Use Innovative Asset Management Techniques for State Real Property
State property worth more than $154 million—more than 22,000 acres—is underused. State agencies with properties approved for sale should sell them in the 2004-05 biennium or risk a cut in state funding. All agencies submitting legislative appropriations requests should be required to provide the Legislature with detailed information on the size, value and use of their real assets. Agencies should be assessed a biennial charge on properties they own as an incentive to reduce their holdings to a minimum. Finally, the state should establish an appointed citizens commission to recommend the closure of unnecessary or duplicative agency offices throughout the state.
State law requires the General Land Office (GLO) to appraise certain state agency properties, determine which are underused and recommend their sale in an annual report to the governor and Legislature. When GLO’s Asset Management Division conducts sales of these properties, the proceeds are deposited in the General Revenue Fund unless other statutes direct the proceeds to other funds. One of those statutes requires all sale proceeds to be deposited in the Capital Trust Fund. Uses of the trust fund are limited to the “acquisition, construction, repair, improvement, or equipping of a building by a state agency” including real and personal property, for certain agencies.
About 15 million acres of surface and mineral rights owned by the Permanent School Fund (PSF) are exempt from this process, as are 2.1 million acres owned by the Permanent University Fund and properties owned by institutions of higher education, the Employees Retirement System and the Teachers Retirement System. GLO also does not review leased or historic properties and highway rights-of-way.
The School Land Board, which manages the PSF and comprises the GLO commissioner, a member appointed by the governor and another appointed by the attorney general, has the first option to purchase any state-owned property for sale. The purchase must be a cash sale at current fair market value as determined by an independent appraisal.
After the statutory exceptions, the remaining properties subject to GLO appraisal and review are those owned by:
- Texas Department of Transportation (TxDOT), other than highway rights-of-way,
- Texas Parks and Wildlife Department (TPWD),
- Texas Department of Criminal Justice (TDCJ),
- Department of Public Safety (DPS),
- Military Facilities Commission,
- Adjutant General,
- Texas Youth Commission (TYC),
- Department of Mental Health and Mental Retardation (MHMR),
- Texas Department of Health,
- schools and commissions for the deaf, the blind and the visually impaired,
- Texas Building and Procurement Commission (TBPC), formerly the General Services Commission and
- a few small agencies such as the State Library and Archive Commission and the Finance Commission.
GLO appraisal reports indicate that among these agencies, TDCJ’s holdings are the most valuable; TPWD holds the most acreage (Exhibit 1).
Real Property Total Market Value(Including Land, Buildings and Improvements)
Selected State Agencies
Sources: General Land Office and the Texas Comptroller of Public Accounts.
Agency (Year of GLO Appraisal) Acres Owned Market Value Department of Criminal Justice (1997) 132,387 $1,812,514,033 Building and Procurement Commission (2000) 258 $ 601,761,485 Mental Health & Mental Retardation (1998) 7,823 $ 362,193,371 Parks & Wildlife Department (1995) 704,329 $ 353,337,648 Department of Transportation (1998) 8,829 $ 267,070,918 Department of Public Safety (1996) 1,359 $ 84,812,115 Youth Commission (1998) 5,850 $ 67,888,000 Military Facilities Commission (1999) 14,386 $ 65,419,805 Workforce Commission (1997) 78 $ 56,372,710 School for the Deaf (1998) 106 $ 31,900,000 Department of Health (1998) 612 $ 22,023,000 Adjutant General (2000) 349 $ 21,684,887 Total 876,366 $3,746,977,972
Since 1995, GLO’s recommendations have resulted in the actual sale of real estate totaling more than $86 million out of a recommended $154 million (Exhibit 2). Of this amount, $53.6 million was due to the 2002 sale of a single TxDOT property near Sugar Land to the PSF.
GLO Real Property Sales since 1995
(As of August 2002)
*Although GLO’s report stated that the highest and best use of the property would be “upper-end” residential development and that it was currently “economically underutilized,” it recommended that “the site be retained for continued agency use.”
