Debt is not a budget solution

Victor Joecks

Despite each having a sales tax, a personal income tax and a corporate income tax, both California and Arizona faced multi-billion-dollar budget holes in the last year: $20.7 billion for California and $4.5 billion for Arizona.

Instead of just reining in out-of-control government spending, California and Arizona relied on budget gimmicks to close their respective gaps. One gimmick both states used was the sale-leaseback agreement.

In a sale-leaseback agreement, a state will sell an asset, usually a government building, for a one-time cash payment and then agree to lease it back for a set time period, often 20 years.

California completed its sale-leaseback agreement last week when it sold 24 office buildings containing 7.3 million square feet of space for $2.33 billion. As part of the agreement, California officials also agreed to leaseback the buildings for at least the next 20 years. After paying off the buildings, the sale generated only $1.2 billion in one-time revenue, but the Legislative Analyst's Office of California estimates the Golden State will pay more than $200 million a year in lease payments. Contractually, these payments will also increase by 10 percent every five years.

In all, the LAO estimates that sale-leaseback will cost Californians over $5 billion more than owning the buildings. Even after adjusting for inflation, the LAO estimates the arrangement will cost California taxpayers up to $1.5 billion in present value. Also, at the end of the sale-leaseback deal California made, the private company, not the state of California, will own the buildings.

The LAO has projected that California will continue to face yearly deficits approaching and exceeding $20 billion over the next five years, although an updated projection that takes into account the current budget won't be available until November 2010. Regardless, having to pay more than $200 million a year in rent won't improve California's fiscal condition.

Arizona did something similar last January, when it sold 20 buildings, including the state capital and legislative chambers, for a total of $735 million. In June, Arizona also sold its Supreme Court and nine other buildings for $300 million. In exchange for $1 billion in one-time cash, Arizona now faces lease payments of approximately $84 million a year after a two-year period of interest-only payments.

In all, Arizona will pay more than $1.6 billion to lease and buy back buildings the state once owned.

And this temporary solution hasn't helped Arizona. Its current-year deficit is $825 million, and in the next fiscal year its deficit is projected to be $1.4 billion.

These sale-leaseback agreements have left both California and Arizona in worse fiscal shape today than before the deals. While the one-time infusions of money have already been spent, both states face significant lease payments for the next 20 years. This is the ultimate in kick-the-can-down-the-road budgeting.

The sale-leaseback idea has garnered some consideration in Nevada. During the most recent special session, Republican gubernatorial candidate Brian Sandoval proposed a sale-leaseback agreement as part of his plan to close the budget gap. He subsequently confirmed to NPRI that, in order to avoid tax increases or massive layoffs, he still would consider such an arrangement. His opponent, Democrat Rory Reid, has not returned phone calls seeking his position on this issue.

Both candidates have insisted they will not raise taxes. A sale-leaseback proposal, however, should not be mistaken as a wise and creative way to increase revenues without raising taxes. Sale-leaseback is a short-sighted policy that literally mortgages a state's future to prop up the unsustainable spending of the present. While a temporary tax increase would kill jobs for two years, a sale-leaseback agreement would create pressure for job-killing tax increases for the next 20 years. After the first biennium, the money is gone, but the lease payments and the artificially high budget — plus rent increases and rollup costs — from the previous biennium remain.

If you've been living beyond your means, eventually you'll have to live beneath your means. And since Nevada has increased inflation-adjusted, per-capita spending by more than 29 percent over the past 15 years, the state is going to have to reduce its unsustainable spending.

California, Arizona and Nevada all have problems with unsustainable spending, not revenue. Sale-leaseback agreements in California and Arizona will only exacerbate those states' budget problems in the next year.

Nevada should learn from and avoid, rather than emulate, this unwise policy.

Victor Joecks is the deputy communications director for the Nevada Policy Research Institute. For more information visit