Threat of litigation looms over faulty Board of Equalization tower

July 21--Board of Equalization employee Luella Vaughn remembers her introduction to the department's notorious high-rise headquarters right after starting her job there seven years ago.

"I was on the fourth floor," she recalled. "And you could see the little brown spots. I was sitting right on top of a water leak."

Vaughn is one of 2,200 employees who work in this downtown building, 24 stories of chronic trouble. Over two decades, employees there have dealt with: Bats. Floods. Leaky windows. Toxic mold. Hazardous chemicals. Glass panels that pop off the building with no warning and shatter on the sidewalk. Fickle elevators. Corroded pipes. A broken fire system water pump. Even a hostage-taker's death.

"Of all the buildings that I've worked in," Vaughn said, "this is the worst. It looks good on the outside but the problems it has are horrendous. I've been with the state 20 years. I've never experienced anything like this."

Now, after $60 million in taxpayer-funded repairs, the Board of Equalization tower at 450 N St. remains riddled with defects, from its crumbling core plumbing to its concrete-and-glass exterior. Repairs will cost another $115 million, the tax-collecting board has estimated. All told, fixing the building could cost taxpayers more than twice its purchase price.

In the latest development, a Sacramento attorney filed a $50 million tort claim this month, a first step toward suing the tax-collecting department on behalf of employees who say their bosses downplayed the building's ailments and put workers' health at risk. The move promises years more in legal wrangling, court costs and potential settlements, all at taxpayers' expense.

Equalization officials are becoming more vocal in their concerns.

"Even though my lawyers told me not to say this, I don't think it's safe," board Chairman Jerome Horton said.

After learning that implementing the latest fixes could take five years -- including two years just to do the paperwork -- board member George Runner said the building represents "the great hypocrisy" of the state.

"If this building was owned by a private entity, the city would not allow it to be standing there with scaffolding around it," Runner said. "They'd insist it be fixed. But since this building is owned by the state, they can't."

Problems from the start

The agency might still be in its former headquarters across the street from the Capitol if not for the aligned interests of two powerful institutions -- the Legislature and the California Public Employees' Retirement System.

For many years, the board's central unit worked at 1040 N St., across from the Capitol. Equalization officials, including longtime Chairman Ernest Dronenburg Jr., wanted more space.

"But there just wasn't any place downtown big enough," said Dronenburg, who served on the board from 1978 to 1998.

Lawmakers, however, coveted the office building for their own expanding operations. The Legislature took ownership of the building in 1989 and soon served notice that the board would have to get out.

Meanwhile, CalPERS was developing a downtown real estate investment -- an 18-story tower on N Street between Fourth and Fifth streets -- on behalf of its public employee beneficiaries. After CalPERS agreed to add more floors, Dronenburg recalled, the state made a deal and the board committed to moving in.

Construction on the site of a former Safeway started in 1991, and two years later, the board moved about 2,000 employees into what was called the Capitol Square Building. CalPERS spent $79.4 million on the project.

Almost immediately, the building drew complaints that it was built on the cheap and was ugly -- in stark contrast to the relatively opulent $120 millionWells Fargo Building across the street.

Richard Hastings, Sacramento's design review director, blasted the board headquarters as "a repeat of a somewhat tired architectural design established in the 1950s" and noted the state government project was exempt from city zoning and design rules.

State officials countered that the tower was a good investment for CalPERS and a good deal for taxpayers footing the board's $1.60-per-square-foot lease -- far less than the $2.50 per square foot commanded by the Wells Fargo tower. "There's a difference between a building that's your advertisement and one you're trying to make money on," CalPERS spokesman Craig Hartung said.

The new tower had been open for less than three months when Jim Ray Holloway arrived on the morning of March 26, 1993, carrying a shotgun, a rifle, two pistols, at least 200 rounds of ammunition -- and a misplaced grudge.

After overpowering a security guard, Holloway took at least seven hostages on the building's 18th floor. He died in a storm of bullets after he leveled his shotgun at a police officer. No employees or police were hurt.

