California Insider

Arnold Schwarzenegger has chosen Donna Arduin, the director of Florida’s Department of Finance, to conduct the independent audit of California’s books he promised during the recall campaign. Arduin, a Duke University graduate who has also worked for the state of New York and Michigan and as an analyst for Morgan Stanley & Co., is taking leave from the Florida administration of Gov. Jeb Bush and donating her time to do the Schwarzenegger audit, according to transition spokesman Rob Stutzman.
While the scope of the audit isn’t yet clear, Arduin said she intends to complete it in time for Schwarzenegger to include her recommendations in his first budget, which must go to the Legislature by Jan. 10.

Don’t look for this to be the top-to-bottom examination of potential waste and fraud in state government. That will come later. Arduin, at least in the first pass, will probably limit herself to establishing a definitive number for the state deficit and listing all the borrowing, diversions, and tricks upon which the current budget rests. Look for her also to perhaps recommend a few structural reforms, including the spending cap Schwarzenegger wants, and possibly a way to restructure the state’s debt.

According to the transition team press release, Arduin in Florida has implemented a system where agencies and departments annually map out the cost and demand for each service they provide, with five-year forecasts for each. She favors performance-based budgeting under which departments attach “real-world performance measures” to each activity and connect outcome goals to budget dollars.

Here is an interesting and not too flattering view of her performance by a columnist at the St. Pete Times.

Gov.-elect Schwarzenegger today unveiled a transition team whose ideological breadth could bridge the Central Valley. It runs from Bill Simon on the right to Willie Brown on the left and includes just about every imaginable spot in between. Despite Simon’s presence, the team does not appear heavily weighted to the right. Most of the Republicans are of the more moderate stripe – people like former Assemblywoman Charlene Zettel and former state Sen. Rebecca Morgan. One of the more notable names on the list is Tammy Bruce, former president of the LA chapter of the National Organization for Women and a member of the group’s board of directors. She was a Schwarzenegger supporter during the campaign.

Others: Orange County Sheriff Mike Carona, Sen. Jim Brulte, Jon Coupal, president of the Howard Jarvis Tazpayers Assn., USC law professor Susan Estrich, former state Treasurer Matt Fong, LA Mayor Jim Hahn, former Assembly Speaker Robert Hertzberg, Robin Kramer, a former Dick Riordan aide, investor Gerald Parsky, who is Bush’s man in California, Cassandra Pye of the California Chamber of Commerce, and many more.

These lists are not always meaningful, of course. They are meant, more than anything, to set a tone and send early signals about a new administration’s direction. The names on the list become conduits for people seeking an appointment in the government. But Schwarzenegger has certainly, with this list, delivered the message that he intends to govern from the center while reaching out to both the left and the right.

Transition spokesman Rob Stutzman said legislative leaders have agreed on a $500,000 transition budget for Schwarzenegger (same as Davis and Wilson had) and a $100,000 budget for Davis to tie up his affairs.

The Oakland Tribune reports that veteran state Sen. John Vasconcellos, a longtime advocate of the self-esteem movement, thinks that the new governor is a "boob" and might quit the Legislature rather than serve alongside Schwarzenegger in Sacramento.

Trying to divine Gov.-elect Schwarzenegger’s likely moves on fiscal policy is a little bit like the old practice of Kremlinology, where analysts had to parse vague statements, watch personnel shifts and consider history to figure out what might happen next. One of the major stories of the campaign was that Schwarzenegger was being vague about his ideas on the budget. I said so many times myself. But now that he has been elected governor and I am trying to assess where he is going from here, I find myself coming back to his many statements during the campaign that gave us broad hints about the direction he intended to take. It turns out that he was more specific than we sometimes gave him credit for, if only you had time to use a careful ear and a bit of imagination. Stitched together and filled in by informed speculation, his fragmentary statements can be used to make some educated guesses about the near future. Would I prefer a candidate, or a governor-elect, who speaks more clearly, directly and specifically about his plans? Absolutely. But this is what we’ve got at the moment, so let’s make the best of it.

I’ve already written at some length about his hopes for federal money, which he mentioned several times during the campaign, even if it was largely ignored by the political press corps. I also think he has a decent chance of cutting a deal with the gaming tribes to contribute something to the state’s general fund.

Now I want to address something else he said over and over during the race: restructuring the state’s debt. What might that mean?

The current state budget rests upon billions of dollars in borrowing, shifts, accounting gimmicks and the like. The famous “audit” that Schwarzenegger mentioned repeatedly during the campaign is probably going to amount to a definitive statement of all of those smoke-and-mirror tactics and what they mean for the state’s fiscal condition. I don’t take literally Schwarzenegger’s comment that this audit will uncover the waste in government. That’s a project that will take months or years to complete. But unlike skeptics who laugh off the audit as a meaningless delaying tactic, I think it would be useful to have in one place at one time a comprehensive analysis of all the shifts and diversions in the budget -- legal and illegal -- to give us a complete sense of the state’s fiscal condition. The Legislative Analyst has done some of this kind of work, but I have seen nothing yet that lays out the entire picture in context.

Next, consider the two major pieces of the budget plan that are most at risk. A scheme to borrow money to pay the state’s obligation to its employee pension fund has already been struck down by a court on grounds that it violates a constitutional provision against borrowing more than $300,000 without a vote of the people. Another, much larger deficit bond is vulnerable to the same kind of legal attack and might yet fall as well. Together the two measures total $13 billion. If they are both struck down, the state will be essentially insolvent, with no ability to borrow to get the money it needs to pay its bills.

Suppose Gov. Schwarzenegger gets an audit which makes this clear and also lays out the looming $8 billion gap between projected spending and revenues in the fiscal year that begins July 1. Now let’s remember several other things he said during the campaign:

The accumulated deficit might be as large as “$20 billion.”
He wants to “restructure the debt.”
He wants to start over fiscally with “a clean slate.”
He wants to adopt a spending cap.
He wants to prohibit future deficit spending.

That’s actually quite a bit of specificity for a guy who supposedly never told us where he was headed. What he didn’t do was tie it all together for us. Now I will try to do that.

What if he does the audit, concludes that we have a $20 billion problem, says Davis tried to circumvent the will of the people by bonding without a vote, and asks the Legislature to put the following on the March ballot:

--A $20 billion bond to finance the accumulated debt and help cover the gap emerging in next year’s budget. (“Restructure the debt.”)
--A constitutional amendment to clearly prohibit future deficit spending without a vote of the people.
--A spending cap or reserve requirement to prevent this from happening again.

He could sell this plan as the only way to avoid big tax increases or devastating spending cuts, the only politically palatable way to get the state out of the fix left for him by his predecessor. It would find favor with Republican legislators who oppose tax increases (and were the first to propose the deficit bond this year) and Democrats who don’t want to vote for spending cuts. It would give the state time to grow out of its problem. And while it could be criticized as more deficit spending, if it were coupled with a spending cap and a clear ban on future borrowing without a vote of the people it could be described as short-term relief combined with long-term reform. It would probably get the support of every major interest group in the state, from labor to business to the anti-tax crowd that started the recall.

And it would be entirely consistent with everything Schwarzenegger said as a candidate.

One last thing: what got Davis in trouble was his lack of boldness, his refusal to attack problems before they became crises. The looming legal challenge to the deficit bonds is one more such disaster-in-waiting. A timid governor would wait and see if the courts strike it down, then be forced to react in a panic to pick up the pieces. A bold, forward-thinking governor would say, what can we do to avoid that kind of situation? The answer: go to the people proactively for the authority that only they can provide, settle the lawsuit, wipe the slate clean and then balance the operating budget going forward.