“Thank you very much. My warmest thanks to the Chamber of Commerce. It's such a great turnout, it's a great evening, and I am really so happy to be a part of it.

I want to tell you of Jennifer Rockett, who beautifully sang ‘The Star Spangled Banner' for us, a great rendition with such a clear, pure voice. Down at the table somebody said to her, ‘Why don't you get your picture taken with the Senator?' And Jennifer looked for a man.

I want to tell Jennifer this story. I was mayor of San Francisco for nine years and a very good friend, his name is Bob McCarthy and he has five children, came to me one day and he said, ‘Do you know what I saw in my house yesterday?'

I said, ‘No, what?'

He said, ‘I went home, I saw my four boys and my girl, they were sitting in the living room and my daughter was sitting in a big chair in the middle and I said, ‘What are you doing?'

‘And they said, ‘We're playing mayor.'

And I said, ‘Well, why is your sister up there?' And the boys looked at him and said, ‘Dad, you know only a girl can be mayor.' So that's really the spirit that I think we have to address here.

Today, I'm delivering a Washington report. I did one yesterday in the downtown partnership in San Diego and we will over time work our way right up the state.

It's just wonderful for me because there are so many people who care about their communities and people who have a say in their communities and I very much appreciate that. And in each one of these, I try to recognize two students, students that we call stellar students.

It means they're good students, they're caring students, they're trying students and academically they have done very well. And rather than wait ‘til the end of the program, because I've noticed that as time goes on they get more nervous when they're at the end of the program.

I decided I would do it up front. So I would like to ask Christina Marcellus and Alejandro Reyes, if you would come to the podium so I could give you just a small proclamation from the United States Senate.

Being biased as I am, I always do ladies first. Christina Marcellus is a junior at Westchester High School and she is accompanied here by her father Jerry Marcellus and her mother Jill Marcellus.

She has a 4.0 grade point average. She's been on the honor roll every semester. She's captain of the golf team where she earned the title ‘League Champion,' and represented Westchester High School in the City Championship. She's not only an outstanding student academically and an excellent athlete but her devotion to community service is where she really shines.

As Vice President of Westchester High School's Interact club, Christina has spearheaded a variety of community service activities. She has served the homeless at the Union Rescue Mission, packaged care packages at Children's Network International for families devastated by disasters around the world, and helped to run a canned food drive for the Los Angeles food pantry. What a wonderful young woman. Congratulations!

Now, Alejandro Reyes. He is a senior at Bernard Catholic High School in Playa Del Rey. He's accompanied by his father, Bernardo Reyes, and by his principal, Jim McClune.

Alejandro has a 4.43 GPA in honors and advanced placement classes. He has excelled athletically on varsity cross country for four years and JV soccer.

He's a recipient of Gatorade's ‘Will to Win' Athlete Award. He's a member of the high school marching band, president of La Sociedad de Los Latinos which is the Hispanic cultural club; he's president of the literary arts magazine club. Alejandro has his poetry published in this magazine.

He's commissioner of environment for the Associated Student Body at his school. He's a member of the California Scholarship Federation and a scholar on the national honor roll, the dean's honor roll, the principal's honor roll – is there any other honor roll? His hobbies include fishing, observing nature, running, writing poetry, and cooking. He plans to attend a four year college and pursue a career in Latino American studies.

Now I want to stop for one minute and tell you something. I am a firm believer that the tragedies of life take people in one of two ways. They either turn you inward and you become somewhat resentful, sometimes bitter, sometimes apart from the rest of the world.

Or they serve to open you up, and you find that because of your tragedy, you can really give more and have more to offer to others. At age seven, Alejandro lost his mother to leukemia. And I've got news for you we're going to find a cure for cancer, believe me, one day.

Most children would be totally decimated by this, but not Alejandro. He steeled his will, he was able to move ahead and stay strong and accomplish so much – and he's only in high school today. An amazing young man. And I think your father is here, but I'll let you introduce him in a minute. Would you give him a big round of applause?

Well, that was the best part. It's downhill from here on.

