Selling state assets would be folly

Capitol Journal

Gov. Jerry Brown has an unexpected opportunity to kill perhaps the worst real estate deal the state of California has ever concocted.

It’s a dreadful deal for taxpayers, that is. It’s a sweetheart for private investors.

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But Brown may be so desperate for cash to balance the books in Sacramento that he will feel compelled to move ahead with the fire sale of 24 buildings on 11 pieces of property.

This Sacramento swill was cooked up by former Gov. Arnold Schwarzenegger and the Legislature to feed their addiction to borrowing. That’s essentially what the transaction would amount to.

The sale would gross $2.3 billion and net the state about $1.3 billion after existing loans on the properties were paid off. That one-time injection of money already has been accounted for in the current red-ink budget. So if Brown dumped the deal, he’d be digging the deficit hole $1.3 billion deeper.

Even with the pending distress sale, the state shortfall for the next 18 months has been projected at $28 billion. But that figure seems to change every week, usually for the worse. So it’s not precisely certain to what degree the loss of $1.3 billion would further damage the state’s immediate fiscal condition.

In the long run, the sale would shortchange taxpayers because the state would be required to lease back, for 20 years, the 7 million square feet of space it peddled for short-term gain. Calling it “poor fiscal policy,” the nonpartisan legislative analyst has warned that the sale-leaseback ultimately would cost the state billions more than it initially gained.

The sale had been scheduled to close on Dec. 15. And Schwarzenegger did everything he could to get the papers signed. But opponents sued, arguing that the deal amounted to an unconstitutional gift of public property. And they won court delays until after Brown took office.

An appeals court set a hearing for Jan. 26 in San Jose. But late last week Brown asked for a month’s delay, and it was granted.

The sale “is still being reviewed,” says Brown spokesman Evan Westrup.

Last year, then-Atty. Gen. Brown declined to defend the sale in court and called it “not prudent.” But now he’s responsible for balancing a budget.

Insiders say the governor considers the sale a terrible idea, but the budget hole is a killer. He hasn’t decided what to do.

His most important and immediate task is to fix the budget mess. Even while penciling in money from the buildings sale, the governor Monday is expected to propose deep spending cuts for universities, for the aged and the disabled, for children on welfare and for Medi-Cal recipients and providers.

K-12 schools are expected to escape relatively unscathed. But they’d also be hit hard if the state couldn’t bank the $1.3 billion in real estate revenue.

Still, Brown isn’t kidding himself. He knows the deal is lousy public policy.

With some of these buildings, it would be as if a homeowner has almost paid off the mortgage but suffers financial setbacks and can’t handle all the bills. So he foolishly sells the house and agrees to rent it back for 20 years.

The Ronald Reagan building in downtown Los Angeles, being sold for $185 million, is scheduled to be paid off in May. The nearby classic Junipero Serra building, going for $106 million, would be free and clear in 2019.

Also being peddled, for $384 million, is the San Francisco Civic Center complex comprising the Earl Warren and Hiram Johnson buildings. The former houses the state Supreme Court. Those structures would be paid off in 10 years.

Other edifices would be paid off within four years.

Annual debt payments on the buildings currently total $118 million. That’s relative chump change.

The legislative analyst’s office estimates in a written report that the added cost of leasing compared to owning the buildings would average $54 million annually for the first five years and eventually rise to $300 million-plus.

“A simple way to measure the cost … is to think of the sale-leaseback as a loan with interest,” the report says. “The state receives cash up front through the sale with the obligation to pay it back over time through lease payments. Under such a calculation, the state’s effective interest would be 10.2%.

“This interest rate is greater — about double — than those the state is currently paying on the buildings’ outstanding … bonds.”

So why doesn’t the state just refinance the buildings and take out cash equity, as a homeowner would? That type of borrowing for ongoing expenses is prohibited by Proposition 58, pushed by Schwarzenegger and approved by voters in 2004. Remember “tear up the credit card and throw it away”?

No one I could find is currently saying this is a good deal for the state. The state Department of General Services had been, but not since Brown showed up.

Not even Michael Bustamante, spokesman for the buyer — politically connected California First, LLC — touts the deal for the public. “I’m not jumping up and down about it,” he says.

Developer Jerry B. Epstein, one of the court plaintiffs, was a longtime member of the Los Angeles State Building Authority until he raised questions about the sale and was promptly booted by Schwarzenegger.

“This is absolutely the worst — the worst — state deal I have ever heard about,” Epstein says. “It’s unbelievable. There has been more deception and secrecy in this than when we invaded Okinawa, which I was involved in.”

This is an early challenge for Brown. Does he do what’s prudent or what’s expedient? He should walk out of escrow.