The 2020-21 Budget: Department of General Services

The 2020-21 Budget: Department of General Services Summary In this analysis, we assess the Governor’s 2020-21 budget proposals for the Department of General Services (DGS). Specifically, we review and make recommendations regarding the Governor’s proposals for (1) additional staff for Contracted Fiscal Services (CFS) workload, including the establishment of a new strike team to assist departments performing accounting activities with the Financial Information System for California (FI$Cal); (2) renovating the Resources, Bateson, and Unruh buildings, and (3) funding elevator and fire system-related deferred maintenance projects. (We discuss DGS’ proposal to support statewide emergency management functions in our forthcoming report, The 2020-21 Budget: Governor’s Wildfire-Related Proposals.) In summary, we recommend the following: • CFS Workload. Approve the six positions for the strike team on a two-year limited-term basis because the level of ongoing workload for the strike team is uncertain, particularly given that the other resources have been provided to assist departments transition to Fi$Cal. • Renovation of the Bateson, Unruh, and Resources Buildings. Require DGS to report at budget hearings on options for reducing the costs of these projects in order to assess whether to move forward with the original scope and timeline of these projects or make adjustments given their significant cost increases. • Deferred Maintenance. Reject $35.4 million (General Fund) proposed for elevator projects at two facilities because it is not clear that these projects must be done immediately and the General Fund should not be used on a long-term basis to fund DGS building needs. Additionally, require DGS to report at budget hearings on its plan for maintaining facilities and for adjusting building rates to address building maintenance needs. GABRIEL PETEK LEGISLATIVE ANALYST FEBRUARY 2020 analysis full gutter 2020-21 BUDGET DEPARTMENT OVERVIEW The DGS provides a variety of services to state The Governor’s budget proposes $2 billion from departments, such as procurement, management various funds to support DGS in 2020-21. This is a of state-owned and leased real estate, net decrease of $257 million, or about 11 percent, management of the state’s vehicle fleet, printing, from current-year estimated expenditures. This administrative hearings, legal and fiscal services, decrease primarily reflects the expiration of $1 billion development of building standards, and oversight in one-time funding provided in 2019-20 to over school construction. The department generally construct a new building on Richards Boulevard funds its operations through fees charged to client in Sacramento, offset by $722 million in one-time departments. funding provided in 2020-21 to renovate three state buildings. (We discuss the proposed funding for the three building renovations further below.) CFS WORKLOAD Background State Provided Significant Resources to Support Department Transitions to Fi$Cal. CFS Provides Accounting and Budgeting Many departments have experienced challenges Services to Various State Entities. The CFS transitioning to Fi$Cal. In response to these program within DGS provides fiscal services— challenges, the state has provided significant including accounting and budgeting services—to resources to assist departments implement the other state entities on a fee-for-service basis. system. For example, in 2019-20, the Department CFS currently provides these services to 45 state of Fi$Cal received $64.1 million ($39.1 million entities, such as the Horse Raising Board, the General Fund) over three years to provide additional Commission on State Mandates, and various state user training (including on accounting in FI$Cal, conservancies. Many of CFS’ client agencies are such as closing month- and year-end financial small, which makes it difficult for them to provide statements) and department support (such as their own fiscal services in a cost-effective manner. assisting with changing departmental business The 2019-20 budget included $9.5 million for CFS. processes). In addition to the resources provided Fi$Cal Project. For almost 15 years, the to the Department of Fi$Cal, at least 13 other administration has been engaged in the design, departments also received FI$Cal-related resources development, and implementation of the FI$Cal in 2019-20. These resources included, for example, project. This information technology (IT) project increased staffing to enable departments to is being developed to replace the state’s aging address the additional workload created by Fi$Cal. and decentralized IT financial systems with a new system that integrates the state’s accounting, Governor’s Proposal budgeting, cash management, and procurement The Governor’s budget for 2020-21proposes processes. In 2016, the Legislature established an ongoing $2.3 million augmentation from the Department of FI$Cal to maintain and operate various sources—including