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Some notes on the governor’s speech

By Josh Richman
Tuesday, June 2nd, 2009 at 12:00 pm in Arnold Schwarzenegger, Assembly, California State Senate, state budget.

He got polite applause, which is de rigeur: The fact is, nobody in that room likes him, and he bears bad news.

The governor as expected continued to insist the May 19 special election indicated that people want their elected officials to do their jobs, make the hard choices, and not raise taxes. As I’ve written earlier, there’s a lack of consensus on what the extremely low turnout and election results really mean, especially when it comes to taxes versus spending.

“California’s day of reckoning is here,” bringing “a transformation of what services Sacramento can provide and how those services are delivered,” the governor said, citing the bone-deep cuts – no, the amputations (eliminating the CalWorks, Healthy Families and Cal Grant programs, among others) – he has proposed. “I know the consequences of those cuts are not just dollars – I see the faces behind those dollars.”

Those faces are kids without teachers, Alzheimer’s patients without in-home care, police and firefighters pink-slipped, he said. “I hear the deomonstrations outside of our capitol. It’s an awful feeling, but we have no choice. Our wallet is empty, our bank is closed and our credit has dried up.”

We must “live within our means,” he said. “We can only spend the money that we have.”

Though he referred to our “outdated and volatile tax system,” he made no mention of possible new revenue streams – perhaps it returning the top bracket of income taxes to where it was under governors Pete Wilson and Ronald Reagan, or inserting a new income tax bracket so that someone making $1 million a year isn’t taxed at the same rate as someone making $50,000 a year, or allowing commercial property to be reassessed at fair market values.

He spoke instead about “great opportunities here for structural reform,” finding innovative ways to stretch the taxpayer dollar and provide services at lower costs – like moving from paper to digital textbooks. “In so many areas of government, there are opportunities here for reform.”

He spoke of consolidating more than a dozen state departments, boards, commissions, and swore he’d not cut a dollar from schools, health care, public safety or parks without first eliminating the California Integrated Waste Management Board (the state agency designated to oversee, manage, and track California’s 92 million tons of waste generated each year, with a current annual budget of $235.3 million – none of it from the general fund, all of it from fees) and other entities like it. He also spoke of selling off state property to pay down the state’s debt, which will ease debt-service burdens on the general fund.

Schwarzenegger gave an unsubtle I-told-you-so, noting his 2004 speech about “blowing up the boxes” in Sacramento and consolidating agencies. “Now we are in a crisis and we are running out of excuses and we have run out of time and the people have run out of patience.”

“Let’s all work together on all of those issues and make it happen,” he said, urging lawmakers to enact most of these structural reforms before leaving for the summer recess in mid July.

“There’s no doubt that the challenges before us are enormous, they will test our will, they will test our resolve, they will test our leadership,” he said, citing recent media reports including New York Times columnist Paul Krugman’s recent, dire review of California government.

“Let’s prove all of the pundits wrong,” he said. “Let’s think big, let’s think outside the box, let’s think long term and lay a new foundation for California’s future.”

Full transcript of the speech as prepared, after the jump…

Speaker Bass, Senate Leader Steinberg, Assemblyman Blakeslee, Senator Hollingsworth, my fellow Constitutional Officers and my fellow servants of the people: Thank you for the gracious invitation to address you today and to address the people of California. Today I want to talk to you about our financial crisis.

Three months ago, the members of this body came together set aside their ideological differences and did what they believed was best for California. We solved $36 billion of a $42 billion deficit.

But as you know part of our budget agreement required us by law to go back to the people for approval right at the time the people wanted to send Sacramento a powerful message.

And that message was clear: Do your job. Don’t come to us with these complex issues. Live within your means. Get rid of the waste and inefficiencies. And don’t raise taxes.

Now as I stand here today we are in the midst of the greatest economic crisis since the Great Depression. In the past 18 months one-third of the world’s wealth has vanished. And because of that and because of California’s outdated and volatile tax system, our revenues have dropped 27 percent from last year. We are now back to the same level of revenues we had in 2003. And when you adjust for inflation and population, we’re back to the level of the late 90’s.

Today, just three months after our February budget we once again face a $24 billion deficit.

California’s day of reckoning is here.

In order to deal with our limited amount of money, I have proposed some dramatic changes in my May Revision. Those spending cuts represent much more than the hard decisions necessary to balance our budget. They represent a transformation of what services Sacramento can provide and how those services are delivered.

The immediate task before us is to cut spending to the money available. And we have no time to waste. The Controller has told us we have 14 days to act or California is at risk of running out of cash. I have already used my executive authority to reduce the state’s payroll. And I have proposed the necessary cuts to the three largest areas of our budget: education, health care and prisons.

