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Chapter 6.2

Apply Innovative Asset Management Practices to TxDOT-Owned Land and Buildings


Summary

The Texas Department of Transportation’s (TxDOT) current system for managing its real estate gives it little incentive to ensure that it makes the best use of its holdings. Requiring the agency to pay annual capital charges for the use of taxpayer-owned property (excluding rights of way) would improve accountability for public resources, provide the Legislature with a budgetary tool to oversee TxDOT’s use of its properties, and encourage the agency to manage its multi-million dollar investment efficiently.


Background

TxDOT Lands and Buildings

Section 31 of the Texas Natural Resources Code gives the GLO the responsibility to “review and keep inventory records of all real property owned by the state.” The code also gives the GLO authority to appraise the properties owned by most land-owning state agencies.[1] The GLO has statutory authority to review TxDOT’s non-right-of-way land holdings every four years and the year before TxDOT’s sunset date.[2]

Despite the appraisal value of these properties, state government accounts record their value “at cost”, or, if not purchased, at the appraised fair value as of the date of acquisition—whether that acquisition occurred in 1890 or 1990.[3] The appraisal and purchase values are quite different, from both a management and an accounting perspective, and the difference matters. For example, GLO records of TxDOT properties reveal a total historical cost of $92.3 million.[4] Yet GLO’s 1996 report on TxDOT lands and buildings (not including lands owned for highway rights of way) appraised them at $165.3 million, nearly twice the historical cost. The 1998 market value of TxDOT properties was placed at $266.4 million, almost three times the historical cost.[5]


Substantive Problems

Such examples illustrate major problems with the state’s current asset management systems. First are the large and obvious discrepancies in the state’s databases on even the most basic issues, such as the value of TxDOT property. The second is the irrelevancy of historical costs. The recent, rapid appreciation in TxDOT’s appraised properties—61 percent over three years, to a level almost 200 percent over historical costs—would have gone unrecognized if not for regular appraisals. Moreover, this kind of information is largely hidden from legislators, citizens, and even agency administrators because the state has no consistent process for compiling, evaluating, or reporting it. Last and most importantly, without solid, market-based information, policymakers and the public have no way of knowing whether state-owned property is being put to its highest and best use.


Capital Charges

Capital charges are best understood as an annual market-based “rent” applied by a government to its units that use real property. The purpose of a capital charge is to provide budgetary incentives for government agencies to use such property in the wisest possible matter.

Capital charges have been implemented successfully in New Zealand, the United Kingdom, Canada and a few US cities. No American state yet assesses a true capital charge, although 30 states do require state agencies to pay the state some form of rent.[6]

The most striking and successful use of capital charges to date occurred in New Zealand, which undertook a massive reorganization of its federal government in the 1980s and 1990s. The government was reorganized into several major functional divisions, each with a chief executive officer (CEO) hired to run the division and achieve set performance targets. Given the freedom to make their own decisions, division CEOs quickly shed under-performing and non-performing properties.

A 1993 study of New Zealand’s system by Price Waterhouse cited an instance in the Ministry of Transport. The ministry realized that, under the system of capital charges, the costs of owning and maintaining airports were unlikely to be recovered through landing charges. Shortly thereafter, the ministry sold the airports to private interests. According to Price Waterhouse:

[O]ur overall conclusion is that the capital charge regime has been very successful in making explicit to chief executives the costs of owning assets... There are sufficient examples of the way in which the charge has influenced behavior to state unequivocally that the concept has been successful and that it is important to continue the regime and where possible improve upon it.[7]


Impact of GASB Standards

The Governmental Accounting Standards Board (GASB) was established in 1984 as an independent national body to set accounting and financial reporting standards for state and local governments. The Texas Government Code, Section 403.031(c), requires that all accounting standards and criteria for agency financial reports developed by the state Comptroller’s office comply with GASB’s standards. These reports then are compiled and published in the Comptroller’s Comprehensive Annual Financial Report each February.[8]

With the September 1, 2001 implementation of GASB’s Statements 34 and 35, all state, county, and local governments and colleges and universities will be required to report investments in infrastructure—roads, bridges, and the like—on an historical cost basis. GASB 34 is intended specifically for governments, while GASB 35 is intended for public colleges and universities.

