Stateline Story

State Budgets Lean on Property Sales, Leases

The Arizona House of Representatives' office, one of the buildings the state is considering selling as part of a sale-leaseback program to raise cash, would cost a private owner more than $18 million. Lawmakers would continue to occupy the building as the state leases it from the new owner for 20 years.
Photo courtesy of the Arizona Governor's office
The Arizona House of Representatives' office, one of the buildings the state is considering selling as part of a sale-leaseback program to raise cash, would cost a private owner more than $18 million. Lawmakers would continue to occupy the building as the state leases it from the new owner for 20 years.

Some states, struggling to balance their budgets, are selling or leasing public property, including state office buildings, prisons and major toll ways. While a quick way to raise revenue, this strategy is attacked by some as a short-term fix that postpones making more difficult decisions.

Arizona and California lawmakers have pursued sale-leasebacks of state buildings, which are sold to private owners; the states then lease the buildings and take back ownership after 20 years.

The deals afford the states quick cash, while guaranteeing investors a profit after recouping the cost of the building through the long-term lease payments from the state. Arizona officials said they have received about 100 inquiries from interested buyers, including real estate investors, financial investors, the private sector and nonprofits.

"We are selling class-A office space with 100 percent occupancy, so it creates a great opportunity for an investor and is a good help to state programs," said Eric Lamoureux, spokesman for the California Department of General Services.

Connecticut is also selling assets to help meet its target to add $60 million to the general fund during the next two years, but its sales are permanent and apply only to property the state no longer uses. The state is planning to sell office buildings, vacant land, cars and equipment. The state treasurer and the Office of Policy and Management are scheduled to submit by Feb. 3, 2010, a list of assets the state could sell, said Adam Liegeot, spokesman for the governor's office.

In Arizona, the sale-leasebacks are part of the state's budget plan to help close a remaining $2 billion deficit in the fiscal 2010 budget. Lawmakers have approved a tentative list of state-owned buildings that could be sold, including the executive office tower, possibly the House and Senate buildings, 10 prison complexes and a state mental health facility.

The sales are expected to generate $737 million for general operations, according to news reports, while costing taxpayers more than that from the lease-back payments during the next 20 years. The state, which has not released what these agreements will cost the state, will continue to pay for the operations and management of the property.

California's plan, also part of its fiscal 2010 budget, is similar. The state authorized the sale-leaseback of 11 properties, which will be advertized after the state finds a broker. The state's general services department has not decided whether the new owners will handle maintenance and operations of the building, but doing so would mean additional savings, Lamoureux said. Selling the property in California should reel in $2 billion in revenue for the general fund. The department worked with the private real estate market to determine whether the plan was good for the state and for investors, Lamoureux said.

The state Agricultural Laboratory in Phoenix, Ariz., and the Orange County Fairgrounds in California are the only properties in those states that will be sold permanently. 

"This is an exceptionally unusual thing for states to do," said Scott Pattison, executive director of National Association of State Budget Officers . "But we have gotten in such a significantly difficult financial period that I'm not surprised states are doing this." He added that he also wouldn't be surprised if other states considered similar measures.

Todd Haggerty, a National Conference of State Legislatures policy associate, said: "States are having to look at anything and everything to close these (budget) gaps. For the most part, easy decisions have already been made, so states are now looking at more difficult options."

In July, NCSL estimated 31 states are already facing combined shortfalls of $58.5 billion for the 2011 fiscal year, which may result in others developing similar plans. Minnesota, Illinois, New York and Massachusetts considered proposals to sell toll roads, parks, airports or lotteries, but did not include these proposals in their fiscal 2010 budgets, which began July 1.

"At this point we're not ruling anything out," said Matt Anderson, spokesperson for the New York state Division of the Budget . "We may look (at sales) as a potential option."

"Sale-leasebacks" arrangements date back to at least 1984, when the city of Tucson, Ariz., sold City Hall to pay for a parking garage. The plan was used a few years later with other properties to help fund additional city projects. Virginia Gov. Tim Kaine (D) also used the sale-leaseback strategy when he was mayor of Richmond by selling a depression-era school to pay for renovating it.

Some states now selling public assets are doing the same - using the money to underwrite specific projects rather than channeling the money into the general fund to cover a deficit.

Missouri's transportation department is selling 23 properties it no longer needs to help fund bridge and road repairs.

Two foreign companies that also own and operate the Chicago Skyway paid Indiana $3.85 billion in 2006 to lease the state's toll road for 75 years. Gov. Mitch Daniels (R) proposed the plan to help pay for the state's transportation program without having to raise taxes, and the investors, Australian company, Macquarie Infrastructure Group, and Spanish company, Cintra SA, bought the property because they could profit from raising tolls and installing electronic toll collection booths to cut costs, said Jane Jankowski, a governor's spokeswoman.

Pennsylvania had also considered leasing its turnpike for $12.8 billion in 2008 to help pay for the costs of repairing highways and bridges, but decided against selling state assets right now, said Ed Myslewicz, spokesman for the state Department of General Services. The state did sell two office buildings this year, in Philadelphia and Pittsburgh, because selling the old buildings and moving state workers to leased space was less expensive than paying for repairs, he said. Florida has also sold public buildings because of costly upkeep.

Some critics suggest that selling off state property allows policy makers to put off making more difficult decisions, such as raising taxes or cutting services.

"We're in the second full year of huge budget deficits. The typical gimmicks have already been employed. Now this new one has surfaced," said Kevin McCarthy, president of the Arizona Tax Research Association . "They are masking the budget deficit and creating a one-time infusion of revenue that will go away next year. Then what will you do? Politicians are kicking the can down the road and crossing their fingers that next year will hold a better set of circumstances."

Jon Shure, deputy director of the state fiscal project at the Center on Budget and Policy Priorities , agreed. "It tends to be a short-term, one-time fix that avoids the difficult decisions of having to find revenue," he said.

"Public buildings should belong to the public. When you sell or lease them, you've given up a piece of real estate that at least symbolically should belong to the public. It says a lot about the desperation the states feel, but desperation is clouding long-term judgment."