Bacon's Rebellion

James A. Bacon


 
 

Raise taxes?

I don't think so!

Anybody Want a Used Prison?

 

Before raising taxes, could we please implement the recommendations of the Wilder Commission -- like rationalizing the state's far-flung real estate portfolio? 


 

When Del. Chris Saxman, R-Staunton, travels around his district in the Shenandoah Valley, he sees a lot of vacant and underutilized state properties. In just the city of Staunton, there’s an old prison facility, the so-called CHIRP building and the half-empty Western State mental institution.

 

At the same time, he frequently hears from administrators of state agencies that they can hardly wait to build new offices. Money is in the appropriations pipeline for many of them. “When our thing comes up next year,” they tell him, “we’ll get our building!”

 

Saxman does not share their enthusiasm. As general manager of a $5 million family business, Shenandoah Spring Water, he can’t imagine letting millions of dollars of assets sit idle. And he can’t help but wonder if the state could be managing its real estate assets more efficiently. Why can’t state agencies rehab vacant state properties? Or, at the very least, why isn’t someone putting vacant properties on the market? “We’ve got leases out there that probably aren’t being well managed,” he says. “I don’t know that we’re getting the bang for the buck we should be getting.”

 

As a member of the House “cost cutting” caucus, Saxman is always looking for opportunities to shrink state government expenditures. After the past two years’ budget crisis, some legislators say the state has hacked spending to the bone. Indeed, pressure is mounting at high levels to find new revenue sources, as evidenced by the recent remarks of Sen. John H. Chichester, R-Stafford, who chairs the powerful Senate Finance Committee.

 

But any tax increase, whether overt or opaque as part of “tax restructuring,” will have to make it through the House. Speaker of the House William J. Howell, R-Fredericksburg, has told Saxaman that he would rather cut costs than raise taxes. And the Staunton senator concurs. One area deserving scrutiny, he says, is the state’s management of real estate.

 

I totally agree. In fact, I would go a step further: Until Virginia starts managing its real estate assets as a business would, advocates of tax increases to support General Fund operations* forfeit the right to be taken seriously. As long as the potential exists to squeeze millions of dollars of inefficiency out of government operations, raising taxes not only is economically irresponsible but represents a bankruptcy of imagination and political will.

 

Look how the Warner administration is re-engineering the $900 million a year the state spends on information technology. Secretary of Technology George Newstrom has declared his intention to save $100 million by 2005. (See "Bringing VITA to Life," August 25, 2003.) That estimate implies savings of $50 million a year.

 

There's lots more where that came from. Last December, the Governor's Commission on Efficiency and Effectiveness (also known as the Wilder Commission) identified potential savings of $750 million annually. As the report noted, "Virginia state government is not presently organized, even at the highest levels, to operate the basic business functions ... in the most efficient and effective manner."

 

More specifically, according to the report, "There is limited systematic analysis about how the Commonwealth can save taxpayer dollars by reforming the way ... it manages its real estate holdings." The state could save $60 million annually by focusing on real estate leasing and related issues.

 

Enormous waste stems from the fact that the Commonwealth allows each agency to make its own real estate decisions. While one agency may require more real estate, another agency has vacant office space. But there is no mechanism for them to pursue co-location of their offices. Nor does the Commonwealth have a procedure for taking best advantage of lease expirations -- of which 212 were expected in 2003 alone.

 

Furthermore, according to the Wilder Commission, there is no systematic effort to dispose of unneeded real estate. And the concept of sale-leaseback arrangements, routine in the private sector, appears to be totally alien to state managers.

 

The Wilder Commission recommended developing a portfolio management system for handling real estate. Among other strategies, the property managers could save money by:

  • Designating unused property as "surplus", seeking either to dispose of it or to redevelop it, perhaps by means of public-private partnerships;

  • Strategically manage the lease expiration and renewal process; and

  • Explore sale-leaseback opportunities for the property the Commonwealth owns.

The Wilder Commission said the Commonwealth should set a goal of driving down its office vacancy rate to less than five percent. By way of comparison, the federal government achieved a 42 percent reduction in average vacancy rates over a four-year period in the late 1990s when it moved to a portfolio management system.

 

These recommendations are excellent. I see no excuse for the Warner administration not to follow up on them, nor for the General Assembly to provide whatever enabling legislation is required.

