Lessons from the State for Encinitas

Selling Assets the Wrong Way

Suppose a grinning real estate agent knocks on your door with a proposal.  He will buy your home (which you own free and clear) for a fair price if, in return, you promise to spend all the proceeds within one year and agree to rent back your property over the next 20 years for an amount that exceeds what you were paid.  At the end of 20 years you will have to arrange a new rental agreement or become homeless.

At this point most property owners would recognize a scam and some might even summon the family pit bull to make sure that the slick salesman beats a hasty retreat. 

However, what is an obvious scam to average taxpayers is called sound public policy by Sacramento politicians.

The Schwarzenegger administration plans to sell 24 state buildings, including the Ronald Reagan State Building in downtown Los Angeles, to raise $1.2 billion to help offset the budget deficit.  If these were surplus properties for which the state had no further use, taxpayers would be cheering.  Indeed, we’ve consistently argued that the state’s real estate portfolio has been mismanaged and offloading surplus property should be vigorously pursued.  There is, for example, no reason whatsoever for the state owning a golf course which could be better managed in the private sector.

But, sadly, this is not the case with the current proposal.  These are facilities that are being used and are important enough that the state is agreeing to lease back these properties for the next 20 years.  Here is how this pencils out according to the Legislative Analyst's Office:  The transaction amounts to borrowing at 10% interest over the next 35 years, an amount much more than the state pays for bonds.

Indeed, the long term financial commitment – in the form of a 20 year lease – is a stark admission that the subject property is not surplus.  Thus we have the worst of all worlds from the perspective of fiscal prudence:    All downside and no upside (other than a quick infusion of cash that will be quickly squandered by the same political elites who are more focused on the debate over the official state rock than they are with balancing the budget).

This deal also runs contrary to the spirit of the law which requires voter approval of long term financial commitments.  But the forces behind this scam know that voters would never agree to so burden the next generation of Californians which is why they are jamming through this sale that does nothing to fix the state’s addiction to overspending and, in fact, makes it worse.

Only in Sacramento does this make sense.  Unemployment is up, personal income is down and so, too, is revenue to government.  The politician’s response is to use tricks to avoid reality and the obvious need to cut back on spending in these times of economic crisis.  Their goal is preserve the government status quo, regardless of how much it hurts already beleaguered taxpayers.

Ironically, the only two voices of reason that are coming from Sacramento on this issue are two officials affiliated with the political party not renowned for fiscal prudence.  State Controller John Chiang and Treasurer Bill Lockyer, both Democrats, have blistered the real estate agreement as bad for taxpayers.  Both serve on the Public Works Board, which granted final approval of the arrangement, but were outvoted by three Schwarzenegger appointees.

Taxpayers will be burdened with decades of lease payments, said Lockyer, while Chiang called the property sale and lease back another budget gimmick that pushes the state's fiscal challenges down the road.  A spokesman for the one of the firms involved in financing the deal has been quoted as saying, "We're happy we came out on top."

The firms involved in this horrible deal did in fact come out on top.  But the taxpayers came out on the bottom.

Now, where is the dog when we need him?

Jon Coupla (www.hjta.com)