July 20, 2011

Franchot urges cabinet secretaries to abandon $1.5B State Center project

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By Megan Poinski
Megan@MarylandReporter.com

Nancy Kopp, Martin O'Malley and Peter Franchot

Treasurer Nancy Kopp, Gov. Martin O'Malley, and Comptroller Peter Franchot

Questioning the practicality of “undertaking a commercial real estate venture of this magnitude in the midst of the worst economic climate since the Great Depression,” Comptroller Peter Franchot has joined the chorus of voices objecting to the $1.5 billion State Center project in midtown Baltimore.

Franchot, one of the three members of the Board of Public Works, has had a front row seat for many of the negotiations, presentations, proposals, and agreements for the project. Members of the Board of Public Works vote on all large government contracts, and Franchot has cast votes on several issues relating to State Center.

Franchot wrote a letter to General Services Secretary Alvin Collins and Transportation Secretary Beverley Swaim-Staley thanking them for their work on the project, a massive public-private partnership planned for an area of more than eight square blocks. However, Franchot said, he’s concerned about the economic impact – both on the government’s coffers and on taxpayers – of moving forward with the project right now.

“What we can afford”

“I believe that in the best of times, the proposed redevelopment of State Center would be a calculated risk with a possibility for longer-term, speculative benefits,” Franchot wrote. “A sagging economy, severe budget challenges and mounting state debt serve as reminders that these are not the best of times. As both of you know so well, those of us who serve as fiscal stewards of the state cannot establish priorities solely on the basis of what we want, or what we hope to achieve, but rather on what we can afford.”

Aerial view of the blocks slated for State Center development.

Aerial view of the blocks slated for State Center development.

Franchot writes that he has always shared Collins, Swaim-Staley, and fellow Board of Public Works member Gov. Martin O’Malley’s desire to bring more jobs to Baltimore and revitalize a neighborhood that has long been overlooked. However, he also has been concerned with how much the project will cost the government, and ultimately the taxpayers. He has brought up these concerns at several Board of Public Works meetings, including last December, when he cast the sole dissenting vote against $33 million in bonds to finance a parking garage for the complex.

The tipping point for Franchot was the long-term lease agreements the government made to rent office space in the new development. The buildings will be constructed on state land by a group of investors, and much of the office space will be rented by the state to relocate several departments. Rent will cost about $34 per square foot – $14 more than the median per square foot cost in downtown Baltimore, according to an attorney for downtown property owners opposing the development.

Concern about cost to taxpayers, debt

Franchot wrote that taxpayers have already made sacrifices to bear the brunt of funding state government in difficult economic times, and are hearing talk of potential tax increases coming up at the special General Assembly session this fall. Taxpayers “will justifiably question our decision to pay premium rates in a bargain rich market where high vacancy levels will, unfortunately, be the norm for the foreseeable future,” Franchot wrote. “This decision is incompatible with the State’s assurances that it has, indeed, done everything possible to contain spending and operate more efficiently before considering new sources of revenue.”

In fact, Franchot said, current trends show that now is an incredible buyer’s market for commercial property. It makes no sense for the state to spend more money to build office space to rent.

Franchot also reiterated that the state cannot afford $33 million in debt for the parking garage. The state may be hitting its own self-imposed debt limit by 2017. Additionally, possible changes in accounting methods by the Governmental Accounting Standards Board may force the state to count this debt as a capital debt obligation, which would in turn drive up the state’s debt load.

“I simply do not believe that we can risk the possibility of ‘maxing out the state’s credit card,’” Franchot wrote. He said government and the people should instead work together to reduce state debt.

Cabinet secretaries reject plea

A joint statement from MDOT’s State Center Project Manager Chris Patusky and Michael Gaines, General Services’ assistant secretary for real estate, says that Franchot is allowed to have his own opinion of the project, and they respect that. However, they write, the reasons that the project was approved are still valid, and the state made the right choice to try to redevelop the office complex on that site. Vacating it, they wrote, would have hurt the city communities that border the site.

“Moreover, the cost benefit analysis by the State’s real estate consultants demonstrated that the public private partnership that was approved by the Board of Public Works represented the most feasible and financially beneficial approach to redeveloping the site from the taxpayer’s perspective,” Patusky and Gaines’ statement says. “Finally, the time for doing the project is right – it will have a significant stimulative effective on the State’s economy.  Financing and construction costs have never been lower and because the private partner is financing the office buildings, the State does not need to begin to pay rents for its new office space until 2014 whereas the benefits of jobs, taxes, and economic stimulus begin immediately.”

Bad weeks for State Center

The State Center project has been meeting with lots of opposition in the last two weeks.

Earlier this month, the Maryland Public Policy Institute released a study critical of the costs to taxpayers for the first phase of construction. According to the study, taxpayers will be footing a $127 million bill for the project.

Gaines and Patusky disagreed with the study, and asked the institute to rescind it. Institute President Christopher Summers refused.

Late last year, a group of downtown commercial property owners who call themselves the Coalition to Save Downtown Baltimore sued the state to stop the project. They claimed that the project was awarded without a proper procurement process, and question the financing.

Last week, a judge ruled that the case can go forward. The project is stopped until there is a resolution to the legal dispute.

The Coalition to Save Downtown Baltimore released a statement on Monday supporting Franchot.

“Now is not the time to gamble on speculative and unnecessary ventures that only add more office supply to an already saturated market,” the statement says. “With over 2 million square feet of vacant space in downtown Baltimore available to be rented at a considerably cheaper rate, it’s time to scrap the State Center project as currently proposed.”

  • Bill Campbell

    The Maryland State Center project was always a bad deal for our taxpayers.  I am glad to see that Comptroller Franchot has realized that it doesn’t deserve his continued suppport.  Unfortunately, Governor O’Malley and Treasurer Kopp can keep this boondoggle moving forward.  Hopefully the lawsuit opposing the Maryland State Center will finally stop the lunacy.