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State controller: November elections can affect financial ecosystem

The national, state and local economies are forecast to slowly improve, and California’s state controller said much depends on the November elections.

The choices that political leaders make can have an effect on the whole system, said California State Controller John Chiang at the 2012 San Diego Beacon Economics Conference on Wednesday.

“Even though we’re making progress, the economy is rebounding. … We have to make sure that not only is the private sector rebounding, [but also] that we take smart, tough, strong actions on the public sector side. We have a huge hangover with huge debts,” Chiang said. “We have a delicate financial ecosystem, not only in the state level, we’re all tied together.”

When Gov. Arnold Schwarzenegger made his first act in office, he reduced the vehicle license fee, which cut $4 billion to state benefits, Chiang said. That money went to local public safety, and when the local cities complained to the Legislature, it reimbursed the cities.

“Well that $4 billion plus they took, that money has to be taken from somewhere else. That money was taken from general fund revenues and other places — less money for education, less money for health care, less money for corrections,” Chiang said.

Also on November’s ballot is Proposition 30, which would create a temporary sales and personal income tax increase. If Prop. 30 passes taxes will increase, but if it fails, the school year will decrease from 175 days to 160 days, said Chiang.

“Increase taxes or cut the school year,” said Chiang. “I would vote yes.”

Debt service is a growing concern in California, said Chiang. Last year the state spent 7.9 percent of its budget on debt service. And debt service and corrections are the highest growing components of the state’s budget -- July 13, 2007 marked the last date that California was operating in the black from a cash perspective, said Chiang.

“This state, with a $1.9 trillion-plus economy, has been operating on borrowed money since, and that’s not a positive position,” said Chiang.

California borrows both internally and externally and is tied with Illinois for the lowest credit rating among the 38 states that borrow, said Chiang. The state spends the most money on education, health care and welfare, and corrections. The largest source of revenue is personal income taxes, followed by sales and use taxes, and corporate taxes.

During the recession, the state’s unemployment rate climbed from 5.7 percent to 12.5 percent in 2010 — the state lost 1.34 million jobs and has recovered around 500,000 of those jobs, said Chiang.

“If you have that many people losing their jobs, you have a deterioration in the state’s tax revenues and an increase in the state’s services,” said Chiang. “People lose their jobs, less income tax revenues, people don’t have as much money in their pockets, they don’t go out and shop as much.”

The state’s tax structure creates incentives for businesses to locate personnel and offices and facilities outside of California, said Chiang, which gives jobs to other states and takes them out of California. Chiang suggested the state eliminates tax credits and drops the overall tax rate to make California more competitive.

In 2008, Chiang said Gov. Arnold Schwarzenegger signed a budget that was 100 days late, and just over a week after the Lehman Brothers’ bankruptcy.

“I told the governor that he shouldn’t sign the budget because we knew it was going to miss because of the timing and the amount,” said Chiang. The budget he signed was in excess of $103 billion, “which reflected one of the best budgets ever if we met those expectations in California history.”

“That year, we witnessed a decline and we are still living in devastation in terms of deterioration of that budget because those deficits carried forward and this is what happened to all of us,” said Chiang.

Education hasn’t been paid in full the amount due under the Prop. 98, said Chiang. In 2008 and 2009, negotiations were made to defer payments for education.

“Conservatively, they’re still owed another $12 billion and they had deferred payments, they weren’t paid entirely for $11 billion,” said Chiang. “One-hundred and eighty-eight school districts are in financial trouble. [That means] 3 million to 7 million school kids are in a school district that has negative qualifying certification — meaning cash flow problems this year or in three years. These are decisions we’re going to have to make on the November ballot.”

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