SACRAMENTO — Former Governor Jerry Brown, now mayor of Oakland, stopped by his old office last week with other city leaders from around the state to lobby his former chief of staff, Gray Davis, to spare local programs from the budget knife.
Brown’s visit became a media event. Not only was he was returning to his former haunts, but, for the first time since leaving office, he had been making public statements critical of his former staffer’s handling of the worst budget crisis in California history. While reporters gathered around Brown, L.A. Mayor Jim Hahn stood in a corner, largely ignored. The Weekly engaged him in small talk. “I’m having fun going around with Jerry,” he said. After a few moments, the Weekly moved away from Hahn, citing a desire not to be photographed. “No danger of that unless I’m standing next to Jerry,” said Hahn.
After the meeting with Davis, Brown chatted about the crisis. “There’s a lot of strategy going on,” said the ex-governor. “In the end I think the banks and bond dealers will force things to happen. They’ll finance the state, and they’ll want to get paid back. There will be taxes as well as cuts because they are more important than the Republicans [who have a staunch no-new-tax stance].”
In other words, some of the key shots in the budget war will be fired by Wall Street and big commercial banks — not by elected officials.
Davis confirmed this, and went on to raise the specter of big banks demanding cuts in exchange for financing the state’s deficit. “I recall as controller in 1994,” said Davis, “going in to [then–Assembly Speaker] Willie Brown, trying to issue revenue-anticipation
warrants. The credit rating of the state was so bad that no one would lend us money based on our credit, so we had to have our credit effectively guaranteed by major banks. And the Bank of America was headquartered in California, and Dick Rosenberg, the CEO, put together a syndicate of banks from across the country which effectively guaranteed the revenue-anticipation warrants that we were going to sell.
Revenue-anticipation warrants, in which the state borrows from one year to another, are rare. “We have done it on a few occasions, four or five occasions, I think, in the state’s history,” noted Davis. “We’ll have to issue revenue-anticipation warrants in all likelihood before the year is out,” he said. “This scenario could play out in many different ways, but I’ll just tell you what happened in 1994. They said, we have to ensure that spending is reduced; therefore, you have to make cuts in the following programs. And I communicated that message to then-Speaker Willie Brown and a variety of other elected officials sitting around the table. They just threw me out of the room. I called up [then–Bank of America chief] Dick Rosenberg, and he got a meeting with all the same players, and in a day they had all agreed, because they realized that this was a message coming not from me, but from the banks.”
“Within a day,” said Davis, “they [Democratic legislative leaders] had introduced the bill to meet those terms. So, I’m confident that the bankers will impress upon the Legislature the need to meet our financial obligations.”
The Weekly asked Davis to elaborate on the notion of bankers demanding specific budget cuts in return for financing the state’s deficit. “They’ll obviously allow us to make those decisions, but they will tell us how much,” he said.
Reminded that he had just said that bankers had insisted on explicit cutbacks in 1994, Davis said, “You know, I have to refresh my memory, but their interest was in reducing revenue [Davis meant expenditures], and they were willing to defer to the Legislature as long as they were convinced those actions did in fact reduce revenues [expenditures] to the levels that would provide the moneys necessary for them to be repaid.”
In 1994, the budget deficit was only $4.5 billion, roughly one-eighth what Davis says the shortfall is now. If the banks had the leverage to turn legislative leaders around in a day last time around, they will have even more leverage this time. The likeliest candidates for the state’s banking consortium this time around are the banks that have been lead underwriters for the more common revenue-anticipation notes: the usual lead underwriter, Lehman Brothers, and Morgan Guaranty, Merrill Lynch, Goldman Sachs and Bank of America, all of them with headquarters thousands of miles away from the impact of California budget cuts. Aside from BofA, all are based in New York.
And while Brown is probably right that none will shy away from California tax increases, their views on which ones are appropriate will almost certainly be colored by the interests of their biggest clients. Will these big out-of-state banks favor closing corporate tax loopholes, raising corporate tax rates, imposing sales taxes on lucrative services as well as goods, or changing the property-tax system to impose higher rates on corporations than on homeowners? It seems a tall order, to say the least.