Judges: ROB McKENNA, Attorney General
Filed Date: 11/3/2008
Status: Precedential
Modified Date: 7/6/2016
Honorable Michael J. Murphy Washington State Treasurer P.O. Box 40200 Olympia, WA 98504-0200
Dear Mr. Murphy:
By letter previously acknowledged, you have requested an opinion on several questions concerning a proposed construction project on land in Olympia called the "Wheeler Block." For [original page 2] clarity, we have slightly paraphrased some of the questions. The questions we address are as follows:
1. Does the maximum occupancy cost per square foot provision ofsubsection (8) of the capital budget authorization for the Wheeler Blockdevelopment apply to all or only to some of the facilities contemplatedin the budget authorization?
2. In calculating the occupancy cost per square foot, must thecalculation be performed on both a square foot and a per employeebasis?
3. In adjusting lease rates for "level of service" for comparisonpurposes, are capital facilities or quality of facilities appropriatelytreated as "services" under the budget authorization?
4. Is there any ultimate cap on either the occupancy cost or the totaldollar cost of the facilities to be financed?
5. With respect to the OFM certification that is required under thebudget authorization, what are the legal consequences, if any, of an"inaccurate" certification by OFM?
6. May the state Treasurer reject the OFM certification?
7. What criteria should the State Finance Committee use to determinewhether it is "reasonably certain" that the proposed financing isexcluded from the computation of indebtedness?
8. Is the proposed financing lease a "financing contract" underRCW
Because the language of Laws of 2008, ch.
The Capital Budget distinguishes between the component parts of the Wheeler Block project. As noted in Attachment A, the Capital Budget provided that DIS is authorized
to lease develop or lease purchase a state general officebuilding and facilities for the department of information services on the state-owned property called "the Wheeler block" in Olympia. Theoffice buildings shall be constructed and financed so that agencies[`] occupancy costs per gross square foot or per employee will not exceed 110 percent of comparable private market rental rates per gross square foot or per employee. The comparable general office space rate shall be calculated based on recent Thurston county leases of new space of at least 100,000 rentable square feet adjusted for known escalation clauses, expected inflation, and differences in the level of service provided by the comparable leases as determined by the department in consultation with the department of general administration.
Laws 2008, ch.
The discrete components of the DIS project are explained in more detail in the pre-design report that DIS commissioned to assist it in analyzing its options for addressing its need for additional space. The "architectural narrative" in this report summarizes the DIS project as follows:3
The program [described] above has been distributed into the facility in the following building components. . . .
Washington State Department of Information Services Data Center andOffice Building Pre-design Report, at 32 (Apr. 18, 2007) (Perkins+Will Report). See also RFP, at 5 (describing "principal components" of DIS project as "Office Building #1 for DIS," "Data Center Complex" ["Link building" and "data halls"], and "Office Building #2 for Washington State Patrol Small Agency Offices"); 2007-09 Capital Budget New Appropriations Project List, at 611 (describing Wheeler Block project financing via lease-purchase agreement "with lease costs for office space within the range of the private market") (emphasis added).
Thus, on the basis of the Legislature's own words, also reflected in the more detailed explanations of the DIS project contained in the pre-design report and the RFP, we conclude that the occupancy cost limitation applies only to the office buildings portion of the project. This result is consistent with the Legislature's prior application of an occupancy cost limitation to the Tumwater Office Building. See Laws of2001, 2d Sp. Sess., ch.
2. In calculating the occupancy cost per square foot, must thecalculation be performed on both a square foot and a per employeebasis?
The Capital Budget provides that the "office buildings shall be constructed and financed so that agencies[`] occupancy costs per gross square foot or per employee will not exceed 110 percent of comparable private market rental rates per gross square foot or per employee." Laws of 2008, ch.
From the context in which it was used, we think the Legislature meant "or" in its ordinary, disjunctive sense. The use of "or" in the authorizing language certainly can be read to mean that the Legislature was deferring to DIS to determine, in consultation with the Department of General Administration ("GA"), which of the two designated cost parameters would be more suitable under the circumstances. Given GA's institutional knowledge of leasing matters, this appears to us to be the most logical reading of the subject language.5
Moreover, we note that the non-DIS office building was to be designed as a demonstration project, which would "provide for staffing and space efficiencies resulting from central reception, support services, and spaces." Laws of 2007, ch.
