Selling State Buildings: The Perfect Time for a Bad Idea?

Here's a wacky idea that seems to be spreading as states confront budget shortfalls: selling state buildings to private investors, then leasing them back ...
by | February 25, 2010

Here's a wacky idea that seems to be spreading as states confront budget shortfalls: selling state buildings to private investors, then leasing them back for government use. Arizona gained national attention by selling several buildings, including the one that houses the governor's office.

People mocked Arizona, but now California and Nevada are talking about doing the same thing. Tucson might sell its City Hall.

In remotely normal times, I think almost anyone in state government would say that these are bad deals for states. Here are some reasons why:

-The whole reason that investors want to do these deals is that governments have to pay them back a lot more money than they get upfront. The Arizona Republic reported that Arizona received $735 million and will have to pay back $1.1 billion. The arrangement discussed in California sounds like a substantially worse deal.

-Of course, any bond sale works that way. What makes these proposals unusual is that they use one-time money to pay recurring operating expenses. In doing so, they tend to conceal or even exacerbate structural budget problems.

-So far as I can tell, these deals don't even aspire to produce any management efficiencies. If, say, a state leases a toll road to private operators, you can make the case that the private company will do a better job managing the road because it has more expertise and/or more political freedom (to raise tolls, for example).

In these lease-back arrangements, it doesn't sound as though the private investors ever even take over management of the buildings (except in the unlikely event that the government defaults). The buildings are nothing more than collateral for a loan.

-Governments don't get anything they didn't already have. In a couple of decades, they'll have paid lots of money to regain full ownership of the same buildings they had before.

If you add it all up, these deals sound a lot like the governmental equivalent of payday lending -- a comparison that Nevada Democrats have made. A somewhat less loaded analogy would be to say what Arizona is doing is similar to taking out a second mortgage, then using the money not to add an addition to your home or pay for your kids to go to college (one-time costs that add value), but rather to pay for your everyday expenses.

Despite all that, there's a case that this is the right thing to do. The building sales have become a topic of debate in Nevada's Republican primary for governor between Gov. Jim Gibbons and his leading challenger, Brian Sandoval. Sandoval favors them, Gibbons opposes them. The two candidates clearly and concisely described the arguments for and against the idea in the Las Vegas Review-Journal:

"Sandoval's idea merely delays solving our budget problems," Gibbons said. "Just like kicking the can further down the road, it does no real good for Nevada's working families."

Gibbons said Sandoval's suggestion showed a "lack of leadership experience."

Sandoval fired back late Friday by declaring that most Nevadans will think his idea on leasing state buildings "is better than raising more than $100 million in new taxes, laying off thousands of teachers and cutting vital programs for foster children, mental health patients and senior citizens -- all which the governor is planning to do."

It's an interesting debate. Payday loans might not seem to make financial sense, but if you don't have any money to buy food or pay your rent, suddenly they seem a lot more logical -- you do whatever you can to survive today and wait until tomorrow to worry about tomorrow. Sandoval essentially is making the same argument.

The political dynamics also will be worth watching. Arizona was ridiculed for "selling the state capitol" (although the historic state capitol building wasn't included in the sale). Usually, it's poor politics to make your state a national laughingstock.

On the other hand, it's also usually poor politics to cut key government services and to raise taxes. Gibbons is running into trouble for proposing to remove tax exemptions for the mining industry. If he'd embraced the lease plan, he could have presented a balanced budget without the tax changes.

Gibbons can say that his plan is the more fiscally responsible one. But, by opposing all tax increases, Sandoval can claim to be the true fiscal conservative. In a Republican primary, it's probably best to be the true fiscal conservative.

Josh Goodman
Josh Goodman  |  Former Staff Writer

More from Politics