The purpose of GASB 34 and 35, according to GASB, is to help users:

  • assess the finances of the government in its entirety, including the year’s operating results.
  • determine whether the government’s overall financial position has improved or deteriorated.
  • evaluate whether the government’s current-year revenues were sufficient to pay for current-year services.
  • understand the cost of providing services to its citizenry.
  • see how the government finances its programs—through user fees and other program revenues versus general tax revenues.
  • understand the extent to which the government has invested in capital assets, including roads, bridges, and other infrastructure assets.
  • make better comparisons between governments.[9]

Under the new standards, governments will be required to report depreciation expenditures for all of their capital assets, including general infrastructure, over the life of the assets. Governments no longer will be able to count the full cost of an asset as an expense in the year it is acquired.

Because GASB 34 and 35 will require much more detailed information on infrastructure assets, TxDOT now has a rare opportunity to acquire significantly better data on its real property. TxDOT should further the movement toward full cost reporting by assessing the market value—not just historical value—of its properties.


A Capital Charge System for TxDOT

The Texas Legislature could institute a capital charge system through an accounting mechanism in the General Appropriations Act, to be presented along with the agency’s appropriated amounts. Capital charges would be shown as standard percentages of total value and applied to all agency land and buildings (other than rights of way). An allowance for a capital charge would represent the Legislature’s estimate of an appropriate offset to that charge. The difference between the capital charge and the allowance would represent an initial budget reduction for TxDOT, with the clear expectation that the agency could and would recover this amount through better asset management.

The Legislature could, at its discretion, opt either to fully fund or reduce TxDOT’s allowance for capital charges if it feels that the agency owns properties too valuable for their current use. In such cases, TxDOT would have its funding reduced by the net assessment. TxDOT’s leadership then would have to evaluate the use of its assets in light of its core functions and dispose of underused and unnecessary properties to restore the reduced funding.

The Legislative Budget Board (LBB), the state agency that prepares each biennium’s appropriations bill, includes the lieutenant governor (who serves as chairman), the speaker of the House of Representatives (vice-chairman); and the chairs of the House Committee on Appropriations, the House Committee on Ways and Means, the Senate Finance Committee, and the Senate State Affairs Committee. In addition, the lieutenant governor appoints two additional members of the Senate to serve on the board, and the speaker appoints two additional members from the House. LBB staff members are noted experts on the state budget. As such, LBB is well-positioned to provide executive guidance and significant expertise on the implementation of capital charges.


Characteristics of a Capital Charge System

Three characteristics of a capital charge system should be kept in mind. First, capital charges do not represent new revenue for the state or new expenditures for an agency. They are simply a tool to provide legislators and agency decision-makers with information on the true cost and use of the taxpayers’ assets—information that, today, often is unknown or erroneous.

Second, for maximum effectiveness, capital charges must be assessed and applied as simply, broadly, and equitably as possible to all TxDOT-owned properties other than rights of way. LBB should value all properties on the same basis, apply charges at the same rate, and make appropriate capital charge allowances as it sees fit.

Lastly, but perhaps most importantly, capital charges do nothing to alter the state’s constitutional “pay-as-you-go” provisions, nor do they undermine the state’s cash-based appropriations system. If anything, they enhance both, because they encourage the budgetary recognition of the actual costs of government from year to year.


Right-of-Way Exception

Over 99 percent of all TxDOT-owned acreage is in the form of right of way. TxDOT’s rights of way eventually could and should be included in a capital charge system. This would encourage their efficient use as well as the development of innovative methods to earn income from rights of way not occupied by pavement and to defray the purchase cost of rights of way as much as possible. Capital charges on rights of way also would serve as a counter to the agency’s current pattern of acquiring rights of way years in advance of their need for future construction. Although such acquisitions may represent a wise strategy in a world of rising property values, the premature removal of land from private use entails the loss of whatever productive value it might otherwise have had, as well as lost property tax revenues for local governments.

