Selling off property private can increase long –term budget costs
Selling off state property to ease California’s budget pain will be a tempting option for Governor Brown, but would likely worsen long-term budget problems.
“Quick cash up-front for low profile but high value items like state buildings and highways will be a siren song tempting Governor Brown,” said Pedro Morillas, CALPIRG Consumer Advocate. “The quick cash sounds great, but will ultimately leave California washed up on the rocks.”
For example, the state of Indiana turned over control of 150 miles of I-95 to a private toll road company for a term of 75 years, and estimates suggest the toll road company will recoup their costs over the next 20 years. Estimates show that the public received about $7 billion less for the rights to the road than they were worth.
Recent examples of this kind of deal making in the Golden State include the proposed I-710 Tunnel project in Pasadena, a new High Desert Corridor from SR 14 in San Bernardino County to I-15 in Los Angeles County, and added truck lane capacity along I-170 from the Los Angeles Port.
“If done for the short-term money, these deals could turn into long term losers for California,” according to Morillas.
In Arizona the state recently made a $735 million deal to sell several state owned buildings then lease them back from the buyers.
“The Arizona legislature’s landlords are now the mutual funds Fidelity and Vanguard instead of the Arizona taxpayers,” added Morillas
Here in California, Governor Schwarzenegger tried an Arizona style selloff that would have generated $1.5 billion up front for 11 state buildings. The nonpartisan Legislative Analyst Office (LAO) projected that California would face higher costs even in the first year of the deal. In the first five years, California would spend $30 million more per year in making lease payments, and up to $200 million per year after that.
“Any homeowner knows that selling your house to rent it back to yourself isn’t moving in the right direction.” concluded Morillas.
If Governor Brown does entertain the idea of privatizing state resources there are some general principles he should follow to ensure a good deal for the public:
(1) Any deal must clearly create net long-term benefits, not just a short-term budget fix.
(2) Privatizing under duress 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.
CALPIRG is a nonpartisan, nonprofit citizens-based advocacy group that stands up to powerful interests on behalf of all Californians. www.calpirg.org