the Central Services the IT system and support its users. These users Cost Recovery Fund, General Fund, and Service currently include a total of 152 departments, with Revolving Fund—and 15 additional positions for additional departments expected to be added in CFS. Of these 15 positions, nine positions would the coming years. The revised 2019-20 budget provide accounting services to support four new includes $138 million for the Department of FI$Cal. client agencies and six positions would create 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET a strike team to consult and assist other state (3) the pace of additional department transitions to agencies with accounting in the Fi$Cal system. (In Fi$Cal. addition to these resources, the Governor’s budget Importance of Oversight of Fi$Cal provides resources to several other departments for Implementation. We find that continued legislative support of various Fi$Cal-related activities.) oversight over the implementation of Fi$Cal is particularly important given the challenges that Assessment departments have experienced thus far transitioning Below, we provide our assessment of the six to Fi$Cal. As part of this oversight, it will be positions proposed for the CFS Strike Team. We important for the Legislature to understand how do not have concerns with the nine additional staff much departments are using CFS’s Strike Team— proposed to provide accounting services for the as well as Department of Fi$Cal’s resources—to four new client agencies. support their accounting activities. Some Overlap Between Strike Team and Recommendation Department of Fi$Cal Activities. We find that the activities proposed for the CFS Strike Team— Approve Funding for Fi$Cal Strike Team on providing other state departments assistance a Two-Year Limited Term Basis. We recommend operating within the Fi$Cal system—are similar that the Legislature approve the funding for to those proposed to be undertaken by the the six-person CFS Strike Team on a two-year Department of Fi$Cal with the funding approved limited-term basis, rather than on an ongoing basis, in 2019-20. For example, both proposals include as proposed by the Governor. If DGS determines providing training for departments on accounting continued resources are required at the end of this in Fi$Cal. Accordingly, it will be important for the limited-term funding, it can request funding for Legislature to consider the proposed CFS Strike additional years at that time. Team in the context of the resources that have After the two-year period, the administration already been provided to the Department of Fi$Cal. should be able to provide information on how the Uncertain Level of Ongoing Strike Team resources provided to implement Fi$Cal—including Workload. We find that there is uncertainty those provided to the CFS Strike Team, Department regarding the amount of ongoing workload for the of Fi$Cal, and other departments that have received CFS Strike Team. In particular, we would expect Fi$Cal-related augmentations—have been used that the CFS Strike Team’s workload could vary thus far and the outcomes they have achieved. over time depending on various uncertain factors, This information should enable the Legislature to including: (1) how much departments use the make a more informed decision regarding whether resources provided to the Department of Fi$Cal for ongoing resources are needed for the CFS Strike similar activities, (2) the level of additional resources Team. Additionally, this information should assist departments directly receive to support their the Legislature with its ongoing oversight over the transitions to Fi$Cal and how such resources affect progress of the Fi$Cal project. departments’ needs for assistance from DGS, and CONSTRUCTION OF SACRAMENTO OFFICE BUILDINGS: RESOURCES, BATESON, AND UNRUH PROJECTS Background and the Legislature approved funding for a study of state office buildings in the Sacramento area, Administration Developed a State Office which was to include assessments of the condition Building Strategy for Sacramento. As part of of state facilities, a plan for sequencing the the 2014-15 budget, the administration proposed www.lao.ca.gov 3 analysis full gutter 2020-21 BUDGET renovation or replacement of state office buildings Resources Building, (2) the Bateson Building, in Sacramento (State Office Building Strategy), and and (3) the Unruh Building. When the Legislature a plan for funding these activities. DGS completed approved funding for performance criteria for these the State Office Building Strategy in March 2016 projects, their total project costs were estimated and made some minor revisions to it in 2018. The to be $627 million—$376 million for the Resources State Office Building Strategy includes building Building renovation, $161 million for the Bateson three new state office buildings and renovating Building renovation, and $90 million for the Unruh eight existing state office buildings within about Building renovation. ten