If he is serious about ending the budget gimmicks and tricks that dig California deeper into debt, Gov. Brown should reject the planned sale of state property and remove the proposed proceeds from his budget. Selling off state property with a contract to rent it back would cost California more down the road.
Quick cash up-front for high-value items like state buildings can be a siren song tempting Gov. Brown. Given California’s massive budget hole, and the prospect of a billion-dollar boost, selling state property may sound like an alluring way to avoid more difficult choices. But these deals will ultimately leave the state washed up on the rocks.
Other states’ experiences show that when states sell off their property for the short-term money, the agreements will turn into long-term losers for taxpayers.
A recent example is the $735 million deal to sell several state-owned buildings in Arizona – including their House and Senate buildings – then lease them back from the buyers for the next 20 years. Over the life of the deal, it is expected that the Arizona tax payers will shell out $1.2 billion in lease payments to the state’s new landlords, the mutual funds Fidelity and Vanguard.
Here in California, Gov. Schwarzenegger proposed a similar, Arizona-style selloff that would offer $1.3 billion up front for 24 state buildings that California must lease back for the next 20 years. Even in the first year of the deal, the nonpartisan Legislative Analyst Office projects that California would face higher annual costs – though the upfront lump sum payment would create the temporary illusion of improved finances. Fortunately the sale was blocked by the courts, and now hangs in legal limbo waiting for a decision from California’s new governor. Gov. Brown has 30 days to decide whether to drop it or push for the fast buck.
As Attorney General, Gov. Brown called Schwarzenegger’s idea imprudent, but he refused to rule out the buildings’ sale in Monday’s budget proposal briefing.
Attorney General Brown’s hesitation was in part because California tax payers will end up paying at least $600 million more than if we just kept the buildings for ourselves. No matter how you look at it, this is just another gimmick. Gov Brown should avoid it like he said he would.
If the governor does entertain the idea of privatizing state assets, he should follow these six principles to ensure the public does not get ripped off:
(1) Any deal must clearly create net long-term benefits, not just a short-term budget fix.
(2) Privatizing during a budget crisis undermines the state’s negotiation leverage – As a potential “seller” of public assets, the state should not undermine its own bargaining position by including potential lease proceeds in draft budget plans. No proceeds from asset leases or sales should be included in budget proposals unless they have already been finalized.
(3) Asset lease proposals should include public escape clauses – Over the course of many decades, unforeseen events or long-term trends can make it beneficial for the public to relocate, replace, merge or eliminate government buildings.
(4) Private “cost savings” should not lead to hidden costs for the public – Investors can’t cut corners and call it “efficiency.”
(5) Strong public transparency and accountability – Private leaseback deals must include very high standards of public transparency in the bidding and negotiation process and continue with full public disclosure throughout the life of a deal.
(6) Escrow accounts should ensure that public assets are returned in top condition – Essentially investors should leave a security deposit with the state so taxpayers aren’t on the hook for neglected repair and upkeep.
The proposed building sales fail to meet these standards, and California can’t afford another deal that is too good to be true. Gov. Schwarzenegger tried and failed to pass off this billion-dollar budget gimmick as a real solution to our budget woes. Gov. Brown knows better and should stick to his initial reaction. This deal is “imprudent.”