While there is a case to be made for including rights of way under a capital charge system, care must be taken to guard against the creation of perverse incentives. For example, a capital charge on all rights of way might make new road construction more costly. If capital charges were assessed differently on paved versus unpaved rights of way, the state could create an incentive to thinly pave rights of way, thereby avoiding a capital charge, but also not creating usable roadway.

No current example of capital charges applied to rights of way is available. Therefore, this issue needs further study.


A Private-Sector Success Story

Champion International of Houston serves as an example of how a capital charge system can benefit overall system performance. Champion, a large timber and paper products manufacturer, once owned and leased some 5 million acres of land worth more than $300 million. It also was in the bottom quarter of its industry sector’s performance in terms of value returned to shareholders.

In 1996, Champion began a capital charge system. Each division of the company that used corporate-owned property was required to pay a 7 percent charge, based on market value, to the parent company as compensation for all costs associated with that property. This charge then was considered in the context of the division’s overall performance measures. Division managers had to take a hard look at their properties and separate performers from non-performers.

The result? In 2000, thanks in large part to capital charges, Champion now ranks in the top quarter of its industry in shareholder value.[10] For Champion, land ownership is not an end, but the means to deliver value to its shareholders. The same could be true for Texas state government.


Recommendations

A. To meet the requirements of Governmental Accounting Standards Board (GASB) Statements 34 and 35, state law should be amended to require the Texas Department of Transportation (TxDOT) to electronically submit information on the lands, buildings and infrastructure it owns to the General Land Office (GLO) by December 1, 2001, and in every quarter thereafter.

This information should be delivered in a manner and format determined by both GLO and the Comptroller’s office. GLO should transmit such information to the Comptroller’s office upon receipt and to the General Services Commission (GSC) upon request. Financial data pertinent to the assessment and collection of capital charges should be transmitted to the Legislative Budget Board (LBB) at regular intervals or as requested.

State legislation should make it clear that LBB may require GLO to provide detailed analyses of each property and their potential uses, including the likelihood of their sale or lease in the upcoming biennium.

The information supplied to GLO by TxDOT should include:

  • total lands owned (in acres), including total right-of-way and the number of acres surfaced for vehicular traffic.
  • total building space owned (in square feet).
  • location of these lands by county.
  • acquisition or historical cost of lands and buildings, including the date of acquisition, method of finance to acquire the properties, and subsequent improvements to the properties.
  • appraised market value, when known, and year of appraisal.
  • current use.
  • expected usage over the coming biennium.
  • long-range plans for each property.
  • recommendations on the retention or disposal of each property.
  • effects, if any, on federal direct and indirect cost recovery, in light of the latest version of federal Office of Management and Budget Circular A-87.

GLO and GSC should use this information to update their respective registries of TxDOT properties and values.

All property information, whether driven by GASB 34/35 or these recommendations, should be sent to GLO in a standard form for every quarter of the state’s fiscal year (December 1, March 1, June 1 and September 1). Such information subsequently should be submitted to the Comptroller’s office for GASB accounting purposes.

B. Beginning in fiscal 2003 and biennially thereafter, TxDOT should determine and submit to GLO the market value of each individual property it owns.

TxDOT may contract with GLO to determine market values. TxDOT or GLO also could use an economic multiplier, to be developed by the GLO in consultation with the Comptroller’s office, GSC and the LBB, to estimate current market values when only historical costs are known.

C. Beginning with the 2002-03 biennium, TxDOT should be assessed a 7 percent capital charge on the ratio of GLO-appraised value of all land and buildings it owns, excluding rights of way. Estimated capital charges, allowances and net assessments should be included in the General Appropriations Act.