[original page 7] To summarize, we conclude that in calculating the occupancy cost maximum for each of the office buildings, DIS is to useeither a cost per square foot or a cost per employee but need not use both for a given building.
3. In adjusting lease rates for "level of service" for comparisonpurposes, are capital facilities or quality of facilities appropriatelytreated as "services" under the budget authorization?
For ease of reference, we repeat here the relevant language from the Capital Budget:
The office buildings shall be constructed and financed so that agencies[`] occupancy costs per gross square foot or per employee will not exceed 110 percent of comparable private market rental rates per gross square foot or per employee. The comparable general office space rate shall be calculated based on recent Thurston county leases of new space of at least 100,000 rentable7 square feet adjusted for known escalation clauses, expected inflation, and differences in the level ofservice provided by the comparable leases as determined by the department in consultation with the department of general administration.
Laws of 2008, ch.
Because "services" is not defined in the Capital Budget, we refer to dictionary definitions to determine the common meaning of the term.See Quadrant Corp. v. State Growth Mgmt. Hrgs. Bd.,
In the context of commercial leases, "services" are reasonably understood to refer to such things as the provision and maintenance of essential systems such as electrical, plumbing, heating, ventilating, and air-conditioning, as well as the provision of general services typically provided to office tenants, such as elevators, landscaping, and parking lot maintenance. See, e.g., Department of Administration,Standard Lease Sample(effective 10/22/2007 v1.1.1) (found at www.ga.wa.gov/RES/form.htm). Thus, we read "differences in level of service" in the Capital Budget to refer to differences in the level of these kinds of systems and general services.
If the Legislature intends a broader meaning with respect to the desired operative effect of comparing the occupancy costs for the new office buildings and private office space based on [originalpage 8] a "difference in the level of services," it is of course free to amend the Capital Budget language to differently define the term.8 4. Is there any ultimate cap on either the occupancy cost or the totaldollar cost of the facilities to be financed?
As was the case in the Tumwater Office Building capital budget authorization (See Laws of 2001, 2d Sp. Sess., ch.
With respect to the non-office building part of the project, the Legislature did not impose a specific dollar or conceptual cost limit. Presumably, this is because there are no comparable data centers from which one can derive a "comparable private market rental rate" or experience-based cost estimate.10 However, as a practical matter, there is an upper limit to the overall project cost. The RFP calls for the successful proposer to enter into a guaranteed maximum price (GMP) development agreement for the project. See RFP, at 15 (ultimate construction costs to be incorporated in development GMP), 20 (successful proposer will collaborate with DIS and other state officials resulting in guaranteed maximum price development agreement). This agreement would establish an upper limit on the overall project cost. Furthermore, the fiscal resources of DIS's state agency clients and other clients who would be paying rents to DIS are finite and thus represent a practical limit on the dollar magnitude of any GMP development agreement.11 [original page 9] 5. With respect to the OFM certification that is required under thebudget authorization, what are the legal consequences, if any, of an"inaccurate" certification by OFM? 6. May the state Treasurer reject the OFM certification?
Your questions 5 and 6 are related, so we discuss them together. In the Capital Budget, OFM is required to certify to certain facts:12
• The project description.
• The project dollar amount.
• Occupancy costs per square foot will not exceed 110 percent of comparable private market rental rates per gross square foot or per employee.
• State agency tenants in the general state agency office building will include the state patrol, and the building will include facilities for small agencies and offices.
• DIS designs and operates the general office building as a demonstration of the efficiencies gained from the integration of office space and telecommunications and computer technology.
• The demonstration project will provide office space, furniture, telecommunications, and computer technology as a single package.
• The general office building will be designed so that small agencies and offices can move in and out of the facility without the typical moving expenses that result from individual agency ownership of furniture and technology.
• The general office building will provide for staffing and space efficiencies resulting from central reception, support services, and spaces.
See Laws of 2008, ch.
The Legislature's reliance on OFM for an assurance regarding the attainment of certain factual, programmatic objectives is consistent with OFM's increasingly central role in the analysis of state capital project proposals. In the same legislative session in which the Legislature authorized the Wheeler Block project, the Legislature also elevated OFM's role in state facility planning and management. Thus, in Laws of 2007, ch.
