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Jerry Brown Should Get Rid of Schwarzenegger's Debt Deals 

Wednesday, Jan 5 2011

Jerry Brown ran for governor opposing budget chicanery that involved disguised borrowing. Post-election, he has stayed on message. "Fair, transparent, and enduring — that's my goal," the Los Angeles Times quoted him as saying in a Dec. 15 story.

Now, two California courts have given Brown opportunities to keep his word. Judges have halted two transactions backed by outgoing Gov. Arnold Schwarzenegger that would saddle future generations with camouflaged, high-interest debt. A judge issued a temporary restraining order Dec. 21 halting Caltrans from signing a deal that would let foreign investors finance, build, and maintain part of the Doyle Drive freeway off-ramp in the Presidio, then rent it back to the government.

Another such odious debt transaction involved selling off 11 state buildings and leasing them back to the state. This one was thrown off track Dec. 28, when state justices refused to let it close before Schwarzenegger left office Jan. 3.

Schwarzenegger has fought vigorously to get courts to let him ink these contracts and keep these deals from reaching Brown's desk. Our new chief executive now has an opportunity to join forces with these deals' opponents, examine the fine print, and determine whether there's a legal way to throw Schwarzenegger's usurers from the temple of state government.

Voters need to hold the new governor to his promise of honest budgeting. But that's difficult, because backers have made Schwarzenegger's lingering debt deals seem vision-blurringly complex. But they're really not difficult to understand if we step back and look at the big picture.

Any time a California politician concocts a deal to obtain money up front, to be paid back later, outside of ordinary bond borrowing, you can be pretty sure it'll be a taxpayer rip-off. That's because California, despite its problems, can borrow money at some of the lowest interest rates around, even though its credit rating compares poorly with other states. Other techniques, particularly ones involving private equity investors, will cost more.

In November, California borrowed money at interest rates of 1.25 percent to 1.5 percent. Equity deals in the private investment world can involve rates in the range of 8 to 13 percent.

Even though official state bond borrowing is inexpensive, politicians don't always like it. That's because they have to publicly admit they're driving California further into debt. More total state debt can mean a lower credit rating. But here's the issue most pressing for face-saving politicos: Polls consistently say that Californian voters want to balance the budget through spending cuts, rather than tax increases. But with equal vehemence, they oppose the cuts in beloved specific programs.

So politicians pretend they aren't borrowing billions of dollars at exorbitant rates. And we get financial mirages like Doyle Drive, and the state building sell-off, which politicians refer to as "innovative financing."

The Doyle Drive deal disguises high-interest-rate borrowing with what it calls a public-private partnership, in which investors put up money to design and build a freeway section, then rent it back to the state. The full costs haven't been tallied yet. But this is expected to incur state expense equivalent to what it would cost to issue around $600 million worth of bonds ("Doyle Drive's Costly Pothole," 6/9/10).

Backers say avoiding state-budgeting red tape gets the road built faster. Investors also take on the risk of cost overruns, which purportedly saves taxpayer money. "It's less expensive than conventional delivery options," says Lee Saage, deputy director for capital projects with the San Francisco County Transportation Authority.

But the state Legislative Analyst's Office disagrees. That watchdog agency recently reported that the deal would cost more in the long run. Its report also pointed out a shocking detail: If California signs the deal, then decides to back out, the contract would require it to pay the investors an "expected profit of about 20 percent per year" over 30 years.

Saage defends that outlandish rate by saying it applies only to cash from foreign investors — which amounts to about 15 percent of the total. Investors will borrow the rest from banks, which won't charge quite such high interest, Saage says.

The union representing state government engineers sued to halt the deal, saying it violates state laws limiting private investment in highways. On Jan. 3, a judge ruled that the project could proceed; Caltrans signed a contract that morning.

A Brown spokesman said he was not aware of the new governor taking a position on the Doyle Drive deal. Our new governor should find a way to head this deal off at the overpass.

Separately, Schwarzenegger touted a deal to sell and lease back 11 prime state buildings, including the Civic Center office complex that houses the California Supreme Court. He claimed this was a way to unleash private-sector ingenuity. But movieland governing is now over, so let's get back to reality: It's one of the worst deals a state official has ever made. California would pocket $1.3 billion now, but pay back $6 billion over 35 years.

In February 2010, I reported that state officials — whose job it was to make sure the buildings were financially sound — denounced the deal as imprudent ("Ex-S.F. GOP Boss Seeks to Halt Sale of Supreme Court, PUC Buildings," The Snitch, 2/26/10).

Schwarzenegger fired Jerry Epstein, president of the Los Angeles State Building Authority, which oversees financing for state office buildings there, and member Redmond Doms. He also canned Donald Casper, a former member of the San Francisco State Building Authority, who, like his L.A. colleagues, said the deal would waste taxpayer money.

The deposed officials sued to halt the sale. State Supreme Court justicies recused themselves, stating they were conflicted because their own chambers were up for sale. On Dec. 28, however, a special group of temporary justices delayed the sale so the arguments could be heard.

As governor, Brown can abandon Schwarzenegger's campaign to defend the sale in court. And he can keep his stated promise to "examine" its fine print.

If it's legally feasible, California should back out.

"It's not an idea I would have chosen. I think selling off the assets for onetime sources of money is not prudent," Brown said during a post-election press briefing. "But of course they couldn't close the budget any other way. Not that I would like to sell buildings, but I'm not sure anything could be done about it."

There's no need for this sort of waffling. Taxing, budget cutting, and bond issuing are better ways to pay our bills than usurious and exotic debt deals.

Imagine a woman whose husband funds a fishing-gear habit by borrowing on their low-interest, home-equity line of credit. She tells him to stop, so behind her back he takes out a high-interest credit card. He might think he's being innovative. But during the fall campaign, and in public pronouncements since, Brown has said that it's time for California to end this kind of deceptive practice.

Our new old governor has an opportunity to start afresh.

About The Author

Matt Smith


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