The Administration’s Sacramento Office Building Construction Strategy: Ensuring Robust Oversight

The Administration’s Sacramento Office Building Construction Strategy: Ensuring Robust Oversight YEARS OF SERVICE MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • DECEMBER 2016 AN LAO REPORT 2 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT EXECUTIVE SUMMARY $1.3 Billion Approved in 2016-17 Is First Step in Administration’s Larger Strategy. In adopting the 2016-17 budget package, the Legislature established the State Project Infrastructure Fund (SPIF), which is continuously appropriated for state projects. The Legislature further provided $1.3 billion to the SPIF over two years for three specific state office building construction projects in Sacramento. These projects reflect the first step of the administration’s larger regional strategy to construct or renovate a total of 11 state office buildings in the Sacramento area over the next ten years. We expect that in the coming years the administration will come forward with more than $1 billion in additional funding requests to continue to carry out this strategy. Administration’s Approach to Strategy Raises Some Specific Concerns. Assessing the condition of the state’s office buildings and taking a regional approach to maintaining these assets makes sense and is consistent with legislative direction. However, we identify some specific areas of concern for the Legislature as it faces decisions about (1) whether to move forward with additional state building projects and (2) how best to oversee the projects funded with the $1.3 billion provided in 2016-17. Specifically, we find the following: • Strategy Lacks Adequate Analysis. The administration’s strategy lacks basic information necessary to determine its merits, including its costs, benefits, and potential alternative approaches—such as addressing a different mix of buildings from the 11 state office buildings that are proposed. • Strategy Is Ambitious. The strategy includes an ambitious construction and renovation schedule, which the administration is already falling behind. Additionally, while the administration has not provided cost estimates, the strategy is likely to be expensive and appears to be growing more so. • Existing SPIF Process Is Problematic for Future Projects. The administration indicates that it plans to continue to use the SPIF funding process—including the use of continuous appropriations—for future projects. This process—which allows the administration to establish and fund projects without legislative approval—greatly reduces legislative control and oversight compared to the traditional budget process. Furthermore, the weaknesses of the process are magnified when more funds are added to the SPIF because the additional funds increase the monies available for the administration to fund projects that were not envisioned by the Legislature. Recommend Legislature Provide Clear Direction to Administration on Strategy. We recommend that the Legislature take the following actions to address the above concerns: • Direct the administration to provide a robust analysis of its strategy. This should include information necessary to evaluate the merits of the strategy, such as the strategy’s costs, benefits, and other available approaches to addressing state office building deficiencies. www.lao.ca.gov Legislative Analyst’s Office 3 AN LAO REPORT • Closely monitor the expenditure of the $1.3 billion approved in 2016-17 through the use of hearings at key points in project life cycles. • Make it clear to the administration that any future funding provided for state office building projects should go through the typical budget process rather than a continuous appropriation under the current SPIF process. We believe these recommendations would help ensure that the state has the information it needs to move forward with the best available strategy for addressing its buildings in the Sacramento area and that any funds provided are spent with adequate legislative oversight and accountability. 4 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT INTRODUCTION In adopting the 2016-17 budget package, Additionally, the Legislature will have to decide the Legislature established the State Project how to best oversee the projects funded with the Infrastructure Fund (SPIF) and provided $1.3 billion provided in 2016-17. $1.3 billion over two years for three specific This report is intended to help guide the state office building projects in the Sacramento Legislature as it makes these decisions. We begin by area. These projects reflect the first step of the providing background information on Sacramento administration’s larger regional strategy to state office buildings and summarizing the actions expand and improve state office buildings in the taken in the 2016-17 budget process. Next, we Sacramento area over the next ten years. In the assess the administration’s regional strategy for coming years, the Legislature will be presented state office buildings in the Sacramento area. with important decisions related to this strategy. Finally, we provide recommendations to assist the Specifically, the Legislature will have to determine Legislature as it faces key decision points related to whether to proceed with the additional projects the administration’s strategy. envisioned in the administration’s regional strategy. BACKGROUND The state, through the Department of approved a total of $2.5 million for DGS to General Services (DGS), owns and maintains complete a long-range planning study (Long-Range 58 general purpose office buildings across the Study) of state-owned general purpose office state. Thirty-four of these buildings—totaling space in the Sacramento area. The Long-Range over 8 million square feet—are in the Sacramento Study was to include (1) an update of an earlier area. These Sacramento area buildings are valued planning study identifying potential office space at over $4 billion and house 35 state departments development opportunities in Sacramento (Office and agencies, such as the Department of Water Planning Study); (2) condition assessments of Resources and the Franchise Tax Board. The state all state office buildings in the Sacramento area also leases about 8 million square feet of general (Sacramento Assessment Report); (3) a plan for purpose office space in the Sacramento area. (We sequencing the renovation or replacement of state note that some state departments other than DGS office buildings in Sacramento (Sequencing Plan); operate office space for more specific purposes. and (4) a funding plan for undertaking these For example, the Department of Motor Vehicles projects, including project cost estimates and an operates field offices.) economic analysis (Funding Plan). Chapter 451 of 2014 (AB 1656, Dickinson) Legislature Required Analysis of required that DGS complete this Long-Range Study Sacramento Office Buildings by July 1, 2015, as well as provided direction on the DGS Directed to Perform Sacramento Office contents of the study and how it was to be used by Planning Effort. As part of the 2014-15 budget, DGS. First, the legislation specified that the study the administration proposed and the Legislature should guide the state’s actions on state buildings www.lao.ca.gov Legislative Analyst’s Office 5 AN LAO REPORT over the next 25 years. Second, it required that “good.” As shown in Figure 1, some of these sites DGS use the information in the Long-Range Study are state-owned and some are privately owned. as the basis for developing detailed cost and scope Additionally, the development time frames for information to be considered in future budget these sites vary, with some potentially ready for proposals. Finally, it directed DGS to issue requests development within five years—such as Downtown for proposals to address the renovation and Block 204 (currently occupied by a parking lot and replacement needs of Sacramento office buildings, the historic Heilbron House)—and others available starting with the three buildings with the most for development within six to ten years—such as significant and immediate facility needs. the State Printing Plant site. Many of these sites Office Planning Study Identified Potential contain existing buildings that would have to Office Development Sites. In 2015, DGS completed be demolished or moved to accommodate new the Office Planning Study component of the development. Long-Range Study, which identified and ranked Sacramento Assessment Report Identified 41 potential sites in Sacramento for future Buildings With Highest Needs. In July 2015, DGS development over the next 40 years based on released the Sacramento Assessment Report portion an evaluation of the feasibility of developing of the Long-Range Study. The report evaluated the sites. Using criteria such as size, ownership 29 state-owned office buildings in Sacramento. (The (state-owned versus privately owned), and access report excluded a few buildings that were vacant or to transportation, the evaluation rated the seven that DGS did not consider to be typical office space, best sites as “superior” and nine additional sites as such as the State Capitol Annex.) Figure 1 Potential Superior and Good Development Sites Identified in Sacramento Office Planning Study Development Site Ownership Time Frame (Years) Location Superior Bonderson Building site State 0-5 Downtown Sacramento CalPERS site State 0-5 Downtown Sacramento Downtown Block 275 State 0-5 Downtown Sacramento Downtown Blocks 203 and 204 State 0-5 Downtown Sacramento Food and Agriculture Annex site State 0-5 Downtown Sacramento Franchise Tax Board site State 0-5 County (near Rancho Cordova) Richards Boulevard area Private 0-5 Railyards area/River District Good Resources Building site State 6-10 Downtown Sacramento State Printing Plant site State 6-10 Railyards area/River District Downtown Core Private 0-5 Downtown Sacramento Bradshaw Landing Private 0-5 County (near Rancho Cordova) Granite Park Private 0-5 Granite Regional Park area (near Tahoe Park) Railyards area Private 0-5 Railyards area/River District Southport Business Park Private 0-5 West Sacramento West Capitol Downtown Private 0-5 West Sacramento Pioneer Bluff area Private 6-10 West Sacramento 6 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Overall, the Sacramento Assessment Report SPIF Funds Are Continuously Appropriated. noted that all of the buildings that were evaluated In adopting the 2016-17 budget package, the were in a safe, serviceable, and functioning Legislature passed Chapter 31 of 2016 (SB 836, condition. The report developed a Facility Committee on Budget and Fiscal Review), Condition Index (FCI) score for each building, which governs the use of the SPIF. Chapter 31 which compared the estimated costs of repairing specifies that monies in the SPIF are continuously versus replacing the building. (A high FCI score appropriated. It also authorizes the administration means that a building’s repair costs are relatively to establish and move forward with projects high compared to cost of replacement.) Based on without having to receive legislative approval this analysis, the report ranked the 29 buildings, through the traditional state budget process, as is identifying 9 in poor condition, 4 in fair condition, typically required for capital outlay projects. (Please and 16 in good condition, as shown in Figure 2 see the box on page 9, for a detailed description (see next page). The report ranked the Resources of the traditional state budget process for capital Building, Personnel Building, and Bonderson outlay projects.) Building as those in most critical need of renovation Certain Notifications Required for Funded or replacement and recommended prioritizing Projects. Chapter 31 requires the administration the needs of these buildings over other buildings, to provide the Legislature with quarterly reports consistent with the direction provided in and notifications in order to establish and move Chapter 451. The report also found that all of the forward with SPIF-funded projects. Figure 3 (see buildings that were evaluated had FCIs well below page 9) summarizes the required notifications. 65, which is the industry standard for replacement. For example, at least 20 days before spending This suggests that all of the buildings that were SPIF funds on project planning activities, the evaluated are better candidates for repair rather administration must provide the Joint Legislative than replacement. (As we discuss later, in September Budget Committee (JLBC) with a notice 2016 the administration completed assessments of identifying the purpose of the planning activity the condition of general purpose office buildings in and its estimated costs. In September 2016, the other parts of the state besides Sacramento.) administration provided the Legislature with the first notification through this process—a Funding Provided for First Three Projects 20-day notification regarding its intent to spend 2016-17 Budget Package Included $1.3 Billion $4.9 million on the development of the cost, scope, Over Two Years. The 2016-17 budget package and delivery method for the O Street Building provided $1 billion from the General Fund in and the new Resources Building. The notification 2016-17 and $300 million in 2017-18 to be deposited review periods for the Legislature range from 20 to into a new fund, the SPIF. This funding is to be 60 days depending on the project and activity. We used for three buildings in the Sacramento area: a note that, because of its unique characteristics, new building at the current Food and Agriculture Chapter 31 created a separate process for the State Annex site on O Street (O Street Building), a new Capitol Annex as described in the box on page 10. Resources Building at a different site, and either As such, when we discuss state office buildings replacement or renovation of the State Capitol in this report, we do not include the State Capitol Annex. (Throughout this report, we refer to these Annex unless otherwise specified. three projects as the “three initial projects.”) www.lao.ca.gov Legislative Analyst’s Office 7 AN LAO REPORT Figure 2 Condition of Buildings Evaluated in Sacramento Assessment Report Resources Personnel Bonderson EDD Annex Poor Unruh Bateson Justice EDD Headquarters Blue Anchor Energy FTB Phase I Fair Board of Equalization Library and Courts II Secretary of State Agriculture FTB Phase II Attorney General Buildings and Grounds East End Block 225 Library and Courts Campbell OES Office Building 8 Good Office Building 9 FTB Phase III East End Block 171 East End Block 172 Rehabilitation East End Block 174 East End Block 173 5 10 15 20 25 30 35 40 Facility Condition Indexa a The Facility Condition Index represents a ratio of each building's estimated repair costs to the estimated replacement value. EDD = Employment Development Department; FTB = Franchise Tax Board; and OES = Office of Emergency Services. 8 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Figure 3 Required Notifications for State Projects Funded Through the State Project Infrastructure Funda Minimum Number of Days of Advanced Activity Contents of Required Notice Notification Expenditure of funds on planning activities Purpose of planning activity and estimates of costs 20 Establishment of scope, cost, and delivery Scope, budget, delivery method, expected tenants, and 45 or 60b method schedule for any space to be constructed or renovated as part of that state project Approval of the project design of a state project Updated estimates of cost and schedule 30 by State Public Works Board Contract or a lease arrangement for a state Updated estimates of cost and schedule 30 project that includes construction Change to the scope of an approved project Change in the scope and any associated costs 20 Change in the cost of an approved project of Change in the cost 20 between 10 percent and 20 percentc a Excludes State Capitol Annex project, which is governed by a separate notification process. b Minimum of 45 days must be provided for the O Street and new Resources building projects. Minimum of 60 days must be provided for other state projects. c The administration indicates that it interprets the law to require them to seek legislative approval of cost increases over 20 percent. Traditional State Budget Process for Capital Outlay Projects Under the traditional state budget process, the administration proposes individual capital outlay projects as part of the Governor’s proposed budget for the coming fiscal year. These capital outlay budget change proposals generally include important details on the proposed projects—such as the project scope, construction timeline, costs by project phase, funding sources, delivery method, and a narrative justification. They also include an analysis of alternatives and an explanation of why the alternatives were rejected in favor of the proposed project. Typically, the administration submits proposals prior to being able to initiate certain design and construction phases of a project. As part of its review of these proposals, the Legislature assesses if projects are consistent with its funding priorities and the long-term programmatic needs of the relevant department. After an individual capital outlay project is approved, the Legislature maintains oversight of certain changes related to the project. Specifically, if the scope of a project changes substantively or if the project’s costs increase by more than 20 percent, the administration is generally required to seek legislative approval through the traditional budget process before being able to proceed. (If the project’s scope changes minimally or its costs increase by between 10 percent and 20 percent, the typical process requires the administration