The legislation also provides that, "State agencies shall not enter into new or renewed leases of more than one million dollars per year unless such leases have been approved by the office of financial management". Id. at § 4(4). Further, among other provisions, "State agencies are prohibited from entering into lease agreements for privately owned buildings that are in the planning stage of development or under construction unless there is prior written approval by the director of the office of financial management." Id. at § 5.
In short, the Legislature has integrated OFM into fundamental state leasing decisions. The Legislature has not conferred on the State Finance Committee or the state Treasurer new legal authority to review OFM certifications or otherwise to interpose objections to such certifications via the process of reviewing financing contracts.13 Both the context of the Capital Budget language and OFM's now central role in state facility planning decisions cause us to conclude that the Legislature intended OFM, and only OFM, to make the certification set forth in the Capital Budget. Thus, neither the state Treasurer nor any other state agency is given authority to reject OFM's certification or dispute its accuracy.
For similar reasons, we conclude that the Legislature did not specify legal consequences to attach to an assertedly "inaccurate" certification by OFM. As discussed, the Legislature intends that OFM bring its expertise and resources to bear on state leasing decisions so that the state receives the best value possible in facility acquisitions. The statute assumes that OFM will properly perform the role assigned to it and will exercise good judgment in making the certifications described above. In establishing this as a programmatic objective, the Legislature has not evinced any intent to alter existing legal relationships or to establish a procedure for challenging OFM's findings.
Thus, we do not believe that perceived inaccuracies in OFM certifications either give rise to legal claims or otherwise call into question the validity of financing contracts that are approved by the State Finance Committee.14 The "check" on OFM's authority in this regard [original page 11] appears to be the Legislature's continuing authority to define (or reconsider) OFM's role and the Legislature's continuing confidence in OFM's performance of its role.
7. What criteria should the State Finance Committee use to determinewhether it is "reasonably certain" that the proposed financing isexcluded from the computation of indebtedness?
8. Is the proposed financing lease a "financing contract" underRCW
We answer questions 7, 8 and 9 together, because they require essentially the same analysis. As you know, in Department of Ecology v.State Finance Committee,
A "financing contract" is defined to mean:
"Financing contract" means any contract entered into by the state for itself or on behalf of an other agency which provides for the use and purchase of real or personal property by the state and provides for payment by the state over a term of more than one year, and which provides that title to the subject property may [original page 12] secure performance of the state or transfer to the state or an other agency by the end of the term, upon exercise of an option, for a nominal amount or for a price determined without reference to fair market value. Financing contracts shall include, but not be limited to, conditional sales contracts, financing leases, lease purchase contracts, or refinancing contracts, but shall not include operating or true leases. For purposes of this chapter, the term "financing contract" shall not include any nonrecourse financing contract or other obligation payable only from money or other property received from private sources and not payable from any public money or property. The term "financing contract" shall include a "master financing contract."
RCW
The Legislature previously authorized GA to enter into a financing contract that did not provide for the use of certificates of participation. See Laws of 2003, ch.
The department shall finance this project using a financing contract as authorized in section 907(2)(c), chapter
8 , Laws of 2001 2nd sp. sess., 16 with title passing to the state if all payments are made as provided in the contract. Should the [original page 13] department choose to use a financing contract that does not provide for the issuance of certificates of participation, the financing contract shall be subject to approval by the state finance committee as required by RCW39.94.010 . In approving a financing contract not providing for the use of certificates of participation, the state finance committee should be reasonably certain that the contract is excluded from the computation of indebtedness, particularly that the contract is not backed by the full faith and credit of the state and the legislature is expressly not obligated to appropriate funds to make payments. For purposes of this section, "financing contract" includes but is not limited to a certificate of participation and tax exempt financing similar to that authorized in RCW47.79.140 .
Laws of 2003, ch.
In the case of the Wheeler Block project, the Legislature has expressly authorized the financing of the project as a financing contract under RCW
[e]nter into a financing contract for an amount approved by the office of financial management for costs and financing expenses and required reserves pursuant to chapter
39.94 RCW. . . . Should the department of information services choose to use a financing contract that does not provide for the issuance of certificates of participation, the financing contract shall be subject to approval by the state finance committee as required by RCW39.94.010 . In approving a financing contract not providing for the use of certificates of participation, the state finance committee should be reasonably certain that the contract is excluded from the computation of indebtedness, particularly that the contract is not backed by the full faith and credit of the state and is expressly not obligated to appropriate funds to make payments. For purposes of this section, "financing contract" includes but is not limited to a certificate of participation and tax exempt financing similar to that authorized in RCW47.79.140 .
