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Tom McClintock

Mr. McClintock is an expert on matters of the State budget and fiscal discipline. He is a Senator in the California State Legislature and ran for Governor in the 2003 recall election. His valuable website is found at [McClintock index]

the Shadow Governor
Setting California's Finances in Order
Fixing the damage done...
[Tom McClintock] 2/13/04

[From a 1/22/04 speech]

Thank you for the invitation to address you today. It is a pleasure to do so and a pleasure to salute you who have stayed in California to weather the storm, while others were giving up and moving out- you are here because you believe in the future and in the fundamental positives of this beautiful corner of the world. And ultimately you are here because of an abiding belief that all will come right.

And it will. We have everything in the world going for us, or nearly so. We have the most equitable climate in the entire hemisphere; we have the most bountiful resources on the entire continent; we are poised on the Pacific Rim in a position to dominate trade in the next century - we have every blessing that God could possibly bestow upon a land.

In fact, the only thing we lack is good public policy.

And we can see the effect of that lack every day. When Fidelity National, one of two Fortune 500 companies left in Santa Barbara County last year announced they were moving to Jacksonville, Florida, their CEO was interviewed on local television. He said, "this was not a complicated decision to make. In Florida, there is no income tax, the sales tax is six percent and it costs 40-bucks to register your car. Why is anybody surprised that we're leaving?

The good news is this: bad public policy can be changed. And I believe that change is now occurring in California.

And so now the question occurs, how do we repair the damage that has been done to our state.

We certainly have a point of reference to find our way back. There was a day in California history not long ago when the state government was admirably meeting the needs of the people. I speak of the Pat Brown administration. It was an age when the state constructed the state water project to meet the needs of a growing population. It was a time when we were building highways faster than Detroit was building cars; when we boasted the finest highway system in the world; when we were building hydroelectric and nuclear power plants that TODAY are producing absolutely pollution-free electricity for between 1⁄2 cent and 3-cents per kilowatt hour. (At a half-cent per kilowatt hour, an average family's electricity bill should come to about $30 - per year). We had the finest university system in the nation - one of the finest public school systems.

And here's the fine point of it. To produce this exceptional level of service, in that Golden Era of California history, Pat Brown his last year in office spent $1,400 (in today's inflation-adjusted dollars) for every man, woman and child in California. Think about that -- $1,400 per person. Today we are spending over $3,000 per person - more than twice as much.

And yet, while spending more and delivering less than at any time in our history, we suffer an unprecedented budget deficit.

Common sense should tell us that there are three ways to cure a deficit. We can borrow in a state that is already up to its eyeballs in debt - and already suffers the worst credit rating in the nation. We can raise taxes in a state that already bears one of the heaviest tax burdens in the nation. Or we can cut spending in a state that is spending at near record levels. I would think the choice would be self-evident.

The first option is presented as Proposition 57 on the March ballot. It would borrow $15 billion - the biggest bond issue in the history of any state in the nation - to paper over the state's budget deficit. This will allow actual state general fund spending to grow - once bookkeeping gimmicks are accounted for - from $75 billion this year to $79 billion next year.

But let me pose this question. If California is suffering from a spending problem, isn't the answer to reduce spending - and not borrow more to spend more?

Never in our 154-year history has one generation passed on its day-to-day expenses to the next. And the reason is because the constitution has prohibited them. Since 1849, California's Constitution has forbidden bonds like this from being used to paper over deficit spending. Long term bonds are supposed to be used for schools, parks, highways and water projects that will serve coming generations. In order to put this unprecedented borrowing on the ballot, the measure's proponents also propose repealing this constitutional protection - and have the chutzpah to call it "a balanced budget amendment."

Why did the Founders place that provision in the law? They were very clear. Let me share the words of the State Supreme Court in two decisions in the 1850's:

"The Framers of the State Constitution were mostly men fresh in the experience of the errors into which other states had fallen. They had witnessed the unhappy results that followed extravagant legislation, and were anxious to rear a bulwark here, which would protect us against similar disasters."

"The framers of the Constitution knew that if they permitted the Legislature to borrow money to defray the ordinary expenses of the government, it would not be long before the State must be brought practically to rely upon the yearly revenue…Besides this, the Convention doubtless thought it unjust to throw the burden of paying the present expense of the government upon posterity, who would be compelled, in addition, to pay their own expenses, or resort to the same method of postponement."

These are the warnings of a generation of giants who built our state. They have been heeded by every generation that has followed until this one.

If we succumb to the Siren song of borrowing, I fear that this will not be the end of it. New York City tried this - and just last year they rolled over their now 25-year-old debt yet again.

The costs are enormous - in addition to the $15 billion in principal, taxpayers will have to pay $6 billion more in interest - bringing the total cost to $21 billion or more than $2,000 for every family in California. It will mean that more than 8 percent of our state general fund spending will be for nothing more than debt service into the foreseeable future. Three percent was the maximum set by George Deukmejian.

California already suffers the lowest credit rating in the nation - and therefore the highest borrowing costs. And once this precedent is set, having done so once, what makes you think they won't do it again and again and again?