to notify the Joint Legislative Budget Committee.) If the Legislature has concerns about the administration’s proposed changes, the Legislature has the opportunity to reject them or to direct the administration to make changes to address the concerns. www.lao.ca.gov Legislative Analyst’s Office 9 AN LAO REPORT Administration’s Sequencing Plan Strategy departments with similar functions in order to achieve operational and programmatic efficiencies. Administration Released Sequencing Plan The Sequencing Plan also states a preference for for Next Ten Years. In March 2016, DGS released state ownership of office space in high-cost areas the Sequencing Plan portion of the Long-Range (rather than leasing), under the assumption that Study. The Sequencing Plan represents the state-ownership is more cost-effective. administration’s proposed strategy for addressing Administration’s Strategy Proposes Various the facility needs of Sacramento office buildings— Projects. In total, the strategy would result in including the three initial projects—over the next constructing three new state office buildings ten years. (We also refer to this Sequencing Plan as consisting of about 2 million square feet—the new the administration’s “strategy” in this report.) We Resources Building, the O Street Building, and a note that the administration indicates that it no new building at the State Printing Plant site—and longer plans to complete the remaining portion of reducing leased space by a roughly equivalent the Long-Range Study, the Funding Plan. amount. (The funding provided in 2016-17 is for Administration’s Strategy Articulates Certain the new Resources and O Street Buildings, as well Principles. While addressing building condition as the State Capitol Annex.) The strategy also needs is a primary motivation for the strategy, the proposes to renovate eight existing state office administration indicates that the strategy is also buildings consisting of about 2 million square intended to serve other goals, such as consolidating feet. These activities would occur over a ten-year department office space to colocate staff working period. Nearly all of the buildings proposed to be on similar topics and reducing the use of leased constructed or renovated are within the downtown space by constructing additional state-owned office core of Sacramento, as shown in Figure 5 (see space. Consistent with those goals, the strategy page 12). In total, the strategy would address articulates the administration’s principles for state one of the three worst buildings identified in the office projects, which are summarized in Figure 4. Sacramento Assessment Report—the Resources For example, one principle is to consolidate State Capitol Annex Project Governed by Separate Process The State Capitol Annex (Annex) is a unique building owned by the state. Built in 1952, the Annex is attached to the east side of the historic Capitol building, which was constructed in 1874. In order to make room for the Annex, the original design of the east side of the Capitol, including a distinctive semi-circular architectural structure known as an apse, was destroyed. Today, the Annex provides roughly 365,000 square feet of space for legislative and gubernatorial offices as well as a variety of committee rooms. Additionally, more than one million visitors are estimated to visit the State Capitol and its Annex annually. Because of its distinctiveness, Chapter 31 of 2016 (SB 836, Committee on Budget and Fiscal Review) creates a separate process to guide the project that will replace or renovate the Annex. The separate process for this project envisions a collaborative approach between the administration and the Legislature’s Joint Committee on Rules (JCR). It also specifically requires the Department of General Services to report to JCR on the scope, budget, delivery method, and schedule for the Annex project. 10 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Building. We note that the administration proposes their original buildings after those buildings are the design-build delivery method—in which a renovated. Limiting the number of staff relocations single contractor designs and constructs a project— can be worthwhile because relocations can affect for all of the planned projects. department operations and result in significant Strategy’s Projects Are Closely Interrelated. costs, including costs to lease temporary space In most cases, the proposed projects in the during renovations and move office equipment and administration’s strategy are interrelated. This is files. because the administration is generally proposing As shown in Figure 6 (see page 13), under to strategically sequence the building renovations the administration’s plan, the construction of by successively conducting staff moves and the new Resources Building is the first step in building renovations. Consistent with its stated the renovation or construction of many other goals, strategically sequencing building renovations interrelated state buildings. Once the new would allow DGS to reduce the number of Resources Building is constructed, staff from the relocations that departments must undergo existing Resources Building will be relocated to since department staff would not move back into the new space. The vacated Resources Building will Figure 4 Administration’s Principles for Sequencing Sacramento Office Space 9 The state prefers to own buildings in areas with high lease costs in order to reduce space costs for state departments. 9 The state shall first consider building on state property before pursuing construction on commercial sites. 9 The state will design new construction and renovation projects with a goal towards achieving Zero Net Energy by incorporating the latest proven materials, designs, technologies, and construction practices. 9 The state prefers that new buildings be built in proximity to public transit. 9 When feasible, the state will offer mixed use development in new office buildings to better meet our tenant and larger community needs. 9 To generate operational and programmatic efficiencies, the state will aim to consolidate departmental space and colocate departments within the same agencies and/or similar functions between departments. 9 The state will use more standardized office configurations to minimize tenant improvement costs and allow for the greatest flexibility when filling space with state tenants. 9 To avoid disruption and minimize costs, the Department of General Services (DGS) will strive to minimize the number of moves a department must make. 9 DGS will coordinate its facility sequencing strategy with its review of state leased space to generate more competitive lease rates in private sector facilities. 9 DGS will continue to meet the programmatic needs of tenants in state buildings but will not complete significant building improvements in buildings it plans to completely renovate, demolish, or sell within the next five years. www.lao.ca.gov Legislative Analyst’s Office 11 then be renovated, and staff from the Employment envisioned related to the construction of the new Development Department (EDD) Headquarters O Street Building and State Printing Plant site. and Annex Buildings will be relocated to the Assessments of Office Buildings in renovated space. That, in turn, will leave the EDD Other Parts of State Headquarters and Annex Buildings vacant and available for renovation and the relocation of In addition to assessing the condition the staff from the Energy Commission Building. of Sacramento area buildings as required by Through the ten-year planning window covered Chapter 451, DGS released an assessment of by the plan, this chain will continue until the state 21 office buildings totaling about 5.1 million ultimately moves staff from existing leased space square feet in other parts of the state (Statewide into newly renovated state office space. Similar Assessment Report). This assessment was sequencing of staff moves and renovations is completed in September 2016 and developed L Street Capitol Mall Capitol Park N Street O Street P Street Roosevelt Park Q Street teertS ht5 teertS ht01 teertS ht51 AN LAO REPORT Figure 5 Location of Sacramento Office Buildings to Be Renovated or Constructed Richards Blvd. Renovated Building Printing Plant e et New Building Site Str h 7t N Railyards Unruh EDD EDD Annex HQ Solar BOE E An D ne D x Existing Blue Anchor Resources O Street New Resources CEC Bateson Downtown BOE = Board of Equalization; EDD = Employment Development Department; and CEC = California Energy Commission. 