Agency (Year of GLO Appraisal) Total Market Value of All Properties Market Value of Properties Recommended for Sale Sales Since 1995 Sales Pending Department of Transportation (1998) $ 267,070,918 $ 89,223,497 $74,632,125 $12,179,950 Mental Health & Mental Retardation (1998) $ 362,193,371 $ 17,318,439 $ 3,212,500 $ 7,413,772 Building and Procurement Commission (2000) $ 601,761,485 $ 15,425,000 $ 1,112,500 $ 6,560,000 Adjutant General (2000)* $ 21,684,887 $ 9,438,201 0 0 Department of Criminal Justice (1997) $1,812,514,033 $ 7,733,780 $ 171,984 $21,934,500 Workforce Commission (1997) $ 56,372,710 $ 3,633,870 $ 3,567,704 $ 2,956,413 Department of Health (1998) $ 22,023,000 $ 3,604,000 0 $ 180,000 School for the Deaf (1998) $ 31,900,000 $ 2,900,000 $ 3,500,000 0 Department of Public Safety (1996) $ 84,812,115 $ 2,147,755 0 $ 542,700 Youth Commission (1998) $ 67,888,000 $ 1,148,523 $ 21,600 $ 100,139 Military Facilities Commission (1999) $ 65,419,805 $ 1,000,219 0 $ 122,000 Parks & Wildlife Dept. (1996) $ 353,337,648 $ 871,625 0 $ 457,675 Total $3,746,977,972 $154,444,909 $86,218,413 $52,447,149
Sources: General Land Office and the Texas Comptroller of Public Accounts.
The statute requiring GLO appraisals also allows the governor to disapprove any of the agency’s recommendations for sale or lease.
Between 1996 and 2001, GLO appraised more than 876,000 acres of state agency-owned land with a total market value, including buildings and improvements, of $3.8 billion. GLO has recommended the sale or lease of 22,000 of these acres because the lands involved were vacant, underused or both.
Of six properties approved by the governor for sale in 1995, two still remain unsold, according to GLO. These parcels, one owned by TxDOT and the other by TBPC, were reappraised in 2002 at a total value of $5.4 million. Seven properties approved for sale in 1999, with a cumulative appraised value of $21.4 million, also remain unsold. In all, 55 properties approved for sale and valued at almost $50 million remain unsold (Exhibit 3).
Status of Agency Properties Approved for Sale Since 1995
*Must receive prior approval from U.S. Department of Labor.
Year Approved for Sale Agency Number of Properties Total Value of Unsold Sites GLO Schedule of Pending Sales (Quarter/Fiscal Year) 1995 Building and Procurement Commission 1 $ 2,060,000 2Q 2003 Department of Transportation 1 $ 3,360,000 1Q 2003 1996 Building and Procurement Commission 1 $ 4,500,000 2Q 2003 1999 Mental Health and Mental Retardation 4 $ 1,879,000 1Q, 2Q 2003 Department of Criminal Justice 2 $19,389,500 1Q 2003 Workforce Commission* 1 $ 145,000 —– 2000 Workforce Commission 6 $ 1,866,000 4Q 2002 –– 1Q 2003 Youth Commission 1 $ 38,400 4Q 2002 2001 Department of Public Safety 2 $ 542,700 2Q 2003 Department of Health 1 $ 180,000 1Q 2003 Mental Health and Mental Retardation 11 $ 5,534,772 1Q –– 2Q 2003 Military Facilities** 2 $ 122,000 –– School for the Blind 1 $ 965,665 –– Building and Procurement Commission 1 $ 1,820,000 2Q 2003 Department of Criminal Justice 1 $ 2,545,000 4Q 2002 Parks and Wildlife Department 3 $ 457,675 1Q 2003 Workforce Commission* 3 $ 945,413 1Q 2003 Department of Transportation 11 $ 2,886,950 1Q 2003 Youth Commission 2 $ 61,739 2Q 2003 TOTAL 55 $49,299,814
**Adjutant General has not approved sale of one site; sale of the other is pending.
Source: General Land Office.
In its September 2001 report, GLO recommended the sale or lease of 65 underused properties totaling 11,260 acres and owned by 12 different agencies. A November 2001 memorandum from the Governor’s Office disapproved 23 of these sales, involving properties totaling 6,700 acres, without supplying a reason.
Except for GLO’s appraisal reports, legislators rarely receive detailed information on the status, value or use of the state’s real properties. The present budgeting or the appropriations processes do not provide such data.
All state agencies and entities that receive legislative appropriations submit detailed program information in biennial legislative appropriation requests (LARs). This information includes funding requests for programs, exceptional items and capital budgets. A table listing the amount expended in the last year of the previous biennium accompanies each request, along with the amounts spent or budgeted for the current biennium and requests for each of the two years in the coming biennium. Except for capital budget requests to purchase real property, however, the LARs generally do not provide information on the acquisition or disposition of major agency real property assets.
