems, New Solutions
Two central dichotomies in state law and policy underlay the difficulty the State has had in attempting to be a pro-active manager of property. The first is that DGS controls a fraction of the property, but is expected to be the State's real estate authority. The second is that the department is caught between trying to be a control and provisioning agency in the mold of centralized bureaucracy, and trying to be an entrepreneurial service-oriented organization. The experience of the last five years demonstrates the persistence of these dichotomies.
The Coordinating CouncilA central element in the State's efforts to pro-actively manage its assets was the establishment by executive order W-18-1991 of an asset management Coordinating Council. The Council was set up to provide communication between various agencies, to make property management more of a priority and to provide a venue for systemic change. In 1992, the Commission was told the council was the best solution to the sstructural problems because it allowed specially funded and special use lands to remain in the hands of the agencies that understood them. The Council, however, was only attended by top officials for a short time. A Council of delegates lost clout and purpose. And now the Council is dormant. |
These dichotomies manifest themselves in the frequent disputes between the Legislature and DGS, the consternation between DGS and its tenants or even other landholding agencies, and the lack of effort that some landholding agencies employ in putting property to its highest and best use. Not even a centralized, administrative effort -- like that embodied in the Asset Management Coordinating Council -- could overcome the institutional inertia and bureaucratic incentives to maintain the status quo.
DGS continues to have difficulty inspiring interagency cooperation -- as evidenced by efforts to renegotiate leases, identify surplus property, or plan for consolidations. It has been unable to manage property based on market-like cues, as evidenced by the uniform rental rate. And it has been unable to respond like a service-oriented agency -- to perform maintenance or provide tenant improvements.
Recommendation 1: The State should aggressively pursue more efficient and market-based management. It should infuse competition whenever possible to encourage innovation and economy. And it should more aggressively tap private-sector services to take advantage of unique opportunities.
The success of any attempts to manage property pro-actively will rest greatly on the mechanisms the State uses to pursue those goals. Pro-active management cannot be legislated, but the Legislature can provide the tools that property managers need to do a better job. Ambition also cannot be legislated, but departments and individuals can be expected to respond to economic and institutional incentives.The Department of General Services could immediately implement this recommendation by taking the following actions:
- The department should more aggressively renegotiate
leases, particularly as part of its efforts to execute some
small-scale consolidation programs. The department should
contract with private firms when necessary to take advantage of
short-term market conditions.
- The department should expand its pilot project using private
brokerage firms to more quickly gain the necessary experience
needed to implement a statewide program that efficiently meets client
needs while protecting taxpayers against contract abuses.
- The department should redesign the Building Rental Account
to establish individual building rents that reflect the market rates of
occupancy. The department and its customers should negotiate
adjustments to those rates to finance deferred maintenance projects.
The department and its customers also should negotiate adjustments
to those rates to finance tenant improvements that might facilitate
organizational restructuring. The Legislature should be billed for its
space costs, or those costs should be allocated over all state agencies,
not just those in DGS-owned buildings. This would be the first step
toward implementing earlier Commission recommendations that
buildings be appraised regularly and that facility managers calculate
an annual return on investment to evaluate the performance of
significant state assets.
- To the extent allowed by law, private maintenance firms should be able to compete against DGS-supplied maintenance for service contracts. The contracts should provide a level of service that minimizes long-term maintenance needs. The bidding process should be reviewed to ensure that public workers have a fair opportunity to compete for maintenance contracts, to consider the policy concerns of differing wages and to provide the State with the best possible value.
The Governor and the Legislature could further implement this recommendation by taking the following actions:
- Legislation should be enacted granting all departments the
option of contracting with DGS, other government agencies or
private-sector firms for meeting their space needs. DGS should have
the opportunity to bid on all proposals.
- All out-sourcing contracts should be reviewed by a central
authority, such as the Department of Finance. The authority's
obligation would be to determine that the decision to use a
private-sector provider was in the best interest of the State.
- Legislation should be passed that allows departments to
redirect 20 percent of the revenue from property-related activities or
savings from space-related decisions to enhance existing programs.