May 4, 2004 - From the August, 2003 issue

Sleeper On Oct. 7th Recall Ballot, Prop.53, Is a State Budget Infrastructure Set-Aside

While ballot measures over the past few years have secured funding for school construction, parkland, water quality, and subsidized housing, simple infrastructure investment has received little attention from voters. The California Business Roundtable hopes to change that, and have helped place Proposition 53, a constitutional amendment that would mandate an allotment of the general fund for infrastructure, on the October 7th recall ballot. Metro Investment Report is pleased to present this interview with California Business Roundtable President William Hauck in which he explains why Proposition 53 is necessary for California's sustained economic growth and how it differs from other initiatives that have sought funding from the state's general fund.


Bill Hauck

Bill, unbeknownst to many, Prop 53, a measure that would require a percentage of the state's general fund-building over eight years to as much as three-percent-to be set aside for maintaining and building public works throughout the state, will appear on the October recall ballot. What arguments support this constitutional measure and why are you a ‘yes' vote?

What's driving it is the need for California both to restore the existing facilities that we have in the state-water facilities, transportation, higher education, natural resources, and some health facilities-which have been neglected to some degree and average in age from 20 to almost 40 years. We need to rehabilitate those facilities so that we don't lose them. Secondly, what's driving this is the fact that California's population is increasing each year by almost 600,000 people. The inevitable result of that is the need for new facilities to deal with the growing population. To my knowledge, there's no forecast existent that indicates that our growth in population is going to slow down substantially over the next five-to-ten years.

Beyond that, currently there is no provision in California law for a steady source of pay-as-you go financing of these facilities. The state, except in the transportation area, relies almost exclusively on general obligation bonds. These require a 2/3 vote in the Legislature to be placed on the ballot, and then a majority vote by the people. Naturally, what gets on the ballot comes out of the political process. It's important we retain bond financing as a major source of public facilities financing, but a steadier source of pay-as-you-go financing should be added to the mixture.

Distinguish this October's Prop 53 from the Planning and Conservation League's Proposition 51 of last November, which was soundly defeated by the voters.

The mechanism is much different from the measure to which you refer. First, for half the money that would be available to the state, the Legislature and the governor would have to agree on the appropriation of the money for specific projects. So, there is no automatic dedication of funds to any project, but rather the Legislature and the governor would decide how to spend the state money. Likewise, at the local government level, city councils and boards of supervisors would be making the decisions regarding the projects that would be financed with these funds.

Prop 53 sets aside a piece of the growth in the general fund over four-percent, inflation adjusted. This means that the general fund probably will have to grow by more than six or seven-percent in order to get any money allocated to this infrastructure. How were those triggers chosen?

The numbers were chosen through a negotiated process. But, the premise underlying these numbers is that, at a time when the general fund is growing by at least six or seven-percent, there should be sufficient funds available to set aside a small portion of the general fund for infrastructure. This means that when the general fund is not growing as rapidly or not growing at all, no transfers would be made. The intention here was not to make the transfers at a time when the state was in a period of fiscal distress.

You have cities and counties, which get half the money, supporting this measure as well as construction unions and contractors, public facilities professionals and business groups. But, Prop 53 doesn't have the Congress of California Seniors, the SEIU, and the teachers and other school officials. Talk about the arguments that are being raised in opposition and your response to them.

Well, the principal argument that will be advanced against this is that it's bad budget policy to dedicate fixed percentages of the general fund to specific purposes. My response to that is that first, this measure is very sensitive to the ups and downs of the general fund. When the state's financial position is not as good as it might be, no transfers are made, and therefore, that money would be available for other programs. When the state is in decent financial shape and is growing at a rate of six or seven-percent or more per year, it should be affordable to transfer those funds. Beyond that, it's critical that we rehabilitate existing facilities, as well as provide for new facilities for a growing population. We have to make this investment. We are living off the legacy of the investments that were made by the previous generation in California. That brought us the freeway system, park system, water system, higher education systems and the natural resources system. We need to be mindful of leaving a similar legacy to our children.

Bill, again, this is a sleeper measure on the October 7 ballot. Talk about the advantages and disadvantages of Prop 53 being on the recall election ballot.

It was originally going to be on the March primary ballot, but because of the special election, the measure was moved to October 7. It's very difficult to predict how voters will respond to this. This measure certainly will not get the kind of attention that it would have gotten in March, when voters are accustomed to an election and accustomed to seeing ballot measures. I suspect that at this point most voters believe that the only thing on the ballot on October 7 will be the question of recalling the governor from office. We are in an unprecedented period here and it's very difficult to predict how things will play out. The campaign for this measure has to proceed as it would normally, make the best case it can, and hope that the voters respond positively.

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Let's segue to the larger issues raised by the recall election. The Economist magazine recently suggested that if California were a nation unto itself, the current fiscal crisis would have warranted intervention by the IMF. The Roundtable has taken a significant interest in government reform in California, as have you. What needs to be done going forward to right the state fiscally?

We need to instill in state government something that I would call "fiscal discipline." We need to do it in a way that has sufficient flexibility yet will not allow the state to get itself so far out of balance in the future. That's not fair to anyone, particularly to those people who rely on the state for a variety of services. It's not fair to students, it's not fair to people who need health related services, and many others. One way to accomplish fiscal discipline in a flexible way could be by requiring that the governor submit a balanced budget in January of each year and by requiring that that budget remain balanced until the end of the fiscal year. In addition, there ought to be a reserve of approximately three-percent of the general fund.

We also need a re-balancing process. This might be as simple as the Department of Finance informing the governor that the budget is out of balance by more than can be covered by the reserve. The governor would then be required to submit a re-balancing bill, which the Legislature would be required to act on in a timely manner. If they failed to act, all legislative business would stop, except emergency measures, until the Legislature did act on that re-balancing bill. The combination of those things would instill the fiscal discipline that's absent today, but still permit flexibility to meet the needs of the people of California.

What, if anything, do you hope to hear articulated in the way of a fiscal reform platform from the governor and/or candidates in the sixty days ?

It's going to be hard to hear very much at all with as many candidates as there are in the race and the short period of time until the election. I hope that we would all hear that California needs to fundamentally examine its political system, take stock of what's working and what is not working, and take specific steps to correct what is not working. Even if we make mistakes in that process, it would be better than continuing with the status quo. We've demonstrated pretty clearly that the status quo in the existing political system is not working.

On October 8th, what should be at the top of the recall winner's reform agenda for the state-what needs immediate attention if we are to right our ship of state?

That would be for the person who ends up in office on October 8th to decide. It would be a very difficult place to be in, because that person will be responsible for submitting and deciding on a budget for the 04-05 fiscal year in a very short period of time. In order for the budget to be submitted in January, budgetary decisions will have to be made in a month to a month-and-a-half. Beyond that, I hope that the governor, whoever that may be, will lay out an agenda for reform of California's political system that could be submitted to the Legislature. If the Legislature failed to act on the agenda, it could be submitted in a variety of forms to the voters in November of 04.

Do you, in closing this interview, feel lonely riding out our current perfect political storm; being one of so few who from long experience fully understands the systemic and fiscal challenges that California faces in the next few years?

No, I don't. Certainly we are in the middle of a political storm, but it seems to me that it provides us an opportunity to do something that voters of California clearly want done. They want the political system to work in California. I don't think voters want to destroy the political system here, they want it to work and at the moment, it's clearly not working. This has raised the visibility of that fact more than it would have otherwise, and we should be mindful of using the opportunity to make the kind of changes that we've been discussing.

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