The Administrations Sacramento Office Building …

$1.3Billion Approved in 201617 Is First Step in Administrations Larger Strategy. In adopting the 201617 budget package, the Legislature established the State Project Infrastructure Fund (SPIF), which is continuously appropriated for state projects. The Legislature further provided $1.3billion to the SPIF over two years for three specific state office building construction projects in Sacramento. These projects reflect the first step of the administrations larger regional strategy to construct or renovate a total of 11state 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 $1billion in additional funding requests to continue to carry out this strategy.

Administrations Approach to Strategy Raises Some Specific Concerns.Assessing the condition of the states 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 $1.3billion provided in 201617. Specifically, we find the following:

Recommend Legislature Provide Clear Direction to Administration on Strategy.We recommend that the Legislature take the following actions to address the above concerns:

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.

In adopting the 201617 budget package, the Legislature established the State Project Infrastructure Fund(SPIF) and provided $1.3billion over two years for three specific state office building projects in the Sacramento area. These projects reflect the first step of the administrations larger regional strategy to expand and improve state office buildings in the Sacramento area over the next ten years. In the coming years, the Legislature will be presented with important decisions related to this strategy. Specifically, the Legislature will have to determine whether to proceed with the additional projects envisioned in the administrations regional strategy. Additionally, the Legislature will have to decide how to best oversee the projects funded with the $1.3billion provided in 201617.

This report is intended to help guide the Legislature as it makes these decisions. We begin by providing background information on Sacramento state office buildings and summarizing the actions taken in the 201617 budget process. Next, we assess the administrations regional strategy for state office buildings in the Sacramento area. Finally, we provide recommendations to assist the Legislature as it faces key decision points related to the administrations strategy.

The state, through the Department of General Services (DGS), owns and maintains 58general purpose office buildings across the state. Thirtyfour of these buildingstotaling over 8million square feetare in the Sacramento area. These Sacramento area buildings are valued at over $4billion and house 35 state departments and agencies, such as the Department of Water Resources and the Franchise Tax Board. The state also leases about 8million square feet of general purpose office space in the Sacramento area. (We note that some state departments other than DGS operate office space for more specific purposes. For example, the Department of Motor Vehicles operates field offices.)

DGS Directed to Perform Sacramento Office Planning Effort. As part of the 201415 budget, the administration proposed and the Legislature approved a total of $2.5million for DGS to complete a longrange planning study (LongRange Study) of stateowned general purpose office space in the Sacramento area. The LongRange Study was to include (1)an update of an earlier planning study identifying potential office space development opportunities in Sacramento (Office Planning Study); (2)condition assessments of all state office buildings in the Sacramento area (Sacramento Assessment Report); (3)a plan for sequencing the renovation or replacement of state office buildings in Sacramento (Sequencing Plan); and (4)a funding plan for undertaking these projects, including project cost estimates and an economic analysis (Funding Plan).

Chapter451 of 2014 (AB 1656, Dickinson) required that DGS complete this LongRange Study by July 1, 2015, as well as provided direction on the contents of the study and how it was to be used by DGS. First, the legislation specified that the study should guide the states actions on state buildings over the next 25 years. Second, it required that DGS use the information in the LongRange Study as the basis for developing detailed cost and scope information to be considered in future budget proposals. Finally, it directed DGS to issue requests for proposals to address the renovation and replacement needs of Sacramento office buildings, starting with the three buildings with the most significant and immediate facility needs.

Office Planning Study Identified Potential Office Development Sites. In 2015, DGS completed the Office Planning Study component of the LongRange Study, which identified and ranked 41 potential sites in Sacramento for future development over the next 40 years based on an evaluation of the feasibility of developing the sites. Using criteria such as size, ownership (stateowned versus privately owned), and access to transportation, the evaluation rated the seven best sites as superior and nine additional sites as good. As shown in Figure1, some of these sites are stateowned and some are privately owned. Additionally, the development time frames for these sites vary, with some potentially ready for development within five yearssuch as Downtown Block 204 (currently occupied by a parking lot and the historic Heilbron House)and others available for development within six to ten yearssuch as the State Printing Plant site. Many of these sites contain existing buildings that would have to be demolished or moved to accommodate new development.

