BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Kevin de León, Chair AB 1656 (Dickinson) - Department of General Services: Board of Equalization Headquarters Amended: August 5, 2014 Policy Vote: GO 10-0 Urgency: No Mandate: No Hearing Date: August 11, 2014 Consultant: Robert Ingenito This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 1656 would authorize the Department of General Services (DGS), in consultation with the Board of Equalization (BOE), to enter into agreements to acquire, construct, purchase, lease-purchase, or lease-with an option to purchase, a facility in the Sacramento area for purposes of consolidating and relocating the BOE Headquarters operations. Fiscal Impact: DGS estimates costs of $3 million to develop and issue a request for proposal and develop terms and conditions of an agreement. The bill authorizes the use of funds from a loan deposited into the Architecture Revolving Fund reserved for repairs to BOE's headquarters building. Any amounts loaned must be repaid from the BOE's operating funds within five years from the date those funds were borrowed. Increased state costs resulting from the procurement of a new headquarters facility and relocation of BOE staff. These costs are unknown, and would reflect a variety of factors, but could reach the tens of millions of dollars annually (General Fund and special funds, See Staff comments). Increased but unknown administrative efficiencies and revenues resulting the consolidation of BOE staff (General Fund and special funds). Background: Under current law, DGS is authorized to perform various functions with respect to state property, and also authorizes the department to acquire title to real property in AB 1656 (Dickinson) Page 1 the name of the State, and to construct, lease, or transfer state property, when authorized by the Legislature. BOE is comprised of four elected members, one from each equalization district, and the State Controller. Created in 1879 by a constitutional amendment, the BOE was initially responsible for ensuring that county property tax assessment practices were equal and uniform throughout California. Under current existing law, BOE administers the following tax and fee programs: sales and use tax, Bradley-Burns uniform local sales and use tax, transactions and use tax, alcoholic beverage tax, cigarette and tobacco products tax, motor vehicle fuel tax, diesel fuel tax, interstate user tax, emergency telephone users surcharge, energy resources surcharge, insurance tax (in part), integrated waste management fee, natural gas surcharge, childhood lead poisoning prevention fee, oil spill response and prevention fee, underground storage tank maintenance fee, use fuel tax, hazardous substances tax, California tire fee, occupational lead poisoning prevention fee, marine invasive species fee, electronic waste recycling fee, timber yield tax and private railroad car tax. The BOE also assesses the property of public utilities and common carriers, and provides certain administrative and oversight functions with respect to the local property tax. In addition, it adopts rules and regulations to clarify tax laws, acts as an appellate body for the review of property, business and income tax assessments, assesses and allocates property values of railroads and specified utilities, and oversees the property tax assessment practices of all 58 counties. In fiscal year (FY) 2012-13, BOE-administered taxes and fees produced $56 billion for California, an increase of 6.8 percent from the previous year. Of its $501 million 2012-13 budget, $287 million, or 57 percent, came from the General Fund. In 1992 DGS, on behalf of the State, entered into a 30-year lease-purchase agreement to acquire the 24-story 610,000 square foot property located at 450 N Street as a headquarters building for BOE. CalPERS owned the building, and spent roughly $80 million to construct it. The State purchased the building from CalPERS in 2006 with a loan Pooled Money Investment Board (PMIB) for $81 million. In 2011, the state $92 million in issued lease-revenue bonds to repay principal and interest on the PMIB loan. AB 1656 (Dickinson) Page 2 Over the past twenty years, the building's troubles have been continual, and include leaky windows, mold, glass panels that dislodge from the exterior of the building with no warning and shatter on the sidewalk, a colony of bats, malfunctioning elevators, corroded pipes carrying wastewater from toilets and sinks, and a broken fire system water pump, requiring round-the-clock staff time to traverse the building is search of potential fire hazards. BOE indicates that roughly $60 million has been spent to date on building repairs and remediation. In addition to defects at the 450 N Street building, BOE has experienced staffing increases in recent years (largely the result of legislative mandates and revenue collection and enforcement efforts) such that the agency has outgrown the building. Currently, BOE has four annex locations in the greater-Sacramento area. Headquarter staff in its five locations (including 450 N Street) total 3,150 persons. The 450 N Street site is designed to house 2,200 employees. For all these reasons, Board Members have voted in favor of relocating its headquarters. On March 12, 2014, the Joint Legislative Audit Committee approved a request by Assemblymember Dickinson for the State Auditor to audit the problems at the BOE building. The audit will examine the cost of repairs made to the building to