New Report Shows Taxpayers on the Hook for $800 Million More

California’s plan to generate $1.2 billion by selling 11 state properties – and then leasing them back – will end up costing taxpayers at least $800 million more than expected, according to a new report (.pdf) from the state’s non-partisan Legislative Analyst’s Office.

The $800 million extra comes from a miscalculation made by the state. Under state law, California doesn’t pay any property taxes on those office buildings – which include five properties in the Sacramento region:

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• Attorney General Building in Sacramento
• Capitol Area East End Complex in Sacramento
• Department of Justice Building in Sacramento
• Franchise Tax Board Complex in Sacramento
• California Emergency Management Agency Headquarters in Rancho Cordova

California budget analysts assumed the state would not have to pay property taxes by selling those buildings, but it turns out taxpayers will shell out more after all. The state was banking on that exemption to continue under the 35 year lease, but that will not be the case.

How could such a miscalculation occur?

Mark Whitaker of the Legislative Analyst Office (LAO) told CBS 13, “This is a new transaction, something the state has never been involved in before. And I think we made some assumptions in order to provide a timely analysis.”

Whitaker added, “As more information on the transaction became clear, it was concluded that the property taxes would likely be assessed on the properties.”

That assessment came from the Board of Equalization and it means taxpayers will now be on the hook for $800 million in higher rents – to offset property taxes the new private owners will pay. The LAO says selling those 11 properties – then leasing them back – will cost California overall $1.4 billion more over 35 years than owning them outright.

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The Department of General Services has defended the deal on numerous occasions, saying it will generate a significant cash infusion for the current budget year.

LAO analyst Mark Whitaker told CBS 13, “This is a short term revenue solution that adds long term obligations to the state.”

“It is poor fiscal policy,” Whitaker added.

The LAO’s new report says the sale leaseback transaction is similar to taking out a long term loan at 10% interest – something critics are calling a bad deal for California taxpayers.

The report comes at the same time the LAO has just released another fiscal analysis, showing California’s deficit woes are even worse than imagined. California is now more than $25 billion in debt.

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