12 Legislative Analyst’s Office www.lao.ca.gov ARTWORK #160511 Graphic Sign Off Template_LAOReport_large.ait Secretary Analyst MPA AN LAO REPORT Deputy Figure 6 Strategy Includes Sequencing of Interrelated Projects CDCR DWR, Parks, Leases N C R al F A ir g e e , n D c F y, W Under Renovation EDD Under Renovation Energy Commission Existing Resources EDD Headquarters and Annex Under Renovation Unknown DWR Energy Commission Leases New Resources STO Transportation, Government Operations and BCSH Agency Swing Space Unknown Building Type Bonderson Under Renovation New State Building Unruh Board of Chiropractic Examiners Leases Leased Building BCSH Agency Government Ops Agency BOE Renovated State Building New Printing Plant Site HCD, DBO,DCA, BOE Under Renovation SPB Under Renovation State Personnel BOE DGS, CalHR, Caltech, Existing State Building OAL, CalVCB (Future Use Unspecified) Leases Leases DDS, H Ag H e S n cy, Under Renovation C C D D C FA DSH New O Street Bateson Leases G O o ff v ic e e r , n O or P ’s R Under Renovation Leases Blue Anchor BCSH = Business, Consumer Services, and Housing; BOE = Board of Equalization; CalFire = Department of Forestry and Fire Protection; CalHR = Human Resources; Caltech = Department of Technology; CalVCB = California Victim Compensation Board; CDC = Department of Conservation; CDFA = Department of Food and Agriculture; DBO = Department of Business Oversight; DCA = Department of Consumer Affairs; DDS = Department of Developmental Services; DGS = Department of General Services; DPR = Department of Parks and Recreation; DSH = Department of State Hospitals; DWR = Department of Water Resources; DFW = Department of Fish and Wildlife; EDD = Employment Development Department; HCD = Housing and Community Development; HHS = Health and Human Services; NR Agency = Natural Resources Agency; OAL = Office of Administrative Law; OPR = Office of Planning and Research; and STO = State Treasurer’s Office. www.lao.ca.gov Legislative Analyst’s Office 13 AN LAO REPORT the FCI for each of these buildings. As shown in Sacramento. Specifically, based on their current Figure 7, this assessment identified 2 additional condition, two buildings—the San Diego State buildings in poor condition, 5 in fair condition, and Building and the Stockton State Building—ranked 14 in good condition. In some cases, these buildings among the ten state office buildings most in need of were rated in worse condition than buildings in repair. LAO ASSESSMENT Overall, the concept of addressing state office the strategy is ambitious—both in terms of cost and building needs as part of a regional strategy— schedule—and that the existing SPIF process does rather than on an ad hoc basis—makes sense. not facilitate adequate legislative oversight. However, we identify below several specific Taking a Regional Approach Makes Sense areas where the administration has not provided adequate information and a robust analysis to The state needs to take care of its office ensure that the Legislature can assess whether its buildings in order to ensure that they can strategy is a good approach, much less the best continue to provide services for years to come. approach available to the state to address these Additionally, addressing state office buildings as buildings in the future. Additionally, we find that part of a regional strategy makes sense. We find Figure 7 Ranking of Office Buildings Outside of Sacramento Facility Statewide Age Condition Condition Building City (Years) Condition Index Ranking San Diego State Building San Diego 53 Poor 17.3 4 Stockton State Building Stockton 52 Poor 12.9 10 Fresno Water Resources Building Fresno 49 Fair 9.9 12 Hugh Burns State Building Fresno 56 Fair 8.0 13 Santa Ana State Building Santa Ana 40 Fair 6.9 15 Redding State Building Redding 53 Fair 6.1 16 Van Nuys State Building Los Angeles 32 Fair 6.0 17 Mission Valley State Building San Diego 16 Good 4.3 22 Justice Joseph A. Rattigan Building Santa Rosa 33 Good 4.3 23 Ronald Reagan State Building Los Angeles 25 Good 4.0 24 Wadie P. Deddeh State Office Building San Diego 10 Good 2.8 27 Red Bluff State Building Red Bluff 47 Good 2.8 28 Ronald M. George State Office Complex/Earl Warren San Francisco 94 Good 2.5 29 California Tower Riverside 44 Good 2.0 32 Alfred E. Alquist Building San Jose 33 Good 1.8 33 Governor Edmund G. “Pat” Brown Building San Francisco 32 Good 1.2 35 4th District Court of Appeal Riverside 17 Good 0.9 38 Junipero Serra Office Building Los Angeles 102 Good 0.7 39 Elihu M. Harris State Building Oakland 18 Good 0.4 40 Ronald M. George State Office Complex/Hiram Johnson San Francisco 18 Good 0.3 43 Leo J. Trombatore Building Marysville 6 Good 0.1 49 14 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT that a regional strategy—informed by data on much of the key information necessary to make building needs from recent facility assessments—is such an assessment. Specifically, the strategy important for a few reasons. lacks basic information on its costs, its benefits, and potential alternatives that are available. It is • First, it allows the state to get a more particularly important for the Legislature to have complete understanding of the condition of this information given the scale and costs of the the state office buildings across the region, identified projects. rather than focusing only on certain No Analysis of Costs. The administration has buildings. This can better enable the state not provided any estimate of the costs of its strategy. to prioritize resources to higher-need We would typically expect the administration to buildings. prepare such an analysis as part of the development • Second, a regional strategy allows the state of its strategy, just as we would expect the to assess Sacramento-area building needs in administration to provide cost estimates for any the context of other state goals. For example, proposal. This type of information is necessary for the administration identified colocating the Legislature to be able to weigh the merits of the department staff. A regional strategy enables proposed projects against its other priorities for the state to consider those types of goals, limited state resources. along with identified facility needs, as it Recognizing this importance, the 2014-15 budget directs resources within the region. provided DGS with funds to undertake the Funding Plan component of the Long-Range Study, which • Third, a regional strategy can enable the was to include cost estimates of planned projects state to take advantage of opportunities to the administration proposed to pursue. However, strategically sequence building renovations the administration indicates that it no longer plans in the region. This can help to reduce the to complete this Funding Plan. (It is unclear how number of required building relocations the funding provided was used.) We note that an and their associated costs. overall cost estimate for the strategy—rather than a Given the advantages of a regional approach, piecemeal approach that only provides cost estimates we find that the Governor’s efforts so far to address for individual projects when they are proposed—is this important topic in a systematic way is a step particularly important because of the interrelated in the right direction, including his release of a nature of the projects within the strategy. It is difficult strategy outlining the timing of future state office for the Legislature to make an informed decision projects in Sacramento. about any individual future project without even a rough understanding of the costs (and benefits) of the Administration’s Strategy related projects in the strategy. Lacked Adequate Analysis Benefits of Strategy Not Identified. The The administration’s specific sequencing administration has also failed to clearly articulate strategy for addressing Sacramento office buildings the benefits that it expects to achieve from the could be a good strategy, or even potentially proposed strategy and to quantify them where the best strategy, available to the state over the feasible. As with any proposal, it is important coming years. However, it is impossible to assess for the Legislature to receive information on whether this is the case because the strategy lacks the expected benefits of the strategy in order to www.lao.ca.gov Legislative Analyst’s Office 15 AN LAO REPORT determine whether it is justified. We recognize that an analysis that evaluates the advantages and in many cases, these benefits are not likely to be disadvantages of the alternatives and explains why quantifiable. For example, it is probably impossible the administration ultimately rejected them in to fully value the benefits associated with providing favor of the proposal. Such an analysis is necessary modern office space to employees. Additionally, it for the Legislature to effectively understand the is difficult to fully assess the operational savings various options available and assess whether the achieved from colocating department staff. administration’s proposal is not only a good option, However, even if these benefits are not quantifiable, but the best option available. it is still valuable for the administration to fully We note that there are two main