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More On Selling California Assets: How to Invest Sale Proceeds, and a Reality Check on Redevelopment

Leonard Gilroy
May 15, 2009, 5:16pm

Following up on my California post yesterday, I was remiss in not clarifying two critical points with regard to the potential state of state assets like San Quentin State Prison, L.A. Memorial Coliseum, Cow Palace, several fairgrounds and hundreds of millions worth of other state property.

The first is the critical issue of what to do with the revenues. It is indeed the case that California owns a ton of properties and assets that it could—and should—sell off. However, proceeds matter, and fiscal responsibility demands that policymakers resist the temptation to turn one-off proceeds from such sales into one-off spending sprees. The reason is simple: in a state with massive projected, ongoing structrual deficits, a one-time cash infusion will only paper over the structural problems and kick the can down the road (and not even very far at that—just to the next budget).

Rather, fiscal prudence would suggest that one-time sale proceeds be directed towards providing the maximum long-term benefit. In that regard, I'd suggest that some acceptable uses of proceeds might include:

The second point is that policymakers need to recognize that the incoherent labrynth of state and local land use and environmental regulations in California presents a very real obstacle to private sector development/redevelopment of these sites (the California Environmental Quality Act offers one glaring example). Presumably, the Governor's idea is to sell the properties, capture the first benefit from the sale proceeds themselves, and capture the second benefit over time from enhanced tax revenues as these properties shift to more economically productive uses.

It's that last benefit that's threatened by California's land use and environmental regulatory morass. Sure, a scenic property like San Quentin would be extremely appealing to private sector developers, but less so if it's sitting underneath a mountain of regulatory red tape, legal challenges under CEQA, etc. that all conspire to limit the economic gains potentially achieved through redevelopment (and likely the value of bids the state receives, given that the market prices in such risks).

To the extent that the state can offer bidders a streamlined regulatory process offering them more certainty (i.e., less risk) in the development approval process, the better. But in the bigger picture, that premise shouldn't just apply to these particular properties; it should be a universal approach.

Clearly, state policymakers are spending a lot of time evaluating what the near-term sale opportunities are, but it's equally critical to recognize that: (a) the package isn't complete until there's a plan on how to invest the proceeds, and (b) merely selling assets doesn't resolve the underlying regulatory obstacles to more economically productive uses.

On a related front, Pamela Prah reviews the path to California's fiscal crisis in a this column today.

Leonard Gilroy is Director of Government Reform

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