Laws of 2008, ch.
On the basis of this language and the nearly identical language by which the Legislature authorized GA to enter into a financing contract for the Tumwater Office Building 63-20 financing, there can be no question that the Legislature considers a 63-20 project to be an appropriate subject of a financing contract.17 The Washington State Treasurer's Report on 63-20 Capital Projects Financing stated:
[original page 14] 63-20 financings were first approved by the Internal Revenue Service in 1963. Such financings have been used in other states for parking garages, correctional facilities, hospitals, schools, and some transportation projects. Under the 63-20 structure, 63-20 bonds are issued by a nonprofit corporation on behalf of the public agency pursuant to a trust indenture with a bank trustee. This issuance by the nonprofit differentiates the 63-20 financing from COPs, where the public entity is the issuer. The 63-20 bond proceeds are deposited in a project fund held by the trustee and used to finance the capital improvements (undertaken by the nonprofit corporation) that are leased to the public agency.
The nonprofit corporation, often through a private development company, designs and builds the project. The project may be operated and maintained either by the public agency itself under the lease from the nonprofit corporation or by the nonprofit corporation through a management contract with a private management firm. Title to the project typically is held by the nonprofit during the life of the bonds. Title to the improvements is transferred to the public agency at lease maturity when the bonds issued by the nonprofit corporation are retired.
State of Washington Office of the State Treasurer, Report on 63-20Capital Projects Financing, at 12-13 (Jan. 23, 2006) (63-20 Report). In other words, certificates of participation are not the exclusive method of financing property being acquired by the state under a financing contract.
It is equally clear that the Legislature did not intend the financing contracts for the Wheeler Block project or the Tumwater Office Building project to create state debt. In this regard, we note that the authorizing language for the two projects was identical:
In approving a financing contract not providing for the use of certificates of participation, the state finance committee should be reasonably certain that the contract is excluded from the computation of indebtedness, particularly that the contract is not backed by the full faith and credit of the state and the legislature is expressly not obligated to appropriate funds to make payments. For purposes of this section, "financing contract" includes but is not limited to a certificate of participation and tax exempt financing similar to that authorized in RCW
47.79.140 .
Laws of 2008, ch.
[original page 15] The Legislature's own authorizing language for the Wheeler Block and Tumwater Office Building projects provides a guide for the state Finance Committee to achieve "reasonable certainty" regarding the legal effects of the financing contract. The financing contract, Finance Committee authorizing resolution, bond documents, and offering documents should make clear that (1) the state's only financial obligation is to make lease payments if funds are appropriated for that purpose and that the Legislature's decision not to appropriate such funds does not constitute a default by the state, and (2) the bonds are not general obligations of the state and are not backed by the full faith and credit of the state. Given the settled nature of the relevant law in Washington and the state's prior experience with both the Department of Ecology building and Tumwater Office Building financings, there should be no obstacle to the proper drafting of such documents. At the risk of stating the obvious, we recommend that the state continue to timely engage experienced bond counsel for consultation and assistance with respect to the drafting of such documents and to the structuring of the underlying financings.
10. Does article
As our response to questions 7, 8 and 9 indicates, we do not believe that a properly drafted financing lease authorized by and in compliance with RCW
Inherent in this conclusion is the proposition that a properly structured and authorized 63-20 financing need not create a "state" obligation within the meaning of article VIII, section 1.18 In theEcology case, the State Finance Committee had argued that the Department of Ecology's financing plan was "similar to the one [the state Supreme Court] disallowed in State ex rel. State Bldg. Fin. Auth. v. Yelle".Ecology v. State,
Similar to the trustee/lessor in the transaction that was the subject of the Ecology decision, the proposed issuer of bonds for the Wheeler Block project is a private, non-profit [original page 16] corporation, not a state agency. Cf. Op. Att'y Gen. 005 (Wyo. 1998), at 10 (concluding that Wyoming Building Corporation is not "alter ego" of state given that (1) corporation is private, non-profit corporation formed under nonprofit corporation law rather than statutorily created state agency; (2) corporation's board, although initially approved by State Building Commission, is self-perpetuating, will not consist of State Building Commission members, and will not otherwise mirror state's governmental body; and (3) corporation's obligations — to repay bonds continues until bonds are paid off — are disparate from obligations of state's obligations, which are merely to pay rent as long as Legislature appropriates money for that purpose).
