The State Worker

California continues to bet on public-private partnerships. Will it pay off?

The groundbreaking ceremony on Friday, Oct. 14, 2016, got UC Merced’s 2020 Project started.
The groundbreaking ceremony on Friday, Oct. 14, 2016, got UC Merced’s 2020 Project started.

In the rolling greens of a defunct county golf course next to California’s youngest public college, tractors turned earth earlier this month for a long-awaited project that would double UC Merced’s footprint at an unprecedented pace.

The heavy equipment on campus these days is breaking new ground in another way, too.

It’s a sign of the University of California’s biggest-yet experiment with a construction project drawing substantially on private funding, committing the campus to a 39-year deal with a single developer that ultimately costs more than $3.6 billion.

Known as UC Merced 2020, the project is distinct in its scale and its long-term contract with an international developer called Plenary Group. Plenary stands to earn about $1.77 billion over time for its role designing, constructing and maintaining the new buildings.

“It certainly is a first in American public higher education,” said UC Merced Vice Chancellor for Planning and Budget Dan Feitelberg.

That contract adds UC Merced to a small but growing list of public agencies in California that are turning to the private sector for help with projects that otherwise might wait indefinitely for state funding. The roster includes a new city hall complex in Long Beach and a tunnel off the Golden Gate Bridge in San Francisco. Each likely will tie up public finances for decades.

At UC Merced, the university expects to pay about $103 million a year from 2020 to 2055 for an upcoming growth spurt. It’s so expensive that the 12-year-old university might not be able to afford another development until it pays off the current expansion.

But the need for residential and classroom space on the overcrowded campus is so acute that the college “bought the biggest house it could with the biggest mortgage we could take on,” UC Merced professor Susan Amussen said.

Public-private partnerships often are touted as an efficient way to spur stalled projects, but they can become more expensive than their publicly managed counterparts. They rely on comparably pricey private financing instead of the public bonds state agencies use for major projects. In a public-private partnership, the state over time repays its developer for private financing costs.

Lately, their advocates have pitched them as a tool to help governments achieve value over time, keep a structure in like-new condition or carry out a special redevelopment.

At UC Merced, Plenary is putting up almost $600 million of its own funding for initial construction, which helped clear the way for the expansive project favored by the campus’s chancellor, Dorothy Leland.

Campus leaders also were won over by the prospect of quickly building expensive structures, and by a commitment to keep them well-maintained through the life of the contract, Feitelberg said.

“You do it for those assets that are so important they really deserve to be kept in top condition,” said Dale Bonner, who as secretary of business, transportation and housing in Gov. Arnold Schwarzenegger’s administration advocated for greater use of public-private partnerships.

Today, he’s an executive in Plenary Group, which won the contract to develop UC Merced’s expansion. It’s also a large part of the development group behind the $520 million Long Beach civic center.

$1.1 billion for 1.6 miles

The state’s first two large-scale public-private projects, a pair of Southern California toll roads authorized by a 1989 law, did not succeed as they were designed. They’re open now but are managed by local governments in Orange and San Diego counties instead of the private developers that built them.

Under Schwarzenegger, Caltrans and a group of Bay Area governments embarked on a different kind of public-private partnership that broke away from the toll roads. The first one, a tunnel in San Francisco called Presidio Parkway, uses a model similar to UC Merced’s in which the public agency slowly pays for the project, first with a lump sum and then in annual installments that reward the developer for keeping the facility in good condition.

Rather than design the 1.6-mile road and hire a company to build the parkway for an estimated $499 million in 2009, the state struck a $1.1 billion deal to have a private company develop and maintain it over 30 years, according to a 2010 California Transportation Commission report.

Presidio Parkway won approval by a 6-5 vote from the commission. It overcame skepticism from commissioners who only wanted to use public-private partnerships for revenue-generating projects, such as toll roads.

