Think Long Committee's Recommendations

8/3/2019 Think Long Committee's Recommendations

1/98

A Blueprint to Renew California:RepoRt and Recommendations pResented by the

think Long committee oR caLioRnia


2/98

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Think Long Committee or Caliornia

Nicolas Berggruen

David Bonderman

Eli Broad

The. Hon. Willie Brown

The Hon. Gray Davis

Maria Elena Durazo

The Hon. Matthew Fong*

The Hon. Ronald George

Antonia Hernandez

The Hon. Robert Hertzberg

Gerry Parsky

The Hon. Condoleeza Rice

Eric Schmidt

Terry Semel

The Hon. George Shultz

Dr. Laura DAndrea Tyson

*We were honored to have Matt Fongs active participation until his passing


3/98

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4/98

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Reducethepersonalincometaxacrossthe

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Fundeducationbyanadditional$5billion

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Provide$2.5billiontotheUniversityofCaliforniaandCaliforniaStateUniversity

r u w r

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Empowercountygovernmentsandhelpreduce

publicsafetycostsbyproviding$1.5billionin

l u

Provide$1billiontoCaliforniacitiesinblock

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Startpayingdownthestateswallofdebtand

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GiveCaliforniansrealpowertomake

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LOCAL EMPOWERMENT. Returning decision-

making power and resources when appropriate

from Sacramento to localities and regions where the

real economy functions and government is closer to

the people and thus more responsive, exible and

accountable. Bygenerating$1.5billionannuallyfor

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AN INDEPENDENT CITIZENS WATCHDOG. Creating

an independent watchdog for the long-term public

interest as a counterbalance to the short-term

mentality and special interest political culture

that dominates Sacramento. t rl

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Rebooting Californias Democracy:


5/98

A MODERN, BROAD-BASED TAX SYSTEM. Updating

Californias tax system to mirror the real composition

of our modern service and information economy

and provide a stable, broad-based tax system that is

sustainable over the long term.

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andreducethesalestaxongoodsfrom5%to4.5%whilebroadeningthesalestaxata5%ratetoapply

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rebate.Thoseearning$45,000andunderwould

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withincomesupto$95,000wouldpayonly2%.The

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pay7.5%.Becauseofthe1%surchargeformental

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8.5%.

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havepaid$1,449inpersonalincometaxesunder

thecurrentsystem,wouldnowpay$832amore

than40%reductionintheirstatepersonalincome

x. ovrll, rr wll clr

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GrossIncomeoflessthan$20,000peryearwouldpayanaverageof$71moreindirectandindirect

statetaxes,whilethoseearningmorethan$1million

wouldpayanaverageof$11,478.

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$10billioninnewrevenuesannuallytostartpaying

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forK-14schools,forCalStateandtheUniversityof

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abusinesswithataxableincomeof$480,000that

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currentsystemwillpay$33,114undertheproposed

.

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I. EMPOWERING LOCALGOVERNMENT AND REGIONS

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Developlocalfundingallocationformulaswithan

wr l-r

Simplifythestructureoftherealignment

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6/98

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Enactstatutorychangestoprovidecountieswith

rr rr fxl

Ensurethatlocalscalincentivesarealignedwith

w l

Promotelocalaccountability

Clearlydenethestatesroleandfunding

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Avoidstate-reimbursablemandates

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wouldgenerate$1.5billionannuallyforcountiesto

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II. THE CITIZENS COUNCIL FORGOVERNMENT ACCOUNTABILITY

California is caught in a downward spiral. According

to the California Deliberative Poll conducted in June

2011, the public believes that nearly 40 cents of every

dollar is wasted because government performance

is not evaluated or accountable. The public therefore

understandably resists investing public resources in

the future if it cannot be assured its hard-earned tax

dollars are being used to improve Californians lives. As

a consequence, the world is moving on and California is

being left behind.

California desperately needs a return to good

governance. This means, above all, restoring the publicstrust in governments ability both to act eectively,

responsively and accountably in the long-term interests

of all Californians and to move away from the short-

term politics of Sacramento.

The Think Long Committee believes it is not enough for

elected political gures to pledge they will pursue good

governance. To ensure accountability and to balance

the short-term politics of Sacramento, good governance

should also be entrusted to a body of citizens invested

with the power to demand performance from their

elected ocials as well as the power to place initiative

proposals, addressing reform in areas such as jobs and

education, directly before their fellow Californians for

approval.

To this end, the Think Long Committee proposes

to establish a Citizens Council for GovernmentAccountability. As this would involve amending the

California Constitution, the Committee intends to

qualify an initiative measure.

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2. ROLE AND POWERS: a rl l

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Settingstandards,oversightofperformance

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Long-termstrategicconcerns


7/98

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Placinginitiativesdirectlyontheballot

The Council would be empowered to develop and

place initiative proposals directly on the ballot.

This would assist the residents of California indeveloping a more active voice regarding the long-

term future direction of the state, rather than be

faced, as is currently true, with only disconnected

single-issue or special interest choices. The Council

would also work with elected ocials, receiving and

monitoring information, and proposing legislation.

AuthorizationtodirecttheSecretaryof

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The Council would be authorized to comment on

relevant initiative proposals with respect to their

long-term impact on the states strategic priorities.

Subpoenapower

The Council would be granted the same subpoena

power currently held by the Little Hoover

Commission i.e., to issue subpoenas to compel

the attendance of witnesses and the productionof books, records, papers, accounts, reports and

documents.

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3. MEMBERSHIP/TERMS/VOTING RULES:t

Councilwouldbecomposedof13voting

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4. QUALIFICATIONS: a-lr wul

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8/98

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In short, the residents of California would have

direct input in the Councils policy-making and thus

in the Councils decisions regarding which of the

Councils initiative proposals would be placed before

the electorate.

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6. STAFF: t cul wul l w

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7. FUNDING: t cul wul v uu

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8. Integrating Foresight The Golden State

Strategic Agenda: clr ur w

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Agenda.

