State Controller John Chiang, who recently made headlines for canceling legislative paychecks under a voter-approved law that requires legislators to pass a budget on time, discussed California’s fiscal state with local education leaders Thursday at SBCC.

Chiang highlighted how California’s chronic budget deficits affect education, a gradual economic recovery, and tax and pension reform.

State Controller John Chiang stopped at SBCC for a forum Thursday.

State Controller John Chiang stopped at SBCC for a forum Thursday. (Valorie Smith / Noozhawk photo)

For K-14 education alone, he said the state owes $20 billion, with about $9 billion in deferrals and anywhere from $9 billion to $14 billion in maintenance.

“That’s not going to get repaid quickly in the near future,” Chiang said. “I mention it in every speech and it seems Gov. (Jerry) Brown understands that if you want to get the state whole, you have to start paying that down. I think he’s serious about that.”

Brown has set out to tackle $3 billion of that deficit this year. But since 75 percent of the state’s spending goes to local government, including education, there isn’t a lot of flexibility in that area and it is subject to the tides of the economy, Chiang said. California has been operating in the red from a cash perspective since July 13, 2007, and has been running on borrowed money, he added.

Stock market trends will have a direct impact on state revenues, which reflect capital gains, but the market is shaky at best, he said.

Countries like Greece, Ireland, Italy, Portugal and Spain have higher debt than ever before and, in the United States, national unemployment numbers aren’t getting much better, Chiang said. These factors point to a gradual recovery, he added.

“So this is optimistic but I think it will take three to five years; maybe 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.”

Budgeting well still means there is tremendous exposure, Chiang said, and part of the problem is there isn’t an educated discussion about California’s finances. Most people don’t understand the balance sheet, he said.

“How can we talk about enhancing business and good tax policy when people don’t understand what it means?” he asked.

Until the tax system is changed and is made more competitive and fair for medium and small businesses, he predicted that education, health care and correctional sectors will suffer.

“We have to be smarter about taxes,” the two-term Democrat said. “We have a tax code that’s outdated, it gives tax breaks to people and large corporations who shouldn’t (receive them).

State Controller John Chiang called for an educated discussion about California's finances.

State Controller John Chiang called for an educated discussion about California’s finances. (Valorie Smith / Noozhawk photo)

“Because of political ideology and tradition, they say when you eliminate a tax credit that counts as a tax increase; that’s not right. Whether it’s on the social or the tax side you ought to be pushing effectiveness and efficiency.”

As for the pension system, three-quarters of people near retirement have insufficient savings, which will change social cost issues and employment patterns, Chiang said. He argued that there must be a change of formula and a fair solution, which isn’t easy, especially when people in the private sector don’t have the same employee benefits as those in the public sector.

“The solution is not to eliminate benefit plans but to create something that the private sector people have, too,” he said.

Although Chiang is confident in Brown’s “prudent budgeting,” he said there is no simple solution.

“There is no silver bullet,” he said. “We got into this predicament by making lot of bad decisions, both small and big, and it will take a lot of good decisions — small and big — to get California out of this deficit.”

One seemingly small decision that had a big payoff was Chiang’s conclusion that, although the Legislature technically met its June 15 deadline to pass a state budget, legislators had provided for only $87.9 billion in revenue — $2 billion short of what was necessary.

Defending his decision to withhold legislators' pay, state Controller John Chiang says the end result was a quicker resolution to the annual budget wrangling.

Defending his decision to withhold legislators’ pay, state Controller John Chiang says the end result was a quicker resolution to the annual budget wrangling. (Valorie Smith / Noozhawk photo)

Citing voter-approved Proposition 58, which requires a balanced budget, and Proposition 25, which mandates that legislators’ daily salary and expenses be forfeited for every day a budget is late, Chiang ordered the pay cut. Some legislators briefly threatened to sue.

“Some of you know of the position I made not to pay the legislators based on Prop. 25 and Prop. 58,” he said. “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 said his decision forced the Legislature to pass the budget more quickly this year. After vetoing the Legislature’s first pass, Brown signed into law a balanced budget on June 30.

“If you look at what happened last year, the budget was passed 100 days late,” he said.

Noozhawk business writer Alex Kacik can be reached at akacik@noozhawk.com. Follow Noozhawk on Twitter: @noozhawk, @NoozhawkNews and @NoozhawkBiz. Become a fan of Noozhawk on Facebook.