Let me just say a word or two about two issues of local concern. And I may be circuitous as I do it, but they really are important local matters. The first is the airport.

And what I really want to say is a product of my experience of nine years as a mayor. When I was mayor of San Francisco, I put a cap on the number of passengers that could come through the airport a year - 28 million annual passengers. I am of the very strong view that the solution to this problem is regional.

The key is the formulation of a regional authority. Now that's difficult to do. I tried to do it with an airport-port authority for regional arrangement and couldn't do it. But with Los Angeles, if you really want a long-term solution, you've got to involve other areas. And you've got to be able to develop this, this feeder line that is quick and efficient. For those of you who travel, just go to Shanghai to the financial district, and get on a Maglev train and see how fast you can get to the Shanghai airport.

I think this is part of the solution, and I very much hope that as you consider various alternatives – the mayor's plan, other comments that have been made, the study that has been done, the community really begins to recognize that you have other resources.

And let me commend you and thank you for getting together, for raising money, for becoming a united team, to save the Los Angeles Air Force Base.

During the last round of base closures, California had 20 percent of the nation's bases close in our state. That's 31 bases and we lost 93,000 direct jobs as a result. Many of us believe we have done our share, and that we should be by-passed this round. But that's not likely to happen.

Therefore, it's really important that communities come together to put forward the best possible case for the base's' importance. The entire criteria, really, is around military values. And that's force readiness, its strategic whip, its cargo – all of the things that have to do with a military base. Now some of us, myself included, would like to have some other criteria, and we tried to get that criteria in, but we did not succeed.

Now, you've raised money, and come together as a community. Now you need to put together the best possible case as to why America's military is served by a continuation of the Los Angeles Air Force Base. So go to it, and do it, and I will be there with you every step of the way.

What I'd like to do now is talk a little bit about where we are in federal government at this stage – where we are with respect to deficits, and deficits that touch the state, and why it is so important that we change our ways.

Then I'll touch on the California economy and then, Iraq , Afghanistan , and where we are going in the country in terms of national security and foreign policy.

There are many people who believe that deficits don't matter. I'm not one of them. I believe that deficits do matter.

In January 2001, the Federal government projected a ten-year surplus of $5.6 trillion. So, June of that year, the tax cut was passed. I voted for that tax cut. I did so because I felt, with this projected surplus, the time had come to give back to the people. In good times, you can afford it. In hard times, you need more help.

By February 2004, for a number of reasons – 9/11, the war in Afghanistan , Iraq , other things that happened in the world – our nation suffered the largest economic reversal in history, resulting in a projected $4.2 trillion budget deficit over ten years.

Under the President's proposed budget, the United States will spend $991,000 a minute more than we have. And, the budget uses all of the $1.1 trillion dollar revenue for the Social Security and Medicare trust fund over the next five years.

The reason this is important is because both Medicare and Social Security go into the red in the next couple of decades. Therefore, building up the trust fund became all-important to staying out of the red ink. Overall, our gross federal debt is expected to rise $6.8 trillion to $15.1 trillion in 2014. Again, some say deficits don't matter. I want to give you a few reasons why I deeply believe they do.

They eventually slow economic growth. The average family's income will be an estimated $1,800 lower by 2014 because of slower income growth. Mortgage rates will rise. Right now, we have low inflation, and low interest rates. Let's say you can find a home for $250,000. The average cost of a home right now would be closer to $400,000 dollars, but let's say $250,000 dollars with a 30-year mortgage. One point of that mortgage is $25,000 dollars. For every point of interest that increases, that's the additional amount of money that a homebuyer pays – which, if you think about it, is worth it. Low interest rates are worth much more to individuals buying cars, buying homes, buying other things than an actual tax cut.

Deficits increase our indebtedness to foreign countries. Now, why is this bad? It's bad because it hurts our independence. We are not as free to do those things and make those criticisms and comment about other nations if we expect them to pick up Treasury bills when the Treasury sells our debt four times a year. Right now, Japan holds $526 billion of our debt. And quarterly, we expect them to buy more. China holds $144 billion – and quarterly, we expect them to buy more. The United Kingdom , $112 billion; the Caribbean banking center, $62 billion – and on and on and on. So, America hampers her independence the larger the debt becomes, the more dependent we become on others who buy our Treasury bills.