“It was political,” said James Ghielmetti, a Bay Area home builder on the Transportation Commission who favors public-private partnerships but opposed Presidio Parkway. “I fought hard not to make that a poster child for public-private partnerships because I was fearful of the outcome.”

The arrangement met strong opposition from state worker unions, who saw a large project shift to the private sector at a high cost.

“It’s taking about a billion dollars over the next 30 years out of the state highway account,” said Bruce Blanning, executive director for Professional Engineers in California Government. His union in 2010 unsuccessfully sued to block the project.

Caltrans Chief Deputy Director Kome Ajise said the transportation agencies expect to save money over time on the parkway. The arrangement shifted some of the project’s liability to its developer, making it responsible for complex architecture on a critical roadway off Highway 101, he said.

Golden Link Partners, the developer, also is required to carry out preventive maintenance. That should keep the road from suffering in future budget downturns, supporters say, when maintenance projects sometimes are squeezed for funding.

“They’re not just sitting there waiting for 30 years,” Ajise said.

The parkway opened last summer. Despite assurances that the deal would cap spending, developer Golden Link Partners sued Caltrans over alleged contract delays and gained another $91 million in a settlement. Ghielmetti was the lone vote against the additional payment.

Although its advocates regard the parkway as a success because it finished on time and generally on budget, the state has not launched another public-private partnership for a road project since it began work in San Francisco.

Caltrans will have to get special permission from the Legislature to try again. It has a six-year window to develop public-private partnerships that closes in December.

Presidio Parkway “helps us make a case for (public-private partnerships) if you truly understand what we get out of it,” Ajise said.

UC gets a green light

The UC won’t need the Legislature’s consent to develop another public-private partnership. It gained that authority in a bill Gov. Jerry Brown signed in 2015.

UC President Janet Napolitano at the UC Merced ceremonial groundbreaking suggested more are in the works. The system says it has billions of dollars worth of deferred maintenance and seismic repairs that need attention.

“The project shows how we can expand access to public research universities at a time of reduced capital investment not only in California but in states across the country,” she said, according to the Merced Sun-Star.

On campus, students and staff who’ve followed the project admit they don’t fully understand it. They’re curious about Plenary’s role on campus after construction ends, just as much as they’re excited about finally gaining a pool, soccer field, more dorms and classrooms.

“I know I want to know a lot more,” said Daniel Sabzehzar, 21, a student who ran unsuccessfully for a seat on the Merced City Council this fall. His campaign frequently highlighted the potential for the UC’s next investment in Merced to spur the city’s economy.

UC Merced’s contract developed over the past two years, with campus leaders seeking an encompassing project that would allow the school to accommodate about 10,000 students and catch up on some overdue facilities.

Today, it has about 7,000 students. It’s so short on space that about 450 students live off campus in apartments rented by the university. Classes run from 7 a.m. to 11 p.m.

“We realize that the traditional project of building one building this year and another next year just wouldn’t work because we need the residence halls at the same time we need the classrooms at the same time we need the student-life space,” said Charles Nies, UC Merced’s vice chancellor for student affairs.

Amussen, who leads UC Merced’s Academic Senate, said the contract sidestepped fault lines that could have triggered opposition on campus. For instance, it requires the developer to pay prevailing wages.

Also, unlike Presidio Parkway, UC Merced’s project does not cut public employees out of the long-term maintenance and upkeep of the new buildings. Daily maintenance will still be carried out by UC employees.

Larger repairs, such as elevator outages, are Plenary’s responsibility. Bonner said one of its subcontractors would have an office on campus throughout the contract.

In some ways, Amussen said, the public-private partnership is an odd fit for a university. The UC’s process for choosing a developer appeared closed to some students and faculty, building a sense of “mistrust,” she said.

She’s excited about the proposal now that it’s taking shape. She praised Chancellor Leland for negotiating a “genius deal” to grow the campus despite tight state budgets.

“You could say we ought not to have to pay for it this way, but the reality is we do,” she said.

Adam Ashton: 916-321-1063, @Adam_Ashton