1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 OCTOBER 6, 2009 9 10 OTHER ADMINISTRATIVE MATTERS 11 DEPUTY DIRECTOR'S REPORT 12 ITEM P3c3 13 2010/11 BUDGET CHANGE PROPOSAL UPDATE 14 15 16 17 18 19 20 21 22 23 24 Reported by: Juli Price Jackson 25 No. CSR 5214 26 27 28 1 1 2 P R E S E N T 3 4 For the Board Betty T. Yee of Equalization: Chair 5 6 Jerome E. Horton Vice-Chair 7 Bill Leonard 8 Member 9 Michelle Steel Member 10 Marcy Jo Mandel 11 Appearing for John Chiang, State Controller 12 (per Government Code Section 7.9) 13 Diane G. Olson 14 Chief, Board Proceedings Division 15 16 17 ---oOo--- 18 Liz Houser Deputy Director 19 Administration 20 Robert Lambert Legal Department 21 Timothy Bow 22 Department of General Services 23 24 ---o0o--- 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 OCTOBER 6, 2009 4 ---oOo--- 5 MS. YEE: Then I guess on -- with respect to 6 the proposal before us for $2.48 million -- and my 7 understanding is this is to address the Priority 1 items 8 that have been identified in the study, right? 9 MS. HOUSER: Correct. 10 MS. YEE: We do have a bill, Mr. Horton, 11 pending AB151, which would authorize General Services to 12 begin discussions with interested parties with respect 13 to a sale or exchange or a lease of the building. 14 And it seems to me the Priority 1 items would 15 have to be pursued regardless of the disposition of the 16 building. So, I don't want to hold that up. 17 But I'm kind of loathe to think about 18 committing ourselves any further without some commitment 19 about, you know, trying to look at another option for 20 this building besides continuing to sink more dollars 21 into it. 22 MS. HOUSER: Correct. The Budget Change 23 Proposal we have before you, first I do apologize for 24 the lateness of this BCP, I've reminded DGS of our 25 process since this is a companion BCP. By the time that 26 we were aware that their -- that the preferred funding 27 strategy for funding the 2. -- the $2,480,000 associated 28 with Phase 1 repairs was to increase our rent, because 3 1 there's always the option to do a capital outlay BCP, 2 but I guess in initial discussions with the Department 3 of Finance the decision was made -- those decisions did 4 not include us -- the decision was made to do a special 5 repair fund funding which is funded through rent 6 increase. 7 So, once we were made aware of the need to 8 increase our rent, we reminded the executive team at DGS 9 that, you know, we need a companion BCP because if 10 you're going to increase our rent, we would need a 11 baseline augmentation to be able to pay that rent 12 increase. 13 So, I do always like to get the BCPs to you 14 prior to the, you know, the meeting before the 15 September 12th date. We have made Finance aware that we 16 would not be able to bring this forward until it had 17 gone before our Board. And they are waiting for what is 18 a late BCP. 19 So, for this -- as much as I hate to see more 20 money go into the building and don't like to have to 21 request something that increases our baseline budget, 22 which kind of skews our other numbers because our 23 expenses go up, I just don't see that we have any choice 24 in this matter. 25 We must do fire, life and safety repairs. It's 26 just not an option. We had been pressing DGS to do a 27 full review of this building to make sure that we were 28 getting everything done that needed to be done. 4 1 So, the water intrusion study that was done by 2 Lacroix Davis was done first. And we're working 3 diligently -- or they're working diligently to address 4 all of those concerns, but we had continually been 5 asking, "What about the infrastructure? Where we are 6 at?" We know we have heating and cooling issues. We 7 know we have issues with these elevators. Is there 8 something else that needs to be reviewed? 9 So, they did move forward the contract. It was 10 performed by Stantec. And it was a -- not so much a 11 comprehensive review, but kind of a high level review of 12 the infrastructure study. And they did identify a 13 number of these fire, life and safety issues. 