years. The projects in the State Office Building Governor’s Proposal Strategy are interrelated as shown in Figure 1. This is because the administration is proposing The Governor’s budget includes $721.7 million to strategically sequence building renovations in lease revenue bond authority in 2020-21 for the by successively conducting staff moves and design-build phase of three projects that are part of building renovations in order to reduce costs and the administration’s State Office Building Strategy. disruptions associated with moving departments This would bring the total project cost for these into and out of temporary space. (In addition three projects to $742.1 million. The Governor’s to these projects, the state is also undertaking specific proposals include: a renovation of the State Capitol Annex and construction of a new “swing space” office building • Resources Building Renovation to temporarily house staff from the Annex, but ($421.3 Million). The budget provides these projects are proceeding separately.) $421.3 million for the design-build phase of the renovation of the Resources Building, Administration Using Design-Build Approach. a 520,000 net useable square foot building The administration has been using the design-build constructed in 1964. The total cost of the project delivery approach for the construction of project is estimated at $430.2 million. the projects included in the State Office Building Strategy. Under this approach, the construction • Bateson Building Renovation contract is not awarded to the lowest bidder. ($183.6 Million). The budget provides Instead, once the performance criteria are $183.6 million for the design-build phase complete, DGS determines the amount to provide of the renovation of the Bateson Building, to the contractor—the stipulated sum—for a 215,000 net useable square foot building completing the final designs and constructing the constructed in 1981. The total cost of the project (known as the design-build phase). Next, project is estimated at $188.8 million. contractors submit detailed proposals that meet • Unruh Building Renovation ($116.8 Million). the requirements outlined in the performance The budget provides $116.8 million for the criteria and can be completed within the amount design-build phase of the renovation of of the stipulated sum. Finally, DGS evaluates the Unruh Building, a 125,000 net usable these proposals based on various criteria, such as square foot building constructed in 1929. environmental sustainability. The total cost of the project is estimated at Significant Funding Has Been Provided $123.1 million. for Strategy. Since 2016-17, the state provided a total of roughly $1.9 billion to support the Assessment State Office Building Strategy. This included the When Originally Proposed, Renovations approval of roughly $20 million from the General Appeared to Be Expensive . . . In our report, Fund in 2018-19 and 2019-20 for the initial The 2018-19 Governor’s Budget: Department of planning phase—known as the performance General Services, we analyzed proposals to fund criteria phase—for the renovation of three office the performance criteria for the Bateson and Unruh building projects in the Sacramento area that are Building renovation projects. At that time, we part of the State Office Building Strategy: (1) the found that the projects appeared to be expensive 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Figure 1 Strategy Includes Sequencing of Interrelated Projects CDCR DWR, Parks, Leases CalFire, DFW Under Renovation E LW DD D , Under Renovation DMHC F Ta ra x n B c o h a is r e d Agency Energy Commission Existing Resources EDD Headquarters Design-Build and Solar PROPOSED Under Renovation DMHC DWR Energy Commission New Resources STO, Transportation Agency, Government FUNDED Operations and BCSH Agency Swing Space CCC, DOC Bonderson Building Type Under Renovation New State Building Unruh Board of Design-Build Chiropractic PROPOSED Examiners Leases Leased Building BCSH Agency STO Government Ops Agency Richards CDTFA/BOE Renovated State Building B F o U u N le D v E ar D d HCD, DBO, DCA 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 D Pa W rk R s , , DSH DOC New O Street Bateson C D a F l W Fi , re, Leases FUNDED Design-Build CCC PROPOSED 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; CCC = California Conservation Corps; DOC = Department of Conservation; CDFA = Department of Food and Agriculture; CDTFA = California Department of Taxes and Fee Administration; DBO = Department of Business Oversight; DCA = Department of Consumer Affairs; DDS = Department of Developmental Services; DGS = Department of General Services; DMHC = Department of Managed Health Care; DOC = Department of Conservation; 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; LWD = Labor and Workforce Development; 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 5 analysis full gutter 2020-21 BUDGET relative to past state office building projects. • Reduce Extent of Renovations. The For