State’s Policy is to Leave Money Sitting Idle during Deficit Times
August 6, 2009
William F. Shughart II
San Francisco Examiner
California’s political leaders are in the midst of celebrating their temporary “solving” of the state’s Brobdingnagian budget mess by combining spending cuts and tax increases with heavy doses of accounting legerdemain. Once again, however, Sacramento has failed to take advantage of a golden opportunity to stanch the red ink without increasing the burden on the private sector—selling state-owned properties.
At the urging of Gov. Arnold Schwarzenegger, the Department of General Services—the state’s landlord—has indeed recently started exploring opportunities to market some of California’s most valuable assets, including the Los Angeles Coliseum, Daly City’s Cow Palace and San Quentin State Prison.
That renewed effort represents a major policy change since 2000, when California’s state auditor sharply criticized the General Services Department for failing to dispose of surplus state property expeditiously, thus bypassing billions of dollars in potential revenue.
According to the statewide property inventory maintained by the Real Estate Services Division of the General Services Department, the taxpayers of California owned 22,727 buildings and more than 6.7 million acres of land at 2,313 sites statewide as of Jan. 2, 2008.
It turns out that state government policy erects barriers to exploiting that potential source of ready cash.
Other than ordinary bureaucratic inertia, delays created by filing environmental impact statements and complying with master facilities plans, the chief reason for foot-dragging is that state agencies have little incentive to identify and sell the properties they no longer need. If and when surplus property actually is disposed of, the General Services Department applies the proceeds (net of its own costs) to pay interest and principal on state bonds. Agencies incur the cost of identifying surplus property, but do not share in the gains from doing so.
Moreover, “surplus” properties can only be disposed of with approval from the state Legislature. Given that such authorization only comes once a year, properties may remain in limbo for up to 14 months while awaiting legislative approval.
Two simple policy changes would transform the incentives now impeding the disposal of surplus state-owned properties: First, eliminate the right of first refusal, thereby forcing public agencies to compete with the private sector for the right to acquire “surplus” lands and ensuring that property ownership is transferred at fair market value to its highest and best user; and second, allow the selling agency to retain a predetermined percentage of that value, thus motivating it to identify and dispose of no longer needed property in a timely manner.
It’s of course true that property now considered “surplus” is only the tip of the fiscal iceberg. If California taxpayers demanded that state government return to its core functions of protecting private-property rights and safeguarding the rule of law, many more state-owned assets would fall under the auctioneer’s hammer.