14 And, you know, we -- we need -- we have been 15 very responsible whenever anything is identified that -- 16 that could impact our employees' safety, we immediately 17 have it addressed. 18 So, now we -- we need to stay with that course. 19 We need to get these things fixed right away. 20 MS. YEE: Right. 21 MS. HOUSER: So, it's -- this is pretty much 22 the only option because we can not afford to pay for it 23 unless we have the budget increase. 24 MS. YEE: Yeah, I understand that. And I guess 25 I want to follow up on Mr. Horton's suggestion about 26 getting all of the parties together. 27 The thing that I am really unhappy about, in 28 terms of our approach with getting these phases and 5 1 segments funded, is that 2.4 million doesn't sound like 2 a lot of money when it goes before the legislature or to 3 Finance, but it's a snapshot of entire effort. 4 And, so, I think we need to be transparent 5 about what this entire effort looks like. And what I'd 6 like to kind of entertain from my colleagues is whether 7 we ought to tie this BCP, this funding for addressing 8 the Priority 1 items is towards implementation of AB 9 151? Because I'm not interested in looking at another 10 piecemeal BCP for Priority 2 or Priority 3 if we're not 11 going to address the long term issues about what we are 12 doing with this building. 13 So, I would be interested in getting some 14 feedback about that. 15 MR. HORTON: Well, you certainly have my 16 support. 17 MS. YEE: Thank you, Mr. Horton. 18 Other comments? 19 Mr. Leonard? 20 MR. LEONARD: I would propose a question to 21 General Services. We've worked hard on this 22 legislation, but it's -- it's in a really broad based 23 authorization. Does General Services really need 24 statute to consider real estate transactions on State 25 office buildings? 26 MR. BOW: With regards to selling or disposing 27 of State property, yes. 28 With regards to leasing property, that would be 6 1 a budget change. 2 MR. LEONARD: I'm actually -- the bill is 3 actually a step backwards before that. It's to have 4 General Services authorized to -- to investigate, 5 consider and analyze proposals to sell a State office 6 building. 7 MR. BOW: Yes, we would need that authority to 8 do that. 9 MR. LEONARD: You do not have that authority? 10 MR. BOW: Not at the current time. 11 MR. LEONARD: You just popped off a week or two 12 ago selling half a dozen State properties and 13 refinancing them as lease purchase and I didn't see any 14 legislation. 15 MR. BOW: AB 22. 16 MR. LEONARD: It's law? 17 MR. BOW: It was part of the trailer bill 18 language for the budget. 19 MR. LEONARD: That was all -- I didn't think 20 that was signed yet. 21 MR. BOW: Yes. 22 MR. LEONARD: Okay. And why did that not 23 include us? 24 MR. BOW: I can't answer that. I don't know 25 the decisions that were made. 26 MR. LEONARD: No, no, doesn't -- give me a 27 rephrase, since it didn't name specific properties that 28 I am aware, why doesn't it include us? 7 1 MR. BOW: Actually, it did. It named 11 2 buildings -- 11 locations, 17 buildings. 3 MR. LEONARD: Okay, I stand corrected. 4 MS. YEE: Okay. 5 Yes, Mr. Horton? 6 . 7 MR. HORTON: Just for clarification purposes, 8 who owns the building? 9 MS. HOUSER: Want to try that, Mr. Bo? 10 MR. BOW: You want to give it a try? 11 MS. YEE: You can take credit, it's okay. 12 MS. HOUSER: From our research, the State of 13 California owns the building. The Department of General 14 Services is the property manager. And the Board of 15 Equalization is here on a tenant assignment. 16 MR. HORTON: And, so, what holds us to this 17 building? Why not just pack up and leave? 18 MS. HOUSER: We would need funding to pack up 19 and leave. 20 MR. HORTON: What about the 65 million? 21 MS. HOUSER: I think that would do it. 22 MR. HORTON: So, we're asking for 65 million 23 from where? 24 MS. HOUSER: So far the funding that has been 25 provided for the 24.6 million, the 15.5 for curtain wall 26 came out of the 9840 funds, which are kind of the 27 emergency funds that are available to address immediate 28 safety needs Statewide. 8 1 The remaining money -- 2 MR. HORTON: Is that Board of Equalization, 3 part of our budget? 