Winter 2004

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Guest Commentary

Janis Dice is a freelance write, editor and photographer in Auburn, California. This profile is reprinted with permission of the author and Comstock’s Business Magazine, in which it originally was published in January 2004.

(Note: At the time this article was written, the Schwarzenegger administration was calling for a constitutional limit on spending. As part of the compromise with the Legislature, the March 2 ballot has Prop. 57, the $15 billion economic recovery bond, and Prop. 58, the balanced budget amendment that is intended to prevent future California legislatures or governors from spending more than the state receives in revenues.)

Chic, yellow-checked suit, pearls at neck and wrist, matching animal print shoes and purse, stylish sandy-blonde hair, clear brown eyes and a quick smile – this tall, slim, 40-year-old hardly looks like an economics guru. But don't let the fashion sense and friendly demeanor be misleading. Donna Arduin, California's new director of the Department of Finance, is an assertive, determined woman who has proven she can play hardball in the big leagues. Arduin assisted Governor George Pataki in solving some of New York's tax woes and most recently gave Florida Governor Jeb Bush a hand in reformulating the state's budget system.

Arduin took vacation time from her job as Florida's budget director when asked to conduct an independent audit of California's finances as a member of newly elected Governor Schwarzenegger's transition team. Two days after being sworn in, the governor made his first appointment, tapping Arduin for the position of director of finance for the state with the fifth-largest economy in the world. "I enjoy a challenge, she understates with a grin, "and, hopefully, this will be a fulfilling job."

Arduin is now on California's payroll, and in the process of leasing a condo locally while conducting a long-distance relationship with her Florida-based significant other. She heads the Department of Finance (DOF) assisted by: Michael C. Genest, chief deputy director, budget; David S. Harper, deputy director, legislation; Stephen W. Kessler, deputy director, operations – all former aides to Senate Republican Leader James L. Brulte of the 31st District; and H.D. Palmer, deputy director, external affairs, a position he held previously under Gov. Pete Wilson.

The DOF is in the executive branch of the Governor's administration, with Arduin now sitting as a member of his Cabinet and senior staff. Her role is to act as the governor's chief financial advisor and to ensure the state's fiscal integrity. She and her staff are responsible for analyzing legislation with financial impacts, developing and maintaining the California State Accounting and Reporting Systems (CALSTARS), and monitoring and auditing the expenditures by state departments to ensure compliance with all laws, standards and policies. The DOF also develops economic and population estimates, as well as revenue and school enrollment forecasts, and interfaces with the Legislature by presenting the governor's budget and analyzing and testifying on proposed legislation.

Arduin certainly has the credentials to meet the task: A graduate of Duke University with a bachelor of arts degree in economics and public policy, she interned for Patti Woodworth in Washington, D.C., at the Office of Management and Budget before moving into the private sector, working for Morgan Stanley in New York, and the Long-Term Credit Bank of Japan in Tokyo. After returning to the United States, she caught up with Woodworth, who had left Washington to work for Senate Majority Leader John Engler in Michigan as the senate fiscal director, then became Governor Bob Martinez' budget director in Florida. Governor Martinez lost his re-election, but Engler won his bid for governor of Michigan and asked Woodworth to come back and be his budget director. "I grew up in Michigan, and I'd worked with and known Patti for a long time," Arduin says, "and she asked me to come join her team as chief deputy director."

When Pataki became New York's governor in 1994, he brought Arduin in as first deputy, then a quick promotion to acting budget director. After four years of professional seasoning, Arduin was asked by Governor Bush to come to Florida and serve as director of the Office of Policy and Budget, where she implemented a process for state agencies to forecast the annual cost of, and need for, each service offered. The process required the agencies to develop performance measures for each action and relate the targeted goals to their budgeted dollars.

Although some critics claim she merely played a paper game, Arduin's efforts are credited in large part to the positive economic turnarounds these states experienced. The Cato Institute, a nonprofit public policy research foundation headquartered in Washington, D.C., that routinely grades governors on their fiscal policies, gave Pataki and Jeb Bush each an "A" after receiving Arduin's assistance.

