|Budget Issue:||Reject building rental rate increase for ADA repairs and deferred maintenance|
|Finding or Recommendation:||Reject Governor's January budget proposal for a temporary, across-the-board $0.10 rental rate increase for the state's office buildings because it is an inappropriate way to fund special repairs across multiple facilities.|
The Department of General Services (DGS) is responsible for the operation, debt service, maintenance, and repair of most state-owned office buildings. The DGS recovers the cost of these services by charging a monthly rental rate to the state departments that are tenants in these facilities. The monthly rental rates vary by building. In 2012-13, the rates ranged from $0.85 to $5.15 per square foot per month.
The Governor proposes to increase the monthly rental rate for DGS-managed office buildings by $0.10 per square foot for a period of ten years to fund special repairs. (Three buildings are exempted from the proposed $0.10 increase because DGS has identified these buildings for major renovation or replacement in its five-year plan.) According to DGS, the repairs are necessary to comply with the Americans with Disabilities Act (ADA) and address deferred maintenance. The additional funds from the $0.10 surcharge would be deposited into a dedicated account for repairs statewide. The rental increase would provide $11 million annually for these repairs for a total of $110 million over the ten-year period. This level of funding matches DGS’ cost estimate for the identified repairs—$82 million for ADA compliance and $28 million in deferred maintenance.
In general, it appears that an increase in the rental rate of some, if not all, of DGS’ buildings is justified. The identification of more than $100 million in ADA and other special repairs indicates that rental rates have been set too low to meet DGS’ costs for operating and maintaining the state’s office buildings. In our view, however, the administration’s proposal to increase each building’s rate by an equal amount is not an appropriate way to adjust the rental rate. We identify several concerns with the administration’s approach below.
Does Not Recognize Differences Between Facilities. A $0.10 increase in the monthly rental rate of each office building does not take into account that the cost of repairs will vary by building. The cost of ADA upgrades and special repairs will depend upon the age and condition of each building. For example, the Caltrans District 3 building opened in 2011 and the Library and Courts Building currently is undergoing a major renovation. Due to these recent improvements, these facilities should not require significant upgrades in the near term, yet the proposal would increase the rental rates in these buildings by the same amount as much older buildings. This means that the tenants of recently renovated or replaced buildings—already paying higher rates to cover the cost of the recent improvements—will subsidize the repairs in other buildings. Similarly, DGS reports that the Franchise Tax Board (FTB) complex accounts for roughly $8 million of the $110 million in identified repairs. The $0.10 increase, however, would require FTB to pay more than $17 million in additional rent over the ten years. On the other hand, DGS has identified over $11 million in repairs for the Board of Equalization (BOE) building, yet BOE would pay just over $5 million in additional rent over the ten-year period. In other words, a uniform surcharge will result in rental rates that do not reflect the true cost of operating and maintaining each facility.
Only Addresses Current Backlog. This proposal would create a temporary surcharge to retire the existing repair backlog (as well as $82 million in ADA upgrades). The proposal, however, does not adjust the base rental rates to address the original cause of the maintenance backlog. Deferred maintenance occurs when special repairs cannot be addressed within the existing budget and are carried over into the following fiscal years. The $28 million in deferred maintenance, therefore, suggests that the current rental rates are insufficient to meet the state’s maintenance costs. By adjusting the rates only for the purpose of retiring the one-time costs associated with ADA and existing deferred maintenance, the proposal would not prevent the accumulation of additional deferred maintenance in future years.
We recommend that the Legislature reject the proposal because a temporary, across-the-board $0.10 rate increase is an inappropriate way to fund special repairs across multiple facilities. The rental rates should be set at amounts sufficient to cover debt service, ongoing operations, and maintenance costs as well as build up a reserve for the repair or replacement of building systems and equipment. Accordingly, we recommend that the Legislature direct DGS to adjust existing rates to meet each facility’s individual needs over time. While more complex, such individual adjustments would result in rental rates that more accurately reflect the cost of operating and maintaining each building. For buildings with significant ADA compliance issues and deferred maintenance, the new building rate may need to include a temporary multiyear increase to cover these one-time costs as well as an increase in the base rental rate to prevent the accumulation of additional deferred maintenance. For newer buildings, DGS also may determine that minor rate increases are needed to establish a sufficient reserve for future scheduled maintenance and special repairs.