4 MS. HOUSER: No, it's not part of our budget. 5 MS. YEE: It's the State. 6 MS. HOUSER: It's a separate fund of money they 7 used as the windows were falling out. They were 8 concerned they could, perhaps, land on someone. 9 MR. HORTON: These were repairs? 10 MS. HOUSER: Yeah. So, they went ahead and 11 triggered the safety repair money to do that. 12 For the other about 9 to 10 million, BOE has 13 had to dig into our budget and find that money and 14 redirect it over there. 15 So, we -- we have not received any other -- 16 MR. HORTON: Where is the balance of the money 17 going to come from? 18 MS. HOUSER: We're very interested to hear that 19 plan from the Department of Finance. 20 MR. HORTON: Do we require legislation to get 21 those funds? Is it part of the legislative budget 22 process? 23 MS. HOUSER: I don't know. I will defer to 24 DGS. I don't if they're planning to increase our rent 25 periodically to do this. I have -- I'm -- we're 26 waiting. 27 MR. HORTON: I heard the increasing of the 28 rent, but I'm still trying to figure out what really 9 1 holds us here. 2 I haven't necessarily heard that. 3 MR. BOW: The building, as Ms. Houser pointed 4 out, is owned by the State of California and the 5 Department the Board of Equalization is the tenant. 6 If the Board of Equalization were to vacate the 7 building, they would still be responsible for the debt 8 service. 9 MR. LAMBERT: I've never seen a lease. I'm not 10 certain about -- I'm not an expert on how the State 11 financing is, but there's no lease. 12 MR. HORTON: Debt service, that sort of implies 13 that we own the building? 14 MR. BOW: We do, the State of California owns 15 the building. 16 MR. HORTON: No, I mean the Board? 17 MR. BOW: The State has identified a department 18 that will pay the debt service on the building. 19 MS. MANDEL: That's why you call the Board of 20 Equalization tenant assignment, is that -- 21 MR. BOW: Correct. 22 MS. MANDEL: -- lingo? 23 MS. HOUSER: We have a bit of a difference of 24 opinion. It's probably best left to our attorneys. 25 I believe, the DGS feels we're a tenant; we 26 feel we are just assigned to this space because the 27 documents that we have show we're assigned to this 28 space. 10 1 But DGS does have a section of Government Code 2 that says whoever the tenant is, it's a State-owned 3 building and if you have a department who's the tenant 4 in the building, that that department is responsible to 5 continue to pay the rent until a backfill tenant is 6 located. Or if -- or that Department is relieved of the 7 rent. 8 So, one of the things we had -- I think the 9 first version of AB 151 we had asked for was specific 10 relief of that section of Government Code so that we 11 wouldn't end up with some sort of court discussion on 12 whether or not we really were subject to that section of 13 code. 14 That way it makes it easier for all of us. 15 MR. HORTON: I would really like to have a 16 legal opinion on this. It seems to me that if I'm the 17 tenant and I'm in a building that has mold, all kinds of 18 problems, that I have got a lease agreement, let's 19 presume that I have one, that sort of binds me to the 20 property, it seems to me that there is some relief, 21 legal relief, that I should be entitled to because my 22 landlord has me in a building that is not -- does not 23 meet the standards in which I entered into the 24 agreement. 25 MR. LAMBERT: If we had a lease, we would have 26 argued constructive eviction sometime ago and probably 27 other things as well. 28 Unfortunately, no lease. 11 1 MR. HORTON: Well, this is real property? 2 MR. LAMBERT: That's true. 3 MR. HORTON: There is no written agreement. 4 So, what -- again, what holds us here? 5 MR. LAMBERT: That's a very good question. We 6 have had a lot of discussions about that. 7 But there is no lease. We would have, 8 obviously, argued constructive eviction had we had a 9 lease. 10 MR. HORTON: Well, again, this is real 11 property. So, it seems to me we can make that argument 12 anyway, whether there is a lease or not. 13 It's not a service, it's real property. 