Governor Schwarzenegger’s plan to sell 11 state buildings to help fill California’s budget gap has been blocked by a San Jose Court. The sale was challenged by the three former state building authority officials who say the deal is a waste of public funds.
They have a good point. The deal is not so much a sale as a lease-back which involves the state renting back court houses and office buildings for a 20 year period. In other words it’s a means to temporarily extract some cash (one-time revenue) that will eventually cost the state $200 million more annually than if the state just held on to the buildings.
California’s Legislative Analyst’s Office (LAO) writes that lease-backs are more prevalent in on the local level and are used to close budget gaps or fund new infrastructure projects. Typically, the government retains ownership. California’s current deal is structured to permanently transfer ownership to the new owner which allows the seller to ask for a higher price. The downside is that California’s government is agreeing to indefinite lease payments without any equity.
In the early 1980s sale-leasebacks grew in popularity with municipal govenrments using them as a substitute for tax-exempt bonds, but the Tax Reform Act of 1986 removed the tax advantages of doing so for government. For an analysis of the tax cost of privatization, see Randall Holcombe’s article in the Southern Economic Journal.