Deficits also require a growing portion of revenue to be devoted to paying interest on the national debt. The interest on the debt isn't like the interest on a home. It doesn't decline, it simply rolls over every year.

So, if you combine what we call discretionary spending – discretionary spending is Department of Education, Department of Justice, Department of Health and Human Services, Department of Interior, Department of Defense – we could cut those agencies, but what we can't cut are entitlement programs – Social Security, Medicare, veteran's benefits, welfare.

When you add those entitlements together and let the interest on the debt go ten years, as a proportion of the federal budget, they will total over 65%. What's the meaning of this? The meaning of it is, you can eliminate everything else – defense, health, education, interior, justice – and you can't solve the debt problem. That's why it is so important that we change our ways and we bring down that debt.

Now California has two things – a huge cash debt, and a huge red structural debt, structural imbalance in the budget – which means, we aren't bringing in enough money in the state to pay for the spending. Governor Davis had a bond – he was going to close the back debt.

There were concerns about the legality and structuring of the specific bond; and now Governor Schwarzenegger has put together a bond. Actually, the car tax revenue is added to that bond, $3 billion, plus about $8.6 billion dollars of bond payments that are due in June.

Without the passage of this bond, we will default, the state will default on bond payments. This is a major event, should it happen. It will have a ricochet effect all across the economy of the state of California . It will have an effect on the financial market of this state; it will have an effect on its ability to get loans, it will have an effect throughout our society.

And that's why I'm going to ask you tonight to vote for two propositions on the March ballot: Propositions 57 and 58. 57, or what's called the Economic Recovery Act, would authorize a one-time – you can only do this once – $15 billion economic recovery bond to pay off a past general funds deficit. This measure would mean the state could pay off its debt in a way that is both legal and constitutional.

Proposition 58, called the California Balanced Budget Act would require the enactment, not just the submission, of a balanced budget. Today, the Governor has to submit a balanced budget. But, the Legislature doesn't have to pass a balanced budget.

With this proposition, it makes the Legislature pass a balanced budget. It is key and critical that we set up a rainy day fund so that we can pay for a catastrophe – like fires, like earthquakes. Those kinds of things. And, it would prohibit any future similar bond measure from being enacted to pay off the state operational.

Now, a lot of people had urged me to run for Governor in this last recall, and I decided not to do it. Perhaps if I had, and by some fluke I had won, I might do this a little differently. It doesn't matter. Today, this is our one hope. At a time of crisis, Californians come together.

And, it is truly right that we come together to pass these two propositions, and give the Governor the support he needs because not to do so would plunge this state, I deeply believe, into a cauldron. I've spoken to State Department branch officials about it. I've spoken to independent financial experts about it, and I really do think that this is the right course for California . So will you help, and will you vote yes on these two propositions?

That was not too enthusiastic…but I will accept it.

Let me touch on a different topic for just a couple of minutes. Our state and our nation face a growing crisis: the out-pricing of companies and the out-sourcing of labor to other parts of the world.

We know that doctors send secretarial work abroad, that computer work is done in China , more and more products are manufactured in South America , and so on and so on. Since 2001, this great state has lost 300,000 manufacturing jobs. On the agriculture front, we have lost 14 percent of our agriculture workforce over the past two years.

In California today, this has made companies contribute $6.32 for $100 in payroll for workers' compensation insurance. This is a 21 percent increase over last year and makes California far less competitive than its neighbors. For example, take Nevada where a company pays just over $3.00 for $100.00 in payroll. So, California businesses pay 110% more in workers' comp than businesses in Nevada . And in Arizona businesses pay $1.60 for $100 in payroll for workers' comp. In California , we pay nearly 300 percent more, the businesses do, in workers' comp than in our neighboring state of Arizona.