Figure 1

Potential Superior and Good Development Sites Identified in Sacramento Office Planning Study

Site

Ownership

Development Time Frame (Years)

Location

Superior

Bonderson Building site

State

05

Downtown Sacramento

CalPERS site

State

05

Downtown Sacramento

Downtown Block 275

State

05

Downtown Sacramento

Downtown Blocks 203 and 204

State

05

Downtown Sacramento

Food and Agriculture Annex site

State

05

Downtown Sacramento

Franchise Tax Board site

State

05

County (near Rancho Cordova)

Richards Boulevard area

Private

05

Railyards area/River District

Good

Resources Building site

State

610

Downtown Sacramento

State Printing Plant site

State

610

Railyards area/River District

Downtown Core

Private

05

Downtown Sacramento

Bradshaw Landing

Private

05

County (near Rancho Cordova)

Granite Park

Private

05

Granite Regional Park area (near Tahoe Park)

Railyards area

Private

05

Railyards area/River District

Southport Business Park

Private

05

West Sacramento

West Capitol Downtown

Private

05

West Sacramento

Pioneer Bluff area

Private

610

West Sacramento

Sacramento Assessment Report Identified Buildings With Highest Needs. In July 2015, DGS released the Sacramento Assessment Report portion of the LongRange Study. The report evaluated 29stateowned office buildings in Sacramento. (The report excluded a few buildings that were vacant or that DGS did not consider to be typical office space, such as the State Capitol Annex.)

Overall, the Sacramento Assessment Report noted that all of the buildings that were evaluated were in a safe, serviceable, and functioning condition. The report developed a Facility Condition Index (FCI) score for each building, which compared the estimated costs of repairing versus replacing the building. (A high FCI score means that a buildings repair costs are relatively high compared to cost of replacement.) Based on this analysis, the report ranked the 29buildings, identifying 9 in poor condition, 4 in fair condition, and 16 in good condition, as shown in Figure2. The report ranked the Resources Building, Personnel Building, and Bonderson Building as those in most critical need of renovation or replacement and recommended prioritizing the needs of these buildings over other buildings, consistent with the direction provided in Chapter451. The report also found that all of the buildings that were evaluated had FCIs well below 65, which is the industry standard for replacement. This suggests that all of the buildings that were evaluated are better candidates for repair rather than replacement. (As we discuss later, in September 2016 the administration completed assessments of the condition of general purpose office buildings in other parts of the state besides Sacramento.)

201617 Budget Package Included $1.3Billion Over Two Years. The 201617 budget package provided $1billion from the General Fund in 201617 and $300million in 201718 to be deposited into a new fund, the SPIF. This funding is to be used for three buildings in the Sacramento area: a new building at the current Food and Agriculture Annex site on O Street (O Street Building), a new Resources Building at a different site, and either replacement or renovation of the State Capitol Annex. (Throughout this report, we refer to these three projects as the three initial projects.)

SPIF Funds Are Continuously Appropriated. In adopting the 201617 budget package, the Legislature passed Chapter31 of 2016 (SB836, Committee on Budget and Fiscal Review), which governs the use of the SPIF. Chapter31 specifies that monies in the SPIF are continuously appropriated. It also authorizes the administration to establish and move forward with projects without having to receive legislative approval through the traditional state budget process, as is typically required for capital outlay projects. (Please see the nearby box, for a detailed description of the 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 Governors proposed budget for the coming fiscal year. These capital outlay budget change proposals generally include important details on the proposed projectssuch 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 longterm 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 projects costs increase by more than 20percent, the administration is generally required to seek legislative approval through the traditional budget process before being able to proceed. (If the projects scope changes minimally or its costs increase by between 10percent and 20percent, the typical process requires the administration to notify the Joint Legislative Budget Committee.) If the Legislature has concerns about the administrations proposed changes, the Legislature has the opportunity to reject them or to direct the administration to make changes to address the concerns.

Certain Notifications Required for Funded Projects. Chapter31 requires the administration to provide the Legislature with quarterly reports and notifications in order to establish and move forward with SPIFfunded projects. Figure3 summarizes the required notifications. For example, at least 20 days before spending SPIF funds on project planning activities, the administration must provide the Joint Legislative Budget Committee (JLBC) with a notice identifying the purpose of the planning activity and its estimated costs. In September 2016, the administration provided the Legislature with the first notification through this processa 20day notification regarding its intent to spend $4.9million on the development of the cost, scope, and delivery method for the O Street Building and the new Resources Building. The notification review periods for the Legislature range from 20to 60 days depending on the project and activity. We note that, because of its unique characteristics, Chapter31 created a separate process for the State Capitol Annex as described in the nearby box. As such, when we discuss state office buildings in this report, we do not include the State Capitol Annex unless otherwise specified.

Figure 3

Required Notifications for State Projects Funded Through the State Project Infrastructure Funda

Activity

Contents of Required Notice

Minimum Number of Days of Advanced Notification

Expenditure of funds on planning activities

Purpose of planning activity and estimates of costs

20

Establishment of scope, cost, and delivery method

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