14 MR, LAMBERT: Well, I'm not really disputing 15 what you're saying, but there is probably more to it 16 than just the legal question. 17 MR. HORTON: Good faith? 18 MS. MANDEL: The way the State runs. 19 MS. HOUSER: Yeah, I -- 20 MR. HORTON: Here's part of my concern, at some 21 point it seems to me we set aside $10 million out of our 22 budget, mindful of the furloughs, the layoffs and all 23 these other things we were talking about and at some 24 point we now have to come up with another, let's say -- 25 MS. HOUSER: 40. 26 MR. HORTON: -- $40 million? 27 Now, no one seems to know where that 28 $40 million is going to come from. But, presumably, if 12 1 we're going to go before the legislature and ask them 2 for $40 million, I would speculate that our dear friends 3 over there are going to ask us some real tough questions 4 about this transaction. And they're not really going 5 to -- to, at least I don't think they are going to say 6 that we, as an agency who is bound to be protective of 7 another agency and not protective of the interests of 8 the agency that we represent. 9 I mean, we represent the California State Board 10 of Equalization and the employees that work here. And 11 our fiduciary and personal responsibility is to those 12 employees and to the budget that the people of the State 13 of California have given us to manage. 14 We need to need to make decisions based on 15 that, not based on the relationship between one State 16 agency and another. And particularly if we can't 17 resolve these matters expeditiously, I'd have some 18 concerns about that and like to have further discussions 19 about that with the legal staff. 20 MS. YEE: Very well. Mr. Lambert, you'll be 21 sure to continue looking at that? 22 MR. LAMBERT: Yes. We have actually been to 23 the budget subcommittees and -- 24 MS. YEE: Yes. 25 MR. LAMBERT: -- so, this issue has come up. 26 In fact, the last time I was there I recall one person 27 suggested that perhaps DGS would swap us buildings if 28 they thought this building was, you know, so good. 13 1 MR. HORTON: What a wonderful idea. 2 Who chairs to Budget Committee in the Senate -- 3 MS. YEE: Senator Ducheny. 4 MR. HORTON: Ducheny? And Assembly? 5 MS. YEE: Assemblywoman Evans. 6 MR. HORTON: Evans. 7 MR. LEONARD: Yes, that's right. 8 MR. LAMBERT: I mean, this -- we have had these 9 discussions. 10 MS. YEE: We have. And, Mr. Horton, you're 11 right. I mean when you put a proposal together for 12 $40 million, you know, it's a nonstarter in the 13 legislature. 14 MR. HORTON: It's a different discussion. 15 MS. YEE: Exactly. And I think that -- I mean, 16 we just need to figure out how we can best make our 17 case. 18 I guess response to your question about what 19 stops us from just picking up and leaving -- 20 MR. HORTON: Well, I was kind of -- 21 MS. YEE: No, no, no. 22 MR. HORTON: -- not serious. 23 MS. YEE: But this is really the kind of 24 conversation we've been having. 25 MR. HORTON: Right. 26 MS. YEE: I mean, we are not interested in 27 having multiple moves of our employees, major 28 disruptions. We have been very supportive, as a Board, 14 1 of trying to look at a long term plan where we can have 2 a complete relocation out of this building. 3 Because when you look at it over the long term, 4 you do take into account the $88 million loan, you take 5 into account the total of 65 million spent on this 6 building. 7 And I think that once we have a long term plan 8 and we can actually then look at a piecemeal approach 9 about how to implement that, that's the way to go -- not 10 as we go along each year to have a piecemeal approach to 11 where we're not sure how much more we're going to be 12 spending. 13 MS. HOUSER: Correct. And, you know, I -- I 14 think in fairness to some of the folks before who had 15 worked on this building, I think that there was the 16 thought that it would be over soon. You know, we fixed 17 the curtain wall and we were only going to spend that 18 amount of money. 