ALAMEDA, Calif. — California Gov. Jerry Brown said Wednesday that he’s killing the state’s plan to sell 11 state office buildings to private investors and lease them back.
The deal would have brought in $1.2 billion in one-time money to help balance this year’s budget. It would also have triggered the redemption or defeasance of $1 billion of tax-exempt lease-revenue debt issued in connection with the buildings’ original financing.
The sale-leaseback deal was negotiated by the administration of the previous governor, Arnold Schwarzenegger. In October the state announced an agreement to sell the 11 buildings to a consortium of investors led by privately owned real-estate firm Hines and private-equity firm Antarctica Capital Real Estate for $2.33 billion, while signing long-term leases to keep state agencies in the buildings.
The original plan called for California to pay about $56 million annually to lease the buildings for state use — an amount that would increase over time — in a deal equivalent to borrowing at a 10.2% interest rate, Brown said at a press conference Wednesday, citing the nonpartisan Legislative Analyst’s Office.
“The sale of the buildings really didn’t make much sense because in effect it was a gigantic loan with interest payments in excess of 10% every year,” he said.
Opponents of the plan filed suit in November challenging the leaseback scheme, thwarting Schwarzenegger’s plans to close the deal before he left office in January, and leaving the decision whether or not to proceed with the transaction in Brown’s hands. The case was pending in an appellate court.
The Democratic governor plans to make up for the $1.2 billion in general fund revenue lost by cancellation of the sale in part by borrowing $830 million from special fund reserves, to be paid back within three years.
The $18 million projected interest cost is a much less than the state would have spent on the leaseback, Brown said.
The remainder of the lost revenue will be made up from higher than expected Medi-Cal managed-care tax revenue and cutting $100 million in prison infrastructure spending.
Controller John Chiang issued a statement Wednesday hailing the governor’s decision.
“While the sale of these buildings would have provided immediate cash for the state, it would have cost Californians more over the long haul. Selling low and renting high would not have served taxpayers’ interests,” Chiang said. “This decision shows Gov. Brown is serious about ending the budget gimmicks and sideshows. Only real, ongoing solutions will improve our balance sheet and solve our annual fiscal problems.”