State office building sale prompts legal battle

The state’s attempt to sell off two dozen office buildings to help balance its books is winding up where a number of Gov. Schwarzenegger’s proposals have landed – in the courts.

Gov. Schwarzenegger estimated that the sales would rack up $1.2 billion for the state’s strapped General Fund. The governor and lawmakers approved the sale as one step in freeing the state from a multibillion-dollar budget deficit. The plan received bipartisan support.

Under the terms of the proposal, the state would continue using the buildings, but would pay rent to the new landlord – the purchaser of the properties.

The deal is referred to as a sales-leaseback, and not everyone is happy with the arrangement.

Arizona had implemented the program prior to Gov. Schwarzenegger’s proposal, and Gov. Schwarzenegger believed his plan would bring in even more money. To increase profits, the buyer of these buildings would pay for all the costs’ of services such as waste hauling and security.

Gov. Schwarzenegger’s proposal received temporary support, but opposition soon developed.

The Legislature approved the bill giving the Department of General Services (DGS) the ability to determine the sale and lease terms that are “in the best interest of the state.” The broad autonomy for the DGS would have severe ramification for the policy.

Jerry Epstein, a Los Angeles-area building and lands official, questioned the DGS’ broad autonomy in a legal action challenging the sale-leaseback. Epstein earlier had raised warnings about the transaction.

Epstein, who served on the Los Angeles State Building Authority as a representative of the Los Angeles Community Redevelopment Agency, was in charge of overseeing, planning, and financing of state office buildings in L.A.

When he requested a cost-benefit analysis and questioned the long-term consequences for taxpayers, Gov. Schwarzenegger refused to reappoint Epstein.

Epstein became so furious he wrote an op-ed article in the Los Angeles Times about the state’s plans. Following the article, Epstein took his opposition up a notch – he went to court.
In the Nov. 16 lawsuit, Epstein argued that as a taxpayer, he has the right to not have his tax dollars spent on bad investments and the right to an informed decision on the use of his taxes.

Epstein uses the Legislative Analyst’s Office’s assessment that this deal would cost more than it gives. The LAO, the Legislature’s nonpartisan fiscal adviser, claims the rental will cost 10.2 percent in interest rates per year – double the current interest rates.

Moreover, the terms of the lease say the state’s base rent will increase 10 percent every five years and that the state will be responsible for paying annual changes in the owner’s operating expenses.

Epstein claims it is unfair to have California’s buildings taken from the citizens after they spent 11 years of paying for them with only a few years left on the lease and with only to become renters again. Instead, he wants a chance to compare options, which brings up Epstein’s second argument.

Epstein claims the sales process was not transparent. The lawsuit said the sale process did not have any published criteria or scoring system for evaluating bids. When the contract was approved – the winner was a group called California First – the state did not release a ranking of all other qualified bids so the public could determine whether it was receiving the best deal.

The lawsuit also alleges that the government overstepped its jurisdiction when it tried to sell two judicial buildings. The suit claims that the government is violating a separation of powers because it did not consult the Judicial Council – the administrative body of the California judiciary – which has authority over buildings housing the state’s appellate courts.
Epstein even accuses the government of criminal behavior.

The lawsuit alleges the government of illegal transactions. Under Article 16.2 of the California Constitution, any use of California’s resources must be paid for with an equivalent amount of what the resource is worth. Because the LAO and this lawsuit claim the deal would cost more than what they receive, Epstein calls the transaction an illegal gift of public funds.