State Crisis Will Test Finance Chief's Theory

Times Staff Writer

Ten years ago, Steve Peace wrote in a newspaper opinion piece that a budget crisis is a great opportunity to reform government.

At the time, California's budget "crisis" was a $3.3-billion deficit on a $42-billion spending plan. Peace, an assemblyman from Chula Vista, found it a good excuse to propose that the state wipe out useless commissions, discipline an out-of-control bureaucracy and "focus on the needs of the future, not the habits of the past."

Today, California's budget is so far out of whack that it makes the 1992 deficit look like spare change. And Peace -- having just walked away from 20 years in the Legislature with a reputation as energetic, caustic and sometimes too smart for his own good -- now has another chance to test his theory that a budget crisis should breed better government.

On Wednesday, Gov. Gray Davis named Peace director of the Department of Finance.

The appointment won high marks from Peace's colleagues in the Legislature, who describe him as incredibly intelligent and hard-working, capable of mastering the intricacies of the most complicated issues. But they also know him as annoyingly long-winded and cocky; a fellow senator once described him as the little brother you don't know whether to hit or hug. His appointment as finance director could prove to be a brilliant or disastrous move for Davis.

Whether it's locking up criminals, buying milk for poor children or widening highways, government decisions invariably come down to money, and the Finance Department's role in advising the governor is central to the debate.

Thanks in large part to losses in the stock market that depressed tax collections, the governor says he and the Legislature must pare spending or raise taxes to cover a $10-billion hole in the current budget and a $25-billion shortfall in the fiscal year beginning July 1.

Leading the Department of Finance when a yawning budget gap has swallowed nearly every other government priority is not what Peace, 49, had in mind when term limits forced him from the Legislature this year.

At his August farewell on the Senate floor, Peace said, "I will follow Mrs. Peace's admonition. She says I can do whatever I want next, as long as the media's not interested in it and it requires me to be out of town periodically."

'Killer Tomatoes'

Peace said he had planned to invest more time with his family, get back into the movie industry and maybe earn a law degree. Now the father of three college-age sons, he produced, wrote and starred in the B-movie classic "Attack of the Killer Tomatoes" when he was a college student himself. He recently sold his share of a San Diego video production company called Four Square Productions.

A graduate of UC San Diego who married a cheerleader from his 11th-grade class, Peace credits his stepfather, Gordon Browning, with inspiring his interest in politics. A Navy dentist, Browning was campaign chairman for then-state Sen. Wadie Deddeh, a Democrat from Chula Vista.

Peace worked for Deddeh and former Democratic Assemblyman Larry Kapiloff of San Diego before running for the Assembly himself at age 29.

"In retrospect, I would not vote for me," said Peace, an opponent of term limits for legislators. "I was too young."

Three years into his Assembly stint, Peace got into a Capitol hallway argument with a senior senator. Witnesses say Peace called Sen. Alfred Alquist (D-San Jose) "a senile old pedophile." Peace claims he actually called Alquist "a pitiful little creature."

He still has a reputation for attacking legislative witnesses. Last year, at a news conference, he told an American Heart Assn. official: "You're so dumb. You can't fix dumb."

He's quick to recount the history of an issue and all of its permutations.

"Ask me what time it is and I'll tell you how to build a clock" is how he once described himself, quoting a sign his schoolteacher mother kept on her desk.

A moderate Democrat who is as wary of the excesses of Democrats as of Republicans, Peace was a member of the "Gang of Five," a group of Democratic lawmakers who teamed with Republicans to try to oust powerful Assembly Speaker Willie Brown in 1988. They failed, and Brown retaliated by stripping them of good committee assignments and prime office space.

Peace eventually worked his way back into Brown's good graces, and won election to the Senate, where he worked on what would become California's disastrous deregulation plan. That experience left him ready to leave Sacramento when he reached the end of his term this year.

Instead, Peace will resume the weekly airplane commute between San Diego and Sacramento.

"What convinced me to take the job," he said, "was that the governor is committed to permanent, structural reform."

In interviews before he agreed to become finance director, Peace described how he believes California can avoid the wild gyrations of the past decade, in which state revenues have gone from bust to boom to bust.

They include such difficult goals as persuading the federal government to pay a greater share of immigration-related costs and reviving California's manufacturing sector. Employment in manufacturing has fallen 12% since 2000.