example, we found that, after adjusting for Legislature could consider taking an approach inflation in construction costs, these renovations similar to the Library and Courts Building were significantly more expensive than the Library renovation—not replacing all the key building and Courts Building—a historic building that DGS components. This approach would reduce indicated it used as a basis for its cost estimates. project costs, although some of these costs When proposed in 2019-20, the renovation of the would potentially be borne at a future date Resources Building was roughly the same cost as when the building components reach the end the Bateson and Unruh Building renovations on of their useful life. As evidenced by the Library a square footage basis, raising similar concerns and Courts building, this approach can still about the relative expense of the building. result in a high-quality renovation. . . . But Are Now Expected to Be Even More • Employ Less Expensive Materials. The Costly. Since the Legislature approved funding for Legislature could consider directing DGS to the performance criteria phase for the Resources, use less expensive materials, such as finishes, Bateson, and Unruh renovation projects, the in some areas. Again, these choices could estimated costs of these projects have increased have trade-offs in some cases, since some significantly. Specifically, the cost of the Resources higher grade finishes also last longer or have Building renovation has increased by 14 percent, lower ongoing maintenance costs. the cost of the Bateson Building renovation has • Delay Projects Until Labor Market Is Less increased by 17 percent, and the cost of the Unruh Impacted. The Legislature could consider Building renovation has increased by 37 percent. delaying a project. This would result in fewer These increases bring the cost per square foot of projects happening simultaneously, which these renovations to be between about $825 and could help address the tight labor market for $1,000 per net useable square foot ($650 and construction workers. However, it would delay $750 per gross square foot). the completion of the renovated building and In our discussions with DGS, the department affect the timing of other projects, since the cited numerous reasons for the cost increases for State Office Building Strategy is generally these projects, including worse building conditions interrelated. Furthermore, construction costs than previously assumed, a tight labor market for could continue to increase, if the construction construction workers, and changes in buildings labor market remains tight. standards. Additionally, DGS indicated that its use of the Library and Courts project as a basis for Recommendation estimating the renovation costs of other projects Require DGS to Report on Options to was problematic, since that project was not as Contain Costs for Legislative Consideration. extensive of a renovation as the proposed projects. We recommend that the Legislature require DGS In particular, according to DGS, the Library and to report at budget hearings with further details on Courts project did not replace all of the key building potential options—such as the ones we identified components, such as elevators. However, the above—that could reduce the costs of these Resources, Bateson, and Unruh renovation projects projects, along with their associated trade-offs. envision full replacements. This information would assist the Legislature in Options to Contain Costs Available. If the assessing whether to move forward with the original Legislature is not comfortable with the cost scope and time line of the Resources, Bateson, increases for the Resources, Bateson, and Unruh and Unruh renovation projects or make adjustments renovation projects, but would like to continue to given the significant cost increases. move forward with the projects, there are a few possible options. Specifically, the Legislature could consider directing DGS to: 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET DEFERRED MAINTENANCE Background that developed during this period, the state provided a total of $35 million from the General DGS Facilities. DGS owns and maintains Fund for DGS’ deferred maintenance projects since 56 office buildings that total roughly 16 million 2015-16 gross square feet. DGS buildings’ are located across the state, but roughly two-thirds of Governor’s Proposal the square footage of the buildings is in the The Governor’s 2020-21 budget proposes about Sacramento region. Other major metropolitan areas $80 million in one-time General Fund support for with a relatively large number of DGS buildings are deferred maintenance projects at DGS buildings. the San Francisco Bay Area and the Greater Los Of this amount, $56.4 million is for elevator Angeles Area. modernizations at three state facilities (the Ronald DGS’ Building Rental Rates. DGS funds M. George, Elihu Harris, and Ronald Reagan building maintenance costs, in addition to other buildings) and $23.6 