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Infrastructure.TheCouncil,withthesupport

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9/98

EnvironmentalGoalsandPolicy.TheOce

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Workforce/HumanCapital.TheCouncil

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Energy.TheEnergyCommissionisrequired

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Water.TheDepartmentofWaterResources

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Transportation.TheDepartmentof

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9. Integrating Oversight:t cul wul

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LittleHooverCommission.TheCommissions

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III.A BROAD-BASED TAXSYSTEM FOR THE FUTURE

Purpose

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Problem

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uur rl rv

rv. a urr, ur x rvu

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byPersonalIncomeTax.In1950,SalesandUseTax

r l 60 r ll rvu;

today,itaccountsforabout25percent.Personal

i tx u r ll r 10

percentoftotalstaterevenuesin1950;today,it

accountsformorethan50percent.


10/98

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Figure 1

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SOURCE:CaliforniaDepartmentofFinance

Thiscametoaheadinscalyear1999-2000

w - rul v, u

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s l r

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urr rrw x .

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l-r ruurl u .

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atananemic3percent,butGeneralFundrevenues

plummetedby19percent.Thiswastheipside

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SOURCE:FederationofTaxAdministrators,February2011

Solution

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rrl rv r

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nearly$1trillionthatis,roughlyhalfofthestates

uu x.


11/98

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rv r l l-r

rw u u, ul

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r llw rr:

Broadenthetaxbasetoincludeservices.

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atarateof5to5.5%andwouldapplyto

ll rv, u wll

ur, x r l r

ul rv. curr rj

showthattheratewillneedtobe51/8%to

v rvu r

v. i rvu r ur u

r ru , r

couldendupbeinglessthan5%.

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3%eectiveJuly1,2013,allowing7

r

v nvr 2012

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ur rr r w x.

4%eectiveJanuary1,2014,butthe

ratecouldbeashighas4.5%.

5%eectiveJanuary1,2015,butthe

ratecouldbeashighas5.5%.

Broadenthetaxbasebyreducingdeductions

fromthePersonalIncomeTax(PIT)and

loweringtaxratesonthePIT,thecorporation

tax(Corp)andthesalestaxongoods

t ur wul l r

ll z u x r

r r, rr x, rl

ru R&d. txr wulrv x r u,

equalto$45,000forjointlers($27,500for

l lr).

i wul l r u

l l r rul r

ul- rr r.

ReducemarginaltaxratesinthePITwhile

simplifyingthecode,reduceratesimposed

underthecorporationtaxandthesalestaxon goods.

t urr x r ruur wul

rl, w ur x r

ru w.

Undertherevisedstructure,beginningin

2014therewouldbenopersonalincometax

onjointlerswithincomesupto$45,000

becauseofthestandarddeduction($45,000

joint;$27,500forsinglelers).Ataxrateof2r wul l j

lersupto$95,000,anda7.5%ratewould

l v u. t

1%surchargeformentalhealthonthose

withincomesover$1millionwouldremain,

makingthateectiverate8.5%.

Lw- ul wul rv

l x r r

r w l x

rv vr ul w

lr .

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bereducedfrom8.84%to7%belowthe

l vr.

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ll -z u, w

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12/98

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rl x rr x.

Wl ru ll x r, wul

r pit rrv ur. ovrll,

rl wul lwr pit r ll

ru xr. t l x r

wouldbeloweredfrom5%to4.5%.

all, w wul ul wr

propertytaxexemptionfrom$7,000to$14,000with

quvl x rr r.

o vr, ul w ju r

incomesupto$1millionwouldpayadditionaldirect

andindirecttaxesrangingfrom$71to$806per

household.Householdsearningmorethan$1million

wouldpayanadditional$11,478.

t c rl wul progressivetaxstructurewiththetop5percentof

rr 62 r ll rl x

ll .

Figure 3

e pr prl i tx t

WouldBePaidbyTop5PercentofFilers

SOURCE:ThinkLongCommittee

W vll w rvu w w x

toreach$10billionwhenfullyphasedinwe

r v llw u:

i r r, rvu ul l u

r ur w

r:

In2005,thepeopleauthorizedEconomic

Rvr b (eRb) w r

thedebtfromtheprioryears.Ultimately

thestatesoldtheentire$15billionofERBs.

t u l wll w

about$4.3billionby2013-14andtherst

rr r r x rvu r

v wll rr r

l ur .

i u -fw r l

fewyears,thestatedelayedpaymentstoK-14

schools,requiredbyProposition98,fromone

yeartothenext,totalingover$10billion.

t x rr r rvu r

v wll r u

forschoolsby$5billionannually,withthe

r r l ru

u rr .

Beginningin2014-15,theadditional$5billion

goingtoK-14educationwillbeprovidedin

x r l r jr

ur , pr

98maintenancefactor.Whilethemaintenance

r rr l rlincreaseK-14educationfundingbyabout$10

ll, v x l-r

ur uur l r r-r,

r, rr r u r

l. t u wll rw vr

rv r rvu r

w l x rv.

Beginningin2014-15,theremaining$5billionin

w rvu wll ll llw:

Upto$2.5billionforhighereducation.

Upto$1.5billiontocountiesfortherecently

pul s rl.

Upto$1.0billiontocitiesasunrestricted

rvu


13/98

Figure 4

sur al u

(Total:$10Billion)

SOURCE:ThinkLongCommittee

t rr r rvu wll

rvu l rul r

x rr.

IV.BUDGET AND OVERSIGHTREFORM

Californias budget and budget process no longer

operate reliably to support critical public programs. The

general fund budget, which is over-reliant on personal

income tax and capital gains, is notoriously volatile. As

Californias economy swings from boom to bust with

the national and international economies, the states

budget swings from being ush to multi-billion dollardecits. Health, social service and education programs

funded in good times have to be cut back in bad times

when they are needed most.

