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Jerry Brown nixes state buildings’ sale/leaseback

By Josh Richman
Wednesday, February 9th, 2011 at 11:49 am in Jerry Brown, John Chiang, state budget.

Gov. Jerry Brown announced this morning that he’s deep-sixing former Gov. Arnold Schwarzenegger’s already-in-motion plan to sell and then lease back 11 state office buildings, saying it would fleece taxpayers in the long run.

Among the state buildings that had been on the sale block were the Elihu Harris Building, at 1515 Clay St. in Oakland; the Earl Warren/Hiram Johnson complex that houses agencies including the state’s Supreme Court, at 350 McAllister/455 Golden Gate Ave. in San Francisco; and the Public Utilities Commission Building, at 505 Van Ness Ave. in San Francisco.

The nonpartisan Legislative Analyst’s Office had panned the plan last April.

“We estimate that the sale of buildings would result in one-time revenue to the state of between $600 million and $1.4 billion, but that annual leasing costs would eventually exceed ownership costs by approximately $200 million. Over the lives of these buildings, we estimate the transaction would cost the state between $600 million and $1.5 billion,” the LAO reported at the time. “In our view, taking on long-term obligations—like the lease payments on these buildings—in exchange for one-time revenue to pay for current services is bad budgeting practice as it simply shifts costs to future years.”

Brown apparently took that to heart, saying today that the plan “was short-sighted and would have cost taxpayers billions of dollars in the long-run. Selling and leasing back the state’s buildings for one-time gains is not prudent.”

State Controller John Chiang quickly agreed. “While the sale of these buildings would have provided immediate cash for the state, it would have cost Californians more over the long haul. Selling low and renting high would not have served taxpayers’ interests,” he said. “This decision shows Governor Brown is serious about ending the budget gimmicks and sideshows. Only real, on-going solutions will improve our balance sheet and solve our annual fiscal problems.”

The Legislature approved a 2009-10 budget that authorized the sale, and the 2010-11 budget assumes $1.2 billion in revenues from it. But Brown said he’ll propose amending his budget proposal to include borrowing $830 million from special fund reserves, to be paid back by FY 2013-14, so program budgets won’t be affected by the sale’s cancellation. He said that’s all that needs to be borrowed because of other new revenues and cost savings including $90 million more from the Medi-Cal managed care tax and $100 million less in prison infrastructure project costs.

The new owners – California First LLC, a partnership led by a Texas real estate firm and an Irvine-based private equity firm – were to take over the buildings Dec. 15, but that was scuttled by a November lawsuit filed in San Francisco by former state building officials whom Schwarzenegger had removed for questioning the deal. A judge’s emergency stay pushed the deal’s closing beyond Schwarzenegger’s term in office, and put the ball in Brown’s court.

UPDATE @ 11:58 P.M.: State Senate President Pro Tem Darrell Steinberg, D-Sacramento, is down with Brown’s “wise decision,” too. “The proposed sale and lease-back of state buildings was a fiscally irresponsible idea conceived by the former administration as an alternative to an honest budget proposal,” he said. “Governor Brown’s plan preserves the state’s assets and is fiscally responsible.”

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