States Look for Economic Relief Selling Govt. Buildings

July 30, 2009— -- It's the solution that no one wants: selling the buildings at the heart of Arizona's state legislature.

But like other recession-battered states, the Grand Canyon state is desperate to close a huge budget gap -- and so the two, 50-year-old buildings home to Arizona's State Senate and House of Representatives grace the list of possible properties that the state could sell to help close a more than $3 billion budget gap next year.

"There are really no good options to get out of this mess that anyone's happy about," said Kevin McCarthy, a longtime Arizona resident and the president of the Arizona Tax Research Association (ATRA), a Phoenix-based finance policy group.

"In a normal time period, as a taxpayer organization, it would be an understatement to say we'd be strongly opposed to something like this," McCarthy said. "But in Arizona these days, there's nothing normal."

Arizona is one of at least a handful of states -- including California, Connecticut and Pennsylvania -- considering or moving forward with state property sales.

"States are having to make some extremely difficult decisions in light of continuing declining revenues," said Todd Haggerty, a research analyst with the National Conference of State Legislatures. "A lot of states are looking at their third or fourth of year of projected budget gaps. You can only cut so much before you have to start finding other sources of revenue."

Connecticut is considering selling government properties as part of a larger effort to sell off state assets, including equipment, to bridge a projected $8.5 billion budget gap over the next two years.

"The governor has said that many of these properties are quite desirable and this is something she wishes she did not have to do," said Adam Liegeot, a spokesman for Connecticut Gov. Jody Rell. "But the fact is the state of Connecticut is having an $8.5 billion problem that both Republicans and Democrats must come together and address."

In Arizona, the state governor's office says the state's two legislature buildings are at the bottom of the list of 32 properties, including prison and state fairgrounds, being considered for sales.

But if the buildings are sold, there wouldn't actually be a major move involved: Phoenix residents shouldn't expect to see their local representatives carting cardboard boxes full of files and potted plants out of the buildings.

Instead, as first reported by the Arizona Republic, lawmakers are considering leasebacks of the properties; they would sell the properties but then continue to use them through lease agreements that would eventuallly result in the state regaining ownership of parcels.

The initial sale of the properties could bring the state between $350 million and more than $700 million in new revenue, said Paul Senseman, a spokesman for Arizona Gov. Jan Brewer.

The catch? ATRA's McCarthy says that back-of-the-envelope calculations show that the state could end up paying between $60 million and $70 million a year on the leases. Over a 20-year lease, that would add up to as much $1.4 billion.

Tough Market, High Hopes

Senseman said the government officials are aware that the proposal, which has bipartisan backing but has yet to receive formal approval, would ultimately end up costing the state money.

"Gov. Brewer has stated that she is certainly not fond of one-time [funding] mechanisms, but she inherited a massive budget deficit when she became governor in January and has had to take very dramtic steps to deal with it," he said.

The consequences of leasebacks -- a financing strategy that isn't uncommon among municipal governments -- aren't the only pratfalls facing states looking to sell properties. There's also the, ahem, awful real estate market, particularly in Arizona and California, which have seen some of the country's highest rates of foreclosure and plummeting real estate prices.

"We're in a fiscal crisis, but it might be shortsighted for them to be selling property now in one of the lowest points in the market, versus holding on to property when values increase and can appreciate," said Steve Geller, a California real estate lawyer.

State officials, however, are more optimistic. Fred Aguiar, the secretary of the State and Consumer Services Agency, said the Golden State properties are unique enough to draw top bidders.

The state, which was grappling with a more than $20 billion budget shortfall, is planning to sell 11 properties, including the Ronald Reagan building in Los Angeles, the Civic Center in San Francisco and the Orange County Fairgrounds. (Other candidates for sale, including San Quentin State Prison and the Los Angeles Coliseum, were ultimately left off the state's list.)

California Gov. Arnold Schwarzenegger signed a bill authorizing the sales on Monday.

The value of the combined properties, which house a total of 17 buildings on 8.1 million square feet, is estimated between $600 million and $1 billion, Aguiar said.

"The state is more interested in getting out of the real estate business than remaining in the real estate business," Aguiar said. "Besides the cash, if it's an old building, the new landlord takes over the responsibility of maintaining the building."

Sold for Good

Aguiar said that California, like Arizona, is looking to keep using the properties through leaseback agreements.

Pennsylvania, in contrast, was ready to give up two of its properties for good. It has already sold its Philadelphia state office building for $25.2 million and plans to close a $4.6 million sale of its Pittsburgh state office building later this year. Employees from both buildings will move to leased space within their respective cities.

In addition to revenue generated from the sales, the state will save millions in maintenance and upgrade costs for the two buildings, said Ed Myzlewicz, press secretary for the Pennsylvania Department of General Services.

"It was clearly evident for us if we were to continue to run both these buildings it would be at an enormous cost to taxpayers," Myzlewicz said. "We began to compare business models, and it was clear to us it would be more economically feasible for us to lease space."