The independent California Legislative Analyst's Office has found that the public-private partnership now building the state's $490 million Gov. George Deukmejian Courthouse in downtown Long Beach is costing $160 million more than it should because cost estimates were flawed.
The report by the non-partisan state fiscal and policy advisor analyzed the financial effectiveness of two enormous public projects that were designed, bid and built under what are called 3Ps, for public-private partnership. Its report titled Maximizing State Benefits from Public-Private Partnerships was released Thursday, Nov. 8, but might have been buried amid post-election analysis.
Law.com's The Recorder wrote around the sunny title:
"The Administrative Office of the Courts used skewed assumptions to justify building the new Long Beach courthouse under an untested public-private financing scheme, a report issued Thursday ... said."
It is an oft-heard term: public-private partnership. The idea behind these arrangements, the report states, is they will, among other things, save money by streamlining the process and transferring risks to the private company. In essence, a private firm develops, designs and builds the public project, then receives a yearly state fee to manage it. San Francisco's Presidio Parkway Transportation Project by Caltrans was the other 3P project the LAO examined.
From the report: "In December 2010, AOC entered into a P3 that requires a private developer to finance, design, build, operate, and maintain the Long Beach courthouse over a 35–year period in exchange for payments from the state totaling $2.3 billion. At this time, the Long Beach courthouse is the only project that the AOC has procured using a P3."
Locally, the courthouse has been championed as an economic boost that will replace a 1959 dilapidated building with a modern one at Broadway and Magnolia. But for Long Beach City Hall, the seemingly simple tunnel between Long Beach Police Department and the new courthouse proved to be a curveball.
And at least one Long Beach City Council member and many residents last year questioned the $5 million city estimated cost it would need to shoulder for a jail-to-court tunnel. Some, including Council Member Gerrie Schipske, believed the inmate tunnel, a public safety issue, should have been part of the original bid. On Oct. 4, 2011, Council members Gary DeLong, Robert Garcia, Patrick O'Donnell and Dee Andrews supported the city paying $1 million in start-up costs for the tunnel. It was estimated to cost "upwards of $5 million."
Long Beach City Hall has said that the state refused to pay for the tunnel, which it viewed as a city-only use. In June 2012, the Long Beach City Manager's office, in a memo to the City Council members, informed them that the tunnel plan was scratched and there was a Plan B: transferring inmates via van at a cost of $243,000 annually in current-day cost, plus a one-time start-up cost of $279,000.
That memo (pdf attached) references several cost estimates that proved wrong. One of them was the fact that the orignal $5 million tunnel cost had been underestimated by millions. A city-hired feasability study concluded it would cost $7 to $10 million.
Responding to Thursday's LAO conclusion, The State Worker blog at Sacramento Bee, which is written for California civil service workers, framed it more bluntly. Its headline read "California unprepared" for public-private partnerships:
"A new report by the Legislative Analyst's Office concludes California taxpayers have overpaid for two infrastructure projects that granted private businesses more sway in the process but concluded that the state could still save big bucks through so-called "public-private partnerships" if they were executed properly.
"State officials looked at Caltrans' and local governments' Presidio Parkway project in San Francisco and the Long Beach Courthouse, which is overseen by the state Administrative Office of the Courts. Both projects are still under construction. Each carries a taxpayer price tag of nearly $500 million and are being built through a public-private partnership.
In its executive summary, the Legislative Analyst's Office, or LAO, states:
"In recent years, the state has partnered with the private sector to finance, design, construct, operate, and maintain two state infrastructure projects—the Presidio Parkway transportation project in San Francisco and the new courthouse in Long Beach. Both the California Department of Transportation (Caltrans) and the Administrative Office of the Courts (AOC) entered into a public–private partnership (P3) for these projects in order to achieve benefits that they might not have obtained under a more traditional procurement approach (such as design–bid–build). These potential benefits include greater price and schedule certainty and the transfer of various project risks to a private partner.
"Our analysis, however, generally indicates that the P3 practices of Caltrans and AOC are not necessarily aligned with the P3 best practices identified in the research. For example, these departments did not use clear P3 processes and appear to have selected projects not well suited for a P3 procurement. In addition, we find that the analyses done to compare project costs under different procurement options were based on several assumptions that are subject to significant uncertainty and interpretation, and tended to favor the selection of a P3 approach.
"Based on our review and findings, we have identified several opportunities for the state to further maximize its benefits when deciding to procure a state infrastructure project as a P3. Specifically, we recommend that the Legislature:
- Specify P3 project selection criteria in state law in order to provide for greater consistency across departments in terms of how P3s are selected.
- Require a comparative analysis of a range of procurement options (including design–bid–build, design–build, and P3) for all potential P3 infrastructure projects in order better determine which procurement option would most effectively benefit the state, as well as allow the state to better balance the potential benefits of increased private sector involvement with the potential risks unique to each project.
- Require the existing Public Infrastructure Advisory Commission (PIAC) to approve state P3 projects in order to improve the consistency of the state's P3 approval process.
- Require PIAC to (1) have a broad mix of expertise related to P3 and state finance and procurement, (2) develop additional best practices for the state's use of P3s, and (3) evaluate other state departments to determine if they would benefit by having P3 authority.
Late Friday, none of the principals could be reached.
To read the report yourself, click here.