Privatization of California Continues Apace

Privatization is typically a very costly and wasteful way to deal with public services. Usually it is little more than a transfer of public wealth to well-connected people in the private sector, done in spite of the fact that that it’s usually unnecessary and forces the public to spend more money than they would have before the privatization.

That scenario is likely to repeat itself in the upcoming privatization of 11 state office buildings:

California has put up the “for sale” sign on 11 state office buildings, including the San Francisco Civic Center and Ronald Reagan building in Los Angeles.

Real estate firm CB Richard Ellis began marketing the buildings Friday on behalf of the state.

Vice chairman Kevin Shannon says the firm is pitching the sale worldwide as a low-risk investment because the state is planning to lease the space back, giving the new owners a steady stream of income.

The sale was adopted as part of last year’s budget agreement between Gov. Arnold Schwarzenegger and lawmakers to raise money for the state. California is facing a $20 billion shortfall through the middle of next year.

The sale is expected raise more than $2 billion.

Read that again. The sale is pitched as “low risk” because you and I will give the new owners a steady stream of income. We’re going to rent these buildings indefinitely, ultimately at much greater cost than $2 billion.

Public ownership of office buildings is a much cheaper way to operate government. We pay back the construction loan and the ongoing maintenance, and that’s usually more affordable than leasing from a landlord who seeks profit in the arrangement. The costs come out of our pockets, especially if we’re cutting other services down the road to pay the privatization cost.

We can expect much more of this if Meg Whitman becomes governor. In fact, I would expect she will make mass privatization a core element of her plans to “solve” the state’s budget mess. California Closed indeed.

7 thoughts on “Privatization of California Continues Apace”

  1. Democratic votes that allowed this are simply unacceptable. Can you provide reference for the exact bill(s) that paved the way last year? This is something to discuss with my Senator and Assemblymember, would like to confirm how they voted and publicize (and help others do the same).

  2. The only difference between doing this and honestly tapping real credit is that this we never pay back.

    We’d be better off if we could just borrow $2 billion at 5%.

  3. I don’t know the details of this particular deal, but when a state or local government sells off something (like, say, its bus fleet) and then leases it back, the deal’s usually based off of depreciation credits. You can deduct the depreciation of capital investments against income for tax purposes*, but as governments don’t pay taxes that’s a worthless benefit as long as the deed’s in their name. So they rig one of these deals – they get a one-time windfall without mucking up their expenses schedule too bad, the new owner gets some tax shielding, everyone wins. Except other government treasuries (federal, mostly) who had a claim on the tax moneys thus shielded.

    So in a lot of ways this might essentially be a plan to siphon money from the feds to CA, with the buyers taking a chunk as a brokerage fee.

    * and the depreciation schedule’s usually pretty front-loaded to encourage capital goods investment-driven growth. This is a pretty important part of commercial developers’ business plans.

  4. Many companies will sell off buildings and lease them back as a way of turning capital assets into expenses.  With the former, depreciation can be deducted for tax purposes (but only for a given amount of time) while all expense can be deducted (without time limits).

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