Transcript and Photo of Gov. Schwarzenegger Proposing Responsible Budget

Time: 1 p.m.
Date: Wednesday, May 14, 2008
Event: May Budget Revision Press Conference, Auditorium, Building 172, Department of Health Care Services, 1500 Capitol Avenue, Sacramento, CA

GOVERNOR SCHWARZENEGGER:

Good afternoon, everybody. Today I'm presenting the legislature with my revised budget proposal for the year 2008-2009. But before I begin, let me again express my gratitude to my finance director Mike Genest and his entire team, who have worked very hard to make this work. And we want to thank you for the hard work you have done. I know you guys have worked on weekends and you have worked sometimes in the evening, sometimes even without food. As you can see, Mike is slowly wasting away. I'm just concerned that he's going to file a claim against me and I'm glad that I have reformed workers' compensation.

Anyway, I also would like to thank my cabinet secretaries for being here today and I want to thank them all for the hard work that they have done to balance the budget. And we want to thank also some of the legislative leaders that are here today and also some of the legislators, so thank you very much. And I want to thank also Susan Kennedy, my chief of staff, who has done also extraordinary work. I think she's the best chief of staff anyone could ever dream of, so thank you very much for the great work. (Applause)

As everyone knows, we are facing an extremely tough budget year. California's economy is the most diverse in the nation and that diversity has kept us strong. Personal income is up in sectors like tech, trade, tourism, and agriculture continues to grow. But here's the problem that we face right now. With the subprime mortgage crisis and the stalled national economy, our revenues have flattened out and because of our dysfunctional budget system spending is going up no matter what. And, on top of that, we don't have a rainy day fund to soften the blow in down years like the one we have right now.

From left to right: Department of Finance Director Mike Genest and Governor Arnold Schwarzenegger (Photo Credit: William Foster, Office of Governor Schwarzenegger).

So what I proposed in my 2008-2009 budget in January was -- we were facing a $14.5 billion deficit. Had we not done everything that we did, and with the economy continuing to decline, the deficit would now be $24.3 billion. I declared a fiscal emergency and the legislators jumped into action and did a great job making cuts in a special session. But the problem that we are facing today is still $17.2 billion, so our crisis is real and it is very serious.

Now, the other thing that you will recall about our January budget proposal is that I included 10 percent cuts across the board to balance the books. But as the deficit grew, I also knew that we could not just make it with cuts alone, that we need additional revenues. And we've got to get creative but without raising taxes, and I will explain that in a moment, exactly how we did that.

In the meantime, I also traveled up and down the state to talk about our dysfunctional budget system and to put the spotlight on that we've got to fix this system, and also to hear the people, to hear the people's ideas and concerns. Because the cold, hard truth is that we cannot continue to run our state like this, where there is no connection between our revenues and our expenditure.

So, in countless budget and town hall meetings from Eureka to Bakersfield and from San Diego to Redding and Fresno, Anaheim and San Luis Obispo and on and on, the people weighed in. And there was no mistaking what I heard time and time again, and it was loud and clear. The people of California want us to live within our means, just as they must in their businesses and their families. They don't want us to spend more money than we take in and they don't want us to raise taxes, especially now when times are tough. But what they do want us to do is to fix our dysfunctional budget system once and for all, so that we don't have to go through this pain every time the economy cools off.

My May Revision reflects some of those concerns. For starters, I'm very happy to say that the budget that I'm releasing today is funding Proposition 98 fully, with $56.8 billion, which allows us to raise per pupil spending for the fifth year in a row. This budget also keeps our state parks open and it also does not release inmates early. And once again, also for the fifth year in a row, it holds the line on taxes. By calling for a constitutionally required rainy day fund it also fixes the systemic problems that are so damaging to our state and to our people.

Now, of course, we had to make some very difficult cuts. No one wanted to do this, but because Health and Human Services is the second largest part of the budget, this is where a lot of the cuts had to come from. I know this is going to be very difficult and this is going to be very painful. This is why I had a hard time to make those cuts. But the absolute bottom line is we cannot spend money that we do not have, plain and simple.

Now, the critical element to making this budget work, now and in the future, is budget reform. As you all know, over time our revenues grew at a very healthy rate. Over the last decade, for instance, revenues have increased an average of five percent a year. But in one of those years the revenues have jumped up by 24 percent and another then, after that, it was flat. And then another year it went up by 14 percent and then, now our revenues are flat again. No other big state has seen such volatile ups and downs in revenues.

