The Budget Deficit & Renting The Future

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You probably don't need any reminders of just how bad the options are for resolving California's state budget woes. And yet, one section in today's new analysis of a plan to sell state office buildings and then lease them back is worth highlighting.

Here's the assessment from the ever-cautious, habitually prudent, Legislative Analyst's Office:

Based on our analysis... the cost of leasing back the buildings would exceed the sale revenue. As a result, we would normally not consider the sale–leaseback a reasonable budget solution since it would add to the structural deficit in order to address the current budget shortfall. Paying for the state’s annual costs of running its programs with a one–time sale of critical state assets is poor fiscal policy. In the current budget environment, however, the sale–leaseback represents one imperfect option among many for balancing the budget.

Let me summarize in more everyday speak: it's a lousy plan but hey, whatdya gonna do?

Department of General Services

Photo: Department of General Services

All of which means that after Governor Schwarzenegger submits his revised budget next month, one that now is likely going to have to address an even larger gap between revenues and expenses, both he and legislators will have to weigh how many 'creative' fixes they will use and whether those fixes exacerbate the fiscal pressures in years to come.

By now, that kind of 'penny wise, pound foolish' strategy is pretty familiar around the state Capitol. But the LAO's new report on the plan to sell office buildings and rent them back seems to be one of the clearest examples of the trade-offs associated with these kinds of decisions.

The plan is simple: sell eleven state-owned office buildings this year, and then sign long-term leases with the new owners. Today's LAO report may make this proposal even more enticing than it was when the Guv first suggested it, because the analysts believe the sales could bolster the 2010-11 budget by $1.4 billion, more than double the Schwarzenegger budget team's current projection.

But here's where the fun begins. The LAO decided to analyze the likely rental costs over the next 35 years, rather than some other analyses that stopped at 20 years. Why? Because the analysts argue that it's a "reasonable useful life" for the buildings in question, and because the state isn't likely to pack its bags and go looking for other digs. Analyzing trends over 35 years, the LAO report concludes the sale of the buildings will cost the state a total of $5 billion more than if those buildings remain government property.

The sale/lease proposal got some attention last week when the Associated Press raised similar (though smaller) questions about long-term costs. When asked about it last week, Governor Schwarzenegger was adamant he won't pursue something that doesn't pencil out.

"I can guarantee you that I will never sell state property if it doesn't make any sense from an investment point of view," he said. "I'm not crazy and do a fire sale. Believe me, it won't happen."

But considering the origins of that term -- "fire sale" -- one might reasonably ask: isn't the state budget already ablaze, so to speak?

Note: the Assembly Accountability and Administrative Review Committee is scheduled to take up the office sale/lease plan tomorrow morning.

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About John Myers

John Myers is senior editor of KQED's new multimedia California Politics & Government Desk.  He has covered California politics for most of the past two decades -- serving previously as Sacramento bureau chief for KQED News and, most recently, as political editor for KXTV News10 (ABC) in Sacramento. He moderated the only gubernatorial debate of 2014, and was named one of the nation's top statehouse reporters by The Washington Post. Follow him on Twitter @johnmyers.

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