Public Private Partneship Isn't Panacea, May Invite Higher Cost To Rebuild Long Beach Civic Center

(February 12, 2013) -- There is an item on tonight's (Feb. 12) Council Agenda that should strike fear in every taxpayer in Long Beach. City Management, with what I presume is the Mayor's approval, has prepared for Council approval "a Request for Qualifications (RFQ) for the financing, design, construction, operation and maintenance of a new City Hall and Main Library and the revitalization of Lincoln Park into a destination park."

Here we go again! First off no one can deny that the Civic Center complex (save the Public Safety building) is a dump. It is a dump because of many years of intentional neglect which has led to the massive amount of deferred maintenance. But once again this eyesore problem was self inflected by unfocused Councils and Mayors.

Building a new Civic Center is not a new idea; it was bantered about during the O'Neill administration and Mayor Foster picked up the ball when he got elected. What has changed is how they want to pay for a new Civic Center.

With Redevelopment money no longer and the City's budget on life support, Foster and his minions on the Council have been speaking in glowing terms about Public Private Partnerships (P3s) and are quite interested in tapping into the Port's deep pockets for funding. They encourage everyone to "think out of the box" and advance the idea that a P3 could get us a new Civic Center and save us money. I suppose just like the Deukmejian Courthouse across the street.

In fact, the agenda uses virtually the same language for the proposed RFQ that the Judicial Council of California used to build the Deukmejian Courthouse so why don't we take a look at just how good a deal the State got with their P3 and what could be in store for Long Beach.

The Courthouse when completed will be approximately 545,000 square feet and cost approximately $495,000,000 or $908.00 per square foot. (I say approximate because different sources list different sizes and costs). The original Project Feasibility Report conducted by the AOC [Administrative Office of the Courts] dated September 8, 2006 and revised June 28, 2007 called for a 31 courtroom facility containing approximately 306,480 square feet with construction cost estimated to be $296,635,000 if a Pay-As-You-Go basis was used. It seems "project creep" grew size by 78% and increased cost by 67% all under a P3 contract.

Oddly the Options Analysis in the AOC report recommends a P3 plan because it would result in "the lowest cost to the state and Capital costs for the state are amortized over a period of time and this method can deliver a completed project faster than the other two options, resulting in lower capital costs." The report says this despite not knowing the estimated costs of using a P3 and admitting the financing cost of a P3 may be higher than using State financing or pay-as-you-go.

So what is this project really costing the State? When Long Beach Judicial Partners (LBJP) completes the project, the California Court web page indicates the Court will be obligated to pay $50 million per year for 35 years. This payment covers the cost of the design, construction, financing cost, operations, utilities, maintenance and life-cycle renewal of building elements. Operations and maintenance costs are subject to annual CPI increases. If you assume operations and maintenance costs are approximately $5 million per year, the Courts are paying $45 million per year to LBJP which begs the question: IF THE COURTS HAVE THE ABILITY TO PAY $45 MILLION PER YEAR TO LBJP WHY DIDN'T THEY DO A PAY-AS-YOU-GO PROGRAM, ELIMINATE THE HIGHER FINANCING COST AND FEES AND PAY OFF EVERY PENNY OF THE PROJECT COST IN LESS THEN 10 YEARS?

What benefit did the AOC see in committing to a program that will cost them in excess of $2 Billion over the life the lease when it could have been paid off within 10 years and enjoyed a free and clear building?

Which leads to a key question: Given the economic and public safety challenges we currently face, why in the world are Mayor Foster and some members of the City Council promoting the development of a new Civic Center and why do they believe a P3 is the program that should be followed?

P3s are consortiums of large multinational corporations and global investment banks funded largely by pension funds, insurance companies and large institutional investors. For infrastructure investments like Courthouses and public buildings and service facilities they offer attractive investment returns with low to moderate risk. As one example, Quadrant Real Estate Advisors (not to my knowledge involved in the courthouse project) in its Compendium of Infrastructure Markets and Potential Opportunities indicates investors can expect average equity internal rates of return of between 9% and 15%.

But State and Municipal governments can float Bonds with interest rates of roughly 3 to 4%.

An article by Toby Sanger and Corin Crawley published in The Monitor in April 2009 made what I consider some compelling arguments about P3s that should give pause to those contemplating using a P3 for the Civic Center. The authors write that the "shifting rationales of P3s has always been highly dubious and that proponents of P3s used to claim that their projects could be less expensive, more innovative, speedier and more accountable than public service delivery." Unfortunately "a string of failures, delays, little transparency and secretive deals proved these claims wrong."

The AOC report assailed the Long Beach Courthouse P3 for using dubious assumptions to justify a P3 procurement that included:

• Tax Adjustments that don't benefit California

• Dramatically overstating project cost overruns if P3 not used

• Cost to the Court to lease space in the future for expansion if not built in the P3 program

• Assuming a P3 program would allow project to come on line 14 months earlier

In my opinion, the cautionary lesson from the Long Beach courthouse should be that the outcome of a pro forma can change significantly with just small changes in variables over 35 years, and the Long Beach public's costs in a P3 for a Civic Center rebuild may end up costing more than using traditional methods. Using a P3 is not the panacea that some politicians have suggested; unfortunately, their misjudgments could ultimately cost the public's wallets.

In my view, there is no way a P3 program with its cost of funds almost double the cost of bond financing can actually save the City money. And that is what the AOC discovered in its analysis of the LB Courthouse project. The AOC report indicated "this selection was problematic" and if "best practice criteria" was used [the Long Beach courthouse failed all of the main criteria] the project "would have been found to be inappropriate for P3 procurement."

The bottom line is that P3s are designed for complex projects with unique features that MAY benefit from "innovative design and construction techniques." In my view, the Long Beach courthouse clearly didn't fit into these constraints and neither does the Long Beach Civic Center.

I don't know if there's a sensible Council majority tonight to resist this civic snake oil at the Civic Center. Our city streets continue to crumble, our parks suffer from a lack of proper maintenance, economic development exists only in theory, property crimes are increasing and taxpayers are handed continuing budget deficits while the Mayor and Council continue to spend time and resources on non essential fluff. This is the wrong time for this city to embark on a new Civic Center. I know it's not as much fun, but I suspect Long Beach residents would rather that our Mayor and Council focus on essential services, fundamental budget changes and pension reform.

Previously on LBReport.com: Common Sense by Terry Jensen (continuing series):