"We've created a tax structure that discourages growth of manufacturing jobs, that underdevelops housing and overdevelops retail because local government is overcompensated by retail," Peace said in an interview last month. "Over time, that's corrosive. At the core of every successful economy is making things."

Prop. 13 'Irrationality'

He connects much of the "irrationality" in California's tax structure to Proposition 13, the 1978 ballot initiative that capped annual property tax assessment hikes at 2% a year until a site is sold. Though Proposition 13 has protected the elderly and the poor from soaring tax bills, it also has made the state, cities and counties more dependent on volatile income and sales taxes.

Peace has suggested cutting the capital gains tax that people pay when they sell commercial property as a way to hasten the turnover and reassessment of businesses at a higher tax rate under Proposition 13.

Jean Ross, executive director of the nonprofit watchdog group California Budget Project, dismissed that idea, saying there is "no evidence" that it would bring in more money.

"It's a massive giveaway to extremely wealthy people who were planning to sell property anyway," she said.

Another suggestion Peace tossed out earlier this month was raising property tax levels above the Proposition 13 cap -- a move that would require the approval of voters. Homeowners could be buffered from the increase with other tax breaks, he said, but commercial property owners don't need the same protection.

Peace doesn't minimize the political difficulty of restructuring the state's revenues, especially if it involves the landmark Proposition 13. "There is not any way to fix the structure without a constitutional amendment," he said this month.

Speaking Thursday as the new finance director, Peace refused to discuss reforms in detail, saying an overhaul belongs in the hands of elected politicians.

Based on his history as Senate budget chairman, he'll probably argue for quick, deep cuts in state programs. Earlier this year, Peace urged the governor to convene the Legislature after the November election so that it could quickly slow the flow of cash.

Paring a dollar this year, midway through the budget, saves $2 next year, Peace argued. But Davis did not call a special session on the budget until the Legislature returned as usual in December.

The shift from elected politician to bureaucrat may not be easy for Peace. Some at the Capitol say they anticipate a clash between Peace and the governor -- both known as mercurial.

"I'll be sitting back to watch that," said the Assembly minority leader, Dave Cox (R-Fair Oaks). He said he knows of Peace's temper only by reputation, and though he doesn't often agree with Peace, "he was always courteous, polite and listened to what I had to say."

Former Democratic lawmaker and budget expert Phil Isenberg, a lobbyist who now advises Davis on budget matters, said Peace should make a terrific finance chief.

"Start with pure brains, a real understanding of the large picture of the issues in California and an ability to drive the process toward decision-making," Isenberg said. "He's a marvelously inventive and smart guy. He'll figure it out."

He is easily frustrated by the failure of fellow lawmakers and the media to grasp the subtleties of the issues he tackles, from workers' compensation and consumer privacy to open primary elections.

None was so complex as the launching of electricity deregulation. That experience two years ago killed Peace's ambition to run for secretary of state and cost him credibility as the power crisis dominated headlines.

California's deregulation plan was launched in 1995 with a 3-2 vote by Republican Gov. Pete Wilson's appointees to the Public Utilities Commission.

The Legislature sought to modify that plan, and Peace was chairman through weeks of hearings in the summer of 1996. The result was a bill that sailed through the Legislature without a single no vote. Peace got much of the credit.

In the hearings, Peace said he didn't think deregulation was a good idea and questioned whether it would help small consumers. But he also bragged about California's effort as "the most complex transition of an industry done anywhere in the world."

He paid for his hubris when the state's new power market went horribly awry, starting in May 2000. Soaring electricity prices enriched private energy companies and bankrupted the state's largest utility.

Peace, frequently and wrongly identified as the originator of deregulation, was ridiculed by San Diegans, whose utility bills doubled.

Peace dropped out of the public spotlight during the worst days of the electricity crisis.

But he kept close watch on the issue. From the Senate floor, he repeatedly attacked the Federal Energy Regulatory Commission for failing to police private energy companies, and Enron Corp. for gouging consumers.

"The problem was, Steve was so sure it was going to work.... He kept talking about it and talking about it, like it was his bill." Then, when the plan unraveled, "he got somewhat defensive and went into a funk," state Sen. John Burton (D-San Francisco) said at Peace's Senate farewell.

"As he would berate FERC and berate FERC, the currency was somewhat devalued in some of our minds .... And then, as time would tell, he was absolutely right."

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