May 5, 2004 - From the February, 2003 issue

Sen. Torlakson Links Balancing State Budget With Fiscal Reform

As the state Legislature settles in for the new year, the budget crisis has been the focus of everyone's attention-and rightfully so. Whether it's the size of the deficit or the specific programs that will suffer significant cuts, this year's budget cycle promises to be one of the worst in California's history. Of course, crisis also begets opportunity. If there was ever a time to look at structural reform to the state budget, now is the time. MIR is pleased to present this interview with state Senator Tom Torlakson in which he addresses the opportunities for reform in this budget environment, the need to continue to focus the state's attention on its long-term growth, and the challenge of creating the proper legislative incentives in front of cities to promote smart growth development.

Sen. Tom Torlakson

Tom, as a seasoned legislator who for many years has been grappling in the state capitol with both state/local fiscal issues, mobility and housing affordability, how have you approached the current budget deficits?

We have to address balancing the budget and the challenge of doing structural reform at the same time. If we don't do something to keep us from going through the same pain and chaos and dysfunction in the future, we will have lost an important opportunity and failed to do our job. It's our responsibility to find some long-term solutions which may include lowering the threshold of budget approval to a 50 percent majority like almost all the other states in the country, a two year budget cycle, or swapping sales tax revenues from the local level to put in to the state accounts and giving income tax or more property tax revenues back to local government. Structural reform of some kind is critical. Because some of it won't get done in the Legislature, I am helping to look at initiatives and talking to coalitions of groups that are willing to put choices in front of the voters.

While we deal with the fiscal crisis, we shouldn't stop addressing the challenges posed by growth pressures in California-the lack of infrastructure, the lack of housing, the lack of basic transportation infrastructure-to keep the economy expanding. Housing and transportation must be addressed together in an integrated way or we're not going to have the economy to sustain a growing budget or our growing and demographically fluid population.

The first five months of the year is typically when the legislative session members introduce bills that address serious policy issues. What law-making are you focusing on and what particular legislation are you collaboratively advancing?

On the transportation infrastructure side, I have Senate Constitutional Amendment Two (SCA 2) which would lower the local transportation sales and special tax voter approval requirement to 50-percent, instead of the current two-thirds requirement. There are many counties that have never passed a half-cent sales tax and will never pass one at two-thirds, but can pass it at 50-percent , or 55-percent.

Also, we're doing polling and research to determine whether that should be a pure transportation measure or whether it should be integrated with housing and infrastructure to capture the public's imagination. I think we should integrate urban infill infrastructure needs, to remove hurdles for infill housing and transit-oriented development. If we just throw more money at new lanes and trains and don't address the land-use patterns, we just move the congestion to another spot ten miles down the road.

The other big effort is to put forward a superbond and re-establish a state-local partnership on transportation funding. The state used to have a state-local partnership fund. It makes more and more sense to try to find ways to form fiscal partnerships with cities and counties in delivering not only transportation, but housing in California-it's not getting done in a coordinated way or an effective way right now. So, it would make sense to have a large portion of the superbond be transportation oriented with a 50/50 match to local counties, cities and regional transportation agencies that have local match money. Then, some portion of it also should be for housing.

Christine Kehoe's been a leader on infrastructure issues and addressing the difficulty local governments face in doing urban revitalization. Even with redevelopment tools available, such as tax-increment financing, it's just not enough. She will introduce a measure granting access to the state superbond monies for integrated planning, incorporating transportation and land-use. This is not just another grant program where you grab money in a hodge-podge manner for individual projects-there's some kind of integrated planning required at the local and regional level that this would tie into.

It's been a while since the gas tax has been adjusted. Being a major revenue source for transportation projects, is it appropriate to revisit the state gas tax?

Normally, it's been about every eight years that the Legislature meets with the voters regarding the gas tax. Today, it's been 13 years since we've adjusted the gas tax. We've lost 30-percent of the buying power of gas tax revenues. What is 18 cents of state gas tax revenue today was also 18 cents back in 1990-we've lost 30-percent of the buying power. I'm proposing that we index the gas tax to CPI and retroactively go back, do the catch up so that we bring what was 18 cents in 1990 up to an equivalent value in today's dollars, which would be 24 cents. This increase would be practically unnoticeable at the pump but it would bring in a billion dollars per year to transportation infrastructure funding. That is another measure we'll be bringing forward.

What, if anything, is the state's attitude regarding the restoration of the vehicle license fee to the coffers of local government?

We should fulfill the promise made to cities and counties to have the vehicle license fees, sometimes called the car tax, restored to its previous level. It has been offset by four billion dollars of general fund money during the good times, and it was meant to be triggered off and on dependent on the surpluses and health of the budget. Well, certainly we don't have a robust budget, we have a budget that's tanked. We hope that Gov. Davis will allow his administrators to pull the trigger and allow the restoration of the VLF to the full amount.

By the way, the tax obligation of car owners and truck owners in California never did change-it's always been at two-percent. If you look at your DMV bill, it says what your tax obligation is, and then it shows that the general fund of the state has been backfilling two-thirds of that. So there's a lot of rhetoric right now about how we're proposing to triple the car tax, but we're really removing what was a surplus of dollars to basically give some relief to car owners.

With the restoration of the VLF, I believe that the money should be used to provide an incentive for cities to have valid housing elements. If you obey the state law, you get your car tax dollars. If you don't, a percentage of that city's money would go into a pot to be distributed to the regions and cities that are meeting their housing element obligations.

Your former colleague, Senator Steve Peace, is now the governor's budget director. There were many hearings while he was in the state senate on state/local fiscal reform-you've spent considerable time and energy on that issue as well. Fiscal reform certainly didn't capture people's attention in the good times, will it capture anybody's attention in the bad times?