19 It's kind of like a bad episode of "This Old 20 House." You know, you start working in this area, you 21 think it's going to be okay and then you find out the 22 electrical is bad and then you find out the plumbing is 23 bad. And then, you know, you -- in a home it's 10,000 24 here, 20,000 there, 50,000 here, then pretty soon you're 25 going, "Oh, wow, what do we do now?" 26 So, in several documents that we've sent 27 forward, a BCP that discusses a long term move out plan 28 to get -- to move BOE to a different campus. This BCP 15 1 that you have before you here, we reference the need for 2 a new look, a second opinion, if you will, now that we 3 know what we know. 4 The curtain wall wasn't the beginning, the 5 middle or the end, it was just a very basic starting 6 point. The remediation is an 18 month effort if we stay 7 on track and very expensive. 8 And then behind that comes the repairs that are 9 needed from the Stantec study, which I don't think you 10 have a timeline, but I think it's around a five-year 11 program, and the elevator modernization, which is a 12 three-year program. 13 MR. HORTON: Okay. 14 MS. HOUSER: Okay. So, when you start adding 15 those all up, then you say, wait, perhaps we should just 16 take time out and step back and look at this instead of 17 it being a continuous construction project. 18 MR. HORTON: Madam Chair? 19 MS. YEE: Mr. Horton? 20 MR. HORTON: Closer -- I am not prepared to 21 piecemeal this. There is -- seems to me -- and 22 certainly not passing fault, I understand this, I mean, 23 I have been in real estate for 25 years, so, I 24 understand it. I get it. 25 I personally would have -- especially now that 26 I know I'm a tenant, you know -- well, you know. We 27 have handled things quite differently. 28 But personally I understand the relationship 16 1 between one State agency and I'm very respectful of that 2 and so forth and so on, but I would say at this point we 3 ought too look at the aggregated effect, the cumulative 4 effect and make decisions based on that -- whatever 5 those decisions might be. 6 And I think ought to incorporate the human 7 element in our deliberations, whether that's in closed 8 session and so forth, we ought to take a look at our 9 responsibility as an agency, not as the State of 10 California. 11 There are a lot of other people who make those 12 decisions relative to the State of California. We have 13 not been bestowed that responsibility. 14 And, so, those are my recommendations, Madam 15 Chair. And I defer to you and your leadership on how 16 best to address them. 17 MS. YEE: Okay. Now I appreciate that, 18 Mr. Horton. We welcome your participation. 19 Mr. Leonard? 20 MR. LEONARD: I just wanted to add to that that 21 the timing of Mr. Horton joining us is actually 22 fortuitous because the Stantec study that came out this 23 summer was really the first to look ahead beyond the 24 crisis of the day of the curtain wall, leaks, elevators, 25 air quality testing and to give us really a building 26 budget. 27 This is the first public meeting where it's 28 actually been presented to this Board officially and 17 1 discussed and General Services invited here to talk 2 about it. So, this -- now that we have a better picture 3 of the total needs of the building, future needs, I 4 think what is going to be an extraordinary maintenance 5 cost because the building was built less than it should 6 have been, for all time to come it will be above and 7 beyond our neighbors that -- Mr. Horton, I welcome you 8 aboard. 9 Now that we've got something we can take to 10 Finance, the legislature, work with General Services to 11 have a master plan of what to do about it, we -- this is 12 the first time this Board has really had -- I think 13 we've all suspected, I don't think anybody's in the dark 14 on that, but it's the first time we've really had some 15 outsider come in and make a list for us that's 16 shockingly large and complete. 17 So, it's good timing. 18 MR. HORTON: Madam Chair? 19 MS. YEE: Yes, Mr. Horton, please? 20 MR. HORTON: Thank you, Madam Chair. 21 Have we had an opportunity to review the 22 documentation between General Services and the original 23 owner of building? And is there anything? 24 MR. LEONARD: I've tried. 