Public Policy Skillfully Crafted: Finance, Water Wars & Senator Peace
Senator, we have a lot of issues to talk about, but lets start with water, if we could. It looks like the Colorado River negotiations are back and proceeding. In March, we interviewed Secretary of Resources Mary Nichols, and she said the following: The lack of resolution on the Colorado River and the widespread perception that the Metropolitan Water District doesnt have its act together are probably the biggest obstacles that we face in the Bay-Delta negotiations. Mets a critical player. I wonder if you could talk about the Colorado River discussions as they relate to California water policy and give us your perspective?
The parties are negotiating in good faith. And hopefully, well get resolution sometime in the next few days. In the end, its going to take the bully pulpit of the Governors Office to drive the final spike in the railroad crossing, but once were there, a lot of dominos will fall into place.
And those are legitimate concerns. The desire of private sector providers to get into the system at the lowest possible cost is appropriate. The desire of public providers, who own those facilities, to protect their ratepayers is also appropriate. But the private providers want to calculate the immediate cost of moving one given unit of water through the system while the public providers want to calculate the total cost of every drop that moves through, whether public or private. Somewhere between those two is a fair market notion of incremental cost.
Businesses deal with incremental cost in various ways. They all have secondary opportunities outside their core business. Often, competitors will offer to rent or make a trade for access to another companys facilities, especially when those facilities have excess capacity. While the cost of these deals may not fully amortize that equipment, theres the obvious value of money on the table and the future ability to turn to the competitor in a similar situation.
The public sector needs to think more like the private sectorhow can we make best use of this embedded investment in water transportation infrastructure? How can we get the highest possible return for ratepayers in the most creative way? The answer is not simply that x units of water means x units of transportation cost; the answer will vary according to the circumstances.
If water is moving from north to south, there will be one set of issues and one cost determination. If the customer is longstanding, the cost will be determined much differently. If the transfer is in dry yearswhere theres excess capacity anywaythe answer will be different from a time when other water would have to be displaced from those facilities.
So once we get the players to accept the basic premise that any transaction involving the historical provider should provide incremental benefit to ratepayers, well get an agreement. At this point, the parties have agreed that there are four types of transactions: totally new, unanticipated customers; totally new, but reasonably expected customers; existing customers with increasing demand or need for additional reliability; and existing customers with existing demands. The transportation costs for each customer group must be dealt with differently.
Extraordinarily well said, Senator. Let me move to the issue of State and local finance, if I could. Youre Chair of the Senate Budget Committee and have been an articulate advocate for repair of the State-local fiscal relationship. As someone whos experienced on both sides of this issue, give our readers a feel of what the crux of the problem is and what the obstacles are to fixing what most agree is a dysfunctional system at present.
The greatest obstacle is the passage of time. This problem began 30 years ago as an unintended consequence of Proposition 13the power to make decisions was transferred to the State, which diminished local governments capacity to identify and establish revenue streams of their own.
The people responsible for raising money ultimately make the decisions, no matter what they say to the contrary. Its like the proverbial college studentthe only time you hear from them is when they need money. At times, being a State legislator in this era has felt just like that with respect to local governments. And thats unhealthy from both a local and a State perspective.
We let 30 years go by without addressing a fundamentally flawed mechanism, and a lot of things happenedmostly, by the way, resulting from good intentions. Theres been 30 years of band-aids, beginning immediately after Prop. 13 when the Legislature bailed out local governments with what was then a large State surplus. Well, that surplus disappeared, revenues to the State shrank, and the State was no longer in a position to provide the backfill of revenue taken away by Prop. 13. The reaction from the local governments was perfectly justifiedthey couldnt function on what was left. However, if the State hadnt acted, we would have had schools shutting down.
So our first goal must be to return independence to local governments. But they must understand that with that independence and authority comes responsibility. Similarly, State government has to be prepared to relinquish some power and authoritywhich is a difficult thing to give up.
Now, those issues concern the power relationship; the financial relationship revolves around infrastructure needs. The State drastically reduced infrastructure financing during the 70s and 80s, and today, many local financial pressures come from infrastructure demands. One group says theyre talking about local government finance, another group says theyre meeting about infrastructure, and a third group thinks the issue is California tax policy. But its all the same issuewhether they know it or not. You cant do local government financial reform without doing infrastructure reform. And you cant do either without tax reform.
An irrational tax structure grew up in California in the aftermath of Prop. 13, and its never been comprehensively discussed in the context of providing the best yield to State and local governments with the lowest possible tax on citizens.
The most graphic example is the sales tax. Compared to other states, we have a very high sales tax, mostly because it hasnt been deductible in our federal income tax since 1986. Right now, were shipping a quarter of our tax impact off to the federal government. It doesnt take a rocket scientist to discover that we could get the same yield from 25% less in taxes by using other federally deductible tax revenues.
California got a huge head start in the 60s by aggressively investing in schools, water systems and transportation systems. Since that time, however, California has been among the lowest investors in all those areas. Its no secret that we have a huge need to invest in infrastructureeducation, water, sewage, transportation and telecommunicationsif we expect sustained future growth. And to improve those thingswhich are necessary to operate an efficient economywe need a tax structure that makes sense.
The business community has a great deal at stake. They understand the interactions and complexities associated with tax policy, the local-State relationship and the infrastructure problems. And I think they will be the key driving force in overcoming these hurdles.
In total, all the organs of government are actually spending less per capita today than they were 30 years ago, on adjusted terms. Whats different is that the portion of the population under 18 and below poverty is 150% higher. So a couple of things are working against each other here: One is a larger dependent poor population, which puts tremendous stress on counties, and educational resources particularly. And two is an economic growth rate not adequate to keep up. We have to restructure the incentives in this tax system so that the growth/productivity rate can keep up with the changes in population demographics. And thats certainly doable.
Let me jump in and ask you about the trailer bill to the State budget that you sponsored. Can you recap what happened with that bill and what your expectations are with the tack you took?
The first component of the State government package was about $250 million of immediate local government assistance, mostly one-time moneys to be used for capital improvements, deferred maintenance, etc.
The second component was a series of actions tied to the successful passage of a constitutional amendment in November 2000. I expect that when we return from summer break, the Legislature will look earnestly at that amendment proposal. This will lead to interim hearings over the fall, and then a stretch-run between January and July aimed at putting that amendment on the ballot.
At this point, its difficult to say where the Legislature and the Governor might head and what the parameters will be. But in general, the bill will logically address three issuestax reform, State-local government relationships and infrastructure.
Senator, let me draw this to a close with a more forward-looking question. Youve had a fairly high profile on a number of issues, and youve recently said youre leaning towards running for Secretary of State in 2002. What would you like to leave behind in your Legislature career that could be the platform for your statewide race for Secretary of State, if thats what you pursue?
Everybody comes to this process with passion for something. I really believe in the democratic process, which is one reason Im interested in running for Secretary of State. Its important that people believe in their governing institutions.
As a legislatorwhether people have agreed or disagreed on given issuesmy aim has always been to maximize public participation and encourage people to see democratic institutions as places to resolve conflict, not engage in it. As Secretary of State, it would be my goal to improve peoples confidence in their electoral system. Its extremely important that we make some fundamental changes to do this.
Hopefully, the heart of that message will have been established by my track record in the Legislature. Every work product Ive engaged in has been conducted in a very open and public forum. Each has been businesslike, timely and functional. And thats how I would like to see the Secretary of States office operatewith election processes themselves more open, inclusive, timely, functional and businesslike.
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Speaker's Commission on State/Local Government Finance