million is for fire alarm systems costs associated with operating buildings (such at five state facilities (the Edmund Brown, Van as custodial and groundskeeping services), Nuys, Justice, Library and Courts II, and Franchise by charging monthly rental rates to the state Tax Board Campus buildings). The budget also departments that are tenants in these facilities. includes provisional language specifying that (1) the These rates are based on a number of factors (such funding is available for elevator and fire alarm as whether or not the building has outstanding projects, (2) the funding is available only upon bonds on it) and range from $2.29 per square foot completion of Department of Finance’s review of to $7.93 per square foot. For example, DGS plans DGS’ project design, and (3) if projects cost less to generally charge state agencies that are tenants than the amounts provided, the difference shall in the buildings without outstanding bonds a revert to the General Fund. The language, however, statewide standard building rental rate of $2.55 per does not identify the specific facilities eligible for square foot per month in 2020-21. funding. Previous Budgets Provided Funding for DGS’ Deferred Maintenance Needs. When routine Assessment maintenance activities are delayed or do not Unclear if All Elevator Projects Represent occur, we refer to this as deferred maintenance. In Immediate Needs. We find that it is not clear 2015-16, DGS identified a deferred maintenance whether all the specific projects proposed for backlog at its buildings totaling $138 million. In funding need to occur immediately. Specifically, our March 2015 report The 2015-16 Budget: DGS cites facility condition assessments performed Addressing Deferred Maintenance in State Office by a contractor in 2015 to support its request Buildings, we identified a few reasons for this for elevator modernizations at three facilities— deferred maintenance backlog. For example, the Ronald M. George, Elihu Harris, and Ronald we found that during the recent recession, DGS Reagan buildings. However, those studies found reduced rental rates in order to relieve costs to that the elevators in two of these three buildings— other state departments, which reduced funding Ronald M. George Building and Elihu Harris available for maintenance activities and likely Building—were not top priority projects and did not contributed to the accumulation of deferred recommended them for immediate completion. For maintenance. For example, the statewide standard example, the report found that the elevators in the building rental rate mentioned above was reduced Elihu Harris building to be in “fairly good shape” by over one-third, from $1.80 per square foot per due to above average maintenance at the facility, month in 2008-09 to $1.12 per square foot per and recommended budgeting for modernization month in 2011-12. To help address the backlog within 3 to 5 years given that parts could become www.lao.ca.gov 7 analysis full gutter 2020-21 BUDGET more scarce in the coming years. While this Fund augmentations on a long-term basis to fund means that the elevators are around their normal its deferred maintenance needs for a couple of modernization cycle, it does not mean that the reasons. First, this funding approach disconnects elevators represent an imminent safety concern or the rental rates paid by departments from the are not functional. Notably, neither the Ronald M. costs of operating and maintaining buildings, which George Building and Elihu Harris Building elevator reduces the department’s incentive to be a good projects appeared on lists of the department’s steward of its buildings. Second, this approach deferred maintenance projects that the Legislature places a disproportionate share of costs on the has received in past years. General Fund, rather than allocating some costs to Facility Condition Assessments Identified the special funds that support some DGS tenants Lower Costs Than Proposal. The facility condition and therefore should bear some of these costs. assessments on the Ronald M. George, Elihu Unclear Why Backlog Has Changed Over Harris, and Ronald Reagan buildings identified Time. If the department has an effective ongoing much lower costs for the recommended elevator maintenance program, we would expect that the modernizations at these three buildings than are size of its deferred maintenance backlog would reflected in DGS’ proposal. Specifically, the facility decline over time as additional funding is provided condition assessments estimated that the costs to address it. However, DGS’ reported backlog of the elevator projects at these three buildings has grown from $138 million to $544 million would total about $13 million, which is roughly between 2015-16 and 2020-21, despite the state one-quarter the cost identified in DGS’ proposal. It providing $35 million to address the backlog since is not clear to us whether this difference is because 2015-16. It is unclear whether these changes in the consultant