May 4, 2004 - From the November, 2003 issue

Hertzberg Opines On Schwarzenegger's Bi-Partisan Transition & Governorship

One of the hallmarks of Governor Schwarzenegger's campaign was his promise to reach out beyond party lines and work with all members of the Legislature to aggressively nudge the state out of fiscal purgatory. The first significant act signifying Schwarzenegger's commitment to bipartisan leadership was the selection of a diverse and representative transition team. MIR is pleased to present this interview with former California Assembly Speaker and current partner at Mayer Brown Rowe & Maw, Robert Hertzberg, in which he addresses the transition of power in Sacramento and the potential for California to realize significant structural reform of its financial management and governance systems.

Robert Hertzberg

Bob, Governor-elect Schwarzenegger pledged during his campaign to open the books in Sacramento to find creative ways to save money and reduce the need for revenue enhancing measures. He also pledged to reach out to members of both parties. As part of the transition team, can you provide our readers with some insight into the new governor's thought process and his support for bi-partisanship?

In everything that I've seen, Schwarzenegger is taking a completely nonpartisan approach. All he's concerned with is bringing in the best and the brightest, regardless of whether they have an ‘R' or a "D' in front of their name. He is clearly taking his administration in a nonpartisan direction, which is great for California.

With respect to finding waste in government, there are a lot of things that you can do that does not affect people's quality of life. You can re-examine how processes, programs and procurement operate, down to cell phone policies and some of the mundane operating policies. When you have a government this big, those types of initiatives add up to pretty significant money-not enough money to close the budget gap, but the effort would signify an important gesture that inspires confidence in people that their government is prudent with their tax dollars.

In an interview with Asm. Darrell Steinberg in last month's Metro Investment Report, he said, "what's fundamentally wrong with [the state's fiscal system] is that there's a huge disconnect between the state collecting taxes and revenue and those who provide the services." Your thoughts and reaction?

Mr. Steinberg is exactly correct-we're kindred spirits on this issue. In the post-Prop. 13 world, local governments' revenue sources have not grown as rapidly as the state. Hence, the state is performing a lot of functions that used to be performed by local government. As a result, we've lost our way. We've lost a sense of what the proper role of state government is and what the proper role of local government is. Local governments have to sit there and write two or three different budgets, guessing what kind of money they're going to get from the state. It's irrational, it's dysfunctional, and it has to be changed. This is the core of the problem we face.

The solution is that we have to give back to local governments the revenues they've had throughout most of California's history-property taxes. The sales tax, which creates all of the wrong incentives, needs to go back to the state. We need to right-size the state government and realign the proper functions for local government.

Treasurer Angelides has warned the governor-elect of the risk in relying on bonds to get the state out of this crisis. What's your interpretation of the warning from Treasurer Angelides? Is it realistic for the governor-elect to believe that the budget can be balanced without any tax increases?

There is a perception that California, because of worker's comp and a whole list of other issues, is not business friendly. At the core of what needs to be done, we have to bring back that famous four-letter word: J-O-B-S. We have to make sure people who are threatening to leave stay in the state; we have to make sure that people are making decisions to expand their business here in California; and, we have to make sure that companies that want to move to the United States look to California as a viable option.

Even though I am a strong partisan Democrat, to raise taxes, given the circumstances, just sends the wrong kind of message. We're going to have to deal with the legal challenges, as the treasurer correctly notes, and figure out a way to refinance this debt. You just can't shut down the government. You just can't take this big amount of money and say, "we're going to shut down services to people for foster care or for food stamps, or whatever else it might be, and then start the program up again in two years." A temporary disruption of service is not an option. The only way to make it through is with some level of appropriate borrowing.

How has the budget crisis and possible state responses affected counties, especially safety net programs? What options exist to preclude the state from having local governments bear the burden of fiscal mismanagement in the Capitol?

My concern is that what happened a dozen years ago will happen again-cuts in the state budget will be borne on the backs of counties, which have the responsibility to provide for the poor and underserved populations. From a local government point of view, the debate over the vehicle license fee has raised the fear that the state will cut the VLF and backfill, leaving local governments shorthanded. The answer to this, of course, is to give local property taxes back to local government so they have both the responsibility and the resources to manage their communities. In addition we should eliminate the need to come to the state for approval of local option sales taxes-currently, local governments can increase their sales taxes by one percent above the statewide base with a 2/3 vote, but they have to come to Sacramento and have the Legislature give them the authority to place the question on a ballot. Local governments should have the ability to place a tax measure on the ballot for local voters to decide.