Witnesses said Holloway was angry over personal tax problems, but was probably confused about where he was. The Franchise Tax Board collects personal taxes. The Board of Equalization mostly collects business and excise taxes.

"He wasn't even looking for our people," said Dronenburg. "He got the wrong building."

The leaks begin

From its earliest days, the Equalization building leaked water during the winter.

Although documents obtained by The Sacramento Bee don't detail the first evidence of leaks, by 1994 CalPERS and other state officials were talking about water intrusion with the tower's builder, Colorado-based Hensel Phelps Construction, and Sacramento-based Dreyfuss & Blackford Architects, which designed the structure. After four years of talks and legal threats, CalPERS "was unable to resolve water intrusion issues," according to a state review of the building's history.

It is not clear why CalPERS did not sue. No one involved with the project remains at CalPERS, a fund spokeswoman said.

By 1998, water was coming into the tower via stairwells and an elevator serving the parking garage. The concrete-and-glass skin on the 23rd floor was leaking, too, along with a door on that same level. Planters on the 12th floor also allowed water into the structure.

Thomas E. Miller, a San Francisco attorney who specializes in construction-defect cases, said that such faults are common with high-rise structures, and often lead to other building failures.

"Nine times out of 10, it starts with a water-related problem," such as leaking windows, Miller said. "Improper slopes, corrosion, mechanical systems, improper ventilation. ... It's rare to find a building without some version of these problems."

Repairs and responsibility

Per the original lease agreement with CalPERS, the Department of General Services took over managing the building in 1999 and negotiated repairs with the builder and architect "in order to avoid the expense and uncertainty of litigation," according to a copy of a settlement agreement obtained by The Bee. In exchange, the state absolved both companies of responsibility for future problems.

General Services Acting Deputy Director Mike Courtney signed the deal, consigning taxpayers to picking up the tab for what have been tens of millions of dollars in subsequent repairs. Courtney now works as a project director for Sacramento-based Vanir Construction Management Inc. He declined to comment for this story.

Hensel Phelps, which recently won a $92 million construction bid for UC Irvine, didn't respond to requests for an interview.

The Dreyfuss architectural firm's art director, Raquel Urbani, responded to a request for an interview with an email: "We are not involved with (the building), you would need to speak to (General Services)."

Dreyfuss' website touts 65 public projects it has helped build, including the Sacramento Municipal Utility District headquarters, several courthouses and the CalPERS R Street expansion. It doesn't mention the Board of Equalization's headquarters.

Department of General Services spokesman Brian Ferguson said that officials at the time believed the agreement made sense because it would fix the tower's ailments.

"The contractor and architect completed all repairs in 2000 based on the best available knowledge at the time," Ferguson said. "They repaired all the known issues."

Miller, the construction-defect lawyer, said that the parties may have come to terms because insurance covering the work may have been exhausted -- and that's if the companies had coverage at all.

"There's no requirement that builders have insurance," he said. "And we see situations where developers have minimum limits of liability insurance that don't cover their exposure. If those policies aren't enough to cover the risk, we wind up accepting that and moving on."

Even if the state hadn't settled, the government wouldn't have legal recourse now. California's statute of limitations for defective construction is four years or 10 years, depending on the type of defect. That clock ran out a dozen years ago.

State buys building

The state was in settlement negotiations with the builder and architect when an exterior glass panel popped off the building's east face on Sept. 1, 1999, and crashed on the sidewalk seven floors below. There were no injuries.

Eleven months later, two panels broke and threw off glass shards, one between floors seven and eight and the other between floors eight and nine. The following winter, rainwater leaked into the building below the 23rd floor.

Another panel fell from the tower's south side on New Year's Day, 2005. Four more broke from the seventh to 10th floors on Sept. 1 that year, flinging glass shards on the garage deck below. Officials ordered the building skirted with plywood-and-pipe scaffolding to protect pedestrians. Floor-by-floor construction disrupted state business when employees had to be moved out of repair zones.