It captures people's attention this way: the Legislature has gone to extraordinary lengths to signal that it supports the restoration of the car tax. Many of us believe it's also time for the cities to step up and be partners with the state, recognizing that we're going to extraordinary means to provide $4 billion to cities and counties. Cities have not been, in my view, partners in delivering the housing the state needs.

But, Tom, you come from local government. You would be the first to recognize their argument that housing doesn't pay for itself under the current fiscal arrangements in California. So, you're asking them to act, regardless of NIMBYism, in a way that is not fiscally responsible given the fiscal demands of police and fire.

That's true in some cases-many of the squandered opportunities have been responses to NIMBYism. Many cities have found ways around meeting their housing responsibilities. We could have a system where we take some portion of property tax revenues-$400 million a year, $600 million a year, or take it all if we could find the room in the budget-and send it back to cities and counties based on housing production. And you can have an incentive system for, say, a twenty year period where cities get extra money based on the type of housing it builds-say you get $2,500 a unit if it's a low-income unit, you get $2,000 a unit if it's a moderate-income unit, you get $3,000 a unit if it's part of a transit village.

Is there much political receptivity to Senator Peace's assertion that local governments are too addicted to sales taxes and the VLF? Is the state's reliance on personal income tax too volatile? And, is the cities' reliance on sales tax is too unstable?



Then, is a structural change at the state level required?


By virtue of your one-word answers, are you implying that this is not the way the Legislature is going to attack the challenge?

Based on the diversity of the Legislature and that the number of winners and losers in any revenue reshuffling is so huge, I think we're going to be taking it more in incremental steps.

When might we hear from Senator Peace regarding the governor's views on VLF return?

I hope soon. I did talk to him about the VLF, and by the way the VLF, I think, there's actually an interesting nexus. The VLF is a growing tax revenue. If you have more homes, you have more cars. In a way, there is a nexus different than the sales tax nexus that's almost a draw with housing. It's contradicted somewhat when you talk about transit-oriented development because you don't necessarily want a lot of cars around transit-oriented development. But, by and large, if cities build more housing they're going to have more VLF, and so that there is some nexus there. I do have a bill that would ban all subsidies to big boxes, like the Costcos and Wal-Mart, and the car dealerships.

Didn't a similar bill once pass the Legislature only to be vetoed by the governor? What's different this time around?

Actually, we never got it to the governor's desk because there was so much opposition to it. AB178, which did pass, allowed for negotiations to occur, and no city could steal another city's big box retailer without paying for 10 years the lost revenue to that city. That has slowed down this obsession and war over who's getting the big boxes. I still think that some kind of swap of the sales tax or some other significant portion of state money makes sense. That could be either a property tax swap, or even an income tax swap, which is more difficult to define but could give a portion of income tax to a city based upon its overall job profile. Then, instead of going after Costcos and retail sales, you would see cities spending more time looking at long-term high-paying jobs and incentivizing business to come to their towns and grow their business there.

Share with our readers why it's so hard to build a political majority for such structural change of our state/local fiscal arrangements. You have been engaged on this issue for a decade or more, but politically it doesn't seem to come together. Why?

Well, we have such a diverse state-478 cities, 58 counties, and a whole bunch of elected mayors and officials that like things the way they are as long as it's not too harmful to their own community. Increasingly, city managers and mayors are realizing that they're victims to the extortion that's goes on with these big boxes and auto dealers over subsidies from the city treasury that could go to public safety and other important city services. The challenge again is we have such a diverse state and there's such inertia to the current systems.

Another challenge is that many cities have played by the rules for the last 10-15 years. They took all of the extra money they had in their budgets and they set up redevelopment agencies, put general fund money in it, added community development block grant money, and they built retail malls to support their future. Many of those cities are actually moderate-income-to-low-to-moderate-income cities and they have based their future on sales tax. If you suddenly took away the prize that they earned under the current set of rules, that is unfair. Any structural changes will have to be phased in so that you're not punishing communities that have played by the rules.

There are a number of commentators who have asserted that in the absence of crossover voting, both party caucuses have edged to the extremes within their party-there appears to be very little collaboration. Legislators seem to be hunkered down to protect, in the absence of a consensus, what they have. Isn't that a bad omen?

That's a bad sign and certainly this crisis challenges us to not hunker down-we have to open up doors and open up conversations. You know, a number of us are doing that to try to understand our respective views, party to party, and to understand that we can stand there at gridlock for a long time. But, that is to the detriment of both parties and to the credibility of the Legislature. And I'm glad to see the governor has convened the Big Five again. Legislative channels are opening up more and more to having serious conversations about how to meet this challenge despite our divergent views on taxes and how to do the cuts.

In this same issue we have an interview with Congressman Earl Blumenauer who's coming out to Los Angeles for a Mobility-21 conference. The re-authorization of the transportation bill is coming up in Congress. With your long concern about transportation and smart growth, how will California interface with the refunding agenda in Washington?

Well, interesting you mention that, Senator Perata is looking at getting a delegation to go back and actually engage with the Congressional representatives on this. I'll be talking to Ellen Tauscher, who has been in a key position in the transportation committee in Congress, about the best ways that we can accomplish that. The California legislative delegation in Sacramento needs to talk to the California Legislative delegation in Washington and make sure we are helping shape the agenda.

There's probably some core consensus among the legislators about what we need and the administration, and I think there may be some divergence among the Congressional delegation about how to be responsive to that or not, but we'll find out. One of the challenges of the next few months is to see if we can get on the same page.


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