To reiterate, properly authorized and structured 63-20 financings do not create state obligations within the meaning of article VIII, section 1(h) of the state constitution.
11. Do public works bidding laws apply to the construction of thefacilities to be leased to the state?
State law defines a "public work" to mean
all work, construction, alteration, repair, or improvement other than ordinary maintenance, executed at the cost of the state or of any municipality, or which is by law a lien or charge on any property therein. All public works, including maintenance when performed by contract shall comply with chapter
39.12 RCW. "Public work" does not include work, construction, alteration, repair, or improvement performed under contracts entered into under RCW36.102.060 (4) or under development agreements entered into under RCW36.102.060 (7) or leases entered into under RCW36.102.060 (8).
RCW
It seems plain that [the retainage laws in chapter
[original page 17] Hall Olswang v. Aetna Cas. Sur. Co.,
We have previously alluded to the question of whether a lease-financed facility constitutes a "public work" without having squarely addressed the specific issue before us now. In AGO
a potential issue exists as to whether construction of a state building financed by means of a financing contract pursuant to RCW
39.94 constitutes a public work because of the structure of such lease-purchase financing. . . . Because the building is not built at the direct cost of the state, it can be argued that the construction is outside the definition of public works. Given the manner in which we respond to the question presented, it is unnecessary to reach this issue in this opinion.
Id. at 5-6 n. 6.
In AGO
However, our opinion was "qualified" as to the question whether "public work" encompassed other projects involving somewhat different fact patterns. We noted that "another common arrangement is for a public entity to lease out property, with the lessee to build a structure or other improvements, the improvements to revert to the lessor's ownership at the end of the lease term." Id. With respect to such projects, we said:
In the case of long-term leases where the useful life of the improvements will be substantially expended before they revert to the lessor, it seems unlikely that the construction of the improvements could be deemed a "public work." In the case of relatively short-term leases, especially where the improvements are constructed for the lessor's use and benefit or to the lessor's specifications as related to eventual [original page 18] public use of the property, a different analysis might apply. In these "mixed" factual situations, we must leave our answer somewhat qualified.
Id.
In AGO
We are not aware of cases from this state, or other states, that squarely address the issue of whether a project financed pursuant to a financing contract is a "public work." However, a few cases involving somewhat similar issues do shed some light on the issue. In Drake v.Molvik Olsen Electric, Inc.,
In Spokane v. Department of Labor and Industries,
Quoting, in part, Drake, the Court of Appeals observed, "`The source of funding does not determine the applicability of the prevailing wage statute,' so long as it is publicly funded." Spokane,
In concluding, the Court of Appeals held that a "public work" does not mandate the government's "direct involvement" in the work being performed.21 "Rather, it requires only that the work be `executed at the cost of' the City. That requirement is met here. In essence, the City finances the work at the [facility]; how efficiently [the contractor] operates the facility determines its profit margin."Id. at 814-15.
In San Antonio Building Construction Trades Council v. SanAntonio,
The union plaintiff argued that the corporation's pledge of designated tax revenues received from the city effectively rendered the project "paid for in whole or in part from public funds." The Court of Appeals disagreed, holding that:
In considering the plain meaning of the phrase `construction of a public work . . . paid for in whole or in part from public funds,' we construe it to mean public funds actually used to construct the public work — here, the convention center hotel. The taxes at issue, however, are not funds that are being used for the [original page 20] construction of the convention center hotel; instead, they are being used as security in the event that the Developer is not able to pay the bond holders."
