The west side of the Sacramento River would have a third tall building if CalSTRS goes ahead with its plan to build a second office tower there. Its 20-story headquarters opened in 2009, and the state Department of General Services has its offices in the ziggurat building. José Luis Villegas Sacramento Bee file
The west side of the Sacramento River would have a third tall building if CalSTRS goes ahead with its plan to build a second office tower there. Its 20-story headquarters opened in 2009, and the state Department of General Services has its offices in the ziggurat building. José Luis Villegas Sacramento Bee file

Business & Real Estate

West Sacramento could get a second CalSTRS tower

By Dale Kasler

dkasler@sacbee.com

December 20, 2016 10:29 AM

CalSTRS is considering building a second office tower, adding to the growing skyline along West Sacramento’s riverfront but raising fresh questions about the financial state of the teachers’ pension fund.

The 10-story building, expected to cost $181 million, would be erected alongside CalSTRS’ 20-story headquarters on the Sacramento River. CalSTRS officials said they need more space; they expect to outgrow the headquarters building, which opened in 2009, about three years from now.

Under CalSTRS’ tentative timeline, the new building would open in June 2020. The tower would help fuel the redevelopment boom on West Sacramento’s waterfront, which includes the Bridge District project south of Raley Field. The CalSTRS tower would also become the city’s third riverfront high-rise, joining the existing CalSTRS building and the 10-story ziggurat building, which houses the state Department of General Services.

Construction of the tower is not a done deal, however. CalSTRS board members, meeting last month, expressed concerns about spending $181 million when investment returns are weakening and the pension fund is barely two years removed from a financial rescue plan approved by the Legislature. The bailout, designed to erase a long-term funding gap, is costing the state, school districts and teachers billions of dollars a year in additional contributions to CalSTRS. The California State Teachers’ Retirement System controls $193 billion in assets and is about 69 percent funded.

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“We’re in a low-return environment probably for quite some time to come, and we’re going to be asking more, frankly, of the state and our employers and our employees,” said state Controller Betty Yee, a board member, during last month’s meeting. “I’d like to wait a couple of years to evaluate our funding status and our staff space needs.”

CalSTRS doesn’t need legislative approval to build the tower and would fund the project itself.

Doug Orr, a college professor in San Francisco and representative of the California Federation of Teachers, warned board members that spending money on a new building could undermine the pension fund politically.

“It’s just going to give a huge amount of ammunition to ex-Mayor Reed and his people who are going to increase their attack on defined pensions,” he told the board. Chuck Reed, the former mayor of San Jose, is one of the leaders of a movement aimed at overhauling California’s public pension system to reduce costs.

The CalSTRS board voted in November to move ahead with the project, but carefully. It authorized CalSTRS’ staff to spend roughly $8 million on design and planning work, but also directed the staff to explore alternatives to a new building.

Staff members said they’ll look for office space they can lease in the region. But they warned that the go-slow approach could complicate a crucial piece of the project. CalSTRS expects to lease out a portion of the new office tower as a means of bringing in revenue while its staff gradually fills the building.

Jack Ehnes, chief executive of CalSTRS, said the pension fund is already talking to potential tenants, but it will become harder to make progress if tenants aren’t convinced the new tower will get built.

Board members, however, said they were more comfortable with the cautious approach. “It puts some guardrails on what we’re doing,” said board member Harry Keiley, a high school teacher from Southern California.

Most board members agreed that CalSTRS eventually will need another office building. It expects its staff will more than double over the next 24 years, to 2,370 employees.

Among other things, CalSTRS is ramping up its investment staff so it can oversee more of its investments in house. It estimates that for every investment officer it hires, it will save $1.2 million a year that otherwise would be paid to outside management firms.

The pension fund has long contemplated needing a second tower, and set aside land along the river when it announced its plans a decade ago to move its headquarters from Sacramento to West Sacramento. The second tower would consist of 265,000 square feet of space. CalSTRS’ headquarters has 409,000 square feet.

Dale Kasler: 916-321-1066, @dakasler