BEVERLY HILLS, Calif. — While the “California Dream” was evoked frequently, panelists at this week’s Milken Institute State of the State Conference were more apt to talk about saving the dream than celebrating it.
The annual event brings together high-profile panelists to discuss the issues facing California. This Tuesday, it was hard to escape talk of the recession, from its impact on the real estate market to the dire condition of the state’s finances.
An entire panel was devoted to California’s budget process, which Treasurer Bill Lockyer described simply as “a train wreck,” adding, “and it’s going to get worse.”
Former Assembly Speaker Robert Hertzberg upped the ante with “high-speed train wreck,” before launching into a sales pitch for the ideas the organization he co-chairs, California Forward, has put forward to reform the budget process, which regularly features missed deadlines and negotiations running into weeks or months as lawmakers try to cobble together the two-thirds supermajorities required to enact a spending plan.
The organization, launched by major mainstream foundations with leadership from both political parties, developed a reform plan that calls for budgets to pass with majority votes — while keeping two-thirds requirements for tax hikes — a two-year budget, performance-based budgets, and a strong rainy-day reserve.
“What you need to do is re-engineer the state,” Hertzberg said. “The real problem is that states were never intended to be the size of the Eastern Seaboard. It manifests itself in the Politburo-style of what happens in Sacramento, where only a handful of people are making the decisions.”
California finance director Mike Genest said it would be “nice” to improve the budget process, but said the focus on process tends to obscure the real problem, which is that the state has a long-term, built-in structural deficit of about $10 billion to $15 billion annually.
“We either have to reduce spending or increase taxes,” he said. “In the end, the arithmetic always wins.”
That’s a near-term issue. The state has even thornier long-term budget issues revolving around its obligations to retired employees, according to David Crane, an adviser on jobs and growth to Gov. Arnold Schwarzenegger, who spoke on another panel that focused on retaining jobs and businesses.
“To put it into perspective, our unfunded liability for pension and health care obligations is on the order of four to five times the size of our general obligation bonds,” he said.
“When we start paying off properly these pension obligations — and we will — it’s going to crowd out other discretionary spending.”
Crane did not detail the math behind his estimate. As of Oct. 1, California had $58.5 billion of outstanding GOs.
In February, the state controller’s office reported an actuarial unfunded liability of $48.2 billion for retired state employees’ health and dental benefits.
As of June 30, 2008, the unfunded actuarial liability for state employees in the California Public Employees’ Retirement System was $14.9 billion, before a 23.4% decline in the market value of CalPERS’ investments over the next year.
And that creates a stark choice for the future, Crane said.
“Either we’re going to be a state that values education and infrastructure, or we’re going to continue to be a state that embraces welfare and incarceration,” he said.
Such uneasiness about the future has provided momentum to California Forward and its reform proposals — which it expects to put before the voters in 2010 — as well as a separate effort to convene a new constitutional convention for the state, an idea that had few professed fans at the Milken event.
“It’s a well-intended, very bad idea,” former Gov. Pete Wilson said during the budget panel. “That is Pandora’s box.”
Reviews were more mixed for a separate reform proposal that is due to get an airing before the end of the year in the Legislature — proposals from a blue-ribbon commission to rewrite the tax code.
The so-called Parsky Commission, named after chair Gerald Parsky, charged with finding ways to reduce the state’s revenue volatility, recommended lowering and flattening the state’s income tax rates while replacing sales and corporation taxes with a quasi-value added tax on net business receipts.
Only nine of the 14 commissioners signed off on the commission’s final recommendations, though the Democratic Hertzberg said he’s a huge fan of Parsky, a Republican.
Though the details need to be fleshed out, Hertzberg said he agreed with the approach of reconstructing the state’s tax system rather than tinkering with it. “Go big or go home,” he said.
But Lockyer said the proposed net receipts tax, for which there are no exact parallels, was a risky approach. And Controller John Chiang, another budget panelist, said the focus on volatility was wrongheaded.
“We ought to have a rainy-day account,” he said. “If we had a little fiscal discipline, we wouldn’t really have to get to flattening the tax system.”
The state’s obvious general fund budget limits will force it to be more willing to look at new ways of financing infrastructure, members of another panel said.
The state has traditionally relied on municipal bonds to finance infrastructure, but that won’t be enough in the future, said former Gov. Gray Davis.
“We have to upgrade our infrastructure in a very serious way, and that cannot be done just with municipal bonds,” Davis said. “You cannot get there from here with municipal bonds. You have to have a place for the private sector and infrastructure funds.”
Dale Bonner, secretary of the state Business, Transportation and Housing Agency, said the Schwarzenegger administration is committed to adding private financing into California’s transportation infrastructure toolkit.
“We’re sitting on tremendous value that I think is not being maximized,” he said. “We have all the fundamentals to make to make this probably the best [public-private partnership] market on the planet.”
