The cost of saving California from paying up to $1.5 billion over 35 years to lease back properties Governor Arnold Schwarzenegger wanted to sell at the height of the financial crisis is officially $24 million.

That’s what the state agreed to pay California First LP after being sued for breach of contract over the aborted sale of 11 high-profile office complexes, including the Ronald Reagan State Building in Los Angeles, the Attorney General’s building in Sacramento and the Public Utilities Commission building in San Francisco.

The dispute had its origins in 2009, when the Schwarzenegger administration instructed the Department of General Services (DGS) to estimate the sale price of the properties.  The plan was to sell them and lease them back, so no offices would be shut down. DGS came up with a value of $2 billion, resulting in $660 million profit after bond debt on the properties was retired. As Eric Lanoureaux of DGS explained, “If the state had to borrow the $660 million, it would cost a lot more.”

Not everyone agreed. State Treasurer Bill Lockyer said the proposed sale was “poor fiscal policy and bad for taxpayers.” But lawmakers overwhelmingly passed Assembly Bill X4 22 authorizing the deal in July 2009 and Schwarzenegger signed it.

Shortly thereafter, media reports cited sources that calculated the value of the deal differently than the DGA and projected it would cost the state hundreds of millions of dollars for decades to come. The independent Legislative Analyst’s Office weighed in with a report in July 2010, which acknowledged the “major upfront benefit” of between $595 million and $1.4 billion, depending on the economy.

But the state would spend $30 million more leasing than ownership would cost the first year. That cost would steadily increase to $200 million a year. The Analyst also warned against selling in a down market, and concluded it was “bad budgeting practice as it simply shifts costs to future years.”   

Jerry Brown was elected governor in November 2010 and cancelled the “short-sighted” sale in 2011 that “would have cost taxpayers billions of dollars in the long-run.” When California First sued that March, the state added a claim that the group had missed a payment.

Trial started in San Francisco County Superior Court in December, but both sides agreed to arbitration and the deal was struck there.

–Ken Broder

To Learn More:

California to Pay $24 Million Settlement over State Properties (by Joe Garofoli, San Francisco Chronicle)

California Pays $24M to Settle Lawsuit over Building Sales (by Paul Elias, Associated Press)

Executive Summary, Evaluating the Sale-Leaseback Proposal (Legislative Analyst’s Office)

Governor Brown Cancels Sales of State Properties (Official news release)