Gov. Brown drops plan to sell 11 state buildings STATE BUDGET

The Edmund G. Brown Building, a state office building located at the 505 Van Ness Ave. in San Francisco, Calif., on Tuesday, March 30, 2010. The Edmund G. Brown Building, a state office building located at the 505 Van Ness Ave. in San Francisco, Calif., on Tuesday, March 30, 2010. Photo: Liz Hafalia, The Chronicle Photo: Liz Hafalia, The Chronicle Image 1 of / 3 Caption Close Gov. Brown drops plan to sell 11 state buildings 1 / 3 Back to Gallery

California will scrap its controversial plan to sell and then lease back 11 state properties, including three buildings at San Francisco's Civic Center, Gov. Jerry Brown announced Wednesday.

The proposed sale of the California Supreme Court headquarters in San Francisco and 10 other buildings would have raised $1.2 billion for the state to help close the budget deficit. But Brown called the plan short-sighted as it would have cost taxpayers billions to lease back those buildings over a long-term period.

"Disposing of assets that are still needed, and to do so incurring tremendous rent charges, doesn't make any sense," Brown said at a news conference at the Capitol.

California has a projected $25.4 billion deficit in its general fund through June 2012 - an amount equivalent to about 30 percent of the current $86 billion general fund budget. The $1.2 billion that would have come to state coffers from the sale will be made up through internal borrowing, Brown said.

Instead of spending $6 billion over the next 35 years to lease back sold state properties, California would pay only the interest on its internal loans: $18 million over the 3-year life of those loans, Brown said.

The sale-leaseback deal came with a 10.6 percent interest rate, while the internal borrowing incurs a 0.6 percent rate.

Pressed by reporters on whether the plan amounts to kicking financial problems into future years, Brown said, "It's fiscally prudent, it's honest, and it's the very opposite of kicking the can down the road."

The building sale was arranged by former Gov. Arnold Schwarzenegger, and had been approved by the Legislature. The plan, however, got caught up in the courts after three former state Building Authority members sued the state to block the sale. They claimed the state would illegally waste taxpayer dollars.

Attorney pleased

Joseph Cotchett, lawyer for two of the plaintiffs, said he was "delighted that the governor has seen fit to cancel this terrible proposal." But he said they would continue with their lawsuit, now before the Sixth District Court of Appeal in San Jose, in hopes of preventing such sales in the future.

"We want to come to an agreement with the state of California that these types of sale and leasebacks will not occur," Cotchett said.

Under the state Constitution, he said, "We don't believe that any administration can go out and sell public buildings for short-term gain and long-term loss."

The buildings included the court at 350 McAllister St., the state Public Utilities Commission building at 505 Van Ness Ave., and properties in Los Angeles, Oakland, Rancho Cordova (Sacramento County), Sacramento and Santa Rosa.

Cotchett said the buyers, an investment group called California First, might go to court to try to force the state to proceed with the sale. But he said he and his clients would argue that the contract "was an unconstitutional act and therefore was void, and there should be no penalty."

California First issued a statement saying it was disappointed by Brown's decision but did not indicate any intention to go to court.

"We had looked forward to assisting the state in addressing its fiscal crises and are available if our assistance is needed in the future," said Michael Bustamante, spokesman for the investors. He declined further comment.

Brown was asked at a news conference if there would be penalties for stopping the sale, and he said, "We don't think so."

The governor said the internal borrowing to fill the gap from stopping the sale would come from surplus Medi-Cal revenues, bonds issued for prison construction and from reserves of various state special funds.

Controller backs plan

State Controller John Chiang backed Brown's move.

"This decision shows Gov. Brown is serious about ending the budget gimmicks and sideshows," Chiang said. "Only real, ongoing solutions will improve our balance sheet and solve our annual fiscal problems."

Lawmakers, who voted to approve the sale and leaseback as part of the budget deal last year, also praised the decision.

"I opposed the sale from the start, but reluctantly agreed to vote for it because the former governor insisted the buildings be sold as a precondition to any budget deal," said Assembly Speaker John Pérez, D-Los Angeles.