In Support of a California Enterprise Commission

Question: How do you run California without a balance sheet?

My answer: Apparently, rather poorly.

We all know about California's liabilities, the $72 billion in debt, the $100 billion plus in unfunded pension liabilities, IOU's, etc. But, where is the list of the state's assets? Incredibly, the state of California, the 8th largest economy in the world, doesn't have a complete balance sheet.

California needs to show the world that our state isn't bankrupt, isn't in dire need of raising taxes or cutting essential services. How? By redeploying its significant assets.

Some of these assets are tangible, like the Rose Bowl, or our University system, others are not, like the value of a large and technologically advanced workforce. California is not only home to some of the best beaches and most beautiful parks in the world, but the busiest ports, major airports, and a DMV whose revenue is the largest in the United States. In total, it has some 22,000 different properties recorded, most of which are vastly underutilized. California is not bankrupt. It's just not making effective use out of what it has right under its nose. If we did, we would not need to cut spending or raise taxes.

We need to leverage the tools of modern finance to ensure premium value for the assets held in the public trust. That means using the capital and expertise of the private sector to create partnerships with the state so that the assets can become more valuable over time and create more revenue for the state. It does not mean selling public assets outright. That's old school. Few in our state would want to do that, especially in a down market.

But through leasing arrangements, and especially by pooling assets together, something that is second nature in modern finance, but that has not been done before with public assets, we can not only ensure premium value, but also raise significant revenues upfront, money that can be used to pay down debt, and even build a reserve, a rainy day fund of sorts for the future.

Where to start? How about the DMV, a woefully inefficient $3.5 billion behemoth bereft of adequate technology investments and likely one of the least popular points of interaction with the state for citizens. Talk about nothing to lose.

What I'm proposing is a far cry from mere "privatization" which means handing over control to the private sector. In my proposal, the state is capitalizing on the private sector's money and expertise but keeping ultimate ownership and control over key decisions. My plan includes a comprehensive regulatory body, similar in nature to the public utility commissions that define the ground rules for price increases and maintaining the integrity of state property.

Australia, an economy significantly smaller than California's, was saddled with 100 billion Aussie dollars of debt in the mid 1990's. In April 2006, their central bank announced that all of the country's debt had been paid off. Thanks largely to redeploying its public assets, Australia now has an $80 billion rainy day fund called the future fund. California, under my plan, can do the same thing.

California is sitting on an embarrassment of riches. Some estimates say the land value alone is worth more than $200 billion, more than enough to pay off all of our debt and have $100 billion left over for our fund for the future.

I have asked Governor Schwarzenegger to issue an executive order to form the California Enterprise Commission. This commission would be responsible for valuing the State's assets, selecting which ones should be part of a first ever California Enterprise Fund, and finding the type of marquis investors that once and for all can shift the whole psychology about the state.

To paraphrase Mark Twain: "the reports of California's demise have been greatly exaggerated." We have technology, incredible weather, education, great citizens and all the resources needed to get us back on track. What I'm proposing is a sound plan to make it happen.

Comments

[JRo90210]

I applaud the article even though it annoyed me at first . Upon rereading it I was pleased that it made a different point than many may have read into it.

Everyone says California is bankrupt. It isn't bankrupt at all but it is living way beyond it's means. Yes, CA needs to reduce its spending and fast. But the point of this article is that a balance sheet in business says that an enterprise is bankrupt if its assets are worth less than its liabilities. CA has assets that are significantly more valuable than its liabilities...by a huge margin.

Mr. Mundell says that there are assets on the balance sheet that have significant value and can be used to create value in cash today to expedite getting CA back within its means. The beauty of this Mundell Plan to me is that the assets mentioned are ones that have no value if removed from CA, they have no value if taken over by outsiders and are not assets we have any fear of losing.

Finally, someone is taking time to look around the world to find solutions working solutions and apply them to our problems here in CA in an intelligent manner. I find it odd that the opposition to this is focused on painting this as a garage sale. I find it sad that the solutions promoted by our legislators seem to lead back to more taxes on those of us who remain in the state.

[Jag Carrao - Huffpost Blogger]

Love this! Kudos to Mundell for thinking outside the box on solving California's budget crisis. Also nice to see diversified opinion on this site -- so Kudos goes to Arianna as well. Both AH and Mundell have always challenged conventional wisdom in the Golden State, braving criticism to bring new ideas to the table. Hope to see more of this in the future.

[AJH]

Australia a resource economy benefitted greatly from the commodity price surge in 2000. Try giving full pictures vs. selling a bankrupt proposal.

They are also a nation state with the full powers of a nation state including control over their currency. California is not.

We have no constitutional authority to maintain a rainy day fund on the scale australia has, indeed if one thinks of their own checkbook and savings and holding 6 months expenses in a savings account California cannot legally do that.

I know bond buyers are getting nervous at their ability to collect off taxes as californians blue and red seem unlikely to increase them we're not going to mortgage our university system to private capital, I hope. Not give private capital acess to our fee revenue streams promissing them shares of it's return in exchange for investment. Contracts requiring only 50% approval that could be written to mandate long term unpredictable fee increases on everything from university education to registrations to park admittance. Nah not happening, I hope.

We don't need to create a shadow debt stream off future fee revenue.

