Analyst: Selling California buildings is bad budgeting |

Analyst: Selling California buildings is bad budgeting

SACRAMENTO, Calif. (AP) – California’s independent government analyst on Tuesday called Gov. Arnold Schwarzenegger’s rare plan to sell 24 state office buildings a “bad budgeting practice” and urged lawmakers to consider other ways to deal with the deficit.

The Legislative Analyst’s Office released a report a day before a legislative committee takes up the matter. The report concluded that it would cost the state between $600 million and $1.5 billion more to sell the properties and then rent them using a 35-year projection.

The finding affirms an Associated Press analysis that found the sale shifts taxpayer costs to the future.

Schwarzenegger had pushed for the sale last year as part of his demands for closing the state’s budget deficit. The governor said it would provide immediate cash to help close the state’s deficit – now projected at $20 billion.

The governor also has said it would be better for the state not to own real estate. The bill was passed without a fiscal review to determine whether California ultimately would make or lose money on the deal.

Last week, the governor said he is a savvy investor and would not go ahead with the sale if it does not pencil out for taxpayers.

The state “needs to complete its negotiations with buyers and conduct a full analysis of the numbers before any final conclusions can be made,” State and Consumer Services Agency Secretary Bill Leonard said in a statement Tuesday.

Lawmakers were made aware that the state likely would end up paying more for rent than it would if it continued to own and maintain the buildings, which include the San Francisco Civic Center, the Ronald Reagan building in Los Angeles and attorney general’s office and department of education in Sacramento.

The analyst’s office found that while the cost of renting the buildings from the new owners would not be that different in the first five years, the state could end up paying more than $200 million more a year in the future.

“In our view, taking on long-term obligations – like the lease payments on these buildings – in exchange for one-time revenue to pay for current services is bad budgeting practice as it simply shifts costs to future years,” the report stated.

The state already owns three of the buildings, while construction bonds on most others will be paid off within 10 years. The state will own the Reagan building outright in a year if it does not sell it.

Last week, the administration said it had received more than 300 bids and that many exceeded the $2 billion price tag the state had sought. The legislative analyst considered a number of price ranges for the buildings and concluded that even at the upper end, the long-term leasing costs will be greater than the one-time bump in revenue for the state.

Sale and leaseback transactions have been done by governments before. Arizona recently financed its state buildings to raise more than $700 million to address its budget deficit. California’s effort is unusual because the state is selling its buildings outright.

Department of General Service officials defended Schwarzenegger’s plan to sell the buildings by saying the state would avoid the risk of unexpected repairs if it was a renter rather than an owner. The analyst’s office, however, found that leasing does not eliminate risk because the state would be responsible for increases in operating costs.

While the state saves money upfront by paying off construction bonds early, the savings would be offset in the future by costlier rent payments. The administration envisions entering a contract with the new owner that specifies the rent amount for 20 years, including increases every five years. But after that point, the state would have to consider repurchasing the building or paying rent at the current market rate.

The state initially began investing in the buildings three decades ago because it found that owning office space was cheaper. The analyst’s report found “this continues to be true.”

The report did not dismiss selling completely and said the state could opt to sell individual buildings that have higher operating costs. The administration last week said it was considering only buyers who bid on the entire package of buildings.

The Assembly Accountability and Administrative Review Committee has scheduled a hearing on Wednesday to examine Schwarzenegger’s proposal. It also will look into why the administration removed members of oversight boards in Los Angeles and San Francisco who had questioned his proposal and replaced them with Schwarzenegger supporters, a development reported by the AP.

If the administration decides to sell, the Legislature has 30 days to review the plan.

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