Instead of adopting common sense reform like a

rainy day fund reserve already in place in many states

California lawmakers have exacerbated budget

problems through poor planning in good times, and

through smoke and mirror gimmicks or borrowing in

bad times.

Further, the review or oversight of state programs is

insucient to ensure that California taxpayers are

getting the results promised by their representatives.

The Legislature spends little time engaged in a

constructive dialogue with the Executive Branch over

the goals of state programs and how to ensure that

programs are achieving those goals.

The Think Long Committee has developed a set ofbudget reforms that aim to change the budget culture

in Sacramento to focus on long-term results and

performance.

1. RainyDayFund. t u l

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4,isscheduledtogobeforethevotersin2014.

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l w r rl ll r

November2012,andnotbedelayedto2014.

2. Multi-yearbudgeting. t c ur

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3. Legislativeoversightintwo-yearsession.a

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4. Pay-Goforlegislationandballotmeasures.

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than$25million,afterconsideringtheproposed

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5. Modifytermlimits.clr r

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15/98

r r al r s r

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V.INITIATIVE REFORMt v ulur x clr rl J m wr r.

p r f rr l.

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(l r) l r w

rivalinitiatives.In2009,RonaldGeorge,atthetime

clr ju, wrr ull u

lr: h vr v w

l vr l r w

rl,

v u ru r r?

-TheEconomist,April23,2011

Abuse of the initiative process undermines the capacity

of representative democracy to function eectively.

The following proposals for reform are targeted at

curbing these abuses to ensure that the initiative process

remains a vital recourse of the public will not a tool

of special interests or an unwieldy blunt instrument for

budgeting at the ballot box. Set forth below are a series

of reforms to the initiative process intended to improve

the process and restore it as an instrument that can

be used to serve the broadest interests of Californians.

The Citizens Council for Government Accountability,

proposed elsewhere in this report, provides for an

innovative use of the initiative process also designed

to further ensure that the initiative process remains a

mechanism of good governance in the public interest.

1. Transparency.Vr r uur w v r r. t

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2. Indirect Initiative/legislative review when

qualied. gv lx u

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16/98

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voters registered in the last general election.

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4. Allow ballot measures that amend theConstitutioningeneralelectionsonly.

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VI.JOBS,HIGHEREDUCATIONAND ECONOMIC GROWTHThe Committee believes that restoring economic vitality

and job growth to California requires both streamlining

burdensome regulations on business and facilitating

public investment in a well-educated workforce

and infrastructure, from smart energy grids to the

broadband information highways of the future.

A guiding objective of the states long-term strategy

should be to build a vibrant, job-creating business

climate that can sustain a solid middle class while

continuing to make California a welcoming place where

families and individuals will want to reside.

As it continues protecting Californias environment and

working conditions, our state government must also

be a proactive facilitator and partner for job-creating

businesses, laying out the red carpet, rather than, too

often, tying up potential growth with red tape.

Such an approach is essential to re-establishing a

manufacturing base in California and for expanding

exports in the coming decades when most growth will

take place in emerging economies led by China.

The Think Long Committee proposes the following

recommendations, drawn from its Jobs, Infrastructure

& Workforce report (see Appendix), to start us down this

path:

1. Streamlining / improving customer service.

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17/98

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2. Accelerating the CEQA permitting process.

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statePublicUtilitiesCommissionarehandled

(Calif.PublicUtilitiesCode section1759).

RequirethatspecialtraininginCEQAmatters

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enactedAB900(Buchanan/Gordon/Steinberg)

andSB292(Padilla),whichcreatesimilarCEQA

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18/98

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3. Aligning workorce skills with uture jobs.

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Aligningskillswithjobsbypromotingcareer

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EncouragingWorkforceInvestmentBoards

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Establishingajobsconsortiumofcutting-edge

companiestocreateamentoring/internship

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CSUsandUCstofuturejobs.Thepipelineof

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Pressingthefederalgovernmenttoexpand

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4. Renewing the commitment to higher

education as a oundation or growth. r

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19/98

Guaranteeaordability.Californiashould

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forgraduation.(Itis50%inNorthCarolina.)

5. Addressing the $765-billion inrastructure

debt. clr rruur

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20/98

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withthePUCtoexpandtheCaliforniaAdvanced

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CONNECTIONRENEWABLEENERGYPRODUCTION.

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21/98

VII.K-12 EDUCATION REFORMQuality K-12 education is the foundation of any solid

middle class society, providing opportunities for upward

mobility. This is especially so in a knowledge economy

that faces sti competition globally and where students

in other countries from Singapore to South Korea to

China outperform Californias students. To ensure the

states long-term competitiveness, California schools

must be brought up to global standards.

However, the issue of the states decaying educational

system goes far beyond economic and business

concerns. At a moment when some argue that the poor

quality of Californias public schools is the civil rights

issue of our time, serious, systematic and signicant

reforms are needed. Without improvements to learning

outcomes, students in many of the poorer communitiesof California will remain on the wrong side of the

Achievement Gap, trapped in some of the countrys

worst schools.

The Think Long plan would provide for a steady and

growing ow of revenue to education over the coming

decades $5 billion annually for K-14 schools and $2.5

billion annually for higher education at California State

University, University of California, and Californias

community colleges. We believe such new fundingshould not be automatically given to a system that is

failing to educate millions of Californians. It instead

should be tied to improving performance of K-12

schools, as a result of rigorous evaluation of teachers, as

well as curbs on automatic teacher tenure and seniority.

We further believe that new nancing for education

should be designed in such a way as to provide parents,

especially the working poor, with the maximum choice

over how and where their children are educated.

In addressing these issues, the Committee spoke witha number of education leaders who provided their

expertise and perspectives. They and many others have

spent their careers researching ways to improve the

educational system, and their collective knowledge

provides the scaolding upon which the Committee

bases the following key reform priorities:

1. Teacher and principal efectiveness. mrz

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andmovingfrom2to5years).

