May 4, 2004 - From the September, 2003 issue

Assembly Republican Leader Campbell On the State's Fiscal Crisis

Regardless of how one feels about Gray Davis, it is undeniable that no matter who is Governor on October 8, California will still be in a deep political morass with no easy answers. However, few in Sacramento seem to be looking beyond the recall with a willingness to work with members of the other party to craft long-term solutions to California's problems. Republican Assemblyman John Campbell (R-Irvine), known in this publication for his work on state/local fiscal reform, is one exception. MIR is pleased to present this interview with Assemblyman Campbell, in which he articulates the case for the recall, and the prospects for meaningful reform after October 7th.

John Campbell

John, how would you describe to your constituents, a month after final passage of the state budget, the fiscal condition of the California state government?

The state of our fiscal affairs is very poor. It is really not significantly better than it was prior to the signing of the most recent budget. Our credit rating, the worst of all 50 states, actually got worse as a result of the most recent budget. In fact, the ability of the state to sell debt again later this year is significantly in question. Some of the debt that was sold earlier this year required what is effectively a guarantee from Merrill Lynch, Goldman Sachs and other investment banking houses in order to get sold in the market-those guarantees are unlikely to repeat. So the state is in a position where it's paying a lot for its money and is unlikely to be able to borrow in the future.

The budget for next year has a stated deficit of $8 billion, but will be larger than that absent an economic recovery. There are a number of things in the budget that are unlikely to come to pass-projected savings that are unlikely to occur and debt instruments that are currently under legal challenge and will not be able to be issued. So if I had to guess, I would say that we're looking at a budget deficit next year more in the neighborhood of $12-15 billion. So, the state's fiscal condition is still very much in peril, and there will need to be additional significant actions in order for the state to get out of this mess.

Are any of the 135 candidates for Governor proposing any solutions that offer you hope that we can right our fiscal ship in the near future? What do you expect the survivor of the recall election, whenever held, to propose, whether it be a Republican or Democrat?

Well, Cruz Bustamante is saying that he's going to raise taxes by $8-10 billion, which I think is exactly the wrong solution. This would need Republican votes to actually happen, which he won't get. And, Bustamante has indicated no willingness whatsoever to reduce spending, which is what will have to occur at some point if we are ever going to get out of this budget mess. Whereas Mr. Schwarzenegger, and Mr. McClintock for that matter, have both indicated their intention to reduce spending and not to raise taxes. We've felt all along that this is something that will have to be done before an eventual solving of this problem. Last year's budget actually raised spending by about $1.5 billion (about 2%) in the midst of the greatest fiscal crisis the state has ever seen. That indicates that there still is not spending discipline based on the current make-up of the Legislature and the current governor.

Before turning to your past bipartisan efforts re structural reform of our local finance, what do you expect a Governor McClintock or Schwarzenegger, or whomever will do with a Democratic Legislature post election day that couldn't be done by Governor Davis and the Democratic Legislature to date?

The governor actually drives the budget process. The governor makes a budget proposal in January every year, revises and updates it in May, and the Legislature works off of the governor's proposed budget. So, the governor can drive the process. Just like a Democratic governor needs to pick up Republican votes to pass the budget, a Republican governor would need to pick up Democratic votes to pass the budget. So that certainly will not be easy. But, that's where somebody like Arnold Schwarzenegger, who would have a very unique bully pulpit just because of who he is, has the opportunity to marshal public opinion to get behind whatever his proposals might be. The other thing is that the governor has some administrative authority within the budget to make some reductions, which a governor can do without the Legislature.

Elaborate on the failure of the bipartisan effort (AB 1221) you and Assemblyman Steinberg advanced re state/local finance reform. It appears that this effort to mitigate local government's dysfunctional relationship with the state was hijacked by the final budget agreement. What went wrong? Is it fatal for future reform efforts?

Assemblyman Steinberg and I put AB 1221 together; it was intended to restructure finances for local governments. We both believe that local governments get such a large percentage of their revenue from the sales tax that it skews development towards retail and other sales tax generating projects as opposed to housing, commercial non-retail office, and industrial buildings. That effort did not get anywhere this year in the Legislature largely because local governments, and with good reason, don't trust the Legislature and somehow were nervous that this was another way to take money from them, which was absolutely not the intent. In fact, over time it would have given more money to local governments. But, they were understandably nervous and afraid to deal with any change, even if it appeared to be something that some of them acknowledged was a good policy.

What wound up in the budget, although it has the appearance of being the same thing that Steinberg and I were working on, is actually a textbook example of form over substance. It swaps sales tax for property tax at the local level, but it's computed so that in absolutely every case every local government gets precisely the same amount of money they would have had if the swap had not taken place. Then, in five years, the swap disappears and goes back to where it was. This was done at request of the governor's office as something they felt they needed to include to sell some of the bond issues. So, the issue that Assemblyman Steinberg and I were tackling is still completely unresolved and still something that we'll be looking at again next year.

