This story was reported for San Diego News Network on July 17, 2009.
California Controller John Chiang visited San Diego Friday, the 16th day of the state’s budget impasse.
Chiang, who initially urged state leaders to worked as quickly as possible to reach an agreement, spoke at the San Diego Regional Chamber of Commerce’s “Good Government” series, highlighting the state’s can of worms.
“When I became the controller two years ago I wanted to provide a world class fiscal outlook,” said Chiang to attendees of the event. “I’m a strong believer in public democracy and public governance.”
Chiang addressed three main issues of the California budget crisis to the room of about 50 chamber members: the problems, what could happen should a budget agreement not be reached in a timely manner and the status of an agreement being reached.
Chiang said the first problem is among elected leaders who often balance the budget on past projections rather than the state of the current economy. For example, in September when Gov. Arnold Schwarzenegger signed the budget 85 days late, the projections were off.
“The budget was out of a balance the moment it was signed,” he said. “They were using numbers from the year before. Why would you do that?”
The same happened in February when legislators pulled all-nighters to reach an agreement. By April, the state was $2 billion out of balance. In addition, this problem was seen in May when Schwarzenegger had to deliver three revisions, all out of balance, Chiang said.
A second problem, Chiang said, is the constant decision to borrow money, which ultimately just pushes the debt to another year. The decision to borrow money may actually be seen when the new budget passes as Schwarzenegger has proposed to borrow $2 billion in municipal property tax revenue. But his proposal would require a two-thirds majority vote in the State Legislature.
Chiang acknowledged there’s a problem with the two-thirds requirement in the State Legislature to pass a fiscal-related bill. The law, unique to California and a few other states, often keeps legislators from passing a balanced budget in a timely manner. In addition, it leaves Californians wondering who is accountable for the budget mess.
“I would say the state’s structure is not beneficial,” Chiang said. “Who do they hold accountable?”
He said a recent poll showed 33 percent of Californians blamed the governor, another 33 percent blamed the Democratic caucus and the remaining Californians blamed the minority Republican group.
The controller, who calls himself a “mathlete,” also made sure to reiterate how severe the crisis is. He addressed the 66,000 jobs loss in California last month and the fact that economists believe the recession won’t end until the fourth quarter of 2010. If that prediction by 80 percent of economists is correct, it will take California two years to get out of the red from that date.
But the worst case scenario — a “default,” when the state must default to the second California constitutional requirement that it must pay its debt services – hasn’t arrived yet, Chiang said.
This, in relation to a business, would be bankruptcy. However, California as a state cannot declare bankruptcy (only local governments can) but the definition of a default would translate to the same.
“A default has great implications,” Chiang said. “If you think it’s bad that we must end summer classes, end P.E. (physical education), end the arts programs or kick the disable to the street…. Imagine that to an infinite degree worst.”
“That’s a default.”
Litigation against the governor and state legislators is also an option if they do not complete their responsibilities like passing a balanced budget, he said.
“That is the predicament we’re in and that is why it’s important the governor and legislators come to an agreement,” Chiang said. “But they’re unwilling to make the tough decisions.”
Chiang wouldn’t comment on what the likelihood is for the state to “default” on its commitments but did say he would do all he could to ensure legislators are making the wise financial decisions even if he had to “beg.”
In terms of the status of an agreement being reached, Chiang said legislators are much further away from it despite recent comments from the Big 5 (Schwarzenegger and party leaders), who say it is close. He said leaders are far from reaching a deal because both parties cannot agree on how much to cut from education, an almost sacred sector when it comes to politics.
“They are far from an agreement on that issue,” Chiang said. “I think they need a lot of work.”
He also said their current ideas were “based on a hopeful economic recovery.”
Chiang’s visit comes as a time when his office is set to distribute $3 billion in IOUs to state agencies and contractors. As of Wednesday, $640 million worth of IOUs were already released.
The Big 5 is expected to meet throughout the weekend until an agreement is reached. Leaders said the final deal on the table still being discussed is the education agreement.
Chiang read a list of how much the state owed the attendees of the event (either through state contracts or taxes) and answering questions.
“No one is immune?” one person asked the controller.
“No,” he answered.
Hoa Quach is the political editor for the San Diego News Network and the state owes her $6.