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:
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.
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