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22/98

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4. Improvingaccountabilitysystemswl

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VIII.PENSION AND HEALTHBENEFIT REFORM

Given the complex issues of long-term public pension

and health benet liabilities, it was beyond the

scope and time frame of the Committees year-long

deliberation to address this critical public policy

matter. While pension systems are in various states of

under-funding in dierent jurisdictions, they represent

an unsustainable burden on many of these budgets,

competing for funding with education, infrastructure,

job creation and social services.

Estimates of the total unfunded liabilities range as high

as $500 billion. Unless resolved through negotiations

between state and local ocials and public employee

unions all other reform progress is at risk.

On October 27, as this report was being nalized,

Governor Brown proposed a package of pension reforms

including a hybrid 401k system, extension of the

retirement age to 67 and increased contributions from

employees that he indicated would save taxpayers

about half of the projected costs of pensions and retiree

health care benets in the long run. We recommend

that the Governor, Legislature and local government

ocials make it the highest priority to work with publicemployee unions to nd ways to address the long-term

costs of pensions and the unfunded liabilities that have

already been built up.

These proposals are the result o a consensus by the members o the Think Long Committee

or Caliornia. Having in common the ambition o a unanimous position, this report is thereoreapproved without implying that each member completely agrees with every individual proposal.

However, what we all agree on is that, as a whole, these reorms, i implemented, will go a long

way toward restoring good governance to Caliornia. Maria Elena Durazo abstained on the fnal

recommendations. Matt Fong passed away during the course o the year.


23/98

Appendix i

Think Long Committee

Presenters and Participants

Contributors to Jobs, Infrastructureand the Workforce Report


24/98

O

CO

O

C

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Nicolas Berggruen

Berggruen Holdings

David Bonderman

TPG Capital

Eli BroadThe Eli and Edythe Broad Foundations

The Honorable Willie Brown

Willie Brown Inc.

Former Caliornia Assembly Speaker

Former Mayor, City o San Francisco

The Honorable Gray Davis

Loeb & Loeb LLP.

Former Governor

State o Caliornia

Maria Elena Durazo

Los Angeles County Federation o Labor, AFL-CIO

The Honorable Ronald George

Chie Justice, Retired

Caliornia Supreme Court

Antonia Hernandez

Caliornia Community Foundation

The Honorable Bob HertzbergMayer Brown LLP.

Former Caliornia Assembly Speaker

Gerald Parsky

Aurora Capital Group

Former Chair

UC Board o Regents

The Honorable Condoleezza Rice

Thomas and Barbara Stephenson Senior Fellow,

Hoover Institution

Former Secretary o State

Eric Schmidt

Google Inc.

Terry Semel

Windsor Media

The Honorable George ShultzThomas w. and Susan B. Ford Distinguished Fellow,

Hoover Institution

Former Secretary o State and Treasury

Dr. Laura DAndrea Tyson

S. K. and Angela Chan Chair in Global Management

Haas Business and Public Policy Group

University o Caliornia, Berkeley

Former Chair

Presidents Council o Economic Advisers

We are honored by the

participation o:

The Honorable Matt Fong*Former Treasurer, State o Caliornia

*W wr hoor to hav Matt Fogs actv ar tcato utl hs assg

And appreciate the

participation o:

Leslie Miller

Google, Inc.

Rusty HicksLos Angeles County Federation o Labor, AFL-CIO

Think Long or Caliornia Committee


25/98

Alan Auerbach

Proessor o Economics and Law

University o Caliornia, Berkeley

First Lady Ann Gust Brown

State o Caliornia

Governor Jerry Brown

State o Caliornia

James Canales

President and CEO

James Irvine Foundation

John Cogan

Senior Fellow

Hoover Institution

Diane Cummins

Advisor to Governor Jerry Brown

Nadya Chinoy Dabby

Director

The Broad Foundation, Education

Joe Dear

Chie Investment Ocer

Caliornia Public Employees

Retirement System

Amy Dominguez-Arms

Program Director

James Irvine Foundation

Stuart Drown

Executive Director

Little Hoover Commission

Hon. Ronald George

Chie Justice (Retired)

Caliornia Supreme Court

Daniel Hancock

Chairman

Little Hoover Commission

Doug Henton

Chairman & CEO

Collaborative Economics

Fran Inman

Past Chair

LA Chamber o Commerce

Hon. Bill Lockyer

Treasurer

State o Caliornia

Jim Mayer

Executive Director

Caliornia Forward

Gregory McGinity

Managing Director o Policy

The Broad Foundation, Education

John Mockler

President

Mockler & Associates

Hon. Gavin Newsom

Caliornia Lt. Governor

Hon. Roger Niello

Governance Fellow

University o Caliornia CenterSacramento

Joe Nunez

Associate Executive Director

Caliornia Teachers Association

Scott D. Pattison

Executive Director

National Association o State

Budget Ocers

Aaron Read

CEO

Aaron Read & Associates

Michelle Rhee

Founder & CEO

StudentsFirst

Ed Roski

Chairman o the Board & CEO

Majestic Realty Co.

Jean Ross

Executive Director

Caliornia Budget Project

Hon. Arnold Schwarzenegger

Former Governor

State o Caliornia

Senator Darrel Steinberg

President Pro Tempore

Caliornia State Senate

Robert Stern

President

Center or Governmental Studies

Joan Sullivan

Los Angeles Deputy Mayor o

Education

Mac Taylor

Legislative AnalystState o Caliornia

Mayor Antonio Villaraigosa

City o Los Angeles

Tracy Westen

CEO

Center or Government Studies

Julie Meier Wright

Former Secretary

CA Trade and Commerce Agency

Think Long Presenters and Participants:


26/98

O

CO

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Bill Allen

President & CEO

Los Angeles Economic Development Corporation

Bob Balgenorth

President

State Building and Construction Trades Council oCaliornia

Greg Blue

Director o Governmental Aairs

SunPower Corporation

Victoria Bradshaw

Former Secretary Caliornia o Labor and Workorce

Development Agency

Kathleen Brown

Chairman o Investment Banking, Midwest

Goldman Sachs

Tony Brunello

Former Deputy Secretary or Energy and Climate

Change

Caliornia Resources Agency

John Bryson

Retired Chairman & CEO

Edison International

Patrick Callan

President

National Center or Public Policy and Higher

Education

Rachelle Chong

Regional VP o Government Aairs or Caliornia

Comcast

Governor Gray Davis

Former Governor

State o Caliornia

Superintendent John Deasy

LA Unifed School District

Governor George Deukmejian

Former Governor

State o Caliornia

Michael Donnelly

Sr. Vice President o Merchandising

Kroger Co.