"She's the best in the business on advising governors on how to cut fat out of a budget," says Stephen Moore, a senior fellow in economics at the institute, who first noticed Arduin while she was making her mark in Michigan. "She is very fiscally conservative and very pro-growth because she understands that lower taxes and smaller value-oriented government make a state fiscally and economically healthier. I think she is a real star in the Schwarzenegger administration. I really think President Bush should have hired her as his budget director. Pulling a budget together isn't easy and few people know how to do it."

Named for Cato's Letters, a series of writings that helped establish the philosophical base for the American Revolution, the institute works to broaden public policy debate and produces books, briefs and commissioned studies that examine differing aspects of the issues. In a brief released last February, the institute pointed out that budget gaps exist in numerous states throughout the United States due to revenue deficits and excess expenditures seen in the '90s. It also attributed California's financial crisis to a change in real per capita general fund spending, noting it rose 25.9 percent between the 1990 and 2001 fiscal years. The state's general fund expenditures expanded by 15 percent in 2000 and another 17 percent in 2001, increasing spending by one-third in just two years. The report suggests California needs to "move away" from depending on inconstant income and capital gains tax revenues, which spurred much of the excess spending in the late '90s. Tax revenues that hit a high of $17 billion in 2000 plunged to just $5 billion in 2003, widening the chasm between revenue and expenditures. "Such taxes in capital not only are bad for high-tech economic growth in the state," the report says, "but leave the state government more vulnerable in downturns."

Tax hikes – often used to try to bring finances into balance – actually have the opposite effect, the brief states, with increases deferring a return to financial health as individuals and businesses move to states with lower tax burdens. The report notes that, in his first years in office in the mid-'90s – when Arduin was his budget director – Governor Pataki coaxed reductions in state income tax rates through the Legislature. Also, there were cuts in workers' compensation, capital gains and inheritance taxes that all helped resuscitate New York's faltering economy.

"The business community responded in New York to Governor Pataki's determination to – and success in – bringing down the level of taxation, reducing the amount of regulations, reducing the cost of workers' compensation and creating a pro-business climate," Arduin says. "The business community put their trust in the governor's initiatives and his successes and started bringing businesses back to New York. In Florida, they also passed workers' compensation reform recently." Asked if changes in the workers' comp system will be part of California's fiscal solution, she answers firmly: "Yes, absolutely."

For states to balance their budgets more easily, the Cato Brief also suggests privatizing state services and limiting spending during economic peaks with a mandatory budget cap that provides taxpayer refunds when revenues exceed a benchmark standard and suspends rebates when they dip below that rate. Twenty-six states currently use some method of tax or spending limitation through constitutional or statutory restrictions that keep them from initiating programs in boom times that can't be funded during slow-downs.

That would help solve some of California's problems, Arduin says, along with other structural reforms, solutions that are right in line with Governor Schwarzenegger's goals.

She was prepared for what was found during the audit, such as the state's revenue instability: "Everyone knows one of the major reasons that we're in this crisis now is because there was a huge one-time surge in revenues that got spent on ongoing programs," she says. Also, there was a lack of restraints within the budgeting systems and "a number of automatic spending programs, entitlements, programs that are in statute that the appropriators and the legislators don't have much control over," she notes. "In most states, when the governor and legislature are determining their budget for the following year, they will make a determination to put more money into a program and it's recorded as an increase in spending. In California, like the federal government, the increases are built into statute and if the budgeteers do anything less than that – even if it's growth – it's considered a cut."

Asked to compare California's budget problems with those of her prior jurisdictions, Arduin says there are "a lot of similarities to New York's budget when Governor Pataki was first inaugurated. There had been years of overspending and not resolving the budget through spending reductions or growing the economy or the revenue means. It was years of some of the gimmicks and trickery that we found also existed in California.