alternatives identify and describe them in order to support its that are available to the state that the rationale for proceeding with the strategy. administration should have included it its analysis. We also note that there are some benefits that First, the administration should have analyzed could be quantified. In those cases, we would options for addressing a different mix of state office expect the administration to estimate and report buildings than the 11 state office buildings that are them. For example, one of the administration’s proposed. This should have included an alternative stated principles is to make both the new and that addresses the three Sacramento office renovated facilities in the strategy Zero Net buildings assessed to be in the worst condition, Energy—that is, to have them generate as much consistent with the legislative direction provided energy on-site as they use on an annual basis. in Chapter 451. As shown in Figure 8, two of the Given the reduced energy use that this goal implies, three buildings in worst condition—the Personnel we would expect the administration to include Building and the Bonderson Building—are not an estimate of the resulting financial savings addressed in the administration’s strategy. It also (as well as the costs to achieve these benefits). should have included an option that addresses other Additionally, the strategy involves building high-need, “poor condition” buildings, as three of 2 million square feet of new state office space that the nine poor condition buildings in Sacramento will ultimately replace state leases—resulting in are not included in the administration’s strategy. some state savings associated with fewer leases. We Second, the administration should have would expect the administration to quantify the evaluated the most cost-effective way to address savings from fewer leases and compare them to the needs of these buildings. For example, it should the costs of constructing this new space. We note have included an analysis of whether it is more that when we conducted this type of comparison cost effective to construct new buildings versus based on available data and using some standard pursue other approaches, such as purchasing or assumptions, we found that it could take over leasing existing privately owned office buildings. 100 years for the savings from lower lease costs We note that this type of evaluation is particularly to offset the construction and operating costs important for informing the Legislature’s future associated with the new buildings proposed. By decision about whether to fund the new building that point, these buildings likely would be well at the Printing Plant site because there is growing beyond their useful lives. evidence that the new buildings that were funded No Analysis of Alternatives. The in 2016-17 are likely to be expensive compared to administration’s strategy also fails to include an other available options. Specifically, based on the analysis of available alternatives. Specifically, administration’s preliminary estimates, we expect 16 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT the new Resources and O Street buildings to cost would be more than double current market rents in roughly $1,000 per square foot. This is well above the downtown area. the estimated cost of building a new high-rise Proposed Strategy Is Ambitious in downtown Sacramento—about $400 to $500 per square foot—and far exceeds the recent sales The proposed strategy is likely to be a prices of existing office buildings in the downtown significant General Fund expense and includes an area—generally under $300 per square foot. Also, ambitious construction and renovation schedule. when the opportunity costs of capital are taken into There are also early indications that the strategy’s account, we estimate that the state’s annual costs costs and timelines are already increasing for some of constructing and operating these new buildings of the three initial projects. Furthermore, given the Figure 8 Condition of Sacramento Area Office Buildingsa Facility Condition Age Renovated or Building Condition Condition Index Ranking (Years) Replaced in Plan Resources Building Poor 38.0 1 52 Yes Personnel Building Poor 24.5 2 62 No Bonderson Building Poor 22.6 3 33 No EDD Annex Poor 16.5 4 33 Yes Jesse M. Unruh Building Poor 16.4 5 87 Yes Gregory Bateson Building Poor 15.7 6 35 Yes Justice Building Poor 14.5 7 34 No EDD Headquarters Poor 14.1 8 61 Yes Blue Anchor Building Poor 10.6 9 84 Yes California Energy Commission Building Fair 8.0 10 34 Yes FTB Phase I Fair 6.0 11 32 No Board of Equalization Headquarters Building Fair 5.8 12 24 Yes Library and Courts II Building Fair 5.0 13 22 No Secretary of State/Archives Building Good 4.6 14 21 No Agriculture Building Good 3.7 15 80 No FTB Phase II Good 3.0 16 24 No Attorney General Building Good 2.4 17 21 No Buildings and Grounds Headquarters Good 2.4 18 23 No East End Complex Block 225 Good 1.7 19 14 No Stanley Mosk Library and Courts Building Good 1.0 20 88 No Campbell Building—Office of Emergency Services Good 0.9 21 14 No Office Building 8 Good 0.4 22 47 No Office Building 9 Good 0.4 23 47 No FTB Phase III Good 0.2 24 11 No East End Complex Block 171 Good 0.2 25 13 No East End Complex Block 172 Good 0.2 26 13 No Rehabilitation Building (OB10) Good 0.2 27 66 No East End Block 174 Good 0.1 28 13 No East End Block 173 Good 0.1 29 13 No a Sacramento Assessment Report did not include buildings that were not considered to be suitable or available as typical office space, such as the Food and Agriculture Annex, the State Printing Plant, and the State Capitol Building and Annex. EDD = Employment Development Department and FTB = Franchise Tax Board. www.lao.ca.gov Legislative Analyst’s Office 17 AN LAO REPORT interrelated nature of the projects in the strategy, constructed on Block 204, which is owned by the these types of changes to initial projects have the state. This change in project delivery method and potential to alter the schedule and associated costs location is anticipated to cost at least an additional of other projects in the strategy. $70 million over the original rough estimate of Cost of Strategy Unclear, but Could Total $530 million because there will be additional project Almost $3 Billion. As previously indicated, the management costs and a longer construction period. administration has not provided the Legislature The administration also indicates that it may increase with a cost estimate for the strategy. Additionally, the size of the O Street Building, which would almost it has failed to define the scope of each of the certainly increase construction costs. projects included in the strategy, which makes it Strategy Has Ambitious Timeline. The strategy difficult to develop an independent cost estimate. proposes to complete 11 state office buildings However, based on the best information available, projects (including both the EDD Headquarters we estimate that the administration’s strategy could and Annex) within the ten-year planning window, cost a total of almost $3 billion. This estimate is as shown in Figure 9. Most of the individual based on the conceptual costs for new buildings construction projects are anticipated to be provided in the administration’s 2016-17 budget completed in four or five years from start to finish. proposal and the Office Planning Study. It also This timeline is significantly faster than other state incorporates cost estimates for building renovations building projects. While DGS has not initiated the based on the ten-year facility needs identified in the construction or major renovation of any state office Sacramento Assessment Report. (We augmented buildings over the past ten years, it has generally the costs identified in the Sacramento Assessment taken the department at least six years to complete Report by about 50 percent to account for various new state office building and major renovation costs that were not included in the report, such projects in recent decades. as labor and project management costs.) We The relatively short time frame for the note that it is possible that the actual costs could projects in the strategy leaves little additional be different from our estimates. For example, time for contingencies once a project is initiated. the administration could propose to undertake To the extent that the administration encounters different—and in some cases possibly more unanticipated circumstances that create project significant—renovations than the ten-year facility delays—such as unanticipated site conditions—it is needs we assume. unlikely that these delays could be accommodated Additionally, this $3 billion estimate includes the without making changes to a project’s schedule. $1.3 billion already approved in 2016-17 for the initial There are also early signs that schedule changes three projects. To the extent that there are changes are occurring. Specifically, the administration to the costs of these projects, it would also affect the indicates that the change to the location of the new overall cost of the strategy. There are some initial Resources Building is expected to shift the schedule indications that the costs of these buildings will grow. for the project back by more than a year compared Specifically, the new Resources Building and O Street to the timeline outlined in the strategy. As this Building are already undergoing revisions that are project and other projects progress and their scopes anticipated to increase costs. The new Resources are further refined, there is risk that there could Building was originally envisioned as a lease-purchase be other changes that could affect timelines and on private property, but is now planned to be potentially associated costs. 