Norman Emerson

Principal

Emerson and Associates

Sarah Flocks

Public Policy Coordinator

Caliornia Labor Federation

Mayor Bob Foster

City o Long Beach

Chris Garland

Chie o Sta to Lieutenant Governor Gavin Newsom

Russ Gould

Chair Emeritus

UC Regents

Carl Guardino

President & CEO

Silicon Valley Leadership Group

Ted Harris

Principal

Caliornia Strategies

Christine Herron

Director

Intel Capital

Bob Hertzberg

Mayer Brown LLP.

Winston Hickox

Former Secretary o Caliornia Environmental

Protection Agency

Doug Hutcheson

CEO

Leap Wireless/Cricket Communications

Irwin Jacobs

Founder and Former Chairman

Qualcomm

Contributors to Jobs, Inrastructure and Workorce Report:


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O

CO

O

C

O

Consultants to Think Long

or Caliornia:

Nathan Gardels

Sr. Advisor Nicolas Berggruen Institute

Global Viewpoint

Joanne C. Kozberg


Mike Genest

Capitol Matrix Consulting

Tim Gage

Blue Sky Consulting Group

Jason Kinney


Steven CahnCaliornia Strategies

Andrew Chang

Chang & Adams Consulting

Peter Schaasma


Brad Williams


Shawn BlosserBlue Sky Consulting

Maureen Dear

Legal Advisor


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Appendix ii

Californias Budget Woes:

How is our Fiscal Health?

Legislative Analysts Ofce report, October 27, 2011


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LAO

Californias Budget Woes:How Is Our Fiscal Health?

Legislative Analysts Office

www.lao.ca.gov

Randall Lewis Seminar Series

University of California, Riverside

October 27, 2011


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LAO

Background


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LAO

General Fund SpendingBy Program

2011-12


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LAO

General Fund SpendingBy Object

2011-12


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LAO

General Fund Revenues

2011-12


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LAO

The Change in OurGeneral Fund Revenue Structure


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LAO

The Origins of Our Situation


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LAO

Increasing Revenue Volatility

What Is Volatility?

State revenues change more dramatically thanthe economy.

From 1979-80 Through 2003-04, Revenues

Were Twiceas Volatile as the Economy

From 1991-92 Through 2003-04, RevenuesWere 3 Timesas Volatile


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LAO

The Capital Gains Roller Coaster

Net Capital Gains Income in California (In Billions)


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LAO

Poor Budgeting Practices

Failure to Build Up Reserves During theGood Times

Boom in Revenues Used for Ongoing

Spending Commitments and Tax Relief Did do some one-time spending

(capital outlay).


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LAO

End ResultState EnteredRecession in Poor Fiscal Shape

State Had an Underlying Out-Year BudgetProblem in Excess of $7 Billion

No Budgetary Reserve to Cushion Blow of

Recession


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LAO

Addressing Our BudgetDuring the Recession


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LAO

Recession DevastatedState Revenues

Percent Reduction in Baseline RevenuesNovember 2010 Estimates Compared to January 2008 Estimates


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LAO

Very Modest Recovery Forecast

Job Loss in Percent


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LAO

The 2011-12 Budget


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LAO

Actions to Close the2011-12 Budget Gap

Two-Year General Fund Benefit (In Billions)


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LAO

MajorExpenditure-Related Actions



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LAO

Major Revenue-Related Actions



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LAO

Revenue-Related ProposalsNot Included in the Budget

Extension of Tax Rate IncreasesAdopted in 2009

Personal income tax (PIT), sales and use tax(SUT), vehicle license fee (VLF)

Tax Provisions Mandatory single sales factor.

Changes to enterprise zone credits.

Sales tax exemption for manufacturingequipment.


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LAO

Impacts on Local Government


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LAO

RealignmentMajor Shift inServices From State to Counties

Transfers Over $6 Billion in Services

Adult and juvenile offenders and parolees.

Mental health programs.

Foster care and child welfare services.

Provides Counties With EquivalentOngoing Funding Sources

Just over 1 percent of state sales tax.

Certain VLF revenues.


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LAO

RealignmentMajor Service DeliveryChanges in Correctional Programs

Lower-Level Offenders, Parole Violators,and Parolees Will Now Be Served Locally

Estimated to Reduce State Prison

Population by 40,000 Inmates (About25 Percent) by 2014


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LAO

Redevelopment Agencies

One Bill Eliminated All Redevelopment Agencies

A Second Allows Existing Agencies to Continue ifThey Make Payments to Other Local Agencies

State Savings of $1.7 Billion in 2011-12 and$400 Million Annually Thereafter

Currently Challenged in Courts


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LAO

The Trigger


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LAO

Mechanism Established toAddress Revenue Shortfall

Given $4 Billion Revenue Assumption,State Adopted Cuts to Go Into EffectMid-Year if Monies Fail to Materialize

Spending Reductions Would CoverAbout 60 Percent of Potential Shortfall


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LAO

Trigger ReductionsFall Into Two Tiers

Tier 1: Revenues Fall at Least$1 Billion Short

$600 million in specific cuts (such as$100 million to the University of California).

Tier 2: Revenues Fall More Than

$2 Billion Short Up to $1,860 million in education cuts,

primarily K-12.