date. The report is not expected to be released until September, after the close of the current legislative session. Proposed Law: This bill would authorize DGS, in consultation with BOE, to enter into one or more agreements to acquire, construct, purchase, lease-purchase, or lease with an option to purchase, to provide usable office and related space in order to consolidate the BOE headquarters operations into one single location. Specifically, this bill would do the following: Authorize DGS to enter into agreements for the planning, design, construction, and acquisition of facilities in the Sacramento region. Require DGS to develop the terms and conditions of the agreements no later than December 31, 2015. Authorize DGS to solicit proposals for the sale, exchange, lease, or rehabilitation of the 450 N Street AB 1656 (Dickinson) Page 3 property. The acquisition of a new facility and sale of the existing 450 N Street property may be handled separately or combined into one proposal. Require DGS to notify the Legislature of the terms and conditions of the proposed agreements at least 45 days prior to executing the agreements. Require that DGS be reimbursed for its costs associated with entering into the agreement in an amount not to exceed $3 million from a loan of funds that are deposited in the Architecture Revolving Fund (ARF) for repairs to the BOE's Headquarters building. Any amounts loaned shall be repaid from the BOE's operating funds within five years from the date those funds were borrowed. Requires DGS to determine whether it is in the best interest of the state to sell or lease the 450 N Street property and report its findings to the Legislature. After making the determination to sell, exchange, or lease the 450 N Street property, requires DGS to make an early payoff of the total outstanding bonds on the property. In order to facilitate the sale of the 450 N Street property, DGS and the SPWB may borrow from the General Fund an amount necessary to satisfy the total outstanding bonds. Any amounts loaned shall be repaid from the sale proceeds of the property. The bill authorizes the State Public Works Board to issue revenue bonds, negotiable notes, or negotiable bond anticipation notes to finance the acquisition of the land and facility for a new consolidated headquarters. The bill authorizes the SPWB and DGS to borrow funds for project costs from the Pooled Money Investment Account (PMIA). In the event the bonds authorized are not sold, the DGS is required to commit a sufficient amount of its support appropriation to repay any loans made for the project from the PMIA. The bill authorizes the BOE to relocate its offices from existing state-owned or state-leased facilities that no AB 1656 (Dickinson) Page 4 longer meets its needs without any obligation to pay rent after vacating the premises. Related Legislation: AB 151 (Jones) of 2010 would have required DGS to conduct a study as to whether it is in the best interest of the state to sell, lease, or exchange the BOE headquarters. It authorized the sale, lease, or exchange thereof, based upon the director's findings. It required DGS to investigate new land and facilities for a BOE headquarters using the net proceeds of the initial agreement. The bill granted BOE independent real estate authority without DGS's involvement. The bill was vetoed by the Governor. Staff Comments: There is ample information indicating a consolidation of BOE office space is an appropriate facilities management decision. Regarding costs, the bill would authorize DGS to spend up to $3 million for the planning, design, construction, and acquisition of facilities for BOE's relocation in the Sacramento region. DGS authorization would also extend to agreements to acquire, construct, purchase, lease-purchase, or entering into a lease with an option to purchase, office space in the Sacramento region for the same purpose. The total fiscal impact to the State of consolidating BOE into a single new location would reflect a variety of factors. Currently, the outstanding balance of the LR bonds that financed the acquisition of the building is $77 million; BOE pays $11.9 million annually in debt service payments until 2020-21. If BOE were to vacate the 450 N Street location, these debt-service payments would need to continue, either (1) by placing another tenant in the building, (2) retiring the bonds, or (3) making annual appropriations (which could present legal problems if payments are made with no tenant occupying the facility). BOE has indicated that, if it were to remain at the 450 N Street location, additional remediation costs would total $31 million. BOE itself could avoid spending a large portion of these costs if were to vacate the 450 N Street site; however, much of the spending would still occur, for the purposes of either (1) selling the building, or (2) refurbishing it in preparation of occupancy by another tenant. It is noted, however, that if this bill were not to be enacted, these remediation costs would likely occur anyway, with BOE still occupying the building. AB 1656 (Dickinson) Page 5 BOE would incur new lease payments for the consolidated location, likely in the tens of millions of dollars annually. It would also incur moving and other relocation expenses it would inhabit, offset somewhat by reduced costs and increased revenues resulting from efficiencies in operation. Assuming proportionality to BOE's current budget, 57 percent of the total costs would come from the General Fund.