State Controller John Chiang On California’s Fiscal Future

California State Controller and Sacramento’s chief financial watchdog John Chiang visited SBCC on Thursday to discuss the state’s fiscal standing with college educators and administrators — the second in a series of lectures held by the official in Santa Barbara County. In a roundtable discussion, Chiang addressed the issues of state-level tax, pension, and health care reform, offering insight and advice on a subject that he stated to be “difficult even for very well educated people to understand.”

“You have to be the honest scorekeeper, to tell them the tough news if that’s required,” said Chiang. He added that “if at any point you want to know what the state’s fiscal condition is, just go to my website.”

The son of Taiwanese immigrants, the second-term Democrat was elected to the post in 2007, and released a report the same year that highlighted the massive costs in providing health benefits for retired state employees, a move credited for reigniting “a much needed discussion.”

The 48-year-old official has since developed a reputation as a tenacious financial overseer, and garnered media attention in 2008 for publicly opposing a budget-cutting initiative proposed by then-Governor Arnold Schwarzenegger to reduce the pay of 200,000 state workers to the $6.55 per hour federal minimum. He made headlines again last month for canceling legislative paychecks under a new law requiring lawmakers to pass a budget by June 15.

“You may know of the position I took not to pay the legislators based on Prop 25 and Prop 58,” he said to the City College assembly. “They were incredibly unhappy, but I was trying to remind them that just two years ago their failed decisions had us in trouble — twice.”

Chiang expressed his optimism for a recovery from the debt crisis, though stated that improvement will require bipartisan collaboration, and that the process is both gradual and without a single solution.

“You just have to be prudent,” he said. “It is going to be difficult in the foreseeable future. We owe the federal government $10 billion dollars, and if we don’t make that payment we will be paying interest penalties. [But] I have great hope for the state. This is the wealthiest country in the world; this is the land of opportunity. If we can do things correctly we can turn things around.”

The controller stated that in order to see improvement in health care and education, the tax system needs to be improved so that it is “more competitive and fair” for small and medium businesses. However, though small businesses are a key link to the state’s economic comeback, he said, higher education and research should not be shortchanged if we are to be competitive on a world wide scale.

“We have a tax code that���s outdated — it gives tax breaks to people and large corporations who shouldn’t have them,” said Chiang. “We have to have a tax code that is updated for this century. Sales tax in 1933 didn’t anticipate modern companies like Amazon….Because of political ideology and tradition, when you eliminate a tax credit it counts as a tax increase — that’s not right.”

He went on to advocate for tax reform that sees closer, more careful examination for legislature that is economical, though not at the expense of key institutions.

“Whether on the social or the tax side, you ought to be pushing effectiveness and efficiency,” he said. “You need to look at our tax credits and see if they benefit the state. If we cut too much of it we lose funding for research and development, which isn’t a good thing.”

Chiang later addressed the state’s pension system, and expressed his approval of Governor Jerry Brown’s handling of an issue for which there is “no silver bullet.” Brown aims to reduce $3 billion in deficits this year, though nearly three-quarters of state spending goes to local governments where “there is little flexibility” and it is subject to “the tides of the economy,” said Chiang. However, to Chiang, it is a marked improvement in management from Brown’s predecessor, whose optimism “was reflected in his budget.”

“We need a pension solution that is sustainable in good times and bad times,” he said. “We got into this predicament because we made a lot of bad decisions, small and big, and it will take a lot of good decisions, small and big, to get us out of it. I think it will take three to five years, but maybe in five years we will be close to getting out of debt in this state,” he said. “But if we don’t budget well, this will take longer.”

Chiang contended that there is a dire need for a change in formula within the pension system, as three-fourths of people near retirement have savings that are inadequate — an issue made more challenging in light of the disparity in employee benefits between those in the private and public sectors.

On the subject of education, Chiang stated that in the K-12 bracket alone, California owes $20 billion, with an additional $9 billion in deferrals and between $9 and $14 billion in maintenance. “We need to put the whole educative system in perspective and see where people fit,” he said. “This is a problem that will continue to get worse unless we do something.”

As for health care, Chiang said the solution lies in transparency. He advocated for an alternative system of funding, one that gives care providers pay initiatives to spend more efficiently, and in the process, broadens communication between the state and the health care industry. “We need to not have pure privacy among health care providers,” he said. “Our health care system is designed poorly; everything is a profit center. We ought to be looking at how much we are paying to make a patient healthy, how much profit you keep should depend on how efficiently the patient is treated.”

The State Controller closed the meeting with a message for the community of Santa Barbara, reiterating the value of prudent action in the face of the state’s precarious economic situation. “There are going to be adjustments, but it is not going to be easy,” he said. “We are not taking advantage of the amazing diversity we have here in California. If we can figure out how to tap into that area, we can do better….The market is shaky, but I think we will figure it out.”