18 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Project Delays Would Likely Have Cascading Building and the Unruh Building. This is because Effects. The interrelation between the different those construction projects will not be able to start projects in the strategy means that delays that affect until the new building is constructed and staff can one project would likely have sequential effects on be relocated into it. Additionally, to the extent that other projects. For example, the one-year delay to the the delay affects the timeline for renovating the construction of the new Resources Building would existing Resources Building and Unruh Building, it affect the timelines of the other projects that are would also affect projects that are connected to those connected to the new Resources Building project— projects—such as the EDD Headquarters and Annex such as the renovations of the existing Resources Buildings and the Energy Commission Building. Figure 9 Schedule of Major Activities for Projects Identified in Sequencing Plan Project 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 Consultant Lease Construction Construction Build New Selection Execution and Move In Resources and Buildinga Construction Consultant PC and Design-Build Construction Construction Replace Selection Award to and Existing and Move In O Street and CEQA Design- Building Building Builder Demolition Consultant PC and PC and Design-Build Construction Construction Replace Selection Award to Existing and Move In Printing Plant and CEQA Design- Building Builder Demolition Consultant PC and Design-Build Construction Construction Construction Renovate Selection and Award to and Move In Resources CEQA Design- Building Builder Consultant PC and Design-Build Construction Construction Renovate Selection Award to and and Move In Bateson and CEQA Design- Construction Building Builder Consultant PC and Design-Build Construction Construction Renovate Selection Award to and and Move In Unruh Building and CEQA Design- Construction Builder Consultant PC and Design-Build Construction Construction Renovate Selection Award to and Move In BOE Building and CEQA Design- Builder Consultant PC and Design-Build Construction Construction Renovate EDD Selection Award to and Move In HQ and Annex and CEQA Design- Building Builder Consultant PC and Design-Build Construction Construction Renovate Selection Award to and Move In Blue Anchor and CEQA Design- Building Builder Consultant PC and Design-Build Construction Renovate Selection Award to CEC Building and CEQA Design- Builder aAfter the release of the Sequencing Plan, the administration modified the proposed delivery method to design-build. It now estimates that the project will be delayed by a year and a half. This could also potentially affect the timeline of some additional projects. CEQA = California Environmental Quality Act; PC = Performance Criteria; BOE = Board of Equalization; EDD = Employment Development Department; HQ = Headquarters; and CEC = California Energy Commission. www.lao.ca.gov Legislative Analyst’s Office 19 AN LAO REPORT Existing SPIF Process Is Problematic projects. We also anticipate that any such delays For Future Projects would not necessarily increase the real costs of projects. This is because, in recent years, the cost of The $1.3 billion provided in the 2016-17 budget constructing buildings has increased at roughly the package was deposited into the continuously same rate as overall inflation. appropriated SPIF. The administration indicates that Rationale Is Particularly Weak For Future it plans to continue to use the SPIF process for future Projects. We find that the administration’s rationale projects. However, as we discuss below, the rationale for using a continuous appropriation—that the for using the SPIF process—that it would result in a traditional budget process could create potential faster project timeline and thus reduce costs—is not project delays and associated costs—is particularly compelling, particularly for future projects. We also weak for most future projects in the strategy. find that the continuous appropriation that is part of This is because the timing of the construction of the existing SPIF process greatly reduces legislative future projects is largely dictated by the timing of oversight and that the notification process, while the completion of the construction of the projects helpful, does not serve as an adequate replacement before them. For example, the renovation of the for the traditional capital outlay process for future Bateson Building cannot begin before its staff are projects. We further find that the weaknesses of moved into the new Resources Building. Under the SPIF process are magnified with the addition of the administration’s strategy, it does not anticipate more funds. beginning any initial planning activities for the Rationale for Continuous Appropriation Is renovation of the Bateson Building, including Not Compelling. The administration’s rationale any work to select consultants to develop for the Legislature providing continuous performance criteria, until 2018-19. However, if the appropriations for projects is that it will enable administration was concerned about the timing of the state to complete projects faster, since project this project, it could start these activities in 2017-18. schedules will not have to align with the state This would provide the administration with an budget process. The administration maintains that additional fiscal year to complete them without a continuous appropriation allows it to proceed affecting the construction timeline. with projects without having to wait for legislative Continued Use of Current SPIF Process approval at the typical points in a project’s life Greatly Reduces Legislative Oversight. We also cycle. The administration further assumes that the find that the use of the SPIF process for future longer time frame that could result from relying on projects would greatly reduce legislative oversight. the typical capital outlay approval process would In place of the annual budget process, the SPIF result in additional project costs. However, the requires quarterly reports and various notifications. traditional capital budget process need not delay We find that the reports and notifications are likely projects significantly. Notably, a key reason for the to include some important information to help the administration to have a well-developed strategy Legislature monitor projects at key project phases. is that it would enable the state to coordinate the In our view, however, the process does not serve as timing of projects with the budget process, thus adequate replacement for the typical capital outlay avoiding any potential delays. Even if projects were budget process, for a few reasons. not well-coordinated with the budget process, any delay would likely not be substantial given the • First, the notification process through typical multiyear timeline for large construction the JLBC provides the Legislature with 20 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT significantly less time to review proposed For example, a COBCP typically includes projects than the approval process through a narrative describing the justification for the traditional capital outlay process. The the project. It also includes an evaluation of JLBC review period is as little as 20 days in the other available alternatives. This type some cases—far less than is necessary to of information is not a required part of the complete a thorough evaluation of a large SPIF notifications, but would be valuable project. to assist the Legislature in determining whether the administration’s proposals • Second, the notification process is make sense. less transparent to the public than the Weaknesses of SPIF Magnified With traditional capital outlay process, which Additional Funding. The weaknesses of the includes public hearings that enable the existing SPIF process would be magnified if Legislature to ask questions and the