(Released on 1/23/11)
For years the public has heard and decried the backlog of school repairs that now is estimated to be more than a billion dollars if the state is to bring school facilities up to an acceptable level.
While there is enough finger pointing to go around, the problem is more complex than having enough money to undertake the necessary repairs and maintenance. To be fair, the criticism of the state’s ability to maintain facilities is not limited only to the public schools, but can justifiably be applied across the board. The problem lies in the bureaucracy and the process of getting the maintenance done. It is also the reason why neither the state nor the counties should be in the business of providing and running affordable housing.
Unlike what the state law requires of condominium and homeowners associations, no money is put aside for deferred maintenance projects such as painting a building or repairing the spalling of the reinforcement bars in concrete structures. As a result, funds must be appropriated as the need arises which means the funds are requested after the fact that the paint is peeling or the cement has cracked. Then we are looking at as much as 10 to 24 months after the request before the major repair work is undertaken and even that time line is optimistic given the state’s procurement process.
As any building manager will tell you, the longer one waits to make those major repairs, the higher the cost escalates as the facility falls into greater disrepair. For example, instead of merely washing down the building as preparation to repaint, the old paint has now begun to peel, requiring that the old paint be scraped and the surface sanded and primed before the new coat of paint can be applied. If the state or county government is squeezed for funds, policymakers may just defer funding those maintenance requests, exacerbating the deterioration of the facility.
That’s why lawmakers may want to consider selling state facilities to private investors – the buildings and not the land – who would then renovate and maintain the facilities and lease them back to the state. The land under the facilities would be leased to the private investors for a term that would allow the investors to recover the capital investment and depreciation. At the end of the term, the state would have the option of buying back the facility for the remaining balance of the debt service incurred by the private investor. The advantage of this strategy is that it would give the state a lump sum of cash up front, which would then be set aside to produce a cash flow from earnings. Putting the facilities into the hands of a private owner would allow the owner to renovate and maintain the facility in a most efficient manner without all of the bureaucracy of state government and its rules and rubric.
A good building manager would make sure funds are set aside in a reserve fund from the rental income to insure that funds are available when the time comes to make those major repairs. Having the facility operated and maintained in the private sector allows the owner to react immediately to maintenance needs by insuring that there are sufficient cash reserves put aside to meet these needs and to plan scheduled major refurbishment of the facility. For the investor, the purchase and renovation of such facilities present tax advantages and potential federal subsidies for the financing such as private activity bonds. This strategy is already being utilized in a number of states such as California, Texas, and Ohio. The legislature has already taken a small step in this direction when it approved a measure that allows the sale of public housing facilities to private investors but insures that the land is not sold.
Some may argue that selling off state facilities is like giving away the crown jewels as those facilities were built with taxpayer dollars. Why give up ownership only to have to pay rent on those same facilities? To those critics the question should be posed, which is worse, having those facilities owned by the state that cannot and has not been able to maintain them, or to turn them over to the private sector that knows how to maintain those facilities and has the flexibility that the state does not have to react quickly to the maintenance issues?
To a large degree, state and county owned facilities are wasted assets as they represent public funds that are tied up and not available for current needs. Lawmakers should consider this strategy as part of the solution to the state’s current financial crisis.