Furthermore, the state lacks any mechanism to ensure that agencies make the highest and best use of the real properties entrusted to them. And no state agency, board or commission has the authority to comprehensively examine agency functions to find ways to consolidate, co-locate or eliminate field offices. Gaining the maximum value for taxpayers from these properties will require a different approach to property management—one that relies on financial accounting and real-world markets.
A capital charge is a recurring charge to agencies based on the value of their real properties. Its purpose is to simulate for government-owned properties the expenses of real property faced by private individuals and corporations, thus providing a market-based incentive to keep state-owned property to a minimum. It also measures the effectiveness of agency asset management programs. New Zealand has used capital charges effectively to reduce the government’s real property inventories and return such properties to the private sector.
Assume, for instance, that Agency ABC owns real property appraised at $100 million, substantially higher than its original (historical) cost of just $10 million. GLO appraisal indicates that $20 million worth of this $100 million property is underused and should be sold as surplus. But the agency has no incentive to sell the property because it presumes, often correctly, that it will receive no financial benefit from the sale and that the revenue will be directed elsewhere.
Assume also that the state then assesses a capital charge of 5 percent on the historical cost of each agency’s properties, to be paid at the end of the biennium. Agency ABC therefore would owe the state $500,000 every two years. If it sold its surplus property, the state would receive $500,000, but the agency would keep its $19.5 million.
During the next budget cycle, ABC’s capital charge would be zero.
Capital charges as efficiency incentives
To see how a capital charge can encourage greater efficiency, assume that Agency XYZ owns real property appraised at $500 million, $100 million of which is appraised as surplus. The historical cost of the property is $25 million, making Agency XYZ’s biennial capital charge $1.25 million ($25 million x 5 percent).
But Agency XYZ, despite significant pressure, refuses to sell any surplus property. During the next budget review, legislators compare the $100 million surplus with the agency’s capital charge. Due to the agency’s refusal to maximize the value of its assets, it would owe the state the full 5 percent—$1.25 million in this case—for every biennium in which it retains the surplus property.
The costs of real property
These two examples highlight the economic value and purpose of a capital charge. With it, legislators and the public know the true value of state-owned properties—and the cost of keeping them. Armed with such information, legislators can better evaluate the state’s real property investments from a business perspective.
For its official financial reports, Texas currently records all real estate at its historical cost. The Comptroller’s office keeps these records in the State Property Accounting system (SPA). Eventually, the state would be well-served by requiring agencies to update their property values to accommodate either actual appraised values, if they exist, or estimated market values as determined by comparisons to county central appraisal district data, local economic data or other sources. These more realistic data, too, should be submitted to both SPA and the GLO.
Capital charges and federal reimbursements
Capital charges might increase the state’s opportunities to seek federal reimbursement for eligible expenses, as allowed by current law. The exact impact would depend on federal laws and appropriations authorizing the programs from which Texas agencies receive funding.
The federal Office of Management and Budget, in its Circular A-87 as amended in 1997, allows state agencies to receive federal reimbursement for their program costs. Costs eligible for reimbursement include property rental costs. For example, several health and human service agencies receive federal reimbursement for a portion of their indirect costs, which can include the use of state-owned facilities to deliver federally funded services and programs. Capital charges could be included in indirect costs and therefore might be eligible for federal reimbursement.
Current capital charges
The 2001 Legislature implemented a capital charge on properties owned by TxDOT in the 2002-2003 appropriations bill. The relevant provision in Rider 55 of TxDOT’s appropriation says:
On August 1 of each year, the Legislative Budget Board shall determine if the department has initiated the process to sell or lease the required amount of properties during each year and shall submit a report of these findings to the Governor. If the department does not initiate the process to sell or lease the required amount of properties during the first year of the biennium, a 7 percent capital charge may be assessed by the Legislative Budget Board and the Governor and reported to the Comptroller on any unsold and/or unleased properties identified and certified by the Governor in the General Land Office’s Real Property Valuation Report for which a process has not been initiated.
TxDOT’s fourth-quarter report for fiscal 2002 indicated that of 15 sites for which sales were considered, four were sold; TxDOT had given GLO the responsibility for marketing nine; and GLO purchased two to lease back to TxDOT.
