Every time Gov. Arnold Schwarzenegger confronts a budget shortfall, he seeks the same way out, always looking for short-term solutions that create long-term problems.
Schwarzenegger’s pattern began in 2004, less than five months after he won office in the 2003 recall of ex-Gov. Gray Davis. That’s when he sponsored $15 billion in “budget-balancing” bonds, vowing to “throw away the credit card” if they passed. They passed and repaying them now costs the state just short of $1 billion every year. It was a one-time budget “solution” that will keep on costing big bucks for 25 more years.
The latest example of Schwarzenegger’s lack of foresight is the great California real estate sale that’s just about to begin. Schwarzenegger plans to sell off 17 state-owned buildings in almost every part of California, with the estimated $2 billion proceeds going first to retire the bonds that paid for the buildings (about $1.35 billion) and the rest (another approximate $665 million) going toward easing this year’s budget deficit.
A Guarantee for When He Is Gone
But there’s a rub. For this is a real estate sale unlike almost any other. When most office buildings are sold, the new owner gets few guarantees of future rental income. Many business leases are year-to-year and recession has spawned millions of vacant square feet, making office buildings a tough sell.
But anyone who buys these buildings won’t have those worries. For Schwarzenegger is guaranteeing the state will keep using them for at least 20 more years.
Which means selling these buildings won’t be very different from issuing bonds. Rental prices have not yet been set, but Republican Bill Leonard, a member of the tax-collecting state Board of Equalization, calculates the rent on a typical building involved in the sale would come to at least $300 million over two decades.
Which means, he says, “the extra rent that will have to be paid for just one of the 17 buildings being sold will equal half of the total profits from the proposed sales.”
But wait, say Schwarzenegger aides, there will be savings if the state should close other offices it now rents and move their functions into the space it will have to lease back until at least 2030.
“We need this money now,” says Eric Lamoureux, spokesman for the Dept. of General Services, which manages state buildings. “We will ensure that the leases we get are market rate.”
True Cost of a Onetime Benefit
Market rate? When the state is guaranteeing 20 years of occupancy, the price ought to be far below market rate. But that’s not the way this governor has ever thought.
Maybe it’s because he knows the approximate $5 billion in rents he’s committing the state to pay in exchange for about $660 million worth of one-time budget benefit will all be paid out on someone else’s watch. Getting the one-time benefit might make his job easier this year; never mind how much it burdens the next three or four persons who inherit his current job.
That makes this a pure form of selfish and shortsighted behavior, the very opposite of paying things forward. This is moving debt forward onto other people’s backs.
The building sale also represents a major reversal in state policy, which has long been predicated on the notion that owning buildings is a lot cheaper than renting them, even when you have to pay for maintenance and interest on construction bonds.
“This is just another form of state debt, leaseback contracts instead of bonds,” complains Leonard, a former longtime legislator from San Bernardino County. “Long-term leases are one of the most expensive forms of financing a government or an individual can choose. It will also depress the market for other office buildings and make it more difficult for other owners to sell off buildings, because when occupancy is guaranteed in these buildings, who wants to buy places without those guarantees?
“It’s just another example of short-term gain bringing long-term pain.”
That, of course, has been the consistent Schwarzenegger pattern, beginning with rolling back vehicle license fees to the tune of about $5 billion a year. Add up the lost revenue from that one move over Schwarzenegger’s six-plus-year term and you’d have just about enough money to cover both this year’s expected deficit and last year’s without raising any taxes or cutting any programs.
Don’t blame the bureaucrats for any of this, says Lamoureux. “We’re carrying forth what the governor directed us to do,” he said.
Which means we have seen the problem, and much of it is Schwarzenegger, perhaps the most short-sighted governor in the history of this state.
Mr. Elias may be contacted at tdelias@aol.com.
His book, “The Burzynski Breakthrough,” is available in a soft cover fourth edition. For more Elias columns, visit www.californiafocus.net