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

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:

  • Paying down existing debt: As this recent Reason study indicates, California’s debt has nearly tripled in just the past six years, from $42.1 billion in FY 2001-02 to a whopping $120.1 billion in FY 2007-08. California pays billions in interest every year on their bonded debt, and paying this debt off early can free up funds for ongoing programmatic spending.
  • Investing in hard infrastructure: California certainly has no shortage of infrastructure needs that spread across asset classes (e.g., highways, water, etc.). Proceeds from property/asset sales could be invested in infrastructure projects with long-term economic value that address immediate needs, relieve congestion and improve the state’s economic competitiveness. The $3.8 billion lease of the Indiana Toll Road—the proceeds of which were used to fund a 10-year state highway investment program—offers an example of this approach.
  • Establish an interest earning infrastructure trust fund: A variation on the theme above—lump-sum payments can be invested in a dedicated trust fund, either through a financial institution or within a public pension system, which would provide annual interest payments to cover ongoing infrastructure operation and maintenance needs. Again, Indiana offers an example. The proceeds from the $3.8 billion upfront payment for the Indiana Toll Road were siloed in an interest-bearing account and dedicated entirely to new transportation infrastructure that otherwise would not be funded.
  • Shoring up unfunded liabilities in legacy pension/retiree health benefits: Unfunded pension and retiree health care liabilities represent a large and looming threat to California’s fiscal health, and taxpayers as a whole benefit when governments find creative ways to shore up these funding gaps without resorting to dramatic service cuts or tax increases. Reason’s 2005 pension study noted that, at the time, the California teachers’ retirement system faced a $24 billion shortfall and the state was paying more than $3 billion each year to keep its retirement funds afloat. Proceeds from property/asset sales could be used to shore up public pension systems, or perhaps even help fund a transition from defined-benefit to defined-contribution programs.
  • Reducing taxes: Wishful thinking…this is California, after all.

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.