public additional funds are added to the account in the to provide input. For this reason, the JLBC future. The statute governing the SPIF provides the notification process is typically reserved administration with the discretion to establish and for minor, midyear changes to the budget fund new projects with JLBC notification rather rather than substantial actions such as the than legislative approval. As the monies in the approval of new projects costing many fund increase, the potential for the administration millions of dollars. to exercise this authority to fund new projects not • Third, the notification process does not envisioned by the Legislature also increases. For require the same level of information that this reason, it is particularly problematic to add would typically be required for a capital funding to the SPIF with its current authority for outlay budget change proposal (COBCP). additional projects in the future. LAO RECOMMENDATIONS Based on our assessment, we make several $1.3 billion approved in 2016-17 through the recommendations to help guide the Legislature use of hearings at key points in project life as it faces key decisions points related to the cycles. Such hearings would help improve administration’s strategy: transparency and ensure that funds are spent consistent with legislative priorities. • First, we recommend that the Legislature direct the administration to provide • Third, we recommend that any future additional information and a robust funding provided for state office building analysis that will allow the Legislature to projects go through the typical budget assess if the strategy represents the best process rather than a continuous approach available to address aging state appropriation under the current SPIF office buildings. process. Doing so would make it easier for the Legislature to provide robust oversight • Second, we recommend that the Legislature over the administration’s ambitious strategy. closely monitor the expenditure of the www.lao.ca.gov Legislative Analyst’s Office 21 AN LAO REPORT Require More Analysis of Strategy analysis should provide a clear description of the Prior to Providing Additional Funds value of the benefits provided and why they are important to justifying the strategy. Our analysis The Legislature is likely to receive proposals suggests that the administration’s strategy does not requesting additional funding—likely totaling over appear to make sense based solely on one of the a billion dollars—for state office building projects benefits that is most easy to quantify—the reduced in Sacramento in the coming years. In order to lease costs. Thus, it is particularly important for help the Legislature in determining the approach the administration to clearly articulate any other it prefers to take to address these infrastructure benefits provided by the strategy in order to make issues, we recommend directing the administration the case that it is worthwhile. to provide an analysis of the overall strategy that Require Analysis of Alternatives. We also includes key information. recommend that the Legislature direct the Require Analysis of Costs and Benefits. Before administration to provide an analysis of available considering any new projects, we recommend alternatives to its strategy. We think that the that the Legislature direct the administration to administration’s analysis should explore two main provide information on the costs and benefits of the types of alternatives: (1) different mixes of buildings overall strategy. This information should include to be addressed and (2) other available approaches the anticipated costs of the strategy broken out to address these buildings. by individual project. A complete understanding First, the administration’s analysis should of these costs—even if it is rough—is critical to evaluate alternative strategies that include a enabling the Legislature to assess whether it is different mix of buildings to address. Figure 10 comfortable with the financial commitment that provides some examples of the types of alternative is associated with implementing the strategy as options that the administration could evaluate. a whole. Furthermore, this information would We also include rough cost estimates of these inform decisions on individual future projects. potential options. These estimates are intended to This is because, given the interrelated nature of provide a sense of the general scale of the potential the individual projects in the strategy, legislative choices available to the Legislature. (We note decisions on one project affect the feasibility of that these estimates are imprecise given the lack other projects. of scope and cost information provided by the Additionally, the information provided by the administration on these projects.) These options administration should include the articulation highlight that there are likely to be trade-offs in of the benefits associated with the strategy and a pursuing a different mix of buildings. For example, quantification of these benefits, as feasible. Some of the Legislature could choose not to fund any the potential benefits of the strategy may be more additional projects beyond those already approved. easily quantified than others. For example, some While this option would reduce construction benefits—such as reduced lease costs—are readily costs by roughly $1.4 billion compared to the quantifiable. Estimates of the magnitude of these administration’s strategy, it would also fail to benefits should be included in the administration’s directly address any of the existing state buildings analysis. Other benefits—such as the value of identified in the Sacramento Assessment Report. having modern office spaces for state employees— Alternatively, in addition to the three priority may be very challenging if not impossible to fully projects, the Legislature could choose to renovate quantify. In these cases, the administration’s 22 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT some combination of the highest-need buildings, Second, the administration should evaluate as identified in the Sacramento Assessment Report. whether other available approaches to addressing For example, it could choose to renovate the three these office buildings—such as buying existing highest-need buildings in Sacramento, consistent privately owned office buildings or leasing with Chapter 451, or to address all the buildings additional space—are more cost-effective. For identified in “poor” condition in the Sacramento example, as described previously, the estimated Assessment Report. These options would both costs of building new office buildings are high result in lower costs than the strategy proposed by compared to the costs of the state’s existing leases the administration, but they also would total less and compared to the cost of purchasing existing new and renovated state-owned office space. While buildings. While there would likely be benefits not shown in the figure, another alternative would to constructing a new building rather than be to include high-need buildings in other parts of purchasing or leasing an existing building—such the state as identified in the Statewide Assessment as additional flexibility in designing the building— Report. these benefits might be outweighed in some cases Figure 10 Estimated Costs of Some Possible Optionsa (Dollars in Millions) Possible Options Priority Sacramento Entire Projects and Priority Condition Sequencing Priority Three Poorest Projects and Buildings Ranking Plan Projects Condition Poor Condition Proposed in Sequencing Plan Build new Resources Buildingb N/A $600 $600 $600 $600 Replace O Street Building N/A 225 225 225 225 Renovate or replace Capitol Annex/LOB II N/A 580 580 580 580 Replace Printing Plantc N/A 955 — — — Renovate Resources Building 1 230 — 230 230 Renovate Bateson Building 6 45 — — 45 Renovate Unruh Building 5 25 — — 25 Renovate BOE Building 12 55 — — — Renovate EDD Headquarters and Annex 4, 8 75 — — 75 Renovate Blue Anchor Building 9 5 — — 5 Renovate CEC Building 10 10 — — — Not Proposed in Sequencing Plan — — Renovate Personnel 2 — — 15 15 Renovate Bonderson 3 — — 20 20 Renovate Justice 7 — — — 40 Total Estimated Costs $2,805 $1,405 $1,670 $1,860 Total amount of new square footage, in thousandsd 1,900 900 900 900 Total amount of renovated square footage, in thousandsd 2,000 — 700 2,000 a Assumes renovations will include the scope of work shown as the ten-year capital needs in the Assessment Report. About 50 percent was added to the estimates of the cost of this work to account for expenses not included in this report. b Includes $70 million in additional costs compared to the original rough estimate due to revised project delivery method and building location. c Estimate is based on conceptual cost estimate provided in the Office Planning Study. d Capitol Annex/LOB II not listed in