Thursday, February 10, 2011

Jerry Brown's budget fight

Gov. Jerry Brown has been working closely with the California legislature on his budget plans.

There haven't been many revisions agreed to yet. One that Jerry just endorsed is the cancellation of the sale of 11 state buildings, a sale which he had thought was a bad idea but was a carryover of one of Gov. Schwarzenegger's budget fixes. But cancelling it leaves a an additional $1.2 billion deficit for the 2012-13 year beginning July 1: David Siders, Brown kills state building sale Sacramento Bee 02/10/2011. Siders reports:

Brown's decision to abandon the controversial building sale was expected. He called it "not prudent" last year and, as state attorney general, he declined to defend the transaction against a court challenge.

On Wednesday he called the sale a "gigantic loan" and the "ultimate in kicking the can down the road."

The transaction, involving 24 buildings on 11 properties, was a bid by Gov. Arnold Schwarzenegger and the Legislature to raise cash in the budget crisis. The state promised to lease back the buildings for at least 20 years, raising concerns about the long-term cost of renting.

The nonpartisan Legislative Analyst's Office said it was "poor fiscal policy," the equivalent of borrowing at more than 10 percent interest over 35 years.
Building sales are generally a questionable revenue-raising device for public entities, unless the building is being abandoned by the government agency that owns it, as in a relocation of offices of a state agency completely out of the city in which they currently reside. As in this case, the rental expenses could actually be more significant in present value (cost adjusted for the price of money over time) than keeping the building and maintaining it. The rental costs generally have to cover the maintenance and capital improvements in some form, anyway.

This is a good example of what Republican budget management in California has meant in practice: taking short-term steps that reduce the budget problem for the moment but build in bigger ones for later years.

What Jerry Brown is trying to achieve this year is a process that not only cuts through those kinds of gimmicks and puts the state finances on a reasonably sustainable basis. And, in the process of doing so, beginning to delegitimize the scam the Republicans have been running here since 1978 of telling voters: "You can cut your taxes and restrict government spending and not suffer any bad consequences yourself."

The San Francisco Chronicle report Wyatt Buchanan et al, Gov. Brown drops plan to sell 11 state buildings 02/10/2011, features additional details on the cancelling of the building sale:

"Disposing of assets that are still needed, and to do so incurring tremendous rent charges, doesn't make any sense," Brown said at a news conference at the Capitol.

California has a projected $25.4 billion deficit in its general fund through June 2012 - an amount equivalent to about 30 percent of the current $86 billion general fund budget. The $1.2 billion that would have come to state coffers from the sale will be made up through internal borrowing, Brown said.

Instead of spending $6 billion over the next 35 years to lease back sold state properties, California would pay only the interest on its internal loans: $18 million over the 3-year life of those loans, Brown said.

The sale-leaseback deal came with a 10.6 percent interest rate, while the internal borrowing incurs a 0.6 percent rate.

Pressed by reporters on whether the plan amounts to kicking financial problems into future years, Brown said, "It's fiscally prudent, it's honest, and it's the very opposite of kicking the can down the road."
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