To provide the incentives for which capital charges are intended and simultaneously avoid constitutional issues associated transportation funds, any net assessment for capital charges should redirect funds from Strategies B.1.1, Central Administration, and B.1.4., Regional Administration, by the amount of the net assessment, and be transferred to Strategy A.1.3., Construction, in TxDOT’s appropriations.

Until TxDOT can implement recommendation B, the value of properties other than rights of way should be determined by the 1999 GLO real property evaluation. This would allow for the early implementation of capital charges by TxDOT in comparison to the recommended timetable for other state agencies contained in the Comptroller’s e-Texas report.[11]

D. State law should be amended to make TxDOT’s capital charge allowance a percentage equal to the GLO-appraised value of properties that GLO recommends TxDOT retain, divided by the GLO-appraised value of all TxDOT properties excluding rights of way.

TxDOT has tended to ignore GLO recommendations to sell unused or underused lands. An allowance percentage as high as the 90 percent recommended in the e-Texas report would allow TxDOT to delay divesting itself of such lands with little penalty. The ratio expressed above, using market values taken from GLO’s 1999 real property report, is 67 percent. In other words, 33 percent of TxDOT’s capital assessment would be a net assessment, resulting in the redirection of funds from administration to construction. The capital allowance would rise over time as TxDOT divests itself of properties.


Fiscal Impact

These recommendations would result in the redirection of funds equal to at least 7 percent of the value of TxDOT lands that GLO has recommended for sale or lease, but that remain unsold. The money would be redirected from funds intended for administration to construction funds. The table below takes into account properties TxDOT has already sold. It also assumes that planned land sales in Fort Bend County of $5 million in fiscal 2001 and $4.3 million in fiscal 2002 will occur, as well as sales recommended in issue 6.1 of this report. The net effect on the State Highway Fund will be positive if capital charges encourage TxDOT to sell more properties than already anticipated here.

Fiscal Year
Net Savings to the State Highway Fund Available to Redirect
2002
$5,397,000
2003
$5,145,000
2004
$4,767,000
2005
$4,389,000
2006
$4,137,000

Endnotes

[1] V.T.C.A., Natural Resources Code §31.

[2] V.T.C.A., Natural Resources Code §31.

[3] Texas Comptroller of Public Accounts, State of Texas 1999 Comprehensive Annual Financial Report (Austin, Texas, February 29, 2000), p. 67.

[4] Based on electronic data supplied by the Texas General Land Office.

[5] Texas General Land Office, Real Property Evaluation Reports: Texas Department of Transportation (Austin, Texas, September 1996 and September 1998).

[6] National Association of State Budget Offices, Capital Budgeting in the States (Washington, DC, September 1997) (http://www.nasbo.org/pubs/capbud97/capbud97.htm). (Internet document.)

[7] Reason Public Policy Institute, Reforming Financial Management In the Public Sector: Lessons U.S. Officials Can Learn From New Zealand, by Ian Ball, Tony Dale, William D. Eggers, and John Sacco (Los Angeles, California, May 1999) (http://www.rppi.org/privatization/ps258.html#_Toc448314906). (Internet document.)

[8] For a copy of the latest Comprehensive Annual Financial Report, see .

[9] Governmental Accounting Standards Board, “Information about GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments” (http://www.rutgers.edu/Accounting/raw/gasb/repmodel/index.htmlUnless otherwise specified, pronouncements of the GASB apply to financial reports of all state and local governmental entities, including general purpose governments, public benefit corporations and authorities, public employee retirement systems, utilities, hospitals and other healthcare providers, and colleges and universities.”

[10] Testimony by Dan Daniels, general manager, Champion Realty Corporation, Houston, Texas, at an e-Texas public hearing held in Austin, Texas on May 23, 2000.

[11] Texas Comptroller of Public Accounts, “AFM-7: Apply Innovative Asset Management Practices to State-Owned Land and Buildings,” e-Texas: Smaller, Smarter, Faster Government (Austin, Texas, December 2000), pp. 295-306.