Office Closure Commission
In 1988, the U.S. Congress authorized the creation of the Defense Base Closure and Realignment Commission (BRAC). Four successive commissions have recommended the closure of 350 major and minor military installations, including 125 major bases, and realignments of operations and functions at 145 others. The Department of Defense (DOD) estimates that when the BRAC closures and realignments are complete, the government will save $5.6 billion annually in operating costs. The Congressional Budget Office estimates savings to be about $5 billion annually. DOD also estimates that the latest BRAC round will cost taxpayers $1.7 billion over six years to implement.
State agencies have about 2,000 offices scattered throughout the state. A citizens’ commission, appointed by the governor, lieutenant governor, speaker of the House, the land commissioner and the comptroller, could be given statutory authority to hold public hearings, take public testimony and recommend the closure of unnecessary state offices. As with the federal program, the governor and Legislature should be allowed to accept or reject the commission’s recommendations only in their entirety.
A. State law should be amended to require all state agencies with pending real property sales that have been approved by the Governor’s Office to finalize those sales in the 2004-2005 biennium.Appropriations for each agency with a pending real property sale that has been approved by the Governor’s Office should be reduced by the estimated value of the pending transactions less 15 percent, to provide a cushion against anticipated and actual sale values. The Comptroller’s office would credit an agency with sale revenue for its use only after the General Land Office (GLO) provides notification that the agency has finalized all its pending sales and deposited the sale revenues into the state’s accounts. As a further incentive to sell unused or unnecessary properties, the selling agency should be allowed to apply property sale revenues to an appropriations strategy of its choosing.A rider should be added to the final appropriations of each agency with a pending real property sale allowing that agency to spend revenues realized from these transactions once all its transactions are completed.
B. State law should be amended to require agencies to include detailed real property financial information in their biennial legislative appropriation requests (LARs).All state agencies and entities that receive appropriations from the Legislature should be required to submit a detailed list of their real property holdings along with their biennial legislative appropriation requests (LARs). This approach would give the Legislative Budget Board (LBB), which reviews LARs for the Legislature, a more accurate and realistic picture of agencies’ financial resources. It also would help legislative budget-writers gauge how well—or how poorly—an agency has spent its money in previous years, particularly on high-dollar capital investments such as land and buildings.This information should include, at minimum:
- total lands owned (in acres);
- total building space owned (in usable square feet);
- location of these properties, by county, city and survey;
- acquisition or historical cost of lands, buildings and improvements to same;
- appraised market value of individual properties, if known, including year of appraisal;
- estimated market value, using available indices or comparisons to county central appraisal district data, local economic data or other sources, if an appraisal is not available or is more than four years old;
- current use;
- expected usage over the coming biennium;
- long-range plans for each property;
- recommendations on the retention or disposition of each property, or recitation of efforts to market eligible properties; and
- the estimated impact, if any, of the capital charge system on direct and indirect cost recovery for federal programs.
C. Beginning in the 2006-2007 biennium, state law should be amended to institute a capital charge system.The mechanism for such capital charges should be implemented in the General Appropriations Act.Beginning in the 2006-2007 biennium, the capital budgets of all agencies receiving appropriations from the state should be reduced by 5 percent of the amount they report to the Comptroller’s office as the acquisition cost of land, land improvements, buildings and building improvements. The LBB, in consultation with the Comptroller’s office and GLO, could reduce an agency’s charges in consideration of market conditions and agency efforts to shed unused or underused properties. The value of each agency’s properties should be based on the historical cost of land and land improvements, values currently reported to the Comptroller’s State Property Accounting system (SPA). At the beginning of each budget cycle, the LBB, with assistance from GLO, would review each agency’s LAR information on real property and determine how poorly or how well the agency is managing its properties. This review should take into account any relevant information such as GLO appraisal reports or past agency efforts to trim property inventories. Upon completing this review and consulting with GLO, the LBB would recommend to the Legislature that none, all or part of the capital charge be forgiven or “offset.”As a result, an agency striving to keep its property holdings to a minimum could be rewarded with an offset of 100 percent of the capital charge; an agency with lackadaisical management and thousands of acres of property that GLO considers underused would not. Whatever offset remains must be paid to the originating state fund in real dollars at the end of each fiscal year. The agencies would be required to sell underused property to pay any outstanding capital charge balances.Thus, each agency would have a financial incentive to own as little property as possible, while taxpayers would realize the benefit of investments made by previous generations. Such a charge also would provide legislators with better information on the true cost of state services for determining future appropriations.