But this roller coaster revenue problem has a simple solution. If we save money during the above-average years then we have enough money for the below-average years. The rainy day fund that I first called for in January would stop Sacramento from spending all that money that comes in when revenues spike. And when our revenues fall below a rolling 10-year average, we would use the rainy day funds to smoothen our revenues so we would not have to make severe cuts in programs. If this reform would have been enacted in 1998, we would not be facing such massive budget problems today. Future governors and legislators may still face tough choices, but with a rainy day fund they should never be this extreme and Sacramento would not have been able to use one-time spikes in revenues to pump up so many permanent programs.

But let's talk about this year. What about this year? We don't even have a rainy day fund yet, nor do we have money in it to avoid the deep cuts. So this is where the California lottery comes in. We chose the lottery because it has been an underperforming asset. So we will modernize the lottery and go to the voters in November asking them to approve both a constitutional amendment establishing the rainy day fund and plans to securitize future lottery revenues. We believe that this will generate $15 billion over the next three years, all of which flow into the new rainy day fund from where the money will be drawn down to the general fund to stabilize revenues for the 2008-2009 budget.

Of course we will do this in a way so that education will still get its current level of lottery proceeds. That allows us to be in the black and fully fund education, Proposition 98, and make other modifications from our January proposal. We are confident that this plan would work.

But to be extra prudent, I'm also proposing a one-time failsafe mechanism, an insurance policy that we hope never to use. If revenues fall short, or if it doesn't get approved by the voters in November, a one-time trigger would temporarily increase the state sales tax by 1 percent. We don't think that this will happen, because securitization of the lottery should guarantee ample revenues to fully finance the rainy day fund, and we have confidence that the economy will rebound and that we will grow our way out of this problem. But in the unlikely event that the trigger is pulled, the tax would be temporary. This is very similar to something that former Governor George Deukmejian used in 1983 when we also faced economic slowdown. And the good thing about this is that, after the tax increase ends, the money automatically gets rebated to the taxpayer.

There are other developments in this budget that allow us to make changes in the January budget. In Corrections, for instance, the 10-percent cuts that would have been achieved by releasing some nonviolent and low-risk inmates early are not needed. Our parole reforms and our declining inmate population allow us to reach almost the same savings without releasing anyone early.

There's one more point that I want to mention. We have a tax system that does not reflect the 21st century California. It needs to be modernized to serve our more dynamic information service and technology-based economy. And I was very happy to see that Speaker Bass yesterday also mentioned that in her speech. So I look forward to working with the legislature to create a bipartisan tax-modernization commission that will give California a tax system that serves modern California better.

Like so many of those other problems that we have tackled together, this is something that has plagued our state for decades. And this is the year to solve it. I think by working together I know that we can give the people of this state the kind of sound, predictable and dependable budget system that they expect and deserve.

Thank you very much. And now, if you have some questions about this, please feel free. Yes?

QUESTIONS/ANSWERS:

QUESTION: Governor, can I ask you about the lottery proposal in particular? If the lottery proposal goes through, I think there are some people who are going to say that amounts to new borrowing. If the voters reject it, you're talking about a tax that would be new taxes. And yet you've made speeches all up and down the state that say we're going to tear up the credit cards and there are going to be no new taxes. How do you explain what looks like an apparent change on your part?

GOVERNOR: Well, first of all, I think that the lottery proposal is a great idea because it's an asset -- the people have voted for it -- it's an asset that is underperforming. And I think that as governor, or I think the legislators also, we have a responsibility to make sure that government performs at 100 percent. Our lottery does not perform at 100 percent; our lottery is 28th in the nation when you compare it with other states. And you know, California doesn't like to be 28th in anything, we like to be number one.

So let's look at that. We're making $3 billion on our lottery. We could make $6 or $7 billion on our lottery. Other states make that amount of money. So I think it is my responsibility to look at that and to use that asset, that underperforming asset, and to use it, especially at a time when we have such a crisis, such a financial crisis. We have $17.2 billion that we're short -- this is the deficit this year -- and I want to use this to help our kids get funded for education, so we keep our teachers in place and no one has to get laid off, and so on. So I think that is a good idea and I hope that the legislators see it the same way.

