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Steve Westly, California State Controller
Moderated by William T. Bagley, Former Member, California State Assembly (1961-74)
Answers to Questions from the Audience
Bill Bagley: If you were in complete control over deciding the state's budget between 1998 and 2003, what would you have done differently?
Steve Westly: I would've stopped growth in government spending much sooner. An awful lot of people, including myself, saw the tech bubble coming, and we saw it was going to burst. I was working at eBay at the time, and I went around the country and said, "The laws of economics have no more overturned than the laws of physics, and profitable companies will never maintain these valuations." We should have seen this coming, and we should've put the brakes on government spending far earlier than we did. What we've done now is put ourselves in an unfortunate situation – we've signed long-term contracts with public employees, other unions; it's very difficult to take these away. Our budget is now fundamentally out of balance, and the governor and the Legislature are going to have a tough time getting it back. No one is going to like the solutions they hear. It's going to be a combination of major cuts and, quite potentially, some limited tax increases.
Bagley: Other than adjusting revenues and expenditures, what are the fundamental structural changes needed for the budget and its processes – actually to the entire state government?
Westly: To get the budget back in balance, you're going to have cut spending and potentially raise revenues. But government can do a much better job of cutting waste. Before we think about raising new taxes, we need to do a better job of cutting waste and collecting some taxes already on the books. I stood up and said in Silicon Valley, as a former Silicon Valley exec: Goods and services being sold over the Internet ought to be taxed like every other part of the economy. That's what's on the books.
People get consumed with, Do we tax the rich more? Do we give tax breaks? Equally important is the issue of tax stability. Now we go through periods and cycles of huge tax peaks and troughs; we have set up our taxation system so that it looks like a roller coaster. We ought to be reevaluating the entire tax code so that we're more based on the taxes that fluctuate least wildly. If you're running a company and you come into a lean time, you can deal with it: lay off employees, pare back the marketing budget. You can't do that in government. Because you can't respond as quickly, we need to smooth out our revenue curve.
Bagley: I served in the '60s when Pat Brown was governor. His last budget was $4.6 billion. Today's general fund is $75 billion, putting capital outlay aside. Ronald Reagan, the great man who was going to cut, trim and squeeze, but in four years his budget was $10 billion – that's a 100 percent increase in four years. Prop. 13 came along and forced the state to take over massive amounts of local government debt and expenses, and that's part of the reason why the budget has grown so high.
I was in college when Earl Warren was governor. He had a $75 million rainy day fund. It costs a billion dollars today to build a bridge. In 1966, Pat Brown, with that $4.6 billion budget, had about a $400 or $500 million deficit. We in the Legislature (it was his idea, we went along with it) advanced the collection of sales taxes; we counted the July tax in June. That balanced the budget for the June fiscal year. Some of us proposed that we advance the collection of the inheritance tax. We were going to call it "Pay now and go later." Here's a hard one from the audience: Do you support changes in Prop. 13 to help solve the state's problems?
Westly: Prop. 13, passed in 1978, has been the third rail of politics, one of the most popular initiatives in the state's history. But it's also restricted basic tax revenues that have, by anybody's standard, short-changed our educational system and some of the other basic public services. There is not going to be any amending Prop. 13 in the near future because there is no political support. At some point, there will be a split-role initiative where people will say, We want to keep housing taxes or real estate taxes on our seniors at a moderated rate – and that part of Prop. 13 will not be touched, but people will review the limits set on corporate taxes and those may be amended, probably in a graduated way over time. There is an initiative on the ballot coming up next year that would repeal it almost overnight. That one is going to be tough to pass, but it's something that will continue to come up, and at some point many people will come to the same conclusion Warren Buffett has: that our current real estate taxation system is not fair, it's not consistent and it makes no sense.
Bagley: I debated Howard Jarvis in 1978 saying that Prop. 13 would simply cause home rule to become a homey homily, and all of the power would be concentrated in Sacramento. He was president of the Los Angeles County apartment owners association. That was one impetus for the passage of Prop. 13, to reduce apartment owners' taxes.
Nearly 7 million Californians lack health insurance and the governor is cutting programs that cover the poor – that's the statement in the question. How should California address this crisis?
Westly: Two points. First, many people I talk to say, My God, we're spending more money than we're taking in, and we went through these boom years – where did all the money go? I would just remind you all education test scores have been up for five consecutive years. The former governor took nearly a million Californians and got them basic health care. We've reinvested in roads; one mile in every five of California's roads is now being expanded or repaired. We've been reinvesting in our state. Now we're going to have to pull in the belt to get our budget back in balance. But the money we spent, much of it, not all, was spent wisely. Now the question is whether we have to make deep cuts. Where do you make those cuts? Many will say, Wherever you make them, don't make them in education or in health care. Fine – that's 80 percent of the budget. When you have cuts of the size we have, they're going to be made across the board. My counsel to the governor is: Do them in as balanced a way as you can, and if you get to the point where there is no more cutting without becoming cost effective, then you need to look at other alternatives – whether it's cutting waste, whether it's short-term taxes, people want to see a balanced approach.
The governor stood up in the campaign and said, I'm never going to raise taxes. Okay. I'm never going to cut education. Okay. I'm going to rescind the vehicle license fee. Okay. And people came to me and said, Is this possible? Here's the honest answer: No! The governor's painted himself into a corner, and I think he realizes how tough it is going to be now, but that's behind us. He was elected – by a substantial margin. We need to do the best we can do.
