August 1, 2003 - From the August, 2003 issue

Treasurer Angelides On State Budget's Policy Implications

Relying heavily on deficit bonds and debt rollovers, the new state budget has been called "hard to swallow," "irresponsible," and downright "ugly" by lawmakers from both sides of the aisle. Perhaps more importantly, Wall Street has looked unfavorably upon California's fiscal crisis and political paralysis, downgrading California's credit rating to the lowest levels of any state in the country. TPR is pleased to present this interview with State Treasurer Phil Angelides, in which he analyzes the budget, its impact on the capacity to accommodate the state's inevitable growth, and its implications for California's long-term fiscal health.


Phil Angelides

Phil, share with our readers the true impact of the state budget recently passed by the Legislature and signed by the governor. What are the fiscal consequences on state and local priorities of the state relying on $10.7 billion of debt to balance its budget?.

Let me start by saying that it's actually more than $10.7 billion when you add it all up. If you look at this budget, it includes over $20 billion of borrowings. There is a $10.7 billion deficit bond financing, a $1.9 billion pension obligation bond, a borrowing of approximately $2 billion against future tobacco settlement revenues, and a number of internal borrowings. The borrowings are very significant -- so significant that, in my mind, it begins to crowd out resources for important investments in education and infrastructure that are fundamentally important to California's future economic prosperity. My preference from day one was that we do what the best businesses would have done, which is bite the bullet and structurally balance this budget so we could face the future.

On a personal level, I was in the real estate development business in the early 1990s when that industry went through a terrible depression. And my company was one of the businesses that was able to survive at a time when many long-term real estate companies were plowed under. I observed that the most successful companies at that time were the ones that dealt with their problems most forthrightly and most rapidly. I'd like to stress how important it is for the state now to move forward to cure the structural imbalance between revenues and expenditures -- it is costly beyond dollars. It precludes the state from facing the future, and that's why I was so disappointed with this budget.

Address the significance of the state's credit rating being downgraded.

You know, there's an anomaly to our bond rating, which is that California remains as strong as or better than much of the nation in terms of its economy. So, while we clearly have difficult times in front of us, on a purely economic basis, especially relative to other states, there's no reason that California should have such a low credit rating. Our credit rating is a reflection of Wall Street's concern about our political paralysis, which has forced the infighting and crisis.

Unfortunately, the fact is that the downgrading of our credit rating will mean that when we borrow to finance important structures like schools, transportation, and urban parks, we will be paying more interest on the bonds than we need to for those important investments in our future. We estimate that the Standard & Poor's downgrade from A- to BBB will cost California taxpayers about $1 billion in additional interest in the next 30 years for the $24 billion in bonds that the voters have already authorized at the ballot box, but which have not yet been issued by the state. So there's a direct cost of these downgrades. But perhaps more importantly, they send a signal across this country of instability in California. That's why I believe it is so important that we get a structurally balanced budget -- even if it requires the raising of revenues on fair bases, asking those who can most afford to pay more to finance essential services, such as institutional infrastructure, and even if that means cutting back on lesser priority programs.

In support of the bond issue to balance the budget, the Legislature approved a tax swap, exchanging property tax revenue for sales tax revenue directed towards local governments. What's your take on the appropriateness of this swap? And what impact, if any, it will have on fixing our dysfunctional state-local fiscal relationship?

The swap obviously has flaws, but you could probably say it's a net plus in the sense that we're giving communities a more stable source of revenue, one that they don't have to compete for hand-in-hand with auto-malls and big-box shopping centers. So, the swap has some beneficial results. But the fact is, again, instead of biting the bullet and raising revenues and cutting programs to produce a structurally balanced budget, the state has deferred decisions for the future. That is ultimately harmful to sustainable development and smart growth because it crimps investments in mass-transit, urban schools, and urban parks -- all of the public goods that serve as the foundation for expanding the private economy.

Phil, on the same ballot as the recall is Proposition 53, a constitutional provision to assure annual investment by the legislature and Governor in the state's often-neglected infrastructure? What's your position on this ballot measure?

Well, I haven't formally taken a position yet, but I am disinclined to support it. It's another example of people holding up a ballot proposition that doesn't grapple with the more fundamental challenges ahead of us. It seals off part of the budget without creating a discreet source of revenue or realistically addressing how we're going to finance its mandate. It's very much akin to what Arnold Schwarzenegger did last year when he created after-school programs. I have objected to all of these initiatives that keep using little pieces out of the budget to solve problems. I believe deeply that we would be much better off if we had comprehensive fiscal reform, and a structurally balanced budget.

