California’s political leadership, Democratic and Republican, executive and legislative, have shown great ingenuity in papering over deficits, creative accounting, and excessive optimism such that the state now faces a structural deficit of $20 billion. It’s truly been bi-partisan as the Democrats always seem to gain just enough Republican votes to pass a budget.
Good times, bad times, the deficit keeps rising.
But now our Governor and legislature have reached a new low.
Every once in awhile a seemingly good idea pops to the surface, but on closer look will only worsen the situation.
The new word is “privatization.” Let’s sell off surplus state lands and convert them to productive use. Sounds good; I’m in favor of it.
But that’s not what’s happening.
The idea was proposed a few years back to close San Quentin, and sell the tract fronting the Bay in Marin County. The developmental potential of these 432 acres during the real estate peak would have been among the highest in the country.
Unfortunately, of course, we need the prison capacity, unless the federal judges, and a compliant legislature, release more prisoners from our prisons.
Back to reality, California style!
The state has identified 24 office buildings and facilities that could fetch an estimated $1.760 billion in cash for the cash starved state. It wouldn’t solve the state’s problem, but it might buy time for the state to get its fiscal house in order.
These are not surplus properties, but many of the state government’s prime office buildings, such as the Ronald Reagan Office Building in Los Angeles, the San Francisco Civic Center, housing the California Supreme Court, and several office buildings in Oakland, Sacramento, and Santa Rosa.
Now comes the rub.
First, these buildings have about $1.1 billion in bonds and debts outstanding on them. Paying off these debts will result in a net of only about $660 million, a far cry from $1.76 billion.
Hold on for a moment; it gets even better.
Second, while many of these buildings might be well suited for an inefficient public bureaucracy, they’re not well suited for private enterprise.
Therefore, the state will enter into a 20 year leaseback on the buildings, with total rentals of about $5.2 billion.
Yes, the state will receive $660 million upfront and pay out $5.2 billion for the pleasure. Anyone with a scintilla of business sense will recognize the utter folly in such a deal, but since our legislative leaders are community organizers, labor organizers, and representatives of public employee unions, they might well proceed anyway.
Our Governor and the legislature are acting like junkies addicted to a quick fix of cash, not thinking about tomorrow when they will need an even greater fix.
The state is currently paying about 4% interest on the bonds, but the new landlords will want at least a 7% return on their investment. A couple of examples will show the absurdity of the proposed deals.
First, if the state keeps the buildings, it will pay out an estimated $192 million next year in bond payments, maintenance, and repairs. If the state sells the buildings, then the estimated rental and utility costs alone next year will be $238 million.
Second, the buildings currently have about 3500 parking spaces, a valuable asset in congested downtowns. Under the proposed leases, the state will have to pay monthly fees for these spaces, about $138 million over the two decades.
Third, the Franchise Tax Building in Sacramento has an estimated value of $396.7 million, but the estimated rent payments over 20 years would be $1.2 billion.
Governor Schwarzenegger last week said there would be no fire sale of state office buildings. He also fired many members of the oversight boards in Los Angeles and San Francisco because they questioned these sales.
If these are not fire sales, then perhaps another stench is in the air.
So, my question about our current leadership in Sacramento is:
A) That desperate;
B) That stupid;
C) That economically illiterate; or
D) Is this why California is in just dire straits?