[Bill Mundell - Huffpost Blogger]

If you don't like Australia's example, look closer to home. The state of Indiana, which was nearly bankrupt five years ago is today in one of the best fiscal conditions in the country. None of it would have been possible without one very bold public/private initiative. That highway deal provided them with almost 4billion dollars to pay down debt and build a billion dollar reserve fund.

[GardenerNorCal]

I am not buying it. I've watched as our utilities were deregulated and our prisons privatized. I don't think I want private industry in charge of our DMV records. I smell a private industry rat who thinks they can make a killing off our registrations, fees and licenses, or perhaps sell the information to marketting and political lobbying firms..

"We need to leverage the tools of modern finance to ensure premium value for the assets held in the public trust. "

Like Wall St. leverages debt and risk through derivative instruments?

"My plan includes a comprehensive regulatory body, similar in nature to the public utility commissions that define the ground rules for price increases and maintaining the integrity of state property."

I think we are all aware of how well the public utility commissions reigned in Enron.

[Bill Mundell - Huffpost Blogger]

I urge you to look at the successful record of the public/private partnership of the DMV in Ontario, Canada

[Bill Mundell - Huffpost Blogger]

No, much more basic than that. Its called portfolio diversification.

Enron's problems were related to the failure of Securities & Exchange commission to detect open fraud. It had nothing to do with the public utility commission.

[DAWK]

nice try bill,but i have recently blogged on 'california progress report' about somthing better than this:

south dakota or north dakota have their own very succesful state bank,and this bank actually can be 'trusted'! california could simply create their own state bank,like the dakotas-did,and begin to use the some 100 billion, now in the coffers to create more wealth,like california banks-do,via loans for homes businesses etc.let the disgusiing commercial banks begin to compete or 'fail'!!
there are several excellent articles on south/north dakota state owned banks,so realize this idea creates money! billions ,no printing press needed,and a state bank doesn't need 'investors' who want their 'stock' to extract a profit from bank depositors.
am guessing all the state wealth that you-bill,mention could aso be used as 'collateral',as a state bank would be holding possibly 300-400 billion in state-declared wealth for loans.imagine homeowners seeing more reasonable home loans and small busineses flourishing and new 'wealth created' via money flowing again in california.
the big problem is state charted banks would all-likley go broke,as the are the real problem,like always taking 'the big bite' from working-folks,and then needing 'too big to fail' tarp tax payerfunds loans.
politics connected to big banking are the real roadblock,so check out south/north dakota and see how they managed to find success and balance state budgets,year after year.

[paddio]

Bravo! a Huffpost blogger talking about the economy ,albeit one state. Everything else that doesn't address the woe full state of our economy is a useless distraction that gives the rats in Washington and the state houses another free pass for their inaction.

[Quaoar]

Kirk or Picard? ;)

[dubiousraves]

This is pie in the sky stuff, a quick fix at best, and not the long-term reform the state needs.

The real assets we need to learn about are who's paying what taxes, and how much. How many well-off people are exempt from property taxes because of Prop 13, vs. who's paying more than they can afford? How many wealthy people in the state have made out like bandits thanks to the Bush tax cuts?

The state needs to scrap Prop 13, or at least fix its absurd inequities. It needs to kill the supermajority rule for taxes and passing budgets. It needs to kill the referendum policy or make it much harder to get propositions on the ballot. And it needs to fix redistricting.

Basically, the state needs to terminate the government, and all its laws, and start over from scratch.

[GardenerNorCal]

True we definitely need to look at corporate tax breaks and exempts. Prop 13 should never have applied to corporate properties. But Prop 13 has provided that many elderly and poor have been able to remain in their homes by reining in what were in the past astronomically increases in property taxes every year.

I think we need to place the blame for California's shortfalls at the feet of who was responsible: The Governor and a legislature that favors business over the individual and social good.

"The CBP looked at the budget deals cut in Sacramento last September and February and says it found that three changes in corporate tax provisions will cost the state as much as $2.5 billion a year -- about one-fourth of all current corporate income tax receipts. Interestingly, the great bulk of the tax cuts will go to a small percentage of the richest corporations. (Sound familiar?)"

hhttp://latimesblogs.latimes.com/lanow/2009/06/are-corporations-pulling-their-tax-weight.html

[GardenerNorCal]

And further evidence as to who pays their taxes:

"In fact, over 1300 California households with over $200,000 of income paid no state personal income taxes at all! This is due to the Enterprise Zone Tax Credit, miscellaneous deductions, and the Research and Development credit.

Another jarring chart is on page 3 of the report which shows that between 2000 and and 2004 (the last year for which data is available) the net profits reported by corporations for California tax purposes more than doubled, rising by 143.1% and yet the total adjusted gross income of California personal income taxpayers increased by 1.4%.

Over the past two decades, the funding of state services has shifted from corporate to personal income taxpayers. New, increased and expanded corporate tax breaks and the 1996 corporate tax rate reductions are responsible for this.

Jean Ross, director of the California Budget Project told me that corporate tax rates overall have dropped by 40% from the early 1980's and that these deliberate tax credits to corporations and changes in accounting practices cost the state over $1 billion per year.

Last year, Governor Schwarzenegger vetoed a bill to merely study the disparities between book income and taxable income reported by corporations under our state's tax laws. So we have our head in the sand on this one."

http://www.californiaprogressreport.com/2007/04/who_pays_taxes_1.html