Doyle Drive's Goofy Privatization Deal Stalled By Judge
|Will Jerry Brown stop the fiscal insanity?|
This marks the second time in nine days that courts have delayed one-time state government financing gimmicks -- the sort of thing Gov.-elect Jerry Brown says he'll curtail. Another such odious deal, to sell off state buildings and lease them back from a consortium led by an investor from India, was delayed by a court last week.
Assuming Brown is forthright when he says he'll end Gov. Arnold Schwarzenegger's smoke-and-mirrors era of California government, the December court delays create an opportunity to replace these deals with promised "transparent and enduring" budgeting.
|This is no way to run a state|
But they're not. Any time a politician concocts a deal to obtain money up front, to be paid back later, without adding to on-the-official-books debt, you can be pretty sure it's going to be a taxpayer ripoff. That's because California, despite its problems, can borrow money officially at the lowest interest rates around; other borrowing techniques, particularly ones involving private equity investors, are going to cost more.
California's official debt is always paid back. Thanks to this low risk, and thanks to tax-free interest lender income, California-as-borrower hands out laughably low interest payments. In November, California borrowed money at between 1.25 percent and 1.5 percent interest. Debt deals in the private investment world, meanwhile, can nowadays involve rates-of-return in the range of 8 percent and 13 percent.
State Treasurer Bill Lockyer explained the reason for the difference in an Los Angeles Times editorial Dec. 20.
Payment of debt service is constitutionally protected, with bond payments required even when the state is operating without a budget. Debt service has second call on general fund dollars, right behind education. Under the California Constitution, making sure bond investors get their money is a higher priority than providing healthcare to kids, protecting the environment and keeping our communities safe.Even though official, above-board state borrowing is inexpensive, politicians don't always like it. That's because they have to publicly admit they're driving California further into debt. Additional official borrowing can also harm the state's bond rating, making most state debt costlier to pay interest on.
And that's why we get deals like Doyle Drive and the state building sell-off.
The Doyle Drive deal disguises borrowing by selling a yet-to-be-built freeway spur, slated to incur state borrowing costs of somewhere betweeen $400 million and $800 million, then renting it from investors. This way, backers say, it gets built more quickly, is better maintained, and won't have cost overruns. It also allows San Francisco transportation officials to encourage the borrow of enough money to expand what is now a humble freeway spur into an ultra-wide $1.5 billion "parkway."
State legislative analysts recently ripped some of the Doyle Drive touts' claims as bogus, calling the deal a long-term money-waster. The union representing state government engineers sued, saying the deal violates state law limiting private highway investment to toll roads. And a judge held the deal up pending court proceedings.
Separately, the $2.3 billion sale and lease-back of state buildings, was explained to the public as a way to unleash private-sector ingenuity in the area of real estate. Temporary-financing-fix specialist Schwarzenegger this year fired state officials appointed to oversee the buildings' financing after they spoke out against the deals -- which would burden the state with excess costs that could total $1.4 billion. The deposed officials sued, and a state appeals court delayed the sale so their arguments could be considered.
The jungle-gym structures and maze-like money trails accompanying both the Doyle Drive deal and the state building sell-off seem to blur these two lawsuit stories into he-said-she-said shout fests. But the deals, and the budget-busting problems with them, are simple to anyone who's been tempted to spend beyond their means.
Imagine a woman whose husband funds a fishing-gear habit by borrowing on their low-interest, home-equity line of credit. She tells him to stop. So he takes out a high-interest credit card behind her back. The husband might think he's being innovative. But during the fall campaign, and in public pronouncements since, Jerry Brown said it's time for California to end this kind of practice.
Dec. 15 the LA Times ran a story quoting Brown at length.
In the past, state leaders relied on one-time gimmicks, some of which made the state's deficit worse, and one-time cash infusions to patch over flawed spending plans. Those days are over, Brown said. "The day of reckoning is upon us and I'm determined to bite the bullet, get it done in whatever way the consensus of California can be built," he said. "Fair, transparent and enduring -- that's my goal."Two courts have now given Brown an opportunity to make good on his word.