The bats came in 2007, settling in on the 12th floor. A company brought in to control them never figured out how the bats got in.

Vaughn, who writes state contracts, started working in the tower that same year. Not long after, she was diagnosed with asthma, she said, and she attributes it to mold in the structure.

"They said they cleaned it," she said, "but people keep getting sick."

Sacramento attorney Perez filed tort claims against the board in 2007 alleging employees were getting ill from exposure to toxic mold. Eventually the state settled with 31 employees. The terms were not disclosed.

"From my first day on the job, I tried to move us out," said Bill Leonard, a former state legislator who served on the Board of Equalization from 2003 to 2010. He toured every floor of the tower, he said, and "started picking up horror stories from employees."

Despite all that, when an opportunity to buy the building emerged, Leonard supported it.

"We were paying an exorbitant interest rate," he said, and purchasing saved $31 million compared with a lease/purchase deal with CalPERS.

The state bought the building for $89,757,872.34, according to CalPERS records. When the fund closed the books on the project, it had earned a 12 percent annual return from the building's inception to its sale in November 2006.

No end in sight?

Leonard knew his way around the halls of the Capitol and tried to persuade former legislative colleagues and then-Gov. Arnold Schwarzenegger to sign off on moving the board's operations.

He and other public officials who have since pushed to relocate the board's headquarters have run up against the same fiscal roadblock. The state owes bondholders about $70 million from the 2006 purchase. The board's lease payments service the debt. If the building goes empty for total renovation or demolition, the bondholders must be paid off.

"Everyone told me, 'You're free to move as long as you find someone to take your place,' " Leonard said.

Finding new tenants would be hobbled by the building's sullied reputation. Even if one tenant or several could be persuaded to move in, the building would first have to be stripped to its bones and refurbished. A state estimate says that would take at least two years, cost unknown.

No one has suggested razing the structure, Runner said.

"What we've heard in conversations the building could be salvaged," Runner said, but it would need to be empty to give work crews complete access.

A half dozen bills in the last four years have proposed moving the agency to other facilities. The latest, by Assemblyman Roger Dickinson, authorizes $3 million for the state to find a location to build on or lease. Lawmakers would have to approve a move.

Dickinson said he's heard, however, that Gov. Jerry Brown may not sign it.

"The governor wants to look at managing existing assets first," Dickinson said. He said he hopes a state audit of the building due this summer will help swing the political pendulum in the other direction.

A spokesman for Brown declined to comment.

Equalization board members are tired of waiting. Republican Runner and Democrat Horton have been particularly pointed in their criticism of perceived bureaucratic foot-dragging.

"What frustrates me is the lack of attention from governor's offices," Runner said. "There are sexier ways to spend money than spending it on a building. ... But this isn't a political issue. It's a government efficiency issue. It's a health issue."

General Services spokesman Ferguson, however, said the tower "meets all government safety guidelines" and is regularly monitored for toxic substances.

"This is one of the most tested buildings in the state inventory," he said.

The costs to fix the tower continue piling up.

Inspections and lab tests have confirmed defects from the building's core to its outer shell. Pipes carrying wastewater from toilets and sinks are corroded throughout the tower. Inspectors say improper pipe angling and insufficient venting are to blame.

After another glass panel fell from the tower's east side more than two years ago, the scaffolding returned. About 2,000 suspect panels still need to be replaced. And the state is spending about $1 million a year to monitor air quality after trace amounts of carcinogens were discovered in the building and mold was detected in the ventilation system.

Last month officials found that a pump that directs water for the building's fire-sprinkler system was defective. The state fire marshal put the building under a "fire watch" until the pump could be repaired. The order forced the state to assign staff to walk the building looking for potential fire hazards.

And costly litigation looms unless the board settles the $50 million tort claim filed by Perez on July 2. Perez said he'll seek class-action status for the case, which claims employees remain exposed to hazardous substances in the building, despite assurances any danger has been contained.

"The claim asserts that management has told employees that the building is mold-free and safe," Perez said, "when in fact the building is not mold-free and is not safe."

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