We have roughly a $78 or $80 billion general fund operating budget. We have to make roughly $12 billion in cuts to put the budget back in balance. The rub is that close to 75 percent of this budget is mandated. There are things you cannot cut. It's public education that we have set aside in Prop. 98 that requires money to go to our K-12 system. It is moneys that go to the state college and UC system. It is basic health care, much of which goes into the coffers of Sacramento and right back out immediately in the form of Medi-Cal payments. These are things that are mandated and that people are highly unlikely to get the two-thirds vote to rescind.
People say, Good God! Controller Westly, I didn't realize this, who passed these mandates? Please! Look to your left and your right – it's us. And, by the way, some fellow just got an initiative on the ballot passed last year for after-school sports programs, yet another mandate. Each and every one of them sound as good as Governor Schwarzenegger's did. When you do them year after year after year, you weave yourself into a straitjacket that makes it very tough to navigate this particular ship of state. I am sympathetic to the position the governor's in; that's why I am not here to kick him. I am here to help work with him to solve the state's financial problems.
I loved the historic perspective that former Assemblyman Bagley put: the former budget deficit $75 million – heck, I think the governor spent that much on Hummers. It's a drop in the bucket.
Bagley: But he no longer pays a high motor vehicle license fee. In 1949, when I graduated from Berkeley, we had no tuition, and the incidental fee in round figures was $60 a year. That paid for health insurance, student body card, a few other things. Tuition today is $6,000. That's a 10,000 percent increase. Inflation has gone up about 1,000 percent from 1950 until now. Ten thousand percent is not inflation, that's an abject – fancy words – abdication on the part of state government. The general fund in California used to support the University of California by 60 percent, it's now about 25 percent. We're no longer a state university; we're a state-subsidized university. You don't have an immediate answer, but in the long run, what can we do for higher education? Understanding community colleges are very important for the wonderful, educated general population, the University of California is important for part of that economic engine. What are we going to do?
Westly: The primary reason California has been so successful over the last 50 years is people like my favorite governor, Pat Brown, had the foresight to invest in the UC system, the state aqueduct, the freeway system. The question is: Are we going to commit to that same level investment? Public opinion has turned against much public spending, even in education. Education bonds used to be a slam dunk. People are less supportive of public education for two reasons. First, we have an aging population, and seniors show they are less interested in investing in education than they used to be. The other part of the equation is what I referred to and what I think is this new covenant: People feel that the dollars they've invested over the last 20 years have not been spent as wisely as they should. We as publicly elected officials, and throughout government, need to say, The buck stops with us – and that means tightening our own belts, that means milestones and objective standards for public services, and it means doing a better job of cutting waste. If government and elected officials will take greater responsibility, we can break the logjam and get people feeling better about moneys they invest in the state's future.
Bagley: There are a lot of questions coming up about, Why not raise taxes? I love to pay deductible taxes. When you cut the motor vehicle license fee, which is an in lieu property tax collected by the DMV, by $4 billion, you have decreased $4 billion worth of federal income tax deductions. And at an average rate, which is low, of 25 percent, you've given the federal government a billion dollars. So Steve, I like to raise taxes that are deductible. What do you like to do?
Westly: I could not be in more agreement with you on this issue. The simple answer, though, is that Californians, by and large, don't want to see taxes raised. It's fascinating for me as a Northern Californian – everywhere I go in the Bay Area, people say, This is an easy one! Go raise taxes! Everywhere I go in Southern California and the Central Valley, where two-thirds of the population live, they say, Are you people mad?
Bagley: The fuel tax is the only tax in the history of the world, perhaps, that's gone down, because it's taxed per gallon. I used to get ten miles to the gallon. I now get 30 miles to the gallon. I'm paying much less fuel tax today than I was 30 or 40 years ago, so you could – I don't want to use the word increase – you could simply ratchet up the fuel tax and pay for all of this infrastructure that some people refuse to support. Having said that, change the subject. The devil is in the details. How would you change the present system of redistricting?
Westly: Let me speak to the issue of fuel tax first. (First, I'm proud to have the one Republican in the state of California who's willing to talk about sensible tax increases. Bill may be the only one. In the Legislature the minority leader of the Senate has said: Any Republican elected official who mentions the word taxes, I will have that person thrown out of office at the next primary election. This is the sort of ideological brinksmanship that's tying this state's hands.) We have one of the smallest gasoline taxes of any state in the country. But if there's one thing Californians are passionate about, it's their cars. After the entire elected officialdom of the state of California watched what happened with the car tax, watched a popularly elected governor thrown out of office in the second recall in U.S. history, elected officials are going to be a little leery to touch that one. People by and large don't want it. It may be a great policy solution. We need to navigate around whether it's a realistic one.
Now, redistricting. You need an initiative. The odds of having the elected officials themselves change is nil. They've got a great deal. I know why the Democrats did the deal. My party has a huge advantage in the Assembly and the Senate; they wanted to lock in a majority lead in perpetuity. The stunning thing is the Republicans looked and said, What the heck, we'll lock ourselves into a minority stature forever as long as we get to keep our seats. We're employed! We love it! The answer is to get the public to put an initiative on the ballot that says at the next decadal census, when redistricting occurs, it'd be done by a nonpartisan, third-party panel – whether it's judges or an appointed group doesn't matter. The key is you don't want it in the Legislature's hands because they have a vested interest.
By the way, just a historic aside, because Bill did bring so much color to this, we've had this once or twice in our history, and Assemblyman Bagley can correct me if I'm wrong, but it led to essentially the same party makeup. There was no dramatic change. It just gave sensible districts that provided a more balanced Legislature.