K-12 cut prorated, based on revenueshortfall.


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LAO

Key Challenges


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LAO

Closing Our RemainingBudget Gap

The State Made Much Greater Progress in2011-12 in Reducing Structural Budget Problem

We Are Still Likely to Have a Significant ProblemNext Year

Revenues will be key.

Our Mid-November Fiscal Forecast Will EstimateRemaining Problem in 2012-13 and Out-Years


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LAO

Deciding on theSize of the Public Sector

Much of the Debateat Both State and FederalLevelComes Down to:

What is the appropriate size of government?

Your Answer Determines Whether You Support

New Revenues or Expenditure Reductions

If Governor Has His Way, You Will Have a Chanceto Vote on Revenue Increases This November


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LAO

AddressingBudget-Related Obligations

The State Has Accumulated a Variety of DeferredExpenses Over the Past Decade:


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LAO

Addressing Public EmployeePost-Retirement Obligations

The State Has Unfunded LiabilitiesPension andRetiree HealthProbably Well Over $150 Billion

Two Major Implications:

Increased state costs to begin to address these

obligations.

Continued pressure to modify benefitsprimarily related to future employees.


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LAO

Addressing Our StateUnemployment Insurance Shortfall

The State Currently Owes Over $9 Billion to theFederal Government Related to OurUnemployment Insurance Program

We Will Need to Raise Employer Costs and/or

Reduce Future Benefits to Bring Our AccountBack to Balance


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LAO

Making Choices on Infrastructure

The State Has Huge Infrastructure Demands:

Water, highways, universities, schools, etc.

Capital Outlay Spending Is Also One of theOnly Ways for State to Contribute Immediately to

Economic Growth

The Tradeoff?

Every $5 billion in new bond spending generates$350 million in debt service payments.


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LAO

Achieving Budgetary Reform

Key Is Addressing Revenue Volatility By:

Taking revenues off the table during goodtimes.

Building up and maintaining reserves that willbe there in bad times.

Many Other Possibilities

Performance based budgeting.

Two-year budgeting.

Improved program reviews.


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LAO

Considering Tax Reform

Incredibly Difficult Task With No ClearConsensus on What to Do

Most Widely Discussed Topics

PIT: reducing volatility.

SUT: broadening base and not taxingbusiness-to-business transactions.


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LAO

Visit the LAO website at:www.lao.ca.gov


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Appendix iii

Jobs, Infrastructure

& the Workforce

Think Long Committee report, September 2011


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STREAMLING GOVERNMENT INVESTING IN INFRASTRUCTURE INVESTING IN INNOVATION

IN PEOPLE MAKING HIGHER EDUCATION A PRIORITY STREAMLING GOVERNMENT INVESTI

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A PRIORITY STREAMLING GOVERNMENT INVESTING IN INFRASTRUCTURE INVESTING IN IN

Jobs,Infrastructure &

the WorkforceSeptember 2011

THINK LONG COMMITTEE FOR CALIFORNIA


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This report was prepared by Doug Henton, Chairman and CEO of Collaborative Economics and JulieMeier Wright, retired President of the San Diego Regional Economic Development Corporation and formerSecretary of the California Trade and Commerce Agency with the assistance ofSteven Cahn, Joanne Kozbergand Nathan Gardels of the Think Long Committee for California. It is based on:

Extensive interviews with current and past leaders of Californias economic development. Those

interviewed include:

Bill Allen, President and CEO of the Los Angeles Economic Development Corporation; Bob Balgenorth,President of the State Building and Construction Trades Council of California, AFL-CIO; Kathleen Brown,Chairman of Investment Banking, Midwest, Goldman Sachs; John Bryson retired Chairman & CEO of EdisonInternational; Gray Davis, former California Governor; George Deukmejian, former California Governor;Michael Donnelly, Sr. Vice President of Merchandising, Kroger & former President of Ralphs Grocery Co.;Bob Foster, Mayor of Long Beach and former President of Southern California Edison; Chris Garland,Office of Lieutenant Governor Gavin Newsom; Russ Gould, former Director of the California Departmentof Finance and past Chairman of the University of California Regents; Carl Guardino, President and CEOof Silicon Valley Leadership Group; Christine Herron, Director of Intel Capital; Doug Hutcheson, CEOof Leap Wireless/Cricket Communications; Irwin Jacobs, founder and former Chairman, Qualcomm; JeffJonker, Chief Business Officer of Satori Pharmaceuticals; Stephen Levy, Director of the Center for the

Continued Study of the California Economy; Lenny Mendonca, Director of McKinsey and Company, Inc.;Leslie Miller with the Office of the Chairman of Google, Inc.; Gavin Newsom, Lieutenant Governor ofCalifornia; Manuel Pastor, Professor of American Studies & Ethnicity, University of Southern California;Noel Perry, Founder of Next 10; Art Pulaski, Executive Secretary-Treasurer, California Labor Federation;Charles Reed, Chancellor of the California State University; Fred Ruiz, Chairman & CEO of Ruiz Foods;Peter Schwartz, Co-founder & Chairman of Global Business Network; Ashley Swearengin, Mayor of Fresno;Laura Tyson, S.K. and Angela Chan Chair in Global Management of the Haas Business and Public PolicyGroup, University of California, Berkeley; Peter Uebberoth, Founder & Principal, Contrarian Group; MegWhitman, former CEO of eBay; Pete Wilson, former California Governor; and Mark Yudof, President of theUniversity of California.

Discussion of the Think Long Committees Task Force on Jobs, Infrastructure & the Workforce held atGoogle, Inc. on May 6, 2011, and chaired by Lieutenant Governor Gavin Newsom. The following task

force members were present: Julie Meier Wright, Sarah Flocks representing Art Pulaski, Christine Herron,Bob Hertzberg, Stephen Levy, Leslie Miller and Noel Perry. Becky Morgan attended as a guest.

