AB 1656 Page 1

Date of Hearing: May 14, 2014

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Mike Gatto, Chair

AB 1656 (Dickinson) – As Amended: March 28, 2014

Policy Committee: Accountability Vote: 13-0

Urgency: No State Mandated Local Program: No Reimbursable:

SUMMARY This bill authorizes the Director of General Services (DGS) to acquire office space in order to

consolidate the operations of the Board of Equalization (BOE) in the Sacramento Region. Specifically, this bill:

1) Authorizes DGS, with consent of the BOE, to enter into a lease, lease-purchase, or lease with

an option to purchase to consolidate the BOE into a single location.

2) Requires DGS to complete a site selection by June 30, 2015 and to complete development of

the terms and conditions of an agreement by December 31, 2015. 3) Requires DGS to provide notice of the terms and conditions to the Legislature's fiscal

committees and the Joint Legislative Budget Committee (JLBC) at least 45 days prior to executing the agreement.

4) Requires DGS to determine whether it is in the state's best interest to sell or lease the BOE's

existing state-owned building at 450 N Street in downtown Sacramento, and report on the

most cost effective option to the fiscal committees and JLBC.

5) Authorizes DGS, if it determines per (4) that the state should dispose of the property, to sell, lease or exchange the property.

6) Stipulates that, upon sale of the property, DGS shall make an early payoff of outstanding lease-revenue bonds.

FISCAL EFFECT

1) A consolidated facility for the BOE would be around one million gross square feet and cost in the range of $500 million, with occupancy in five to six years following authorization. As

this facility would likely be acquired under a lease with a purchase option or a lease-purchase agreement, payments would be made for 25-30 years through augmentations to the BOE's operating budget.

2) DGS's one-time cost will be up to $3 million to complete an acquisition agreement.

3) BOE would incur one-time moving costs in the low millions of dollars.

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4) If the state does not sell the current BOE headquarters building and instead relocated other

state tenants currently in leased space, these agencies will incur significant one-time moving costs, but over the long run should realize ongoing savings related to occupying a state-owned, rather than leased, facility.

COMMENTS

1) Background and Purpose. The board, which administers tax and fee programs, is seeking to

leave its current headquarters in downtown Sacramento because of space constraints and

various ongoing building maintenance issues that have arisen since moving to the location in 1993 under a lease-purchase agreement. In 2006, the state exercised an early purchase option

on the building for about $80 million by issuing lease-revenue bonds. The bonds are scheduled to be retired in 2021.

The current building was designed to house 2,200 employees, but space is now needed for almost 3,000 employees. The board has moved about a quarter of its headquarters operations

to four annexes in the Sacramento region, creating operating inefficiencies and increases costs. Moreover, the BOE has averaged personnel growth of almost three percent annually.

In addition to space constraints, the problem-plagued headquarters building has had several issues that have required and still require extensive repairs. According to BOE, the state has

spent approximately $59 million thus far in repairs. Issues have involved water intrusion, mold growth that required extensive remediation, deficiencies with the exterior wall window system, and the need to update several building systems. BOE reports more problems have

recently been discovered and efforts to correct them are expected to cost an additional $30 and $40 million over the next few years.

This bill authorizes the consolidation of BOE operations in a new location and the disposition of the current headquarters building if DGS finds that is the most cost-effective approach.

2) Righting a Mistake. As a revenue collection agency processing thousands of documents

daily, the BOE probably never should have been located in a downtown highrise building. As part of the Supplemental Report to the 2012-13 Budget Act, DGS was required to prepare a preliminary study for relocation and consolidation of the BOE. In this report BOE

acknowledges that it "has planned for many years to streamline its business operations into a horizontal movement of tax documents and receipts through the scanning to destruction

process from station to contiguous station without being moved vertically from floor to floor by courier." Essentially a similar arrangement to that used by the Franchise Tax Board. Thus relocation of the BOE to a low-rise facility makes business sense.

3) Leasing Not a Long-Term Solution. The bill, in part, provides authorization for DGS to lease

facilities for the BOE. While a straight lease provides the most flexibility to a tenant, in the long run it is generally more beneficial for the state to have ownership of its various headquarters operations.

4) Timeline Too Short. The bill provides DGS six months to complete sight selection and 12

months total to develop terms and conditions of a lease agreement. There is no need for two separate deadlines, as the site selection would be part of the lease criteria. The entire process, however, will take at least 18 months upon appropriation of sufficient funds to DGS.

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5) Auditor Study Pending. In March, the Joint Legislative Budget Committee approved having the State Auditor examine the costs to repair the 450 N Street building and the costs/benefits of consolidating the BOE. Unfortunately, this report is not expected to be released until

September, after the end of this legislative session.

Analysis Prepared by: Chuck Nicol / APPR. / (916) 319-2081