"Florida, by comparison, has a very good budgeting system in place, statutorily and constitutionally, that does not allow for a number of these things to occur. Nonetheless, Florida was hit very hard immediately after September 11th with a fiscal crisis of its own. So, in both states, governors had to find ways to get through these crises that were very different in nature, but they both had ways to deal with it," says Arduin.

In Governor Bush's case, the goal was "to implement his policy priorities," Arduin explains. "Florida is a sales-tax state with limited but steady growth in revenues and it's important that they are being accurately prioritized. That's no different from any other state. But, when a governor feels very strongly about his policy concerns, then his budget director's job is to make sure that they can be accomplished within the limited budget revenues."

That's the thrust of Arduin's assignment in the Golden State. "The governor is the decision maker, and it's important that he has a number of options available to him to meet his goals," Arduin says. "My job is to provide those options."

Arduin's new position also requires that she defend the governor's policy objectives, which according to Cato's Moore, should be no problem. "She's tough as nails and she doesn't back down, and that's a very admirable quality for a person in that job to have," he says. "Already, I think, the Legislature has tried to lay some gloves on her. But knowledge is power and she knows the insides and outsides of how these budgets work. She knows where the bodies are buried, so to speak. She's good at being a lightning rod and good at taking the heat. It's kind of like the good cop/bad cop scenario," he suggests. "The governor is the good cop and the budget director is the bad cop. That's just the nature of the job."

But the ability to fight for unpopular policies or proposed cuts doesn't mean Arduin sees only faceless, bottom-line numbers. She recognizes that lopping the budget equates to the elimination of jobs, programs and services. "But the trade-off is, it's a zero-sum game," she says. "You weigh the program, hopefully, against the outcome – although, in California at this point, it is difficult to get outcomes on programs versus other uses of those dollars within state government, versus what the hard-working person who made the money and paid the taxes would do with those dollars. So they all have faces on them. It's a matter of prioritizing."

"Sometimes those of us who spend a lot of time in government forget that there's a face on the side of taxpayers," she continues, "and it's very important that we weigh part of those difficult decisions with them in mind."

When Arduin's job is finished in California, she would like to be remembered as being a fair and loyal public servant. "That sounds pretty boring," she admits, "but, in my job, being fair and straightforward is very important, I believe."

She also would like to accomplish helping the governor get through this fiscal crisis, putting policies in place that would prevent this kind of dilemma from occurring again.

"We need to do something," she says, "and the governor has a spending limit proposal in front of the Legislature that goes a long way toward the solution. Additionally, it would be very helpful if California had performance measures and outcomes on its programs; measurable outcomes that would tell lawmakers, policymakers, the governor and the citizens of California what they're getting for their money. It's hard to prioritize within the budget if you don't have that kind of information." As a long-term goal, she also would like to make the budget "easy to understand and accessible to the people."

To counter the stressful situations a budget director faces on the job, Arduin swims and exercises "to think, take a step away and gather my thoughts." But, since arriving in the capital city, long work days to beat the Jan. 10 budget deadline have prevented her daily workouts. "I can't wait to get back into an exercise routine," she declares, laughing, "assuming that, at some point, we get out of this building."

Arduin was also involved in the Big Sisters programs in New York and Florida, and mentors college graduates just starting their careers. She's doing what her late father and Woodworth inspired her to do: Give others the same kinds of opportunities she received.

"I started a state government-wide internship program in Michigan and ran it while I was deputy budget director until we got someone to run it," she recalls. "I believe (my internship) was the most important thing in my career and I've tried to pass it on to as many people as I can."

Arduin, who has worked for four Republican governors, has no qualms about the challenges she faces working with a Democrat-controlled legislature, "because the governor's team is bi-partisan. The most important thing is that the policies that we put into place for the state – particularly those that go into the constitution – are good sound policies for the taxpayers of California; for the people of the state," she says. "And that's more important than the outcome of any day and any discussion in the Legislature."