Bad Math Proved in State Building Sale Plan

By JUDY LIN
|  Thursday, Apr 15, 2010  |  Updated 4:45 PM PDT
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Bad Math Proved in State Building Sale Plan

The Federal Building in San Francisco takes tops on the list.

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California lawmakers said Thursday they will examine Gov. Arnold Schwarzenegger's plan to sell state office buildings after revelations that it might be a bad deal for taxpayers.

The Associated Press reported this week that California will pay about $5.2 billion to rent the buildings over the next 20 years after they are sold to private investors. The administration hopes to net just $660 million from the sale, after paying off $1.1 billion in construction bonds, as a way to help close the state's budget deficit.

The development prompted a state legislative committee to announce it would look into the matter. The Assembly Accountability and Administrative Review Committee will scrutinize the sale of two dozen state office buildings during its April 28 meeting.

Schwarzenegger persuaded the Legislature to authorize the sale last summer as a way to get upfront cash to help close California's deficit, now projected at $20 billion. Just three of the 120 lawmakers voted against the plan, which was never heard in committee.

Lawmakers were made aware that the state likely would pay more rent than it would if it continued to own and maintain the buildings, but there was no fiscal review to determine whether California ultimately would make or lose money on the deal.

Assembly Speaker John Perez, D-Los Angeles, said Thursday that it would be unconscionable to sell state property at fire-sale prices only to have to rent them back at market rates. Bids from prospective buyers were due Wednesday.

Perez said the governor was able to get the Legislature to authorize the sale last summer because of California's budget system, which requires a two-thirds vote. Vote-trading is common among lawmakers in order to reach that threshold, which is rare among state legislatures nationwide.

"It's another example of budget elements that are bootstrapped in where there's a two-thirds majority requirement," Perez said in a statement.

Assembly Minority Leader Martin Garrick, R-Carlsbad, said he also supported a review of the plan.

Not all legislative leaders were having second thoughts. Senate Minority Leader Dennis Hollingsworth, R-Murrieta, said state government should not be in the business of holding real estate. He said money derived from the sale could help fund schools, law enforcement and firefighting in the coming year.

When he proposed the idea, Schwarzenegger pitched it in part as a way to relieve the state of ongoing maintainence costs. The state estimates it will spend nearly $75 million on maintenance and repairs in the next year.

Also Thursday, an independent economics think tank released a report that reached a conclusion similar to the one in the AP report. The AP analyzed state documents created by the marketing firm the state has hired to run the sale, CB Richard Ellis.

According to the lease proposals, the state would pay $5.2 billion over the next 20 years to rent offices it currently owns and would pay monthly fees for nearly 3,500 parking spaces it now controls, adding $138 million to the state's costs. The state also might have to cover increases in property tax assessments once the buildings are sold.

After the 20-year period, the state would have the ability to repurchase the properties at market rate.

Beacon Economics, based in San Rafael, ran a separate analysis that concluded the sale-and-leaseback plan would increase costs to the state over the long run. The Beacon study was commissioned by the State Employees International Union, Local 1000, the largest state employee's union.

"It's a bad deal all the way around," said Christopher Thornberg of the think tank's Los Angeles office.

Thornberg said the sale undermines the spirit of Proposition 58, a ballot measure promoted by Schwarzenegger and passed by voters in 2004. It prohibits the state from issuing long-term debt to cover ongoing government expenses.

"It's no different than if they issued a bunch of bonds to pay for the current deficit," Thornberg said.

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