Report 2014-108 Summary - September 2014

State Board of Equalization Building: Despite Ongoing Health and Safety Concerns, the State Has Not Thoroughly Analyzed the Costs and Benefits of Relocating Employees

HIGHLIGHTS

Our assessment of the State Board of Equalization's (BOE) and the California Department of General Services' (General Services) analysis of BOE's headquarters building highlighted the following:

RESULTS IN BRIEF

The State Board of Equalization (BOE) administers tax programs concentrated in four general areas: sales and use taxes, property taxes, special taxes, and the tax appellate program. Headquartered in the Sacramento area in five locations, BOE has occupied the building located at 450 N Street in downtown Sacramento (building) since 1993. After initially leasing the building from the California Public Employees' Retirement System, the California Department of General Services (General Services) was authorized by legislation to purchase the building in 2006. Since at least 1994 BOE has experienced maintenance problems in the building, including water intrusion, visible mold, corrosion in drainage pipes, and spandrel glass panels falling from the building.1 As a result, General Services has conducted several major repair projects, amounting to roughly $60 million in repairs and upgrades to the building as of February 2014. However, continued health concerns associated with the building prompted three BOE employees in August 2014 to file a class action lawsuit against the State with the Sacramento County Superior Court, seeking up to $75 million in damages. Since 2012 BOE and General Services have been preparing for another large repair project, believed to total roughly $40 million.

BOE has performed or commissioned several analyses on the costs and benefits of relocating and consolidating its headquarters locations, but it has not yet prepared a cohesive, properly supported analysis demonstrating that the benefits to the State of moving BOE to a new facility outweigh the costs. As part of a business case it developed in 2013, BOE stated that it anticipates a 5 percent improvement in productivity by streamlining its business operations, potentially equating to an additional $89 million in annual revenue that enforcement personnel such as auditors and collectors would generate. BOE staff believe that by mirroring the Franchise Tax Board's (FTB) horizontal movement of tax documents—rather than its current practice of moving documents vertically among the building's multiple floors—it will achieve gains similar to those it says FTB achieved when it moved to its current location. If actually realized, this additional revenue would dwarf any marginal differences between the costs to maintain BOE's current work space and the costs to lease a new facility. However, BOE staff were unable to provide us with documentation or assertions from FTB that such an increase in productivity actually occurred when FTB moved. Further, although BOE is planning to hire a vendor to perform a study, it has not analyzed its own tax document processing to determine whether it could increase productivity by consolidating its headquarters, despite a 2010 consultant report recommending that BOE perform such an analysis. Without a strong rationale underlying its assumptions, BOE cannot clearly demonstrate the validity of its claim that relocating and consolidating its headquarters operations would result in additional revenue to the State.

BOE also cannot support critical components of an internally developed analysis of the costs and benefits of maintaining its current spatial configuration versus relocating and consolidating its headquarters. Specifically, BOE cannot support some of its cost estimates, such as the monthly lease rates for temporary space and for a new consolidated facility. Under BOE's assumptions, it appears the State would benefit from emptying the building and permanently relocating BOE headquarters staff to a new consolidated facility. However, most of this benefit is derived from BOE's assumption that remediating an empty building would cost $20 million less than emptying and remediating only a few floors at a time. Although General Services agreed with this concept, it would not make a blanket statement that such a large reduction in costs would occur.

BOE also analyzed other aspects related to consolidating its headquarters staff at a new facility, such as the loss of productivity and state revenues from temporarily moving employees while repairs are conducted and the need for more space to accommodate potential future staffing growth. Although it developed a methodology to estimate the lost productivity from its employees moving to, working at, and moving back from a temporary work location, BOE could not provide documentation or a strong rationale to support its estimate of 80 hours of lost productivity per employee. BOE also estimated the state revenues its employees would not collect while moving to, working at, and moving back from a temporary work location, but it could not substantiate a key figure—an estimate of the amount of state revenue lost per employee. Finally, BOE has done some planning to estimate its future space needs, and as part of that planning, it relied on a projected annual growth rate in its staffing of 3 percent. However, our review of its total filled positions found that BOE's average annual growth rate has been less than 1 percent over the past 20 years. By overstating its staffing growth, BOE has overstated its need for future office space to accommodate new staff.

Because BOE's analyses included several assumptions that do not have adequate support or rationale, we performed an expanded analysis that included additional components and used more conservative assumptions for certain elements. For example, because BOE could not support its estimated productivity gain of 5 percent after moving to a new consolidated facility, we trimmed this component of the analysis to one-tenth of BOE's expected productivity gains. We also halved BOE's estimated reduction in the costs of remediating an empty building, and we halved its estimated productivity and revenue losses from moving staff only once during a consolidation. After producing a much more conservative estimate, we still believe there could be a net fiscal benefit for the State to move BOE staff to a new facility so the building can be remediated while empty of all its employees. However, we believe any net fiscal benefits will quickly erode if the State cannot sell or find a productive use for the building after it has been remediated.

General Services is responsible for overseeing the use of state facilities; however, it has not determined whether maintaining ownership and repairing the BOE building is in the best interest of the State, and it has not made plans for using or selling the building should BOE be allowed to move to a new facility. General Services has responsibility in statute for maintaining state buildings and property and also for making the final determination on the use of existing state-owned facilities. As stated earlier, BOE and General Services have been preparing to make key repairs to the building and according to officials at General Services, representatives from trade and manufacturers associations indicated that construction associated with the failing components in the building may cost roughly $40 million. General Services' officials stated that this figure could change once the project scope is finalized. Additionally, the State could face potentially significant legal and workers' compensation costs associated with the health concerns in the building, based on current and past litigation. Given its broad statutory authority, we would expect General Services to be more proactive in determining the value of the building and comparing that value against the repair and potential legal costs associated with the building to determine whether it should remain a part of the State's property portfolio.

RECOMMENDATIONS

To more clearly demonstrate its case for a new facility, BOE should do the following:

To ensure that it can accurately estimate any shifts in worker productivity and state revenue, BOE should strengthen its current methodology by analyzing the productivity and revenue collections of its employees and by monitoring those metrics at least semiannually. Additionally, BOE should support its methodology with documentation.

To ensure that resources are spent wisely, General Services should seek the funding and approval needed to analyze whether keeping or selling the BOE building would be in the State's best financial interest. As part of that analysis, General Services should conduct, or contract for, appraisals to assess the value of the building with and without the repairs to determine whether making the repairs is in the best interest of the State. If continued ownership of the building appears to be prudent, General Services should evaluate potential productive uses for the building should BOE move to a new facility. General Services should report the results of its analysis to the Legislature no later than September 2015.

AGENCY COMMENTS

BOE and General Services indicated that they plan to implement our recommendations.

1 Spandrel glass is an architectural material used to cover construction materials, disguise arches and columns, and present a seamless exterior to buildings.