I know the consequences of these cuts are not just dollars. I see the faces behind those dollars…I see the children whose teacher will be laid-off… I see the Alzheimer’s’ patients losing some of their In-Home Support Services… I see the firefighters and police officers who will lose their jobs.

People come up to me all the time, pleading, “Governor, please don’t cut my program.” They tell me how the cuts will affect them and their loved ones. I see the pain in their eyes and hear the fear in their voice.

It’s an awful feeling. But we have no choice.

Our wallet is empty. Our bank is closed. Our credit is dried up.

I know for many of you, these will be the hardest votes you will ever make. But the people sent us here to lead not only in times of prosperity but also in times of crisis. We must make these cuts and live within our means, because what is the alternative. If we don’t act, the state will simply run out of money and go insolvent.

We are not Washington. We cannot print money. We cannot run up trillion-dollar deficits. We can only spend what we have. That is the harsh but simple reality.

At the same time we cannot make this budget just about cuts. There are also some great opportunities for structural reform. Winston Churchill said a pessimist sees the difficulty in every opportunity. An optimist sees the opportunity in every difficulty.

So let’s use this crisis as an opportunity to make government more efficient and find innovative ways to stretch taxpayer dollars. Can we find a way to provide these services at a lower cost?

For example, I have asked our State Board of Education to make textbooks available in digital formats. We expect the first science and math books to be digital by this fall. If we expand this to more textbooks, schools could save hundreds of millions of dollars a year. That’s hundreds of millions of dollars that could be used to hire teachers and reduce class sizes.

In so many areas of government there are opportunities like this for reform. All we have to do is go out and seize them.

Spending on prisons has nearly doubled in the past five years. We spend $49,000 per inmate, per year. The national average is $32,000. Other states have privately-run correctional facilities that operate at half the cost. Why can’t we?

We must also restructure the relationship between state and local government. We all hear from local officials about the heavy hand of Sacramento. If we are providing fewer resources, we have an obligation to cut most of the strings and mandates, and to get out of the way. Right now we are cutting billions of dollars from schools. So shouldn’t we give districts more freedom and flexibility and not tie their hands with strict rules like who is allowed to mow the lawn or fix the roof or do the plumbing?

I am also proposing once again to eliminate and consolidate more than a dozen state departments, boards and commissions. These include the Waste Management Board, the Court Reporters Board, the Department of Boating and Waterways and the Inspection and Maintenance Review Committee. There is absolutely no reason to hold onto these redundant boards in this crisis. We should not and I will not cut a dollar from education, a dollar from health care, a dollar from public safety, or a dollar from state parks without first cutting the Waste Management Board. Every dollar we save from those boards and commissions is a dollar that can be used to help our most vulnerable citizens.

I am also proposing to sell off state property because Sacramento should not be in the real estate business, especially when we are in a fiscal crisis. Now I know the money we receive for this property won’t go directly to our General Fund. It will go to pay off debt. But that lowers our debt payments which does help our General Fund.

Everywhere I go, I hear stories about families selling off their boats and motorcycles to make ends meet. They have garage sales and yard sales. They know that you don’t keep a boat at the dock when you can’t put food on the table.

All these proposals have been talked about for years, yet they never get done. I remember in 2004, I talked about blowing up the boxes, and consolidating agencies…. But now we are in a crisis. We have run out of excuses. We have run out of time. And the people have run out of patience.

Earlier this year, we began consolidating all of our IT departments. My proposal to consolidate all of our energy functions is in legislation before you right now. So is a proposal to consolidate the departments that oversee financial institutions. And I will soon send you legislation to merge our tax collection operations. These are all actions that we can take on our own to save money and make government more efficient. We don’t have to bother the people. We don’t need permission from the federal government.

I know that Senator Steinberg is talking about reforming and restructuring relationships between state and local government. Senator Hollingsworth and the Republicans have some great ideas about performance-based budgeting. In July, we should receive the bipartisan recommendations from our Tax Modernization Commission. This will be a tremendous opportunity to make our revenues more reliable and less volatile and help the state avoid the boom and bust budgets that have brought us here today.

Let’s all work together to make it happen.

Now I don’t expect every single one of these reforms to happen within the next 14 days. But we can certainly get them done before this body adjourns for Summer Recess on July 17th.

Now there are other big reforms that I continue to believe strongly in like a spending cap and rainy day fund in order to further stabilize our revenues. But I’m not going to talk about that today because those reforms require voter approval. And as we learned a few weeks ago, the voters will never trust us on those issues until we show that we can do our jobs in this Capitol and make the tough decisions.

