The new Long Beach court building will be completed this fall, providing a much-needed replacement for one of the worst courthouses in the state. By contracting with a private firm, the state was able to complete this large new court building on a fast track, without having to pay up front for design or construction.
Several recent reports have repeated misconceptions about the project.
Claim: The project is over budget.
The state’s maximum costs for the entire 35-year life of the agreement have been known since 2010, when the project agreement was approved and signed.
The state will only begin payment on the courthouse when it is finished and occupied. The private project company assumes all risks for any cost overruns during construction, but so far the project is actually running slightly under budget (and ahead of schedule). Change orders have been minimal, approximately 1 percent of the construction budget, which is well within the agreement’s allowances for changes, and the operational impacts of these changes are known today.
The state’s actual annual fee will depend on how well the building is run. The state will deduct for any outage or failure that affects building operations. The maximum costs included estimates for inflation, but actual inflation could be less, and inflation affects less than a third of the service payment. These are actually two of the benefits of the performance-based infrastructure delivery method: predictable costs and a performance guarantee.
Claim: The Legislative Analyst’s Office (LAO) concluded that the state paid $160 million too much for the building.
Not accurate. The LAO report focused on the state’s practices in selecting and evaluating these kinds of projects. It looked specifically at the value-for-money analysis, which was used, among other criteria, to evaluate different procurement models before the state committed to the project. The value-for-money analysis underwent rigorous and regular reviews by the state Department of Finance—pursuant to the authorizing legislation—before the project was approved.
Years after the project was approved, the LAO took issue with some of the underlying assumptions of the analysis and asserted that changing those assumptions could have changed the result of the analysis "by as much as $160 million in net present value terms."
The LAO’s assessment is theoretical only; it is not an evaluation of the project’s actual costs. In the same report, the LAO took similar issue with a Caltrans value-for-money analysis, indicating that the state is just starting to gain experience evaluating these kinds of projects. The Judicial Council maintains that the Long Beach analysis followed best industry practices and proved the project's value for the state. Council staff believes it is premature to evaluate the project's actual costs and intends to do a full analysis after the court has occupied the building for a couple of years. More information
Claim: The courthouse will cost the state $2.3 billion.
This statement mischaracterizes the project’s cost, for three reasons:
- The total project cost is for much more than the initial design and construction of the court building and the garage, which is costing about $339.5 million. It is a service contract for the private party to finance, design, build, operate, and maintain the courthouse for 35 years.
A good analogy would be for an all-inclusive package deal for a brand-new house and a separate garage, in which the monthly mortgage payment covers not only the house itself and the cost of financing over 35 years, but also utilities and all repairs and maintenance, including life-cycle replacements for all appliances and things like carpeting, and even small purchases like lightbulbs, as well as upkeep such as landscaping and window-washing, to keep the house in top shape for 35 years.
- This figure, which comes from adding up the maximum service fee payment for 35 years, makes no allowance for a basic economic principle: the present value of money. It assumes that a dollar 30 years from now will be worth the same as a dollar today, with no allowance for inflation. The more appropriate way to evaluate a long-term capital budgeting item like this is with its net present cost. The net present cost of the Long Beach project is $725 million. The state owns the building throughout, but it will be turned over to the state in top condition at the end of the 35-year term.
- Because the payments are performance-based, the annual service fees spelled out in the project agreement are the maximum the state will pay. If there are problems in the building, the state will deduct, so the fee could be less, but not more, than what is specified in the project agreement.
Claim: The private partner bears no risk in this arrangement.
Inaccurate. Under the project agreement, the private project company bears significant design, construction, and operating risk. The private company must cover all risks related to design and construction–such as any additional work needed to pass building code agency reviews and receive permits, any costs related to construction delays, and even latent defects in the architectural or engineering design. As noted before, the project agreement includes a performance guarantee for the entire 35 years: deductions will be made when court spaces are unavailable or specified operational performance standards are not met.