Discussion of the Think Long Committee at a meeting on August 10th, 2011, chaired by Dr. Laura Tyson.

The Think Long Committee wants to thank Stephen Levy for his major contribution to this endeavor as wellas the following individuals:Greg Blue, Director of Government Affairs, SunPower Corporation; VictoriaBradshaw, former Secretary California of Labor and Workforce Development Agency; Tony Brunello, formerDeputy Secretary for Energy and Climate Change, California Resources Agency; Patrick Callan, President,National Center for Public Policy and Higher Education; Rachelle Chong, Regional Vice President ofGovernment Affairs for California, Comcast; Norman Emerson, Principal, Emerson and Associates; ChrisGarland, Chief of Staff to Lieutenant Governor Gavin Newsom; Ted Harris, Principal, California Strategies;Winston Hickox, former Secretary of California Environmental Protection Agency; Loren Kaye, Presidentof California Foundation for Commerce and Education; Robin Kramer, Commissioner, Port of Los Angeles;

Sunne Wright McPeak, President and CEO, California Emerging Technology Fund and former Secretary,Business, Transportation & Housing Agency; Mark Watts, Principal, Smith, Watts and Co.; and Peter E.Weber, Chair, Executive Committee, California Partnership for the San Joaquin Valley.

The Think Long Committee applauds Governor Jerry Brown and leaders in the Legislature for their effortsto address Californias economic challenges and its double-digit unemployment rate.

Finally, the Committee thanks Lt. Governor Gavin Newsom for chairing its Task Force on Jobs, Infrastructure& the Workforce and for his focus on improving the states economic prospects.


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CONTENTS

INTRODUCTION..........................................................................................................................................6

KEY RECOMMENDATIONS...........................................................................................................................8

FACTS ABOUT THE CALIFORNIA ECONOMY............................................................................................12

FRAMEWORK..............................................................................................................................................14

RECOMMENDATIONS & GOALS................................................................................................................17

Investing in Infrastructure.........................................................................................................................18

Investing in People...................................................................................................................................23

Making Government Job Friendly and California Attractive to Private Investment....................................26

CONCLUSION............................................................................................................................................28

ENDNOTES.................................................................................................................................................29


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INTRODUCTION

6

California and its economy enjoy many strengths and advantages compared to itsnational and global competitors. The worlds eighth largest economy, the stateincludes industries with significant long-term growth potential. California is thenations leading center of technology and innovation, capturing $1 in every $2of the nations venture capital funding. It is the dominant entertainment centerwith 40% of the nations jobs. California also is the leading Pacific Rim center forexports, foreign trade and investment. It remains the nations largest agriculturalproducer and exporter, and tourism has solid long-term growth prospects asconsumers around the world experience rising incomes.

But, the competitive climate has become even more challenging for Californiaand the nation. Other countries such as China, India and Brazil are producingstrong economic growth and making rapid advances in technology while investingaggressively in infrastructure and education. No longer is America the onlycenter of technology and innovation. Instead, both California and the nation areexperiencing high rates of high school dropouts and failing to increase the numberof college graduates, particularly in science, technology, engineering and math.

California, and the nation as a whole, still can seize economic opportunities, butonly if both overcome these multiplying sets of challenges challenges made eventougher by the ongoing economic downturn and lingering effects from the GreatRecession. Failing to act with a real sense of urgency will threaten the essence ofthe California lifestyle, which is built on the states middle class, its workers andtheir families and is fueled by opportunity and innovation in an evolving globaleconomy. Cultivating a healthy economy in California will provide the good jobsthat pay family-supporting wages.

In setting forth how California best can adapt to these challenges, the Think Long

Committee for California Task Force on Jobs, Infrastructure and the Workforce firstanalyzed the results of 20 years of prior reports as well as conducted interviewsand held discussions with more than 50 business, government, academic and laborleaders from regions throughout the state.


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Think Long Committee for California - Jobs, Infrastructure & Workforce

7

From this work, a set of recommendations emergesaround three key points:

California is an economy of distinct regions

Productivity and innovation are key to futuregrowth and prosperity

Public policy should promote productivity andinnovation in both the public and private sector

Since California is an economy of distinct regions, anystatewide economic strategy that seeks to bolster broad-based prosperity and a healthy middle class of skilledworkers must be built from the bottom up. Further,such a strategy requires both reducing the cost of doingbusiness by streamlining our complex regulatory processand adding value to the business climate by investing ininfrastructure, innovation and people.

As it establishes an economic strategy, the state shouldfocus resources and policies where its strengths andcomparative advantages lie: its climate; the relative sizeof its market; a highly skilled workforce; regions that arehubs of innovation; and access to trade with Asia andLatin America.

The Task Force also carefully reviewed the oftenrepeated criticism that California is a terrible place todo business. These complaints have been around fordecades, through good times and bad, and there are

dissenting views. Here is where there is no dissent:Good customer service is essential, whether one istalking about a business or a government agency.California must provide that higher level of service inorder to compete with other states and nations. As werecommend in this report, it can start by providing singlepoints of contact for interested investors and businesses.Consolidation of duplicating agencies and streamliningregulations can save money over the long term, butthe main immediate payoff will be in better customerservice.

Traditionally, the debate about creating an economic

strategy for California has revolved around twocompeting definitions of a good business climate:

Cost-Driven: In this view, a good business climateis defined as the absence of high taxes, excessiveregulations, high labor costs and high utility rates.Businesses are assumed to be cost-driven and thuslocate and grow in environments that provide thelowest-priced inputs (land, labor, capital) and theleast interference by government.

Innovation-Driven or High-Road: In this view, agood business climate is defined as what is addedto the environment for industries and companies.This includes a skilled workforce, accessibletechnology (often from a state university), capital

markets, quality infrastructure and a network ofsuppliers. Government has an important role toplay in helping to create and maintain this type ofbusiness climate.

As noted, a competitive business climate for Californiarequires both critical investments that add to productivityas well as policy reforms that reduce the costs andcomplexity of doing business.