Another one of my problems with Proposition 53 is that, ultimately, it really doesn't talk about the kinds of infrastructure investment it's funding. Transportation is not just about more lanes on a freeway; it's about new land use patterns and the support of mass transit that allows us to grow in a smarter way. Water is not just about more capacity; it's about smarter utilization of a precious resource. Based on what I've observed, it makes the job of getting a comprehensive budget more difficult, and secondly, it does not target resources in a way that really builds our economic future in a sustainable way.

In a recent column in the Sacrament Bee, Daniel Weintraub talks about the pension deal that was passed without dissent on September 10, 1999, which will cost the taxpayers $10 billion over 20 years and is a huge hit on state and local revenues. MIR raises this vote only to suggest that in a term-limited Legislature, an d in the absence of comprehensive structural reform, the interests of state and local employees get much more attention than does infrastructure. If so, who do voters feels assured that infrastructure is competitive when budgets are crafted?

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Well, I don't want to sound trite, but there is some truth to a society's need to find the leadership and will of the future. I don't believe that if every special interest peels off their part of the budget that we've accomplished anything other than diminish the common interest in a process integral to California's future. I am someone who believes that we must build a movement of business leaders, civic leaders and community leaders to once again have a fiscal framework that allows us to make the seminal investments in California.

You have to start with this question: "What can state government do to create sustained economic progress which is broadly felt in California?" When I ask that question, I always come back to the fact that state government can be a partner-an agent for sustained economic growth broadly felt-if it focuses on educating the workforce for the 21st century and providing the infrastructure, broadly defined, to underline expanding the private economy. If that is our policy priority, then the budget should be reflective of that.

What essential structural reforms would you endorse to make California more governable and to address the challenges you have outlined above?

I have a couple thoughts on that. Number one, I'm a strong believer in majority vote, both at the state level and the local level. Society and communities ought to have the ability to invest in their future. So I would move to a majority vote budget at the state level. I also think it's time to re-examine all of the initiatives that are now weighing down this budget process. From the Schwarzenegger after-school initiative that purported to fund after-school programs but instead drained money from Healthy Families, to all the other strictures that have really constrained our ability to face the future.

Second, and most important, I really do believe that 25 years after Proposition 13, it's time to have a rational discussion again about how we can empower local communities and neighborhoods to make investments in parks, libraries, public safety, and schools. One of the best things that has happened in recent years is the lowering of the vote threshold on school construction bonds from 2/3 to 55-percent. This allowed communities to make rational decisions about whether they wanted to spend a little extra money to fix 50-to-60-year-old schools. Sacramento is so removed from most people's lives that unless we return more power to communities, we'll never get the kind of responsible, accountable government we know to be possible.

In support of your thesis, the voters have been generous recently in supporting transportation, schools, parks, water, and open space bonds. But, the agencies administering those funds tend to operate in a silo-like fashion and seem uninterested in engaging in holistic planning of the kind you engaged in when you were in community development. Why then should the voters have any hope that the silos will be breached and collaboration will emerge as common practice for planning infrastructure in the future?

Well, people need to take a little responsibility here. We so distrust the public process, but nevertheless I really do believe in empowering communities by majority vote. To say, generally, if I want to make an investment in our public fabric-broadly defined, from parks to schools to libraries-then I'm going to have the power to do so in a suitable way that fits their community. If a community wants to build a school-library complex rather than have to seek out state money from the Library Board or the State Allocation Board, they should be able to do that. We so constrain creativity, flexibility, and investment in our future that we've harmed ourselves.

Okay, with less than sixty days to recall, give us your take on the historic election.

It's not good for California that nine months after a legitimately held election, we're having this carnival chock full of divisiveness, instability, and opportunism. I made a personal decision to stay on the job and try to argue for the investments we need to make in our state's future. I really do believe we need to get back to the politics of dialogue and engagement, and away from the politics of raw theatre, anger, and frustration. So, I'm against the recall, and I will urge Californians to vote against it.

And, in my capacity as a public leader, I am doing everything I can to breed a new politics in this state around investment in our future, around the empowerment of communities and California facing what are really monumental challenges. I'm fearful, as I look at this recall, that we're not going to hear a word about a state going from 35 million to 46 million and how we ought to grow. I'm deeply fearful that we're not going to hear a word about the growing gap between rich and poor, and the educational investment policies we need to embrace. This is not a forum for the kind of engaged dialogue that moves a civilized society forward. I hope on October 8th, we can begin the real work of facing our future.

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