In my experience in government, when you go through that lobbying book, there are more organizations lobbying on behalf of local governments and special districts and counties than there are representing the oil companies and the tobacco companies and all of the other business interests. Local government has become the biggest single lobbying force in the state, and it's completely across party lines. We just have to shift that power back to the local government where the services can be provided.

In the Darrell Steinberg interview, he repeatedly returned to his bi-partisan proposal to have state and locals swap property tax for sales tax. What options exist for righting the ship of the state with respect to the way we collect taxes and the way we share those taxes across government jurisdictions?


It helps to remember that when you're a consumer of government services, you don't care whether it's the state government or the federal government or special district or the city government providing the services. You look at your government as this monolithic entity that's supposed to provide services. The big problem we have is that government doesn't see itself the same way. We think of our own little perks-that if I'm a federal official, I get to control these dollars; or, if I'm a state official I get to control these dollars. With that system of management comes strings and conditions and reports and accountability and all sorts of things. The mistake is that we all tend to do that and control our dollars.

To accomplish structural reform, we have to sit back and look fundamentally at what are the services and who has control of what dollars. Basically, we need to redo the financial plumbing so that there's no more interference with the property tax revenues by the state. Local governments need to have confidence in their revenue streams so they can plan, so they can build, so they can finance, and so they can budget. Right now, they can't do any of those things because they are held at the whim of the state. It's created this horrible dysfunctional relationship, which the people should not have to deal with, but which affects their lives on a day to day basis.

Is there a political climate in the state capital to support the structural reforms you describe?

There's a pretty significant movement in the capital. Elected officials, appropriately so, have gotten the message that people are just sick and tired and fed up with puke politics. People are tired of hearing "I'm on the red team, you're on the green team, and I'm going to spend all my time tripping you up so that you can look bad and I can gain power" and visa versa. In the meantime, it is hurting the people because every time somebody on the other team gets tripped up, a program that affects someone's life is harmed. Legislators understand this. There's some energy as it relates to the new governor to try to come up with some fresh ideas and I'm optimistic about these first six months going into the next legislative session.

On the evening of May 21, 1907 a group of 15 reform-minded young men, journalists, and lawyers met together at Levy's Café in downtown Los Angeles to talk about advancing reforms which would help citizens take back government from the special interests then in the capital. Is there a parallel to Levy's Cafe 100 years later? You know well how initiatives have shaped California governance-you created a Speaker's Commission to look at initiative reform. But isn't the initiative process the best means to achieve structural reforms?

First of all, I love the story of Levy's café. I love the fact that when there was no hope in sight and the railroads controlled all the power in Sacramento, that a small group of people could get together and change the power structure in California. Today, there's an exact parallel in my judgement because there is a similar funnel through which all the power runs, all of which occurred as a result of unintended consequences. There's also a great deal of energy out there among a lot of people who are willing to sit down at that table, be one of the fifteen reformers around that table in Levy's café today, in 2003. I see it all over California. Unfortunately, the way our constitution is currently drafted, the only way for us to make those kinds of constitutional changes is through the initiative process. There have been hundreds of initiatives passed, and thousands proposed over the years since 1910. But I think that there are legitimate needs and legitimate times when the initiative is appropriate, and this is one of them. We need to make changes with respect to the ability of the state to borrow and for us to restructure the flow of funds so government works better.

Let's turn to Governor Schwarzenegger's new administration. The bipartisan transition team, of which you are a member, has input into who the cabinet and discretionary choices for leadership in the new governor's administration will be. What do you expect when this full panoply of appointments is finally announced?

I expect to see new faces that haven't served in government. I expect to see very smart and capable people. I expect to see Democrats and Republicans, and a very fresh kind approach to governing, moving away from politics as usual. Everything that I have seen so far is supportive of that.

In your opinion, what will be the working relationship between the Legislature and the new governor?

I think it'll be good. The new governor has very strong people skills and he will use them. He'll pick up the phone and he'll call Senator Burton and he'll call Speaker Wesson and he will deal with them on a very personal level. Those are all good signs-the foundation for a positive relationship.

Bob, many people in the state and in Los Angeles still believe-seeing you everywhere addressing and offering leadership on a host of public policy challenges confronting state and local government-that you're still in public office. Are you?

I feel like I'm still on office. I‘ve been engaged in everything from universal preschool with Nancy Riordan and hundreds of other people, to budget reform, to water issues, to the state budget, to the transition team. It's really been just a marvelous time since leaving government. I've joined many committee boards, through which I'm very involved in the civic debate. It's a nice position to be in and it's been a lot of fun.


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