I have a lot of respect for State Treasurer Dean Martin. In the midst of the worst budget crisis the state has ever seen, managing millions in state assets, Martin never fails to take a few moments to explain something.
Which is why I dialed him up the other day to ask him about selling the state capitol.
If you've been following it -- bleary eyed and weary of the endless bickering as I have -- you know part of the budget package the governor signed last week includes a provision to sell some of the state's buildings. The idea: to put cash in the coffers now and lease back the buildings over a period of years.
The Arizona State Hospital, Arizona Pioneer's Retirement facility, even Kartchner Caverns could eventually wind up in private hands.
It sounds like a swell idea, until you start to run the numbers.
For starters, the bill won't become law for another 90 days. Then the Department of Administration will basically put out the for sale signs, issuing RFP's to institutional investors who may or may not sign on. The buildings have to be inspected, followed by the legal process of drawing up complicated agreements to lease back the property.
So the eventual cash infusion may not happen for months, and maybe not in time to help this year's budget. "We don't expect to see any money until Spring," Martin told me.
Those who have the deep pockets for this kind of investment are fund managers at places like insurance companies and pension funds, and they want a guaranteed return on their investment. In other words, Arizona's competition is the bond market. One saving grace... the bond market really sucks right now.
But as Martin tells it, a leaseback agreement is considered riskier, because of the possibility the state will bail on the buildings themselves. So, in order to make it attractive, DOA officials will have to offer a higher rate of return than bonds.
It's uncharted territory for the state. And for investors. Martin says in the first six months of the year, about $800 million went into this kind of thing in a handful of municipalities. That may seem like a lot, but it's not, at least on an institutional scale.
Arizona's business alone would double that, and the state has some competition. California, Pennsylvania and Connecticut have similar plans.
So assuming it works, it's still pretty unsavory. Martin likens it to basically borrowing money. If you think about it, it's like taking a second mortgage out on your house at a higher interest rate... to pay for groceries.
That's because the deficit doesn't go away, bogged down by declining sale tax revenues and voter-approved mandates that can't be cut. The budget deficit next year, given current revenues, is expected to top $5 billion. It's a temporary solution to an ongoing problem.
As I said, I have a lot of respect for Treasurer Martin, but I don't envy him.