envisioned less comprehensive DGS’ reported backlog represent actual changes in modernization efforts than DGS or whether the deferred maintenance needs across years or are a differences are due to other factors, such as result of differences in how deferred maintenance is poor cost estimation. This suggests that there is catalogued or reported by the department. uncertainty about the cost of the projects and it It is important to understand what is leading to is possible that there could be significant unspent these changes in the reported backlog because it funds. While the Governor’s provisional language might point to different legislative responses. For attempts to address this possibility, it does not limit example, if changes in the department’s backlog the use of the funds to the projects at the three represent actual differences in accumulated needs, specific buildings identified by the department. it might suggest that DGS’ routine maintenance Accordingly, if the Legislature is comfortable activities are insufficient and that it should improve funding one or more elevator projects, it will want its maintenance program. However, if the changes to limit the use of the funds and ensure that they are a result of a new reporting methodology, it are not spent on other elevator projects that were raises questions about the department’s process not specified in the proposal, since some of them for identifying and cataloging deferred maintenance. may be lower priority. Recommendations General Fund Not an Appropriate Funding Source to Support DGS Buildings on Regular Reject Funding for Two Non-Urgent Elevator Basis. Building rates are intended to reflect the Projects. We recommend that the Legislature cost of operating and maintaining buildings. It has only approve funding for the most critical, urgent been reasonable for the Legislature to provide deferred maintenance projects, since the General some limited funding on a short-term basis to Fund should not be used on a long-term basis to help DGS address its most critical deferred fund DGS building needs. Less urgent projects maintenance needs, particularly those that were should generally be planned for in advance deferred when the department kept rates artificially and funded over a period of time through DGS’ low during the recession. However, we find that rates structure. This approach would more fairly it is not appropriate for DGS to rely on General apportion their costs across various funds and also 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET create better incentives for the department to be less costly than proposed, the unused funds would a good steward of its buildings. Consistent with return to the General Fund rather allowing DGS to this approach, we recommend that the Legislature use the funds on other elevator projects that may reject the $35.4 million (General Fund) proposed be of less urgency. for the Elihu Harris and Ronald M. George Building Require DGS to Report on Plan for elevator projects. While these specific projects Maintaining Facilities and Adjusting Rates may be worthwhile, it is not clear they represent to Reflect Actual Costs. We recommend that immediate, critical needs. (We are not raising the Legislature direct DGS to report at budget concerns with the $44.7 million for the Ronald hearings on why the department’s reported Reagan Building elevator project and the fire alarm backlog of deferred maintenance has increased system projects, since the department and the dramatically, and how the department will prevent facility condition assessments better support the the further accumulation of deferred maintenance. urgency of these projects.) It will be important for the Legislature to have this Modify Provisional Language to Limit Use information given that DGS’ deferred maintenance of Elevator Funding to Specific Projects. needs have grown substantially in recent years Given the differences in the cost estimates for despite multiple allocations of deferred maintenance elevator projects reflected in the facility condition funding. We further recommend that the Legislature assessments and DGS’ proposal, which suggest direct DGS to report on its plan for adjusting future the actual project costs could be less than building rates to address its backlog of deferred estimated, we recommend that the provisional maintenance projects—including the Elihu Harris language be modified to identify the specific and Ronald M. George building elevators—over facilities eligible for the elevator project funding— time, rather than continuing to rely on General Fund such as the Ronald Reagan Building. This will augmentations. ensure that, if the specific elevator project or projects that the Legislature approves are ultimately www.lao.ca.gov 9 analysis full gutter 2020-21 BUDGET LAO PUBLICATIONS This report was prepared by Helen Kerstein, and reviewed by Drew Soderborg and Anthony Simbol. 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. 10 LEGISLATIVE ANALYST’S OFFICE