If we reject this bond, that leaves two options: tax increases or spending cuts.

There is no shortage of proposals to raise taxes. But here is the fundamental flaw in those proposals - raising tax rates does not necessarily raise tax revenues.

In a high tax environment - and Californians already shoulder the 8th heaviest burden in the nation -- raising taxes reduces revenues.

We know this today as the Laffer Curve - but it is not mere theory - it was the bitter practical experience of this state in 1991, when Pete Wilson imposed the biggest tax increase in the history of this or any state. That tax increase broke the back of California's economy, turned a recession into a near depression, and needlessly prolonged our fiscal difficulties years into the future until 1994, when the state budget finally ended up in a state of de facto receivership - with the state's creditors dictating the parameters of the state's budget. We actually took in $1 billion LESS TOTAL REVENUE after the tax increases took effect than we had received without them.

The second problem is that today the wealthiest quarter of one percent of California taxpayers pay nearly one third of all income taxes in California - there are only about 25,000 of them left. As Arthur Laffer has often pointed out, there is nothing more portable in this world than money and rich people. It doesn't take many of those folks leaving California before you have taken a huge chunk out of your income tax collections.

So that leaves spending reductions. And the proponents of borrowing and tax increases tell us that such cuts would be "draconian." They call it "An Armageddon Budget."

Really? Here's the math of the budget and I'll let you judge for yourselves. In the last five years, state general fund spending has grown 43 percent. As a practical matter it will grow another 5 percent under the proposed budget.

A 13.4 percent overall reduction in the rate of spending, if made immediately, would completely cure the entire budget deficit by the end of the budget year without tax increases, borrowing, or raids on local governments - and would allow us to begin the 2005 budget with a clean slate, debt free, and with $12 billion of breathing room. And we would still be spending 15 percent more than we spent the day that Gray Davis became governor.

If we wait until April 1st, that figure grows to 16 percent - but an 8 percent reduction would cure the budget deficit by the end of the following fiscal year.

Can that be done? Bear in mind we are spending more than twice per capita what Pat Brown spent his last year in office - in inflation-adjusted dollars. We are spending nearly twice per capita what the neighboring state of Arizona is spending.

Does that mean Draconian cuts? Not if we change the way we are spending money. Simply contracting out state services - allowing state government to shop around for the best service at the lowest price - would save $9 billion across all departments. Streamlining state agencies - abolishing agencies that duplicate local or federal functions - or that overlap other state agencies - would save another $6 billion. Workers Compensation reform - in addition to the enormous burden it would lift from the economy - and thereby ACTUALLY raise tax revenues - would also result in $2 1⁄2 billion of direct savings to state and local governments. Forbidding services to illegal immigrants would save an additional $4 billion. That's more than $21 billion right there - much more that would need to be saved in order to bring the state's finances back under control.

"That's fine," I often hear, "but it will never pass the legislature, so you're just talking pie in the sky."

Well of course it won't pass the legislature. Is there anyone in this state really so naïve as to believe that that the same legislature that got us into this mess will now magically get us back out again? I have said all along that for any governor to succeed he would have to bypass the legislature and go directly to the people with a series of fundamental reforms - including contracting out, workers compensation reform, and spending limitation measures. Given the governor's ability to call a special election, these reforms could be enacted within 180 days of the governor's oath of office.

Even if begun today, they could be in place just a few weeks after the start of the fiscal year.

And just two simple reforms would make it possible to balance this and all future budgets - and they're not new reforms. They are laws that served this state and served it well for many years.

One is to restore the Gann Spending Limit. From 1979 to 1990 the Gann Spending Limit restrained the growth of government spending to the combined rate of inflation and population growth. This allowed the state budget to more than double in that decade - but only as fast as the economy could sustain. It was a decade of balanced budgets, prudent reserves, no tax increases and steady economic growth.

It was blown up in 1990. If it were simply restored to where it would have been today - oddly enough, that's where a 13.4 percent reduction would actually place us - the same level that would clear the deficit within the budget year.

The other reform is to restore the mid-year cut authority that the Governor of California had from 1939 until 1983. During that period, a Governor had the authority -- and the responsibility -- to make mid-year spending reductions without going back to the legislature - any time that spending was getting ahead of revenues. It worked, It worked well. Even Gray Davis just last year asked to have that authority restored. And we should do so.

So there it is. Restoring integrity to the state's finances is well within our ability - all that we have lacked is the political will and the political leadership. The people supplied the political will on October 7th. Now it is up to the political leadership.

What happens over the next few months will determine whether the election of October 7th truly was the historic turning point we all fervently hoped - or whether it merely opened yet another chapter of spend, borrow and tax.

On October 7th we sent a powerful message to this government: NO MORE TAXES. On March 2nd, we can send another: NO MORE BORROWING.

And then - if the initiatives are filed now - in July we can enact the reforms necessary to make these changes - and in November we can finish the job by replacing the legislature.

And then all of you who have stayed the course - who have remained in California on the faith and belief in this great state - will be ideally positioned to fully enjoy the recovery as capital, enterprise, and prosperity returns to this once and future Golden State.




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