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Thursday, April 22, 2010

Dems Hop Bandwagon to Scuttle State Building Fire Sale

Posted By on Thu, Apr 22, 2010 at 2:30 PM

click to enlarge Your government in action...
  • Your government in action...

Official fired for criticizing sale asked to air beefs in Sacramento next week; he says government is looking for "exit strategy."

Top California Democratic Party players are piling on a movement to scuttle Gov. Arnold Schwarzenegger's plan to sell 24 state buildings and then rent them back from the new  owners.

The Service Employees International Union has commissioned a scathing analysis of the plan -- which would earn California a quick $660 million from the sale, then cost a projected $5.2 billion in rent and expenses over the next 20 years. A Democrat-controlled Assembly committee, meanwhile, will next week examine the cost-effectiveness of a deal widely viewed as wasteful.

Christopher Thornberg, principal of Beacon Economics, which undertook the SEIU-commissioned study, says the sell-off deal is so bad that, if a private corporation were undertaking it, accounting rules would require the seller to book major losses from day one.

"These are the kind of hijinks that ensue because they don't have to use these basic accounting rules," he said.

South L.A. Democratic Assemblyman Hector De La Torre, meanwhile, has called for a hearing next week before his Accountability and Administrative Review Committee, examining charges the sale may waste money, and that plans to conduct the sale have been veiled in secrecy.

The Associated Press quoted de la Torre as saying "we will go through this with a fine-tooth comb to make sure this isn't a situation where you get short-term gain with long-term expenses."

Thornberg's analysis suggests such an examination could not go well for the governor's plan -- and may not even require all that fine-toothed a comb. By selling off buildings in exchange for a one-time payment, California is essentially squandering two key advantages that have long made it cost-effective for the state to own its own buildings.

For one, governments can typically take out loans at a lower interest rate than private investors, because governments are not as likely to go bankrupt. And when investors borrow money to buy the buildings -- and they then rent them back to California --- the new owners have to charge extra rent just to account for their higher loan payments.

"By shifting the properties from public to private ownership, they're significantly raising the cost of capital for those structures," Thornberg says.

Another advantage California will fritter away in the deal is the government's tax-free status. When a private, for-profit investor buys and then operates buildings, it has to pay taxes on its assets and operations. The tax expense will then be passed on to the renter -- in this case the state of California. Had the state held on to the buildings in the first place, there would have been no such tax expense.

Testifying at next week's hearing will be Donald Casper, the former state official who was fired from his role overseeing financing of state-owned buildings in San Francisco; and Jerry Epstein, who was fired from a similar role overseeing Los Angeles' state buildings. Both men had complained publicly that the sale would result in burning taxpayer money.

"There was no cost-benefit analysis done beforehand," said Casper, a former chairman of the San Francisco Republican Party. "Schwarzenegger says the state shouldn't be in the business of managing real estate, but should be all about providing services. That's misleading. The real business of government is to govern effectively."

And this deal, some Democratic power players seem to be saying, is not cost-effective.

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Matt Smith


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