The Ultimate Revenue Raiser: Asset Sales

In these budget busting times, state-owned buildings are increasingly up for sale. But states may have better options.
by | May 19, 2010

For some lucky states, the financial books are being righted; budgets are coming into balance with relative ease. In others -- and this includes most of the biggest, most populous states -- revenue continues to be in desperately short supply. Despite some spending cuts and tax or fee hikes, budget gaps persist. To fill those shortfalls, a number of states are talking about raising revenue by selling assets. Georgia, for instance, is considering a plan to sell nonessential buildings and negotiate sale-leaseback agreements for facilities it intends to keep using. In California, the Department of General Services has been authorized by the legislature to sell and then lease back 11 state-owned office properties. The sale-leaseback would free up the state's equity in the buildings, providing cash to fill the current budgetary shortfall. Arizona has already sold its state Capitol building -- famously reported on The Daily Show last September. Even Jason Jones, the Comedy Central reporter, questioned the wisdom of selling a building only to have to pay more in rent to use it than it cost to own it.

Clearly, there are positives and negatives to selling assets, and some assets are a better "for sale" bet than others. Those questions formed the heart of a discussion I had with Ivan Kenneally, assistant professor of political science at the Rochester Institute of Technology. He not only spelled out some of the trade-offs, but also suggested a new and radical approach that may gain currency in the current environment. Here are excerpts from our conversation:

What's behind the talk of selling off assets?

Given the crunch the states are under, what you're seeing is an evolution of desperate ideas. Beyond raising taxes or fees and cutting spending, states have been trying to balance their budgets by extending payment of debts on labor or contractor fees -- not defaulting on them but radically postponing them. A lot of states have slowed down the dispersion of tax reimbursements, which in effect gives them an interest-free loan from the public. Another move is furloughing workers. A state can save an enormous amount of money if it compels state workers to take off one day a week unpaid. The next step, when we see really bad budget issues, is selling off assets.

It raises money in the short term -- that's the plus side. But selling assets is like an alarm. It reveals how entrenched the dysfunction of the legislative process is. State leaders can't make the hard budget decisions, can't even get things done in times of an emergency. My own state, New York, is talking about selling assets -- as are Georgia and California, among others. They are considering it because they are at the bottom of the barrel in terms of fiscal circumstances.

Look at a private corporation that needs to improve its cash flow. The first thing it does is streamline for efficiency -- trimming all the fat so it can float lighter. That means layoffs, restructuring the organization and trimming financial obligations. Then, if it is still in trouble, it turns to selling some of its physical infrastructure. But it's an entirely different ballgame in government. New York State has done some cutting, but in light of the budget shortfalls it has, those cuts are remarkably unimpressive. So that raises the question: If it becomes politically impossible to make obvious cuts, what do you do? Sell some stuff off?

When states decide to sell assets, they seem to turn to office buildings. How good an idea is that? Are there other assets that it would be more efficient or better to sell?

This is not exactly the best time to move real estate. It's a buyer's -- not a seller's -- market in most parts of the country. That puts states in a terrible position. They may have to sell assets, such as buildings, at radically reduced prices.

There are also complications. If you're selling an office building and you have workers there, you have to relocate them or fire them. So it's difficult to pull off that kind of sale without other cuts. But renting the building back eats up whatever cash was acquired from the sale. It would make more sense if the government said: "There's a division we want to cut or lay off in this building." Then there would be an economic benefit of no longer having salaries to pay, and they could sell the building permanently.

Ideally, you want to sell assets that are not entangled in other services the way buildings are. The least complicated would be land, working on the assumption that it isn't environmentally protected. A lot of states have enormous amounts of property designated as off-limits for development. They could, in principle, sell that land off for private development and make money in two ways -- upfront in terms of the sale of an asset and then in tax revenue generated by development. But it might be politically unpopular. People don't like to see property that they think has environmental significance sold off for private development. It would be bad to see a headline, "Field Sold for Sake of Strip Mall."

Are there ways to get a better payoff from an asset sale?

There is a more aggressive approach. It has to do with the U.S. Supreme Court's Kelo decision on eminent domain -- the takings clause in the Fifth Amendment. States can appropriate land or commercial property as necessary for some pressing public need -- natural resources need to be cultivated there or someone needs to build a power grid. Kelo justified a more expansive interpretation of the takings clause so eminent domain could be more aggressive -- a government can seize property to sell for private interests. With the Kelo decision, I think we're going to see governments explore eminent-domain takeovers to acquire assets they can sell off. If you spin this out, that means they can sell stuff they didn't previously own. Through building code revisions they might ascertain that a structure is no longer legitimate, and therefore they could exercise eminent domain on it. Or they could use eminent domain to acquire a plot of land that they could sell to a developer. They would be pushing development to enlarge state coffers. This could be the next step, given the talk of selling off assets.

The Kelo decision was so unpopular on a national level that governments haven't taken advantage of it. But I've heard rumors here and there. Once you find states discussing the selling off of assets, almost all bets are off. All of these moves are done with a color of desperation. If they can't politically do the obvious things to balance their budget, they have to do something.

Correction: An earlier version stated incorrectly that Michigan was one of a handful of states selling assets. Michigan has been removed.

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