25 MR. LAMBERT: There's very little there. The 26 original owner was CalPers and I think we've often noted 27 that that's the best real estate decision CalPers has 28 made in twenty years was to sell back to DGS. 18 1 MR. HORTON: There is no documents there? 2 MR. LAMBERT: I believe there's documents, but I 3 haven't seen as much as you would expect from a 4 private -- you now, how the State deals with real estate 5 is very interesting, and is probably more -- a bigger 6 topic than we can discuss now. 7 But it's a lot less documentation than you 8 would see in a private transaction. 9 MR. LEONARD: Mr. Horton? 10 MS. YEE: Mr. Leonard? 11 MR. LEONARD: In the early 1990s the 12 legislature, in their infinite wisdom, decided to buy 13 the building across N Street and ordered General 14 Services to evict all of the tenants that were signed 15 there, including the Board of Equalization, Consumer 16 Affairs and Food and Ag, there was a number. 17 Board of Equalization, I was legislator, not a 18 Board Member at the time, had a matter of short period 19 after the budget trailer bill was signed in which 20 statutory language buying the building for, I am not 21 even sure a price was named, it was just ordered to be 22 done. There was a desperation on the part of the Board 23 of Equalization to find space. This building was about 24 to -- I guess it was on the market, but CalPers was 25 pursuing private purchasers for the building. 26 And when the Board of Equalization went 27 hunting, it was a fire sale on both ends. And CalPers 28 wanted to sell it quickly and turn around the thing and 19 1 the Board of Equalization was desperate for a home 2 because the legislature had evicted them retroactively. 3 MR. HORTON: So, we have no legal obligations 4 to be here, right? 5 You are going to answer that later on, not 6 now -- not now. 7 MR. LAMBERT: I can't answers that now. It's a 8 big question. 9 MS. YEE: No, let's pursue that question 10 later. 11 MR. HORTON: Thank you, Madam Chair. 12 MS. YEE: Thank you. 13 I have one question then I want to return us to 14 the related item, the 2010/11 Budget Change Proposal and 15 that is, I assume that within all of the costs that you 16 enumerated, Ms. Houser, that it does include what I 17 think we're probably going to need and that's the 18 ongoing maintenance of the curtain wall? 19 MS. HOUSER: Correct. 20 MS. YEE: Okay. 21 MS. HOUSER: At this point, we -- 22 MS. YEE: Seems to me that's kind of coming up 23 now. 24 MS. HOUSER: -- we do not have -- I think I 25 have heard some general -- do you have a general cost 26 estimate on the ongoing maintenance? 27 MR. BOW: It was identified in the Stantec 28 report as Priority 3. 20 1 MS. YEE: Okay, it's in there. 2 MR. BOW: But we're -- what we're looking at is 3 we're addressing Priority 1s first and then we're still 4 evaluating the Priority 2s and 3s and how that would -- 5 that would be stretched out over the five years 6 infrastructure plan and our seven year repair plan. 7 So -- 8 MS. YEE: I just wanted to be sure it was 9 somewhere. 10 MR. BOW: We're hoping to be able to spread 11 those costs out because they're -- they're not fire, 12 life, safety systems. 13 MS. YEE: Right, okay. 14 Let me return to then the draft Budget Change 15 Proposal, which we did receive late, for the addressing 16 of the Priority 1 items identified in the Stantec 17 report. 18 I'd like to make a motion to approve the Budget 19 Change Proposal, but to tie the proposal to the 20 implementation AB 151. 21 MR. LEONARD: Second. 22 MS. YEE: Okay. Motion by Mr. Leonard, second 23 by -- motion by Yee, second by Leonard. 24 Discussion? 25 MR. HORTON: Great move, Madam Chair. 26 MS. YEE: Okay. Any objection? 27 Without objection, that motion carries. 28 MS. HOUSER: Thank you, Mr. Bow. 21 1 MS. YEE: Thank you very much, gentlemen. 2 ---o0o--- 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 22 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 OCTOBER 6, 2009 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 22 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: November 5, 2009 17 18 19 20 21 ____________________________ 22 JULI PRICE JACKSON 23 Hearing Reporter 24 25 26 27 28 23