A Chat With State Treasurer Bill Lockyer

CC: Is this budget deal a permanent solution to the chronic gap between spending commitments and revenue 

BL: No. It’s far short of that. The long-term gap represents about 4 percent of the general fund which in a normal year can be closed. This was a particularly bad year. And when bigger tax increases or deeper program cuts become unpalatable people borrow, which we’ve continued to do each year. The last time the state budget had balanced revenue and expenditures was 1999. It’s got to get done one of these days and hopefully soon. 

But at least this year, unlike last year when they gave away huge business tax breaks and got nothing for it, it was a little more balanced package. I defy anyone to show me convincing, hard evidence of job creation and economic benefit. 

(Editor’s Note: One of Lockyer’s more memorable lines, addressed to a windy witness at a legislative hearing is: “The plural of anecdote is not evidence.”) 

No budget is perfect, the nature of a budget is everyone is unhappy about something. I also know if you weren’t actually doing the negotiations you could have gotten a far better deal. That’s what everyone always believes. The ones who weren’t there could always have done better. From personal experience, it’s hard when you’re the negotiator. I don’t know whether the best decisions got made but I wasn’t one of the negotiators. 

CC: How could you know? There was never a public hearing on the thing. 

BL: I agree that’s bothersome. It used to be we’d make the final closing bits and pieces arrangements in the middle of the night but never rewrote the state constitution in the middle of the night.

CC: They did that? 

BL: Yep. The open primary and the other things (GOP Sen. Abel) Maldonado wanted. Those are constitutional amendments. Frankly, I think this is just the beginning of serious budget holdups in the future. If you’re willing to rewrite the constitution to get a needed vote, the antes will only keep going up. 

In terms of getting the job done you have to give the legislative leaders a pretty good grade for that. Although I would say there were too many concessions to Republicans. 

CC: Were you involved privately in the negotiations? 

BL: Not really. I had an idea toward the end in which you’d go to the Republicans and say, ‘We surrender. You get what you want for your part of the state. Orange, San Bernardino, Riverside, and the far North all get no new taxes, only cuts. The rest of the state would get the combination of cuts and taxes. Sort of a red and blue budget. 

CC: Is the Pooled Money Investment Account back up to speed?

BL: We did a little work with the account today. The Bay Area Toll Authority wants a private sale of $200 million in bonds to help with their projects. They’re going to buy state bonds and then we’ll dedicate the money to projects on the list for them. Some other deal like that might come together. 

CC: That’s nothing like what the account was doing before. 

BL: No. The account does two things: maintains day-to-day, week-to-week state cash flow and helps with our infrastructure needs through bond programs of one sort or another. So when all the money was needed for cash flow purposes, 6,000 of those projects got shut down. Some were kept going because of the tremendous costs of shutting them down. One of the consequences of this whole mess is I guess all future contracts will have big penalties to the state if it halts construction. That will be their way of getting insurance. Certainly, the person on our side of the table will negotiate the contract that way. 

But with the tax increases there will be some money that starts to come in above the original estimates to help with state cash flow So then the question is how soon can we get in the market for bonds and how much. That’s basically how the account will get refilled, bond proceeds. 

CC: Tell me one more time how the account works. 

BL: In order to not have delays — like the project is ready to go but you still have to go out to sell the bond — to avoid that, we loan them the money from the account and then when the market is right then we go sell the bond. But, as I say, the money in the account got used for cash flow so there wasn’t an adequate amount to do both cash flow and the bond projects. 

CC: When are we going to get back in the market? 

BL: We’re hoping in maybe late March, possibly early April. Fairly soon. The need is several billion but we can’t do that. The salesmen they all say, ‘Oh sure you can easily sell $5 billion.’ None of our folks think we can get that much. 

We’re waiting for the cash flow analysis basically that we and (Gov. Schwarzenegger’s Department of) Finance put together so we’ll know what’s coming, what bills need to get paid, how much of a bond issue if we go out with one, how much will be devoted to cash flow and infrastructure. We don’t have those answers yet. Another week or so before we can reasonably make some decisions. We hope there’s a good retail market out there. We don’t know yet. 

CC: Is borrowing more expensive because our rating is in the cellar?

BL: Yes. We don’t know how much more expensive. It has to do with size. Borrow more, pay a little more. The fact is our rating is the lowest of all the states. It’s not fair but it’s the rating we’ve got. I’ve argued with the rating agencies on that but they claim their ratings are being responsive to investors. If they’re being responsive to investors then they want us to have a bad rating so the investors get a better yield. They’re helping rip us off, in effect. The rating should be based on how safe is your money. Then they say, ‘Our investors want more granularity.’ 

CC: Then they should go to the beach. 

BL: Good answer. Investors don’t care about intricacies of California’s budget process. Rather than optics, they want to know ‘Is my money safe.’ 

CC: Has California ever defaulted on anything, long term or short term? 

BL: The state, no. Never. We’ll wind up paying more because of the rating than we probably should. It’s good for investors. It’s not good for taxpayers. The higher debt service is an extra little squeeze on other program needs. You could have use the money for some other purpose. 

CC: What do you think about the so-called spending cap on the May ballot? 

BL: We’re still looking at it. We still have to see what impact it has on program spending and its impact on the cost of borrowing for the state. 

CC: There’s an initiative out there to lower budget votes to 55 percent. 

BL: What would have greatly assisted its passage, is including the punishment, the no-legislative-pay if a budget is late. The two combined polls at something like 80 percent. But the pay measure is on this May’s ballot and the 55 percent won’t be on until next year. A thrown away opportunity.

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