Gimme Shelters

After mortgaging our future in an orgy of budget-related borrowing, the Legislature hatches new orgiastic plans: sleazy tax shelters

Talk about your Wall Street accounting scandals: The new budget passed by the California Legislature is so fraught with financial chicanery that I'd hardly be surprised if state officials next went to work enabling phony offshore shell companies or sham corporate tax-shelter games.

And wouldn't you know it? That's exactly what our state Legislature is doing. Earlier this month the Legislature passed a $99 billion budget that includes massive borrowing, pension fund raiding, state/local tax-swap maneuvers, interdepartmental till-rifling, and $1.5 billion in bonds that suck up future payments from the state's successful lawsuit against tobacco companies.

Now, the Legislature is scheduled to continue its work on a bill that would permanently put California governmental agencies into the business of marketing sham corporate tax shelters that would be based on a projected $1 billion per year in public assets.

The bill, now in committee, would extend a tax break that enables a financial maneuver known as the "lease-leaseback." If the bill is eventually approved, dozens of local and regional agencies would be able to convey to private investors the right to deduct wear and tear, or depreciation, on government-owned equipment from the federal income taxes paid by the investors. These deals are generally conducted through offshore shell companies. They typically involve shuffling millions of dollars around for no other purpose than corporate tax-dodging.

Like the billions of dollars in bond deals floating the new state budget, lease-leasebacks generate not just funding for the California government, but millions of dollars in associated fees for white-shoe lawyers and consultants, money most often scooped up by firms that have Sacramento lobbying arms. In short, SB 760 -- sponsored by two Democrats and supported by every one of the dozens of Republicans who've had a chance to vote on it -- is a perfect poster child for the orgy of financial irresponsibility that's gripped California governance this year. The measure has passed unanimously in committee and in floor votes and is currently in committee for revisions.

For all their theatrical carping about Gray Davis' past financial-management misdeeds, Republicans are joint malefactors in the highly leveraged budget mess that will cripple the state for years to come. A cagily named, $10.7 billion "deficit-reduction bond" package -- through which the state will engage in arcane state-local tax swaps to push this year's budget crisis into the next five years -- was initially nurtured by Senate Republican leader Jim Brulte, says Jean Ross, director of the California Budget Project.

"Brulte proposed rolling forward the deficit. Davis embraced it. The Legislature accepted it," Ross says.

Don't get me wrong: Critics are right when they slam Gray Davis for seeking political benefit by avoiding hard financial choices; his awful handling of the energy crisis may end up costing the state $50 billion.

But Californians are fools to buy the idea that a recall of the governor would purge the state's flaky-financing disease. California public officials of every political stripe have become addicted to Enron-style accounting gimmicks. If voters think a high-drama, right wing­ financed recall will fix this malaise, I've got some offshore tax shelters to sell them.

So, apparently, does the Legislature. SB 760, sponsored by Sens. Jack Scott (D-Los Angeles) and Dede Alpert (D-San Diego), would extend a state tax break, passed last year and scheduled to expire in 2004, that makes it profitable for municipal transit agencies to sell investors the right to use public assets as tax shelters. The state legislative analyst predicts $1 billion of such assets will be used in tax shelters during coming years. With time, a significant part of state infrastructure will be nominally owned by corporate investors, according to this analysis. And every year those investors will claim a loss on their federal income taxes resulting from wear and tear on those assets. In exchange for the right to game the IRS in this way, corporate investors will pay agencies such as Bay Area Rapid Transit a fee that will, by definition, be less than the amount of taxes the investors will be slipping from the federal till.

"To unlock the value in those [government] assets I think is considered by many to be called creative financing," notes BART Controller Treasurer Scott Schroeder, who is currently negotiating with investors on a deal involving $200 million worth of rail cars.

Creative indeed: The BART deal provides a peek into a smoke-and-mirrors financing future.

Complete details of the rail car transaction are secret, and will remain so until Sept. 9, the same day the BART board is scheduled to vote on whether to approve the wildly complex deal. In other words, the board will be voting largely on blind faith that corporate lawyers didn't get the better of the public's negotiators. Because corporate tax shelters take myriad forms, every one of these deals is different. But BART and other transit agencies have already done hundreds of millions of dollars' worth of tax-shelter deals from which a rough outline can be drawn.

Last year, BART leased $130 million of train switching and other electronic gear so investors could use it as a private tax shelter. The same year, the San Francisco Municipal Railway leased $388 million worth of rail cars in connection with a Cayman Islands­based tax dodge.

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