California plan to sell buildings not a financial panacea, report says


California’s plan to sell government office buildings to generate short-term cash will cost hundreds of millions of dollars more than previously estimated and is the equivalent of long-term borrowing at 10% interest, according to an internal review prepared for the Legislature.

Gov. Arnold Schwarzenegger and state lawmakers approved the building sales in 2009 and put the structures, including the Ronald Reagan State Building in downtown Los Angeles, on the market in February. The plan is to use the proceeds from the sale of 24 state buildings at 11 locations to shrink the deficit. The idea has no shortage of critics, who say the plan is a mere accounting gimmick, as the state will have to pay to lease back the offices in the coming years.

“Nobody with any business acumen says that this is a smart deal,” said Jerry Epstein, a former president of the Los Angeles State Building Authority, who says Schwarzenegger removed him from the panel after he raised questions about the transaction earlier this year.


Administration officials insist that their calculations show that the state would save money — $2 million — over the first 20 years and that any estimates beyond that are “highly speculative.”

But a new report, written by the nonpartisan Legislative Analyst’s Office at the request of lawmakers, says the administration’s estimates are overly optimistic. The long-term price tag of the sale, which the analysts calculated over a 35-year period, has ballooned by about $800 million, an increase of 133% since the office’s last estimate in April, as a result of a change in property tax calculations, according to the report.

The analysts say the transaction pencils out roughly as the equivalent of the state’s borrowing money at an interest rate of more than 10% a year — considerably more than what the state now pays on its bonds.

The report calls the plan “poor fiscal policy.”

Assemblyman Hector De La Torre (D-South Gate), who held a hearing that probed the real estate deal this spring, derided the sale-leaseback as nothing more than “a loan with really bad terms.”

“It’s a bad deal for the taxpayers of California,” he said.

Administration officials disagree and are proceeding with plans to sell the buildings to a private buyer for $2.3 billion — a greater sum, they note, than originally expected. Roughly $1.2 billion of the proceeds will go to shrink this year’s budget deficit. The remainder will pay off what the state still owes on the structures.

“The whole purpose of entering into this transaction was to generate money now to shore up the budget to prevent further budget cuts or tax increases,” said Eric Lamoureux, a Department of General Services spokesman. “We will accomplish that.”


Legislators’ 30-day formal window to review the real estate deal closed Tuesday and Senate Budget Committee Chairwoman Denise Ducheny (D-San Diego), who opposes the plan, conceded that the sale — with its proceeds already accounted for in the budget — is likely to continue as is: “We don’t have legal authority, at this point, to say ‘Don’t do this,’ ” she said.