The key to high-road success is public investment toattract private investment. Californias strengths areits places and people. William F. Miller of Stanford

summarizes the direction for a high-road state economicstrategy:

What works? What is effective are people and placepolicies. What does not diffuse away quickly areinfrastructure and workforce. Although a few key peoplemay be mobile, large numbers of the workforce arenot. Polices that support the education and training ofthe workforce, that support research combined witheducation, that support a modern infrastructure, andsupport the development of institutions that facilitatecollaboration between business, government, and theindependent sector will have lasting effects of buildingcapacity that does not diffuse away. Develop the peopleand placesthe habitat for living and working.Supporting the ongoing development of Californiaspeople and places, its core strengths, should be thecentral approach of the states economic strategy.

The Task Forces report is divided into three sections:

An executive summary of priorityrecommendations for improving infrastructure,strengthening higher education / workforcedevelopment and streamlining regulation.

Facts about the California economy that informedthe recommendations.

A full set of actionable recommendationsand goals. Those include: education andbudget strategies to reform and fund increasedinvestment through strengthening localgovernment, proposals to organize and fundcritical infrastructure investments, and policies tostreamline regulation.


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8

The Silicon Valley Leadership Groups 2011 CEOBusiness Climate Survey identifies the key challenges indeveloping an innovation strategy for California:

Increasingly it is difcult or Silicon Valleycompanies to compete against other centers oinnovation and entrepreneurshipboth domesticand abroad. Among the unique challenges areglobalization and the international competitionor talent. A deteriorating state inrastructure in

areas ranging rom public education to publictransportation has added to the difculties orecruiting the best workorce, fnding them availablehousing, and educating their children to betomorrows world-class workorce.

The CEO survey reminds us that in competing forbusinesses we also must compete for talent, whichmeans competing for people. Executive interviewsconducted in recent industry studies for local workforceboards uniformly rank access to a skilled labor forceas the number one reason for locating in California.Fortunately investments in people and places dodouble dutyproviding great places to work whilesimultaneously developing great places to live.

The Think Long Committee has developed a series ofrecommendations for investing in California peopleand places to create communities and regions thatsay come here to live and work. PreK-12 educationrecommendations, while critically important to astrong California workforce, are not covered in thisreport as they are part of the Think Long Committeesbroader scope of deliberation. Key infrastructure, highereducation and job/workforce recommendations are

set forth below, as are recommendations for how tostreamline customer service (one-stop shopping) andhow regulations can be implemented to make Californiaa more welcoming place for innovation and jobs.

IMPROVING INFRASTRUCTURE

Think Long has identified infrastructure needs of morethan $765 billion over the next 10 years with nearlyhalf of these dollars currently without a funding source.(For more detail see chart on page 18.) Planning forand funding infrastructure in California is a partnershipeffort involving the state, local and regional agencies;the private sector; and the federal government. Thefunding gaps are large but it is critical, given Californias

continuing budget problems, that new investmentsare made strategically and wisely. Such investmentsalso would address immediately one of the biggestcontributors to the states high unemployment rate:the ongoing loss of construction jobs. Thoughtfulinvestments in infrastructure as suggested in theLegislative Analysts report A Ten-Year Perspective:California Infrastructure Spending will have bothsubstantial short- and long-term effects on the stateseconomic strength.

Before additional funds are allocated Think Longrecommends the state:

Develop a better process to insure thatinfrastructure investments are made wisely. Majorideas include rigorous evaluation of alternatives;devolution of planning and prioritization to thelocal and regional level where possible; andextensive reliance on user fees where feasible,including active promotion of public-privatepartnerships. The state also must ensure there areproper inter-regional and multi-modal linkages.

Carefully evaluate alternatives to additionalinvestment and identify innovative ways to invest.

There are many ways to expand infrastructurecapacity besides building. These approachesinclude conservation, metering for more efficientenergy use and the use of prices such as peak-hour pricing for energy and highways to reduce

KEY RECOMMENDATIONS


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9

peak demands and new construction needs. Thereare more efficient materials and construction

process available, as well. The state should bedevoting more resources to maintenance (versusrepair, which is more expensive) and also shouldreduce bureaucracy to expedite projects.

Implement the Water Innovation Roadmapby the California Council of Science andTechnology, Department of Water Resource andother partners. Doing so will promote scienceand technology solutions to the states water-supply challenges by using IT and smart systemsapplications to increase water efficiency; reduceenergy intensity of water systems; and assure that

surface and groundwater use is monitored usingremote sensing and satellite technologies.

A funding strategy for Californias unfundedinfrastructure gap should include the following:

Require a new dedicated funding source for futurestate General Obligations bonds. This approachfollows the well-accepted practice where localagency and school bonds are approved onlyif voters also approve a new funding source.Benefits include improved transparency andgovernance since voters will know that state

bonds arent free and reduce debt-service costs,which will free up funds for other purposes in thestate budget.

Adopt user fees, where appropriate, forinfrastructure funding. This can include tolls forpeak-hour freeway use and the use of publicprivate partnerships where the private sectorfinances and develops public infrastructure inreturn for user fees. The state should pursueopportunities for private-sector financing ofinfrastructure where possible although the reviewof infrastructure needs conducted by the Think

Long Committee for California found that a largeproportion of new investments such as road repairis not appropriate for the toll road/user fee model.

Follow the recommendations of the LegislativeAnalysts Office (LAO) and others to correct

deficiencies in the current state fuel-tax system toprovide funding that keeps pace with needs andinflation in an era when fuel efficiency and fueluse are improving rapidly and no longer able tokeep pace with transportation funding needs.

Improve local agency ability to plan for andfinance infrastructure by adopting the samerules for local infrastructure and transit districtsthat we have for schools, where new fundingcan be approved by local voters with a 55%majority. Also implement the recommend

Think Long Committee's Recommendations

Documents

Transcript of Think Long Committee's Recommendations