Yes?

QUESTION: Governor, why did you choose to securitize the lottery rather than the lease that had been talked about before? What's the advantage of your proposal over a lease?

GOVERNOR: Well, I think that Mike Genest will get into that afterwards and he can tell you exactly, because they have been part of the negotiations. But first of all, as you could see, the value is now a realistic value of the new kind of environment that we're in, which is the $15 billion, and we want to use it for the next three years in order to help us with our financial crisis. And it is securitized. This way we don't have to license it out, this way we keep ownership of the lottery. So I think it has certain advantages, but he's going to get into the details of that.

QUESTION: Governor, why would Wall Street loan money to the state based on a budget that has a November ballot measure that may or may not even pass? I mean, at the very least that's going to just whack interest rates. But I wouldn't borrow money on something that may or may not -- or lend money on something that may or may not happen.

GOVERNOR: Well, as you know -- and this is what I mentioned in my speech -- that we securitize. There's a trigger that if it does not pass then the 1 percent sales tax will kick in, so it is secure.

QUESTION: That almost sounds like blackmail: Either you pass this, or you get a tax increase.

GOVERNOR: Not really. The way we see it is we want to help, to make sure that we have enough funding for the programs. Because like I said when we had our budget deficit in January, I was convinced that we could do it without any additional revenues, just to do it through cuts. But then, when we saw the deficit getting worse and worse and worse, then I was convinced that we have to use extra revenues. So this is our way of solving the problem and doing a combination of cuts and having some additional revenues. And it is really the only way to go. There are, of course, other proposals out there, but I think that this is the right way to go to utilize -- and I think that the people will vote for the lottery, because I think that the people of California don't want to have an asset that California has that is underperforming. I think they will want to make those changes and to take that money and to go and give it to education and to other areas, health care and so on.

Yes, please.

QUESTION: You're talking budget reform, you've been talking about budget reform for a long while. But the fact remains that, five years after Governor Davis was recalled for a massive budget deficit, it's like déjà vu. Why isn't it happening? And how do you compare yourself to the budget deficits of the past?

GOVERNOR: Well first of all, as you know, we're not a dictatorship, so one man doesn't run the state. So I need the legislators to go along with it and I need the people to go along with it. When I first came into office in 2003 I made it very clear that I wanted to change the budget system and perfect the budget system and make the budget system perform in such a way so that we put aside a rainy day fund and that we put a cap on the spending. That was voted down. It was within a month I was in office.

Then I went back again, because I was very determined that we've got to fix the budget system, because we're running into this problem over and over and over again, for the last three decades. Democratic governors, Republican governors, all ran into this same problem. We went back to the people in 2005. And then, as you remember, a lot of money was spent against it because, again, they didn't like the idea of putting a cap on it.

So now we are back again. And I want to say to the people of California and to the legislators, how many more years, how many more decades should we go through this crisis, that every single time we have a downturn in the economy, that we go through this, that we face $15 or $20 billion in deficit, just because we can't get our act together and have a sound budget system like other states have, where we put a rainy day fund aside so when we have spikes in revenues of 23 percent like we had in the '90s that we go and take some of that money and put it aside so when we are having a downturn we can supplement our shortage of revenues?

That's what we need. That doesn't mean it solves completely the problem, but it softens, as I said here, the blow. And this way we only have then to make small cuts, rather than what we have now, which is huge cuts. And it's very painful for people out there to go through this, that one year they get all the funding in the world and the next year we take money away from them. It is not a system that works and we've got to fix it.

And I was very happy that Speaker Bass talked about that yesterday, that we've got to fix the budget system. The system itself needs to be fixed, because it's not just this year. And, may I remind you, that the legislators have had a tendency of just going to look at it one year at a time, but that's not the way to look at it. We've got to look at the system and we've got to fix the system once and for all, because California deserves that.

Yes?

QUESTION: How would you propose to defuse opposition from the gaming tribes to modernizing the lottery? Because, obviously, they're going to see this as cutting into their share of the gaming revenues.

GOVERNOR: Well, there is -- and we have no electric devices, we don't do the same things that they are doing, so I don't think there's any problem. But we will talk to them. You know, there is always concern. I don't think their concern is this. I think, what I have heard, is that their concern is that this is opening up the door and where is this going to go? I think this is the concern that they have. But we have no intentions to really compete with them.

