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Gov. Arnold Schwarzenegger explains the dire economic scenario

At an appearance in San Francisco Tuesday morning, Gov. Arnold Schwarzenegger criticized what he called the budget "kabuki" that is now under way in the Legislature, as both parties advance budgets that they know will not get the two-thirds majority necessary for approval.

The governor said the state was spending $52.5 million a day that it did not have while the budget impasse drags on. He did however express confidence that the parties would soon return to the bargaining table and get a budget deal done. "After they're done with their kabuki, they will come back and negotiate," he said.

Schwarzenegger made the remarks at CitySummit 2010, an event hosted by the San Francisco Chamber of Commerce for hundreds of local business people. It featured panels with representatives from companies such as Salesforce.com and Twitter, as well as a talk by Ted Egan, San Francisco’s chief economist, who assessed the city’s economic woes.

Schwarzenegger argued that the state needs pension reform and tax reform to find its way forward economically. He set up charts on the stage to illustrate the case for pension reform, asserting that the California Public Employees' Retirement System's pension costs had risen from $150 million to $6.5 billion a year over the past decade, and would reach $20 billion within 10 years if nothing was done. "We're spending more money on pensions and retirement than on schools," he said. Pension costs were "crowding out other programs." 

He also said he was committed to "landing in the middle" when it came to the ideological wars between Democrats and Republicans. He called for tax reform to reduce the dependence on income taxes, which account for 53 percent of state revenues but tend to be highly volatile. "How do you plan when you have the roller coaster ride?" he asked, referring to the fluctuations in tax revenue that accompany the ups and downs of the economy.

The governor also underscored his commitment to high-speed rail. "I'm a big believer in infrastructure," he said, citing his European background, which he said led him to take a longer view of things. "High-speed rail, it will be wonderful," he said. "That's economic power — how fast we move people and goods around."

He denounced the effort to repeal AB 32, the landmark environmental legislation, as the work of "two greedy oil companies from Texas."

"We're going to raise millions of dollars to beat that back," he said.

"This time we are in right now is so crucial," he concluded, in response to a question about his future plans. "Pension reform, tax reform... If I can do that I will be a happy camper."

Speaking earlier Tuesday morning, Egan, San Francisco’s chief economist, put the city’s economic woes into a national and statewide context.

The national gross domestic product grew for four quarters, but at the end of June growth was slowing with a dramatic increase in the trade deficit. “U.S. consumers are starting to spend again, but they’re spending money on imports,” which isn’t helping create jobs here, Egan said.

In fact, the local and state recovery on jobs has essentially stopped. San Francisco was stuck at 9.7 percent unemployment in July, which was better than California overall, which remains stalled above 12.8 percent, according to numbers from the state’s Employment Development Department, which were not seasonally adjusted.

Egan said that pockets of job growth in fields such as information technology, green industries and biotech have kept San Francisco from faring as badly as the rest of the state.

One bright spot: Venture capital investment in the Bay Area doubled from $1.5 billion in the first quarter of this year to $3 billion in the second quarter, according to data from PricewaterhouseCoopers. That change has taken venture-capital investment back to pre-recession levels with money going into “innovation-based industries,” Egan said, like technology.

“I believe that these are going to be the engines that drive our entire region economy to recovery in the next several month,” Egan said.

Jonathan Weber contributed reporting.