Id. at 751.23
In analyzing the Wheeler Block project, we conclude that projects constructed pursuant to properly structured and authorized financing contracts under 63-20 financings do not constitute "public works."24 In such projects, the developer procures the construction financing and bears the financial and completion risk.25 See 63-20 Report, at 35 (Noting that under 63-20 financing, obligation may be structured as non-recourse, result being that sole source of repayment may be project revenue and thus bondholders, rather than state, bear risk of nonpayment), 50-51 (spreadsheet comparisons of lease payment components and various financing methods indicate that in 63-20 financings, the developer bears risk, controls the financing, and owns the project until bonds are paid off).26 While DIS will make lease [originalpage 21] payments, those payments are not the source of funds for construction of the project buildings and facilities. Thus, no public funds are used for the construction and, hence, the project is not a public work. Moreover, although the flexibility that 63-20 financings is said to provide to agencies and local governments is attributed in part to the ability to proceed without application of all competitive bid requirements (see 63-20 Report, at 32), the 63-20 financing method has numerous other stated benefits: timing flexibility, expedited completion compared to conventional project delivery methods, lower project costs, substitution of private resources and personnel for constrained public resources, risk shifting to the private sector, and access to new sources of private capital. See 63-20 Report, at 31-35. Moreover, the 63-20 financing method is a federally and state recognized, tax-exempt financing mechanism. It cannot be said that the 63-20 financing mechanism has no intrinsic value or purpose other than to permit agencies to "escape" the effect of public works laws.27
Thus, for the reasons discussed above, we conclude the Wheeler Block project is not a "public work." I hope the foregoing information will prove useful.
Sincerely,
ROB McKENNA Attorney GeneralROBERT J. FALLIS Assistant Attorney General
:pmd
The following agencies may enter into financial contracts, paid from any funds of an agency, appropriated or nonappropriated, for the purposes indicated and in not more than the principal amounts indicated, plus financing expenses and required reserves pursuant to chapter39.94 RCW.. . . .
(2) Department of general administration:
. . . .
(c) Enter into a financing contract for an amount approved by the office of financial management for costs plus financing expenses and required reserves pursuant to chapter
39.94 RCW to lease develop or lease purchase a state office building of 150,000 to 200,000 square feet on state-owned property in Tumwater according to the terms of the agreement with the Port of Olympia when the property was acquired or within the preferred development/leasing areas in Thurston county. The building shall be constructed and financed so that agency occupancy costs will not exceed comparable private market rental rates. The comparable general office state rate shall be calculated based on the three latest Thurston county leases of new space of at least 100,000 rentable square feet adjusted for inflation as determined by the department of general administration. The department of general administration shall coordinate with potential state agency tenants whose current leases expire near the time of occupancy so that buyout of current leases do not add to state expenses. The office of financial management shall certify to the state treasurer: (i) The project description and dollar amount; and (ii) that all requirements of this subsection (2)(c) have been met.
Laws of 2001, 2d Sp. Sess., ch.
Carr-Gottstein Properties v. State , 899 P.2d 136 ( 1995 )
In Re Anzai , 85 Haw. 1 ( 1997 )
Fults v. City of Coralville , 666 N.W.2d 548 ( 2003 )
Wilson v. Kentucky Transportation Cabinet , 884 S.W.2d 641 ( 1994 )
Schulz v. State of New York , 84 N.Y.2d 231 ( 1994 )
Lonegan v. State , 176 N.J. 2 ( 2003 )
Quadrant Corp. v. STATE, GROWTH MANAGEMENT HEARINGS BD. , 110 P.3d 1132 ( 2005 )
State v. Conte , 154 P.3d 194 ( 2007 )
HJS Development, Inc. v. Pierce County , 61 P.3d 1141 ( 2003 )
In Re Personal Restraint of Andress , 56 P.3d 981 ( 2002 )
Drake v. Molvik & Olsen Electric, Inc. , 107 Wash. 2d 26 ( 1986 )
In Re the Oklahoma Capitol Improvement Authority , 958 P.2d 759 ( 1998 )
Anderson v. City of Seattle , 78 Wash. 2d 201 ( 1970 )
Lycoming County Nursing Home Ass'n v. Commonwealth , 156 Pa. Commw. 280 ( 1993 )
City v. State, Dept. of Labor and Industries , 998 P.2d 913 ( 2000 )
Dieck v. Unified School District of Antigo , 165 Wis. 2d 458 ( 1991 )
Department of Ecology v. State Finance Committee , 116 Wash. 2d 246 ( 1991 )
SUPPORTERS OF CENTER, INC. v. Moore , 80 P.3d 618 ( 2003 )