Author: Joel Fox

The fact that a bill by state Senator Jeff Denham to sell San Quentin failed to move forward from the Senate Committee on Public Safety yesterday indicates a deeper problem than the state managing this one piece of property.

Over the years, the state has acquired property as if it were a real estate magnate building an empire. California should not be in the real estate business. It should just hold property related to its essential functions and manage that property wisely.

While a prison is an essential state function, San Quentin is an example of poor management of resources.

The 157-year old prison on San Francisco Bay that houses Death Row inmates is in need of repair and expansion. However, the prison sits on prime real estate with magnificent views of the bay. As an investor once told me, there is only so much California waterfront property and this chunk of land would bring a princely sum in the marketplace. Denham estimates the sales price as up to $2 billion.

There has been growing talk of convening a constitutional convention to deal with the budget and other California governmental problems. Governor Arnold Schwarzenegger and would-be governor Gavin Newsom have both endorsed the idea. How a constitutional convention would take shape is a great unknown.

The Bay Area Council, a business group that is spearheading the constitutional convention effort, has noted on their website that a lot of rules would have to be worked out. One is how delegates would be chosen. Three suggestions on the website propose that delegates can be elected, apply for the job, or be chosen like juries are selected.

With so much mystery on the workings of a constitutional convention, I thought it would be interesting to look back at the last time California put on a constitutional convention. That convention took place between September 1878 and March 1879. Delegates met for 127 days (over a 157 day period) although the act establishing the convention declared that, “no compensation shall be allowed delegates after the expiration of one hundred days.”

Investors gobbled up California’s general obligation bonds the last couple of days and that could be a positive indication that the market might look favorably on California’s fiscal fix.

On Monday, I suggested that the sale of general obligation bonds offered by the state would be an early test of investors’ attitude toward some Special Election ballot measures.

Proposition1C in particular, the lottery modernization measure, needs Wall Street to plunk down billions to help balance the budget with payoff to investors from lottery proceeds down the road.

Treasurer Bill Lockyer sold around $2.5 billion more in bonds than he originally anticipated putting on the market. About half the bonds were taken by individual investors, the other half by institutional investors. Relatively high interest rates accounts for some of the bond sale success. However, the successful offering also indicates that investors have positive feelings about California’s economic stability. That could bode well for Prop 1C if the voters support it in May.

Opponents charge that the spending limit contained in Proposition 1A is phony and deceptive. The claim is based on three points. First, that the limit can go up anytime there is a tax increase. Second, that the spending limit isn’t real because the governor by simple executive order can draw down funds from the rainy day fund. Third, that the measure is deceptive because it is tied to a two-year extension in tax increases, which was not revealed in the ballot argument.

The Prop 1A opponents certainly have a legitimate gripe with the last point. The spending limit measure comes with a cost, which should be spelled out to voters. The legislators who controlled the ballot argument process did not do that. Once the cost is expressed, however, then the question should be asked of the voters: Is what they are getting in a spending limit worth the price? In an earlier article, I laid out reasons why finally getting a spending limit is important to the fiscal sanity of the state.

However, the spending limit itself is not phony. Opponents are incorrect in charging the governor can undo the limit by fiat. And, like talking about the spending limit without discussing the tax extension, stating that the limit can be raised with a tax increase doesn’t tell the whole story.

Today, state treasurer Bill Lockyer will begin offering $4 billion worth of California general obligation bonds for purchase by California citizens. On Wednesday the bond sale will open for institutional investors. If successful, the bonds will initially back a $500 million payment for infrastructure improvements. The bond sale could give an early indication on how some of the budget reform measures, including one on the May Special Election ballot, are being considered by both investors and California taxpayers.

The bonds are being offered at a time when the Wall Street ratings agencies are taking a sour look at California’s fiscal health. Last week, the Fitch Ratings service downgraded California’s general obligation bond rating from A+ to A, which now ranks the lowest of all 50 states. Standard and Poors Rating Services had knocked down the state’s bond rating to A in February.

Okay, help me understand the political happenings in Los Angeles yesterday when the president came to town and was greeted by the governor at a town hall meeting.

President Obama spoke positively about the initiatives supported by Governor Schwarzenegger in California’s May special election. The main initiative creates a spending limit. So the president is praising the idea of a spending limit at the time he is offering record setting trillion dollar budgets and enormous spending packages through his stimulus program.

At the same time, Governor Schwarzenegger heaped warm praise on the president and his handling of the economy. Part of the president’s economic package includes tax cuts for many Americans. Governor Schwarzenegger’s recently passed budget included tax increases for all Californians.

I guess that’s why they call it political science. You need some scientific formula to figure all this out.

The Milken Institute’s California Center reports that one bright spot in a dismal business climate is the energy sector both with research and production of alternative and renewable energy along with production and refinement of oil and natural gas. To understand the effect the energy business has on the California economy, the Institute reported on the Chevron Corporation, California’s largest Fortune 500 company.

Chevron is the largest firm in the state as measured by revenue and is the only major energy producer headquartered in California.

Chevron’s impact on the economy is revealed in some numbers highlighted by the Milken report.

• In 2007, Chevron directly employed 10,000 workers in California. These workers contributed earnings of $1.2 billion and an output of $4.5 billion to the state’s economy.

Yesterday, I reported on San Francisco Mayor Gavin Newsom’s town hall meeting in Santa Monica and what I perceived as his tax and spend rhetoric. I was struck by the contrast with another Democratic gubernatorial candidate who has been around the block a few times – Jerry Brown.

In an interview with the San Francisco Chronicle’s Carla Marinucci a week ago,
Attorney General Brown took a different tack. According to Marinucci’s report, Brown said if he were elected governor, “I would not be advocating new taxes, I’ll tell you that.” Already, California is “one of the highest tax states around,” he said. “So we’ve got to be competitive. We can’t drive all the jobs out and tax the few people who stay.”

Jerry Brown has lived through a tax revolt before when he was governor in 1978 and he senses when the natives are restless. Leading the opposition to Proposition 13, Brown learned the wrath of taxpayers first hand. After the initiative passed overwhelmingly, he declared himself a “born-again tax cutter” and did his best to implement the measure. In fact, his efforts on that front lead Proposition 13 co-author Howard Jarvis to vote for Brown for re-election.

San Francisco Mayor Gavin Newsom said he would be the “worst advocate” for measures on the special election ballot. Speaking to about 500 people at a town hall meeting in Santa Monica High School’s gym last night, Newsom said he supported the idea of a rainy day fund but would not be a champion for the ballot measures. He singled out Proposition 1C, the lottery modernization measure, saying it was bad policy to encourage gambling as a way to pay off the state’s debt. However, he said, he recognized that if the measures did not pass, the budget situation would be worse.

Newsom, however, was a strong advocate for a constitutional convention to deal with California’s dysfunctional government. On his list of reforms was Proposition 13 and the two-thirds vote to pass the budget and raise taxes.

Declaring that unlike Warren Buffet, who was warned away from a discussion of Prop 13 by then candidate Arnold Schwarzenegger, Newsom said that Californians needed to have a conversation about Prop 13. He backed off a little and said that at least there should be a conversation about property taxes on commercial property. Newsom told the audience members they were paying for Proposition 13 in the highest income taxes in the nation and the high and regressive sales tax.