 

But the Wilder Commission proposals should be regarded as just the beginning. In truth, the potential savings could be much greater. Overlooked by the commission (at least in its final report) is the savings to be generated by conservation and energy management in state properties.

 

The cost of heating, lighting, air-conditioning and ventilating office buildings is typically the largest operating cost of real estate. State government is one of the biggest energy consumers in the Old Dominion. How much does the state pay in energy bills? I doubt anybody knows. If the state can't compile a list all of its real estate holdings in a single file -- which it can't -- there is little chance that anyone is keeping tab of all of its utility charges.

 

As luck would have it, a Richmond company, Tridium, Inc., is a world leader in building automation and energy conservation. I happen to know about this company because my wife is chief financial officer, and I hear about its triumphs and travails every night when she comes home from work. Tridium has developed an Internet-based platform for monitoring remote sensors and devices regulating energy consumption.

 

As the company notes on its website, demand charges often comprise 40 percent to 60 percent of a company's energy bill. In addition, ratchet charges may cost an organization thousands of dollars annually. "With real-time control of demand," Tridium's marketing material claims, "large commercial and industrial customers can avoid costly peaks, flatten their load, and reduce energy expenses by 10, 20, or even 30 percent!"

 

"Should I run the generator? Adjust space temperature? Dim the lights? Sequence my compressors?" All these decisions can be made by energy-management experts working in a central location using Tridium's technology. Tridium is not the only company that installs building automation controls, so I'm not putting in a plug for my wife's employer. I'm merely citing it as an example of how the state can improve the efficiency of its facilities management.

 

Let's say, for purposes of argument, that it takes $100 million to equip all state facilities with a state-of-the-art energy management capability. Let's assume the investment generates savings of $30 million annually, a typical return on building automation programs. If the state floated $100 million in bonds, repayable at five percent over 20 years, it would pay about $12.5 million annually -- yielding $17.5 million in net savings. (Actual figures may be lower, or much higher, depending on the scope of the project.)

 

This is not rocket science. We don't need to bring in a team of Wharton MBAs to figure it out. Frankly, it's Property Management 101, entailing the kind of decision making that Real Estate Investment Trusts and other portfolio managers engage in every day.

 

Even then, we haven't begun to exhaust the possibilities. Virginia doesn't just consume energy -- it's an energy producer. The state operates power-generating facilities at its prisons and universities. Power generation is, to be generous, somewhat peripheral to these institutions' core missions. Indeed, one might go so far as to ask, what are these people thinking? Why isn't the state buying the energy from someone who generates power as their main business -- a company conversant with the latest technology and best practices, and possessing the flexibility to make timely capital improvements?

 

Who knows, perhaps the state could privatize its power plants, selling them to a energy company and buying back the power. A deal could be structured either to provide cash in hand -- which could be reinvested in, say, new K-12 construction or university classrooms -- or to yield improvements in ongoing cash flow.

 

Stranger things have happened. In April, Gov. Mark R. Warner approved the issuance of $118.5 million in state bonds to pay for rehabbing the State Capitol building and three state office buildings in the capitol complex. The effort contemplates potential public-private partnerships under 2002 legislation to support building improvements around the seat of government. Tapping outside investment will allow the state to give its capitol complex a facelift in time for the 2007 Jamestown celebration.

 

That project demonstrates on a small but highly visible scale the kind of creativity the Commonwealth could be pursuing across the state. Until we see evidence that the state is pursuing every cost-cutting option, I see no justification for raising taxes.

 

-- August 25, 2003

 

Note: In last edition's column, "Voting with their Feet," I promised to follow up with detailed migration data on who is entering and who is leaving Virginia and its regions. I am still working on that project and will publish my findings in the next edition.

 


* I specify "General Fund operations" because I think we're dealing with a very different set of issues regarding the transportation trust fund. Raising the gasoline tax, which functions much like a user fee, is very different from raising sales and income taxes. I defer discussion of these complex issues to another time.

 

Bring Home the Bacon

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Fire back!

 

You can berate Bacon at jabacon@

baconsrebellion.com

 

Or read his profile here.

 

 

 

 

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More Ideas for Cutting State Spending

 

Why not out-source back-office personnel operations? Florida's trying it -- why not Virginia? See Geoffrey Segal's "Outsource More, Govern Better" (August 25, 2003)

 

...And Segal's "Privatizing Prisons" (July 28, 2003).