either new or renovated space, since plan for building is unknown. LOB = Legislative Office Building; BOE = Board of Equalization; EDD = Employment Development Department; and CEC = California Energy Commission. www.lao.ca.gov Legislative Analyst’s Office 23 AN LAO REPORT by the additional costs. Thus, it is important would not serve all the purposes of the traditional for the administration to provide this analysis budget process, it would provide some of the to demonstrate that its preferred approach to benefits of this process. For example, it would addressing buildings is the best available one. provide the Legislature with an opportunity to review details of the projects in a public setting. Closely Monitor Expenditure of Such a hearing would also enable the Legislature $1.3 Billion Already Approved to address questions to the administration to The scope and details of the two state building ensure that it is comfortable with them. This public projects initially approved—the new Resources process is particularly important because based on Building and O Street Building—are not well our discussions with the administration, we expect defined. Furthermore, because the projects are that there will be notable changes to aspects of the funded out of the SPIF, there is a greater chance projects—such as location and costs—compared that these projects could change over time without to what the Legislature envisioned when the legislative approval. Accordingly, it is important projects were funded. Additionally, the public for the Legislature to maintain close oversight process is especially important because, based on over these projects to ensure that funds are spent the preliminary cost estimates that are available, in a manner consistent with its priorities. As such, these are expensive projects. Thus, these hearings we recommend that the Legislature hold public would provide the Legislature with an opportunity hearings—such as through the relevant budget to better understand the reasons for their apparent subcommittees—at critical project decision points. high costs and ensure that it is still comfortable Hold Hearings When Project Scope and Cost moving forward with them. Are Defined. We recommend that the Legislature Hold Hearings When Project Scope and hold a hearing when the scope and cost of each of Cost Change Substantially. We also recommend the two new state building projects are defined. that the Legislature hold a hearing when the Generally, scope and cost of capital outlay projects scope or cost of the two state office building are defined when the Legislature initially approves projects change significantly. Specifically, given the project—for example, when the Legislature the size of these projects, we recommend that approves funding for performance criteria. the Legislature consider holding a hearing if However, unlike typical capital outlay projects, the cost of an individual project changes by the scope and cost of these projects were not well more than 10 percent. (We note that, although defined in the administration’s proposal. Instead, there is some potential ambiguity in the law, the the administration is currently in the process of administration has indicated to us that it interprets solidifying their scope and cost, a process that we the law to require a new legislative appropriation expect will be completed in early 2017. At that time, if a SPIF-funded project has total cost increases we expect the administration to notify the JLBC. exceeding 20 percent.) Similarly, we recommend When the JLBC receives these notifications, a hearing if key details about one of these projects we recommend that the Legislature conduct a change—such as its location or proposed use. These thorough review of them, including holding a hearings would provide the Legislature with a public hearing. While a public hearing upon the valuable opportunity to ask the administration to establishment of scope and cost of these projects articulate the reasons for changes in scope or cost. 24 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Without such hearings, the administration could process, we recommend that the Legislature direct make substantial changes to these projects without the administration to provide individual COBCPs, the public review process provided by a hearing. or equivalent, for any future projects. Each of these COBCPs should provide the type of information Avoid Use of Current SPIF Process that is typically included in such proposals, for Any New Projects including: Rely on Traditional Budget Process. If the • A description of the project scope and its administration pursues its strategy as currently justification. envisioned, the Legislature should expect to receive additional funding requests as soon as 2017-18. • The estimated project cost (by project The administration indicates that it anticipates phase), funding source, timeline, and continuing to use the SPIF process—including delivery approach. its continuous appropriation—to fund additional • An evaluation of project alternatives and a projects. We strongly recommend that the description of why the proposed approach Legislature avoid putting additional funding into a was selected over the alternatives. continuously appropriated fund, including the SPIF as currently structured. Instead, if the Legislature is This information should be sufficiently detailed comfortable providing additional funding for state and reliable to enable the Legislature to understand office buildings in the Sacramento area in future what it would be funding and to evaluate the years, we recommend that it approve them through merits of the projects. This information is critical the state budget process. The budget process in order to enable the Legislature to evaluate provides the Legislature with the ability to use its whether cost estimates are reasonable and that constitutionally granted appropriation authority to each of the proposed projects is the best way to ensure that state funds are directed to its highest accomplish the goals associated with that building. priorities and are spent with adequate legislative This information would also facilitate the future oversight and accountability. Furthermore, while oversight of any projects that are subsequently the administration’s rationale is that this approach approved by setting clear expectations of the initial is necessary to expedite projects, this argument project costs, scope, and other critical project generally is not compelling for future projects. details. We note that the administration failed Such projects are more heavily constrained by the to provide this type of detailed information on progress of the recently approved projects than by each of the three initial projects it proposed in the time required for approval of proposals through 2016-17. This failure made it more difficult for the the traditional budget process. Legislature to assess these projects. Require Detailed Analysis and Information in Future Proposals. Consistent with the typical CONCLUSION We expect that in the near future the $1 billion—for additional state office buildings. administration will come forward with requests We anticipate that, absent clear direction from for more funding—likely totaling more than the Legislature, the administration may submit www.lao.ca.gov Legislative Analyst’s Office 25 AN LAO REPORT proposals that—like its proposal in 2016-17—fail to process that facilitates more robust legislative include key information and analyses. Additionally, oversight and control than the SPIF process. we expect that the administration might continue Finally, since the SPIF process governs the funding to propose using the SPIF process, which reduces for the state building projects funded in 2016-17, legislative oversight and is particularly flawed we recommend that the Legislature use other tools for future projects. Thus, we strongly encourage at its disposal—such as legislative hearings—to the Legislature to provide clear direction to the closely monitor them. While these tools are not a administration that it expects more complete replacement for the traditional budget process, they information and a robust analysis to justify any can provide some additional legislative oversight future project or funding proposals. Furthermore, that can help hold the administration accountable we also strongly encourage the Legislature to and ensure that funds are used consistent with make it clear to the administration that any future legislative priorities. funding that is provided should be subject to a 26 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT www.lao.ca.gov Legislative Analyst’s Office 27 AN LAO REPORT LAO Publications This report was prepared by Helen Kerstein and reviewed by Brian Brown. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 28 Legislative Analyst’s Office www.lao.ca.gov