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Sacramento, CA- A budget that includes selling off public buildings to lease back to ourselves for more money than the sale generates isn’t a balanced budget. According to an analysis by the LAO of a similar proposal, this deal could end up costing California money in its very first year.
This isn't a solution, especially when the official studies show it’s a money loser over time. And writing those proceeds into the budget would take away the state's bargaining leverage to reject bad deals. In addition, the original proposal by Governor Schwarzenegger was projected to cost Californians $600 million more than if we just kept the buildings for ourselves. Governor Brown should be commended for seeing the gimmick for what it is and sending the legislature back to the drawing board.
"This building sale deal is the equivalent of a payday loan for California," said Pedro Morillas, Legislative Director for CALPIRG. "Quick cash up front with a hefty price tag on the back end should not be considered a balanced solution to any budget."
By including the building sale proceeds in the budget proposal before having the money in hand the legislature effectively ended any possibility of getting a better deal out of the buyers. The results of making deals in this manner can be disastrous.
For example, the City of Chicago no longer owns its parking meters. That city created a budget that included projected revenues from the parking meter sale before that deal was signed or properly scrutinized. The result is that a meter rates quadrupled in parts of the city, the city has to pay hefty fines to the private company to use public roads for parades or other civic events, and the deal is considered a disaster.
"Bidders for our state buildings know what the legislature needs, know they can’t walk away from the table, and know that they won't get paid if they don't cut this deal. That is a situation stacked against the interests of Californians." Added Morillas.
Arizona is another example of how bad these deals can get. They sold several state owned buildings—including their House and Senate buildings—then leased them back from the buyers for the next 20 years. Over the life of the deal, it is expected that the Arizona citizens will shell out $1.2 billion in lease payments to state’s new landlords, the mutual funds Fidelity and Vanguard.
If the legislature or the governor do intend to sell any state buildings or any other publicly owned assets here are some principles they should follow:
(1) Any deal must clearly create net long-term benefits, not just a short-term budget fix.
(2) Privatizing during a budget crisis undermines the state’s negotiation leverage – As a potential “seller” of public assets, the state should not undermine its own bargaining position by including potential lease proceeds in draft budget plans. No proceeds from asset leases or sales should be included in budget proposals unless they have already been finalized.
(3) Asset lease proposals should include public escape clauses – Over the course of many decades, unforeseen events or long-term trends can make it beneficial for the public to relocate, replace, merge or eliminate government buildings.
(4) Private “cost savings” should not lead to hidden costs for the public—Investors can’t cut corners and call it “efficiency”.
(5) Strong public transparency and accountability – Private leaseback deals must include very high standards of public transparency in the bidding and negotiation process and continue with full public disclosure throughout the life of a deal.
(6) Escrow accounts should ensure that public assets are returned in top condition – Essentially investors should leave a security deposit with the state so taxpayers aren’t on the hook for neglected repair and upkeep.
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CALPIRG, the California Public Interest Research Group, is a non-profit, non-partisan consumer group that takes on powerful interests on behalf of its members, working to win concrete results for our health and our well-being.
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