Yes?

QUESTION: Governor, you said that you're opposed to gimmicks or robbing Peter to pay Paul to balance the state budget. How is this not a gimmick, borrowing on future earnings that may or may not materialize from the lottery?

GOVERNOR: Well, like I said, that I think the lottery is a terrific idea because we have to utilize the potential of the lottery 100 percent. The lottery is owned by the state of California and it is not performing. I think it is our job and we want to make sure that everything that the government does is performing at a 100 percent level. And so this is why there is billions of dollars of potential there and I think we should make it perform at 100 percent.

And so I think that the people will understand that, and the people will go along with it and they will vote for it. And especially when they know that this is money that will go to very important programs, especially in health care and, as you know, that we have made severe cuts in health care.

But what is even -- when it comes to health care, what's even more painful is that we didn't get health care reform done, because that would have given Medi-Cal an additional $4 billion. So we are going to go and continue staying on that subject of health care reform and continue working with the stakeholders together to get this done.

Yes?

QUESTION: The tax commission -- can you talk about -- you're saying that it would be completely separate from the commission that the Speaker is talking about appointing? How --

GOVERNOR: I did not say that.

QUESTION: I was hoping you could clarify that. How quickly do you see this coming to fruition? And are you going to direct the commission to focus on any particular parts of the tax system?

GOVERNOR: Well, first of all, sometimes it takes longer and sometimes it takes a shorter period of time to put a commission together. But what my vision of the commission is that we work together, the legislative leaders, Democrats and Republicans, that we all appoint people in that commission, and then we let them study the subject. Because I think that a lot of us agree and I'm one of them. I've had conversations with Speaker Bass about this when she came to my office.

I think it is very important that we look at it. We should always, every 10 years, look at the system, not only with the tax, but in anything, and bring it up to date. And I think that, as she said, that our tax system is from the '30s. Why not look at it in a serious way? Maybe we are missing something.

And also, how do we make sure that our system and our revenues are not as volatile, that they go up and down all the time? Other states don't have that; they have a better system. And I think that we should study other states, what they are doing. And how do we create more stable kinds of revenues for our state and then also fix the budget system to create more stability? I think with that together we would have a much better system and we will bring the spending line and the revenue line together.

STAFF: Last question, please.

QUESTION: Governor, you said you would be seeking additional cuts in Health and Human Services. And I'm wondering, how do you justify that when the economy is not doing well and the demand for government programs is going up?

GOVERNOR: Well, I think that you said it. Because the economy is not doing well and because we have a broken budget system we don't have more money. We have to live within our means. And this became very clear when I went up and down the state and had my town hall meetings, that the people said government has got to live within its means. Don't come back to us always for more revenues. Live within your means. That's what I need to do in my business, that's what I need to do in my family. We have to live within our means.

And so this is why we don't have the money this year. This is why we have a $17 billion deficit and this is why we don't have enough money for health care and for other areas. Everyone has to tighten their belts. Local government has to tighten their belts, we have to tighten our belts. We have to recognize there's only so much money.

And if we go back to the people and start taxing them more, what will happen is they move out of the state, because that's happening already a lot of times now. And what also happens is, it takes money away from the economy. People don't have that money then and they don't spend, and therefore you start losing jobs and you start having decrease in revenues in our state. So I think it will backfire. I mean, it's easy always to say raise taxes. There are some people here in our Capitol that immediately say, "Raise taxes." I think that you have to think it through. What does that do to the economy when you raise taxes? Do we not really make this backfire and then have less revenues come in? As a matter of fact, I talked to Governor Wilson and one of the things that he told me was that when he raised taxes, immediately the next year $2.5 billion less came in than anticipated, because it slowed the economy down. So we have to be very careful with it.

That's why I felt that the regular fight will come up in the Capitol. Democrats are going to say we've got to get more revenues, Republicans are going to say no, this will never happen, we have to cut more programs and all of those things. So what I try to find is the middle. Let us go make some cuts, but let us go in the direction of the lottery. This way we don't have to raise revenues from the people, because we have an underperforming asset sitting there. Let's take that revenue and add it and help with some of the programs and get us through this very, very difficult time that we are in right now.

judythpiazza@newsblaze.com

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