LAO Schools DGS On Sale-Leaseback

Anthony Pignataro:

Yet another Legislative Analyst’s Office report has come out blasting the state Department of General Services‘ monster sale-leaseback deal. This deal, first reported in CalWatchdog back in February, is quite simple: the state will sell 11 buildings across the state for about $2.3 billion — cash the state desperately needs — and then lease the buildings back. Indeed, the LAO says that, “The 2010-11 Budget Act assumes the sale-leaseback would generate $1.2 billion in General Fund revenue.”

A single corporation — California First LLC, a consortium that includes the real estate firm Hines and Antarctica Capital Real Estate, a private equity firm — is buying the buildings. The problem, which the LAO also reported here, is that over the long term, such a deal ends up costing the state more than it would have paid had it just held onto the buildings. “As a result, we cautioned that the sale-leaseback was not an ideal budget solution because it would add to the state’s structural deficit,” the LAO said of its April findings. “In general, we reach the same conclusion [now] that the sale-leaseback is poor fiscal policy.”

Ouch!

Oh, it gets better. From Page 6 of the 12 page report: “We disagree with some of DGS’ other assumptions, however, which we think overstate the potential costs and risks of the state continuing to own the buildings and make the sale-leaseback appear more favorable than it actually would be.”

Specifically, “the sale-leaseback would cost the state $646 million more than the status quo over the first 20 years in present value terms. In contrast to DGS’ analysis, therefore, the transaction would be a major fiscal loss even under the shortest possible timeframe.”

As far as the long term, the deal looks even worse. “For 35 years, the time period we use in our analysis below, the net cost is about $1.4 billion.”

And that’s in present value terms. “In total,” the LAO reported, “we estimate the total cost of the sale-leaseback would be approximately $6 billion more than the cost of state ownership over the 35-year period.”

So to recap: To score a quick $1 billion to paper over part of our state’s $20 billion deficit, the state signed a deal that will end up costing the state upwards to $6 billion over the next generation.

Then again, this is California, and that means this deal is probably the best we can get.

NOV. 10, 2010

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