D. For the 2006-2007 biennium and thereafter, reported acquisition costs should be replaced with regularly updated market values, either by appraisal or by comparisons to county central appraisal district data, local economic data or other sources. Capital charges should be adjusted accordingly.The property values presently recorded in SPA are the original purchase or build price plus improvements. Agencies should be required to report updated market values to the Comptroller’s office and GLO. The introduction of real market values would give the state better information on the true worth and use of its real properties.
E. State law should be amended to create a Texas Agency Infrastructure Commission to recommend the co-location and/or closure of state agency offices throughout Texas.The governor should appoint five members of the commission, including the chair. The lieutenant governor, speaker of the Texas House, land commissioner and comptroller each should appoint one member. The commission should be charged with investigating the number and function of state agency field offices and recommending their co-location or closure as appropriate. The commission’s recommendations should take effect on the first day of fiscal 2006 unless the Legislature passes a joint resolution rejecting all of the commission’s recommendations. The GLO’s Asset Management Division and the Governor’s Office should staff the commission.
Savings from these recommendations would be contingent upon reductions in 2004-2005 appropriations for the following agencies in the following amounts (see Exhibit 3 for further detail):
*DPS properties approved for sale were purchased originally with general revenue funds in 1967 and 1976.
Agency Total Value of Property Approved for Sale (Less 15 Percent) Texas Department of Health $ 153,000 Texas Department of Mental Health and Mental Retardation $ 6,301,706 Texas Military Facilities Commission $ 103,700 Texas Building and Procurement Commission $ 7,123,000 Texas Department of Criminal Justice $ 18,644,325 Texas Parks and Wildlife Department $ 389,024 Texas Youth Commission $ 32,640 Texas Department of Public Safety* $ 461,295 Biennial Total General Revenue $ 33,208,690 Annual Total (2004-2005) $ 16,604,345 Texas Department of Transportation $ 5,309,908 Biennial Total Highway Fund $ 5,309,908 Annual Total (2004-2005) $ 2,654,954 Biennial Grand Total $ 38,518,598
Sources: General Land Office and Texas Comptroller of Public Accounts.
To generate these savings, no rents shall be owed in the 2004-2005 biennium by state agencies that continue to occupy the properties recommended for sale in this estimate.
Savings for 2006 and beyond would depend upon the updated market values of state property and cannot be estimated.
This estimate also includes the travel and per diem costs of the nine-member citizens’ commission, estimated to be $100,000 annually, to be paid from general revenue.
CBE: Cannot be estimated.
Fiscal Year Savings to General Revenue Savings to Fund 006 (Highway Fund) 2004 $16,504,000 $2,655,000 2005 $16,504,000 $2,655,000 2006 CBE CBE 2007 CBE CBE 2008 CBE CBE
Tex. Nat. Res. Code Ann. §31.067; and Tex. Gov’t Code §2201.
Tex. Nat. Res. Code Ann. §31.155 (d).
Tex. Nat. Res. Code Ann. §31.159.
General Land Office, Real Property Evaluation Reports: Adjutant General’s Department (Austin, Texas, September 2000), p. 9.
Tex. Nat. Res. Code Ann. §31.1571 and §31.158.
E-mail communication and spreadsheet from Tom Tagliabue, General Land Office, Austin, Texas, August 8, 2002.
Letter and attached memorandum from Governor Rick Perry to Commissioner David Dewhurst, General Land Office, November 30, 2001.
For more information, see Texas Comptroller of Public Accounts, e-Texas (Austin, Texas, December 2000), pp. 295-306.
U.S. Office of Management and Budget, OMB Circular A-87, Revised 5/4/95, as Further Amended 8/29/97 (Washington, DC, August 1997), http://www.whitehouse.gov/omb/circulars/a087/a087-all.html. (Last visited October 8, 2002.)
Tex. S.B. 1, 77th Leg., R.S., rider 55, p. VII-34 (2001).
Letter from Michael W. Behrens, executive director, Texas Department of Transportation, Austin, Texas, October 1, 2002.
U.S. Army, “Defense Authorization Amendments and Base Closure and Realignment Act of 1988 (Pub. L. 100-526),” http://www.hqda.army.mil/acsim/brac/web/reference/pl100526.html#s202. (Last visited October 9, 2002.)
Global Security.org, “Base Realignment and Closure (BRAC),” http://www.globalsecurity.org/military/facility/brac.htm. (Last visited October 11, 2002.)
Congressional Budget Office, Review of The Report of the Department of Defense on Base Realignment and Closure (Washington, D.C., July 1, 1998), http://www.cbo.gov/showdoc.cfm?index=647&sequence=0. (Last visited October 11, 2002.)