Ex-California Gov. Gray Davis On State's Crisis IOUs, service cuts and layoffs. California is the poster child of state budget crises. The state is currently facing a budget shortfall estimated at more than $26 billion. Former Gov. Gray Davis — Arnold Schwarzenegger's predecessor and the loser of the 2003 recall election — shares his thoughts on how California's Constitution has worsened the impact of the recession.

Ex-California Gov. Gray Davis On State's Crisis

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GUY RAZ, host:

California Governor Arnold Schwarzenegger declared a fiscal emergency this past week. And for the second time since the Great Depression, that state will issue IOUs.

Governor SCHWARZENEGGER (Republican, California): We don't have the money to pay our bills.

RAZ: The governor and the legislature can't agree on a budget. The state is facing a more than $26 billion shortfall; and by law, the legislature can't pass a budget unless it's balanced.

Now, part of the problem is California's cumbersome system of government. And joining us to help unravel the state's problems is former California Governor Gray Davis. He was ousted by voters in a recall six years ago.

And Governor Davis, welcome to the program.

Mr. GRAY DAVIS (Former Democratic Governor, California): My pleasure to be with you, Guy.

RAZ: Now as bad as the situation is, do you ever secretly wish you were back in the governor's chair trying to fix this mess?

Mr. DAVIS: No. It's great to be governor in good times, but in bad times, it's just a mess, and I don't envy Governor Schwarzenegger's situation at all. In fact, I told him during the transition back in 2003 that he needed two things to be successful, neither of which he can control: One is it had to rain in the north to help the Central Valley farmers, and you needed a strong economy. I said if he had a strong economy, people would consider him a hero; and if he didn't, he'd be a bum.

RAZ: Let's talk a little bit about California's structural, let's say, challenges. Both tax increases and any budgets have to be passed by a two-thirds majority in the legislature, right?

Mr. DAVIS: Yes, and I liken it to getting into a street fight with one hand tied behind your back. The Congress doesn't have to do it, 47 other states don't have to do it, and the two states that have a similar requirement, Arkansas and Rhode Island, really have nothing in common with California.

RAZ: And then on top of that, you have this ballot system which gives the voters in the state this incredible power to force the state to spend money on things like education and health care, but then they don't seem to want to pay the bill for it. I mean, how do you actually pay for things when there's no money there?

Mr. DAVIS: Well, that's a very good question, and a number of initiatives recently have been on the ballot, making the point this will not raise taxes. But what they don't tell you is it will compete with money already going to education, health care, the environment, other good causes that the public supports.

So, I mean, I think that any initiative that proposes to spend more money, identify the funding source, and if it's going to take money away from another funding source, it ought to say so. So, there's a lot of tweaks our system needs.

RAZ: Does California need to tear up its constitution and start over?

Mr. DAVIS: Well, I think it's time for a constitutional convention. We haven't had one in 100 years. Some states require that that issue be considered every 10 or 15 years, and I think it should be confined to budgetary or fiscal matters.

RAZ: Now, Governor Schwarzenegger has said California is too big to fail, and yet it seems as if your state is on the brink of collapse. I mean, will the federal government have to bail California out?

Mr. DAVIS: I hope we don't have to ask them to do that. We represent about 12 percent of the nation's GDP. So we ought to be able to work this out on our own.

To me, it's very simple. We've been living beyond our means for a very long time, not just under Governor Schwarzenegger and myself but under Governor Wilson, Governor Deukmejian. What happens is in good times, every dollar gets disposed of. Republicans say this is way too much money, we have to reduce taxes; and Democrats say well, if we're ever going to fix education, this is the time to do it. We have the money.

Okay. But good times are like high tide, they're always followed by low tide. And when low tide comes, there's not enough money to do all the things you do in good times. So that's why other changes ought to include a spending limit and a rainy-day fund to help up for the adverse cuts in bad times.

RAZ: But without any of these options that you're pushing for, I mean, right now, it seems as if California is sort of structurally incapable of avoiding the kind of meltdown its facing.

I mean, given this two-thirds legislative requirement for tax hikes and so on, I mean, right now how does California just make it through the summer?

Mr. DAVIS: There are no good options. The state has gone beyond the tipping point, and there are no good choices. The governor insists that no taxes or fees be raised. That means $26 billion worth of additional cuts have to be made, and if you can't raise taxes, then that is a very painful process. It's not easy to make these reductions.

RAZ: Looking back now, at this point in your career and in your life, if you were in Governor Schwarzenegger's position, what specifically would you do? How would you be able to push through a balanced budget now? Would you literally have to go and demand compromises from members of the legislature?

Mr. DAVIS: Well, a governor can't - he can demand all he wants, but he can't produce a budget. All he can do is revise it or veto it. The legislature has to be forthcoming with a document that gets a two-thirds vote, and the process is very tedious. You have to piece together reductions, frankly some accounting tricks that allow the budget to be balanced in a way that can command a two-thirds vote in both houses and get the governor's approval.

So, it's not a question of is there a preferred way to do it. If you can get it done at all, it's near heroic given the fiscal challenge that the legislation and the governor are currently facing.

RAZ: One final question for you. What will the consequences for the nation be if California failed?

Mr. DAVIS: I mean, California is currently the eighth largest economy in the world, and it's not good for America, for capitalism, for our democracy, if a major state can't find a way to put its fiscal house in order. And I believe we will.

I can't tell you exactly what that path will be, but I think the legislators are people of good will, as is the governor, and they will find a way to get this done for everyone's sake, the sooner the better.

RAZ: Gray Davis served as California governor from 1999 to 2003.

Governor Davis, thank you for your time.

Mr. DAVIS: My pleasure.

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