PD Editorial: A budget gimmick that backfired

California is paying a steep price for desperation.

In 2010, facing an enormous budget shortfall, Gov. Arnold Schwarzenegger settled on a plan to sell 11 state office buildings – among them the state Supreme Court building in San Francisco and the Joseph Rattigan State Building in Santa Rosa – and lease them back.

The payoff: A quick cash infusion of about $1.5 billion.

But this scheme was an accounting gimmick, the ultimate in political expediency.

It promised some short-term budget relief for Schwarzenegger and state legislators - electeds who would be long gone when California taxpayers got stuck with a bill for long-term costs exceeding, by some estimates, $5 billion. Can you say boondoggle?

Five years later, it’s going to cost taxpayers $24 million to get out from under this lose-lose deal and hold on to these buildings.

Yes, that’s better than $5 billion. But it’s still a costly example of what happens when elected officials look for easy solutions to difficult problems.

The terms of this one-sided deal weren’t hidden in any fine print or obscured by budget jargon. In fact, they made headlines.

The Associated Press reported that taxpayers would be on the hook for $5.2 billion in rent over 20 years. On top of that, taxpayers would pay $138 million to rent 3,500 parking spaces associated with the buildings. And, unlike typical lease-purchase arrangements, ownership of the buildings wouldn’t revert to the state when the leases expired.

The state’s nonpartisan legislative analyst counseled against the sale-leaseback, forecasting a net cost to taxpayers of up to $1.5 billion over two decades – a more conservative estimate than AP but still a substantial sum and, as an analyst report noted, the “equivalent of long–term borrowing at double digit interest rates.”

Those warnings were echoed by two members of a state advisory board. They were replaced by the governor, and, in time-honored tradition, legislators squawked with indignation at the costly proposal and the treatment of the whistleblowers. Then, they voted for the sale-lease back plan, and the governor signed it into state law.

The sales weren’t yet closed in 2011 when Schwarzenegger left office, and Gov. Jerry Brown pulled the plug on this short-sighted deal.

Of course, it wasn’t that simple.

Just as the state stood to waste billions, an investment group led by a Texas real estate firm and an Irvine-based private equity company called California First LP stood to profit handsomely.

So when Brown canceled the deal, the investors headed to court. The case went to trial in December. It subsequently was shifted to an arbitrator, and a $24 million settlement was announced in late February.

California’s finances have improved dramatically, with the state building a healthy budget surplus over the past few years. So there’s money in the bank to settle the lawsuit and end this sorry chapter in governance.

We only wish we could be confident that it won’t resurface the next time a governor and the Legislature find themselves facing a budget deficit. There are no quick fixes.