Sale of State Office Building Will Cost Taxpayers $55 Million
The Pa Auditor General said today that a special investigation has determined that the sale of the State Office Building here will cost taxpayers almost $55 million rather than save money, as the Department of General Services asserted when it sold the landmark structure for $4.6 million last April.
Wagner sent copies of his report to DGS, Gov. Rendell, and the General Assembly, recommending that they immediately cancel a sales agreement with River Vue Associates, as well as lease agreements with the seven private landlords.
“Our investigation proves conclusively that the sale of the State Office Building is a bad deal for taxpayers,” Wagner said. “It was a fire sale conducted during the worst real estate downturn since the Great Depression, and it needs to be reversed. With our commonwealth struggling to close a budget deficit in the billions of dollars, it would be fiscally reckless to saddle taxpayers with long-term spending obligations they don’t want and can’t afford.”
Besides being a bad financial deal for taxpayers, the investigation also found that selling the State Office Building will decentralize commonwealth operations and relocate agencies to seven different buildings throughout Allegheny and Westmoreland counties, making it harder for taxpayers to find the services they are seeking.
“The residents of southwestern Pennsylvania, who have been able to access numerous state government offices in a single remarkable location for over a half-century – the dream of Pittsburgh mayor and, later, Pennsylvania governor, David L. Lawrence – will suffer due to the inconvenience and confusion caused by this decentralization,” said Wagner, who added, “Decentralization adds costs and decreases efficiencies in state government.”
Opened in 1957 and located at the entrance to Point State Park at the tip of Pittsburgh’s Golden Triangle, the State Office Building was the first structure the commonwealth built outside of Harrisburg to place numerous state agencies under one roof. The 16-story building cost $8 million to construct and contains 274,308 square feet of office space and a 23,848-square-foot basement. Along with the Gateway Center complex, it stood as a symbol of Pittsburgh’s first post-World War II downtown renaissance.
Wagner’s investigators determined that the Department of General Services grossly exaggerated the benefits of the sale of the State Office Building by using the highest conceivable estimate of renovation costs (based on completely “gutting” the building) and understating the cost of leasing office space elsewhere. As a result, DGS concluded that a sale would save the state $14 million over 20 years. However, in reaching that conclusion, General Services did not take into account all costs to be incurred by leasing and used a 20-year time period despite DGS’s own estimate that renovations would extend the useful life of the building by an additional 30 years.
When lease costs are projected over 30 years, investigators found that selling the State Office Building would not save money, but instead would cost taxpayers a significant amount. Investigators estimated the 30-year cost of leasing other office space at $220.8 million, compared with an estimated cost of $166.2 million to refurbish and maintain the building, for a net cost to
taxpayers of $54.6 million.
“Somebody got a great deal on the sale of the Pittsburgh State Office Building,” Wagner said, “but it sure wasn’t the taxpayers of the Commonwealth of Pennsylvania.”
Investigators also found:
* DGS understated the full amount to be paid for leased office space. It said that the average price for three main office leases would be $11.16 per square foot. However, when additional charges to cover operational costs were included, the average cost to taxpayers rose to $25.75 per square foot. In addition, DGS’s estimates entirely ignored the costs of three other leases. A total of seven new leases will be required to house the 22 state agencies and 800 state employees displaced by the sale of the building.
* DGS sold the building for less than its appraised value, for less than the sale amounts of other commercial buildings in Pittsburgh’s central business district, and for significantly less than the sale price of the Philadelphia State Office Building. After certain required deductions and payments, including $160,000 in brokerage fees, the state will net only $1.5 million from the sale — roughly one-third of the building’s $4.6 million sale price.
* DGS did not hold any public hearings on the sale of the building. There was a single informational meeting held, not by General Services, but by a legislative committee. The meeting was held in Harrisburg on the day before the passage of the bill that authorized the sale of the building and 11 other state properties. There were no hearings advertised or held in the Pittsburgh area.
* The owners of Piatt Place, at 301 Fifth Avenue in downtown Pittsburgh, who will receive $165 million in lease payments from the state over the next 30 years, are affiliated with River Vue Associates, the purchaser of the State Office Building. Due to the timing of the leases and the sales closing, the Department of General Services may end up making payments to lease new space from Piatt Place and other landlords even before it receives payment from River Vue for the sale of the building.
“The overall conclusion of this report is that, as a result of its disregard for the best interests of the commonwealth and taxpayers, the Department of General Services sold the State Office Building for less than what it was worth so that it could proceed with new lease agreements – a decision that will ultimately cost the commonwealth and taxpayers almost the entire amount of money that DGS claims would be required to renovate the building,” Wagner said.
General Services estimated that a comprehensive rehabilitation of the State Office Building would cost $64 million. However, DGS staff admitted to Wagner’s investigators that the cost could be significantly lower. Wagner noted that DGS failed to use $15.5 million in capital budget funds for renovations, which the General Assembly had authorized in 1994 and 2002. Wagner has also proposed spending a small portion of the new federal stimulus funds for certain authorized “green” expenditures involved in the renovation of the building.
Wagner’s report, which includes numerous appendices as well as DGS’s response, is available to the public at www.auditorgen.state.pa.us.
Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly. He is the commonwealth’s elected independent fiscal watchdog, conducting financial audits, performance audits, and special investigations. The Department of the Auditor General conducts approximately 5,000 audits per year. To learn more about the Department of the Auditor General, taxpayers are encouraged to visit the department’s website at www.auditorgen.state.pa.us.