What, if any, are the lessons learned re the difficulty of devoling power and funding from the state back to local government? What are the prospects for such efforts ever being successful?

The prospects will get better eventually. There did seem to be a recognition that the way local governments are funded today is not sustainable. First, whenever the state government sneezes, local governments catch cold. Because of the way the funding is now, one of the first places the state government goes when they have a budget crisis is to local governments, who may have budgeted their finances very well. And suddenly they have to carry the burden of the state's problems, even if they have been fiscally responsible. That's something that local governments want to get out from under desperately. Local government ought to have directed and viable sources of revenue that the state can't steal on a whim.


The other issue relative to local government funding is its imbalance. Originally, the property tax was a local tax intended to fund local governments. Assemblyman Steinberg and I believe that the property tax is the most logical place for local government to get their revenue, because an awful lot of their costs are property driven. Local government also can control revenue from property taxes as they approve or reject developments or redevelopment. Local government has more control over property tax than they do over the car tax, which is one of the sources of revenue they have now. As often happens in Sacramento, an issue gets brought up and it doesn't go through the first year. And, it may not even go through the second year. But, once the issue gets in play and people start talking about it, eventually some action comes on that issue. That's where we are with local governments. The relationship between local and state government finance is in play, it's on the table, and there is widespread recognition that there are problems with it.

Theory was that it takes more than one or two legislative sessions for successful reform efforts to percolate. However, in a term-limited world, six years in the Assembly, is this still realistic? Can the legislature as a body still come to grips over time with a new idea, become familiar with the issues, and eventually embrace it politically? Or must reform efforts start again every 2, 4, 6 years because of the limits on member's terms?

There's no question that term limits interfere with that kind of process. Roughly 35-40% of the Assembly turns over every two years. Of course, Assemblyman Steinberg will be termed out in 2004, and I'm actually leaving office in 2004 and running for State Senate. So if we don't get our legislation through in 2004, I'll be finding new partners to work with.

Given your own experience in the Legislature, should the voters be urged to lengthen members' terms?

I have been a supporter of term limits and I voted for the current term-limits measure, which was Proposition 140. I would only support extending the limits if the extension did not apply to current legislators. In other words, I would want to make it clear that I would not vote for a term-limit extension in order to extend my own career. I should live with the term limits under which I was first elected.

Let's go back to the recall. As minority leader of your party, and with experience in governing as well as a background in the private sector, wouldn't you agree that what the private sector most needs from government is predictability and stability? Isn't the recall, and the precedent it might set, the antithesis of stable governance, and thus essentially bad for California's business environment?

I think the recall is a positive because I'm not sure how the business and economic climate here could be more unstable and more uncertain than it was before the recall. The state has these giant fiscal problems, and legislation that kills jobs, hurts the economy, and convinces more and more businesses either to shut down, to leave the state, or to grow elsewhere is being passed and signed into law literally on a daily basis. Certainly, what I have heard from multiple businesses that I come in contact with is that the status quo of this last year has been absolutely unacceptable. In fact, California is so large a state that if the state budget and economic woes don't get better soon, it could actually impact the national recovery.

This recall vote has the opportunity to get us on a new track and to spur some confidence that the problem will be grappled with instead of being pushed off a year, pushed off a year, pushed off a year. A lot of the solution is to raise additional revenues by reforming the business climate so that people will hire more employees and make more money and pay more taxes. Our bonds were selling at nearly a 100-basis point premium prior to the final filing date for the recall because of the state's poor credit rating. After the filing for the recall closed, when Mr. Schwarzenegger entered the race, that premium actually dropped from about 100-basis points down to around 50-to-60-basis points. So, in the secondary markets, California's bond pricing actually improved because of the recall. The markets see the recall as an opportunity to at least stop the passage of additional anti-business legislation in Sacramento.

Lastly, like Prop 13, California's resort to a recall to alter public policy is now apparently spreading to other states. For example, Nevada's Republican governor is being threatened with recall from his right. Is a political pattern emerging? Is recall likely to be resorted to more often? Should recall be the political weapon of choice in the 46 states with budget deficits?

I believe there are 17 states that have some kind of recall process. Of course, others may want to look at it now. It's a matter of having confidence in the electorate to handle this properly or not. I was one of the co-chairs of the recall effort, and I had the ability to see polling and listen to focus groups on the recall. The people I listened to and saw understand the distinction that you should not recall someone because you disagree with them. You should recall them on the basis of competence or incompetence, trustworthiness, and corruption. Regardless of their political bent, be they Democrats or Republicans, people understood the distinction. The recall moved forward on Governor Davis not because people disagreed with him, but because they felt he was incompetent and untrustworthy and that his votes were for sale. That's what they believed and that's why they did it. I don't think Californians would have recalled a governor because they disagreed with him. Since the recall was put into the constitution in 1911, there have been recall attempts on every governor save one-and none has ever gotten anywhere near this close. I don't think that's just a coincidence.


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