June 29, 2004 - From the June, 2004 issue

Former State Finance Director Steve Peace Sheds Light on State/Local Fiscal Dysfunctionality

In the April issue of MIR, Steve Peace began to address the dysfunctional state-local fiscal relationship and the budget challenge in front of Governor Schwarzenegger. MIR is pleased to present part two of this interview with Former State Senator, Assemblyman, and Finance Director Steve Peace, in which he continues his thoughtful discussion on the state's fiscal affairs.


Steve Peace

Steve, many who have been involved in the budget battles past, including you, have often articulated that local government, without a champion in the governor's office has no chance at rebalancing the state/local arrangement. You were the governor's right arm-the finance director. If efforts at reform of our fiscal arrangement are to be successful, what ought to be the new governor's relationship with the Legislature?

I don't know that you can draw assumptions about what the relationships were in one administration versus another administration, or even within a given administration when you change participants. In the case of the Davis administration, the world was profoundly different when Tim Gage was director of finance than it was in the year that I was director of finance. I'm not saying it was better or worse, but it was fundamentally different. Every director of finance approaches the job very differently. It's just the nature of the beast.

In the current environment, it's pretty clear is that Donna Arduin's assigned role is to be Darth Vader, and she understands that and she expects to be viewed as the devil incarnate. Then, the governor, no matter what, is the good guy. That's not an uncommon circumstance. It's different for every single combination of actors.

From a local government perspective, the director of finance has an obligation to advocate for fiscal stability for the state first and foremost. Every director is going to come at that in a different way. Because I came into the position already with a great deal of participation in this whole policy debate on the state-local relationship and had already spent an awful lot of political capital preaching the need for the state and local governments and schools to arrive at a compromise, it would have been pretty difficult for me to have any credibility as the director of finance by unilaterally advocating for the state to the detriment of localities.

I thought we were making some pretty good progress in terms of reaching out to local government. There were a few moments early in the process where I didn't do myself any favors by speaking first and thinking later. When I referred to the VLF as being something that local government was dependent upon, what I was trying to say is that it was a pact that the public would have never sustained-that it was doomed. The only thing we didn't know was how it was going to go away. The one thing you did know was that it was going to go away. And it was in local government's interest to start figuring out how they were going to deal in a world without that revenue.

For all of us in and around government, there is often a tendency to dramatically overestimate the degree to which the public agrees with us, no matter who we are. It's interesting to watch people serve in local government, move on to the Legislature and watch their views change as they move to a different venue. But the one thing that they have in common with the public is that they are predisposed to distrust all of us. So, that's why I have argued, at the end of the day, that it's nearly impossible for any segment of the governing bodies to make their case to the public unless everybody can get on the same page.

What kind of marks would you give the Schwarzenegger administration so far?

I think they're doing a good job to this point. They're dealing with the low hanging fruit, but they're doing what needs to be done and they're moving relatively expeditiously. There certainly are some things all of us see that we would do differently. But, they've got their checklist of things that they told the public they're going to do, and they're making sure that they hit them all. And, that's important to establishing credibility with the public. As they move to the more difficult decisions, that credibility is going to be political capital, and it will be very important for the governor to have that in his back pocket.

Let's talk about all of the initiatives that are likely to be on the ballot in November and how they complicate or enhance the ability of our representatives in the Capitol to steer this ship of state to a comfortable port.

The tragedy is, the situation has kind of degenerated into a circumstance in which the Legislature really just doesn't do substantive things. They kind of specialize in the trivial, because the big things are kind of hard to get your hands around. There are lots of reasons for that. The lack of institutional memory associated with term limits is a critical component of it. You could see it in the energy crisis. The Legislature was told, basically by the independent energy producers and the media, that the problem was caused in California, when in fact the problem was caused in Washington. A mature Legislature, with more than six people who had been there at the time the work product was passed would have had enough institutional memory to fight back. This Legislature couldn't.

That whole experience has had a really debilitating effect on the Legislature. It didn't respond, couldn't respond, didn't understand, flailed around in all the wrong places, and ended up being afraid of going after tough issues. So, the governor comes in, and people talk about needing to deal with workers' compensation, and you have to wave the bloody rag of initiative in there to get the Legislature to move, and everybody knows that. So now, when there is a substantive policy issue to address, they don't even think about going to the Legislature until they've developed their initiative strategy. So, at a minimum, the initiative influences the Legislature in the sense that it is a threat.

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So, what's the cost of government?

Representative democracy. You have a work product that ultimately is driven more by special interest groups than the tension of putting people into public hearings and negotiating policy through careful debate over a long period of time. The legislative process forces all of the disparate interests of society and of the economy to find ways to compromise their economic interest. You don't have that forum in an initiative process. What is presented is who paid for the initiative to be written. There certainly have been and always will be perversions of the representative process, but I think they pale by comparison to what can and is done on a regular basis by initiative.

Look at the permanent heritage we now deal with on gambling as a consequence of the initiative pushed by the Indians. All that began, interestingly enough, not with their initiative, but with the initiative that created the lottery, with the fiction that it was going to be funding schools. If you don't have the lottery, you don't have Dan Lungren's opinion as attorney general saying that the lottery can run keno style games. If you don't have this decision, you don't have the window for the Indians to step in and start doing casino style gambling under the federal law. So, it's a series of dominos that all trace themselves back to the company that ultimately ran the California Lottery, which ran the initiative to get the lottery passed in the first place. You can go back and trace just about everything we deal with and find its initiative roots.

Let's tie two themes together. You've often commented that politics is a subset of culture, and your career before politics and along with politics had to deal with film-making. Talk a little bit about how constraining the culture is on the political options we californians have going forward.

The media-driven culture we live in-and I mean media both in the news sense as well as in the entertainment sense-is more and more driven by a culture of extremism. We revere the icons of the right and the left, and we diminish the contributions of the pragmatists who attempt to solve problems. There's a certain irony in how we go around the world and bemoan the lack of moderates in the Middle East and in other areas where there are hot beds of confrontation, while here at home allow a culture to develop, both in the liberal world as well as in the conservative world, in which we diminish moderates as people who allegedly have no values. That is at the root of the stumbling that is occurring in American democracy in general.

As a culture, we have accepted this idea that extreme views and extreme conduct and extreme activity is a good thing. It has happened even in fad diets, where we tell that if you do just this one thing, and you do it over and over again, you'll solve all your dieting problems. And yet, hundreds of thousands of years of human culture, religious teachings, ethical works, sectarian and non-sectarian, all find their common ground on principles of moderation and the idea that you have to maintain some balance-balance in your life, balance in your relationships, balance in your economy, balance in your portfolio, balance in your diet, and balance in your politics.

Somehow, we've extracted the capital from the politicians who would choose to practice a politics of balance. We study history, we look back at the practitioners of the past and we see the people who were the glue makers and who resolved conflicts. We recognize through history the value of those who facilitate and broker pragmatic change, and we certainly recognize it when we look overseas. But we've lost track of it at home.

We can't end this interview without our readers learning what you're doing now and plan to do, now that you've weaned yourself from from government service, for the moment at least.

I'm working on trying to put together a couple of shows and I'm doing some consulting. And, as I announced earlier this year, we've kicked off California Today, which is a think tank focused on national issues and their impact on California. I'm working on developing the agenda for California Today as well.

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