Above the Bottom Line

State Treasurer John Chiang on California’s credit rating, tax increases and investing for the future

Back Q&A May 15, 2015 By Rich Ehisen

As California’s banker, Treasurer John Chiang has the responsibility of managing the state’s investments and financing. It is a job for which he is well-equipped, having previously served eight years as the state Controller, the person charged with managing the state’s day-to-day finances. We sat down with him recently to talk about the California economy and his calls for the state to increase affordable housing and for corporate boardroom diversity.  

In February, Fitch’s upgraded California’s credit rating from A to A+. That’s a good thing, but we still rank near the bottom of all states in this regard. How do you assess the overall strength of California’s economy and our near-term fiscal health?

Our economy relative to others is strong. We see marked improvement across the spectrum. Technology helped lead California out of the recession; it continues to boom and flourish. Having just traveled internationally, it’s absolutely incredible the stature and the ideal that Silicon Valley holds in China and elsewhere. I was just in Israel in November and China in December. They’re trying to replicate it, but they understand that you have an ecosystem that is incredibly unique.

There has been growing sentiment in some circles that lawmakers should consider extending — or perhaps even making permanent — the temporary sales tax increases voters approved in 2012 under Proposition 30. You have said you oppose this, but with our economic recovery so tentative, why not extend those taxes for at least a few more years?

I think it would depend on the circumstances. The governor has always approached Prop. 30 with the commitment that these taxes would be temporary to get us out of a difficult situation. I think the voters responded to make sure California had a shored up financial position. If something dramatic changes in the next year or two, obviously we’ll have to continue to talk to the voters to make sure we protect California’s financial situation and continue to increase our credit rating.  

Under current circumstances, you don’t see something that would necessitate that?

No, but let’s take the stock market. If there were a precipitous decline, obviously we would have to figure out if we needed additional revenues to make sure essential services didn’t fall by the wayside and that California’s financial condition didn’t crack and incur further harm to the private sector.

Speaking of taxes, many people believe we are way past due for reforming or at least tweaking Proposition 13, the state’s historic 1978 ballot measure that established how we assess and tax property. Most tweaks would split commercial property away from residential real estate and allow it to be taxed differently — at a presumably higher rate. Where do you fall on this?

I’m more open to a massive reform of California’s tax system, but I don’t like taking an individual, piecemeal approach to taxes. I’m trying to figure out how to keep California families doing well, how to keep California businesses competitive, how to finance essential services; you have to have the appropriate balance. Instead of isolating focus on just a few specific things like the sales tax or taxes on services, I’d like to have a holistic discussion about the entire tax system. You want some consistency so businesses and individuals can plan for their future.

I think we’re just not capturing the opportunities of the 20th century. Too many boards use old thinking, and the world has changed dramatically. Look, for example, at how quickly apps have become dominant in our society. Eight years ago, apps weren’t commonly applied or even discussed, and now they are in the trillions of dollars of global value.

So how about the diversity, the young people who apply that technology? Look at people in Japan or Korea and the Asian countries that were three to five years ahead of us in applying these technologies. Where America used to be dominant in technologies, we now have to be a lot more nimble in figuring out how we capture these opportunities. How do you get the personnel who understand the markets to seize upon these opportunities? Hopefully they’re here in California so that we’ll have job growth, but we have a lot of old corporations with people who are comfortable only hanging out with people they are already comfortable with. And for us at CalPERS and CalSTRS, where we are long term investors, we need these corporations we are invested in to perform well so that we can make sure we get maximum value for our investment.

Why specifically sexual orientation and gender?

It’s part of the world makeup, the world purchasing power and world economic growth opportunities. Women are over half the population, and they’re growing in their educational achievement; their graduate numbers are far outpacing men’s. We need people to understand the market. The common example in lack of corporate diversity was a few decades back with Avon, the cosmetics giant that had only one female on the board. Now, with all due respect, what do men know about women’s tastes in purchasing cosmetics? And then culturally, if you’re trying to sell products to Latinas or Asian or African American women who use different cosmetic products, how well does the person on your board who doesn’t have that personalized experience help you? So you have lost value for those corporations.

What has the response been like for you since going public with these concerns?

A lot of people are very excited, but the wall is still up. It’s hard. Even when you talk to leaders and corporate governance people within corporations, they like the idea, but they have relationships, they have established practices. People are going to have to learn to change past behavior, and that’s not easy.

You have also been vocal in your belief that we must do more to create affordable housing in California. You’ve teamed up  with Assembly Speaker Toni Atkins on this issue. Again, why do you feel this is such a critical issue to address this year?

Well the social costs are staggering. If you have a homeless person on the streets, the fact is that at some point they’ll probably need emergency care, instead of getting preventative care. With public safety costs, research shows we can save thousands of dollars annually if we can put a homeless person into a place that is sheltered. And it certainly has huge long-term economic costs, particularly when we’re talking about homeless children. If you can’t find housing for a young person, then odds are we’re going to lose the talent pool for the future. We have to have the talent pool available so that companies can be competitive. And for me, it’s also a moral issue about what America stands for in regards to opportunity.

You have also called for lawmakers to streamline business regulations. What are some specific things you would like to see them do?

We have to look at the regulatory barriers and hurdles companies face and make it easier for people to comply. For instance, I use the story of a friend of mine, his family owns the largest shrimp importing company in the U.S. He has four or five government agencies that he has to comply with, and two or three of them are asking for the same things, federal, state and county. These governments ought to think about how we work together. How do we identify similar standards? If a company fulfills the requirements of one agency that is in the same issue area as another agency, it ought to satisfy the obligations of both. We ought to be in communication and conversation with each other to try to reduce the bureaucratic and administrative friction, so businesses can dedicate more resources and time and energy to being productive. And then we have to upgrade in regards to technology.