There is no doubt that the challenges before us are enormous. They will test our will, our resolve and our leadership. Many of the things I am proposing are despised by the special interests that rely on the status quo. And we are all familiar with the interest groups and their army of lobbyists. But let’s not forget, it is our job to lobby on behalf of the people and the great state of California.

In the coming days and weeks, the entire nation will be watching how we react and respond. Last week, Paul Krugman from the New York Times wrote that California is in a state of paralysis…and that our political system has failed to rise to the occasion. People are writing California off. They are talking about the end of the California Dream. They don’t believe that we in this room have the courage and determination to do what needs to be done or that the state is manageable.

Let’s prove all the pundits wrong. Let’s use this crisis as an opportunity to make big and lasting change. Let’s not think just in the short-term. Let’s think about the long-term, let’s think big and lay a new foundation for California’s future. Let’s meet these challenges head-on without gimmicks.

I don’t want to hand these problems to the next governor and I know you don’t want to hand them to the next Legislature. I have faith in all of you. I have faith in our ability to once again come together for the good of our state. Let’s move forward and put California back on the path to prosperity.

Thank you very much.

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  • John W

    I’m a Democrat. Personally, I’d be willing to pay more taxes. If the burden of covering the deficit were shared equally between business and individual taxpayers, it would require about $1,200 per family in additional taxes to get us out of this mess. But that’s not going to happen. The legislature needs to get on with it, and make the cuts. They can argue about what cuts to make, but they had better not waste time talking about revenue. It’s a nonstarter. I’d love to be making a million plus per year and have to worry about the legislature raising the top rate another percent — from 10.3% if you count the mental health tax to 11.3%. But, if they did that, I would be looking at every possible option to reduce my exposure to that through available tax sheltering methods or changing my official residence to another state. So, it’s counter productive. It’s not true that those making $50,000 pay the same tax rate as people making $1,000,000. The effective rate for an individual with $50k of taxable income is roughly 5 percent. For somebody with $1,000,000 of taxable income, it’s more than 8 percent. They pay about $30,000 more in state income tax than they would if they were taxed at the same effective rate as the person with $50k. Reliance on that is part of why were are in this mess in the first place.

  • Josh Richman

    John: I was speaking of marginal tax rates, you’re speaking of effective taxes. What you say is true – according to the Franchise Tax Board, a single individual making $50,000 in taxable income would pay about $2,346 (about 5 percent) while someone making $1 million in taxable income would pay about $90,696 in state taxes (about 9 percent) because so much more of that latter person’s income falls above the $47,056 threshold at which the 9.3 percent rate kicks in.

    Consider, however, the respective impacts on those households – what $2,346 means to the former person’s costs and quality of life compared to what the $90,696 means to the latter’s. Who’ll have more trouble paying the rent, buying the necessities of life? Where is the bigger sacrifice being made? It’s a philosophical point, perhaps, but if we’re talking about shared burdens for a common good…

    Also, your assertion that raising the richest’ Californians’ tax rates to levels at which they were under previous Republican governors facing budget crises would produce to a “rich flight” out of California might have some problems:

    Though tracking the movement of wealthy taxpayers from state to state is difficult, experts on public finance and migration say they have yet to document a substantial “rich drain” in states that have raised income taxes in recent years.

    “At the level we’re talking about, there’s no quantitative evidence that it affects the mobility decisions of affluent taxpayers,” said Douglas S. Massey, a demographer at Princeton University and president of the American Academy of Political and Social Science.

    [snip]

    New Jersey raised taxes on the wealthy in 2004, increasing by 2.6 percentage points the tax rate levied on those making more than $500,000 a year; and Gov. Jon S. Corzine this month proposed a new increase on high earners.

    But a study by Professor Massey and two colleagues, published in September, estimated that the previous tax increase cost New Jersey only 50 to 350 existing “half-millionaire” households — a relatively small number against the total of 44,000 such households in the state.

    While those departures cost the state about $38 million a year in revenue, the study estimates, the higher taxes levied on those who stayed have brought in an average of $895 million a year. Also in 2004, California voters approved a 1 percent income tax surcharge on personal income over $1 million, and Silicon Valley and Beverly Hills appear to remain well populated with the wealthy. From 2004 to 2007, according to a study by the California Budget Project, a left-leaning research organization, the number of millionaire taxpayers rose by close to 50 percent, well outpacing the 8.6 percent growth in the total number of those paying personal income tax.

    I’m not trying to mount an argument here that the entire deficit should be solved with tax hikes; clearly some additional spending cuts are necessary. I’m just trying to invite a more balanced discussion of the options on the table.