Now, the bottom line is that businesses begin to go across the border and this becomes a significant burden on our economy and our workers. So I hope that all across the state, Chambers of Commerce really push this year for workers' comp reform.

Now let me go to Iraq . It was mentioned that the past two-and-a-half years, I have served on the Senate Select Committee on Intelligence which provides oversight to the 15 intelligence departments of the United States government.

With respect to Iraq , we were briefed, we received a classified version of the intelligence community's analysis, all of it, which is called the National Intelligence Estimate (NIE) and an unclassified version was available to the public. And, the key findings were very specific that Saddam Hussein possessed chemical and biological weapons and had violated United Nations restrictions on the building of missiles.

Deep concern was also spelled out by the President, the Vice President, by Secretary Rumsfeld. Secretary Powell spoke directly to the UN about mobile biological weapons and aerial photos of suspected chemical and biological factories were provided.

I joined 76 members of the United States Senate to vote to give the President authorization to use force in Iraq . It's true, that we expected him to go to the United Nations and develop a larger, sounder alliance. But nonetheless, we had that vote. Imagine my consternation when months after hostilities were seemingly over and the United States military and administration did not ask the United Nations, they found nothing.

So, a special Iraq Survey Group was put together headed by Dr. David Kay, a former arms inspector. He went over to Iraq with his team and months went by and then he came back to report that there are no weapons of mass destruction. Ladies and gentlemen, this was a massive intelligence failure on the part of the United States government. And, I truly believe that had it not been for the claims of weapons of mass destruction, the vote to authorize the use of force in the United States Senate may have had just a bare majority or may have not had a majority.

We need to make major changes. I introduced a bill in the 107 th Congress and again in the 108 th Congress to reform the way that the intelligence community is structured.

The head the Central Intelligence Agency is what is called a DCI, the Director of Central Intelligence, but the Secretary of Defense controls 80 percent of the overall Intelligence budget. The DCI has no statutory and budgetary authority. He can't move people across the community – it is a bad situation.

The American intelligence establishment was basically set up for the Cold War, and we are in a totally different world now. We are in a world of asymmetric terror where individuals and groups come together to raise money to build bombs and go out and commit terrible acts. The adversaries are not from the Western world. The adversaries are, for the most part, from the Muslim world and the intelligence community's understanding of the language and culture leaves a lot to be desired in terms of developing an effective human intelligence organization and network.

As Dr. David Kay said, if there is going to be a policy of preemption that this Administration has set as the hallmark of their defense policy, you better be sure that your intelligence is right. Nonetheless, we are there and it is critical that the country we leave is stable: that the government is able to run it in a humanitarian and decent way; that the infrastructure is rebuilt; and that the people are reasonably secure.

And one of my great worries is that there is a rush right now to an election and I am very concerned that should there be an Iraq election that the result may well bring about a major civil war. That would put us in a worse place because the governing party that ruled the country under Saddam Hussein for 40 years is a minority and the Shia party or the Shia majority could very well win and the result could very well be a fundamentalist Islamic party. This is not a pretty picture.

In Afghanistan – we must work to secure that country. The Democratic Government of Karzai must be reinforced. The warlords of the southern part of the country are now going back into the business of opium and heroin production, the highest amount of production ever. And the money from this heroin production is going to the Taliban, going to Al Qaeda, going to our visceral enemies and we must stop it.

The third challenge internationally is North Korea . North Korea is isolated, it has a military dictatorship, people are starving, it is proficient in nuclear sciences, proficient in the development of long-range missiles, an absolute renegade country that may be making nuclear weapons themselves. And so we have another challenge where diplomacy, where hard diplomacy is needed.

Then we have Pakistan and India. Both are now nuclear countries, with a long-standing history of conflict. Both are able to deliver nuclear devices that are substantial and now we learn that Pakistan has been sharing technology with rogue nations. So, national security and foreign policy runs together. At the same time, those of us in Washington and those of us here in this great city are very concerned about homeland security. We have a huge new agency with 22 major departments. There is much to be done at our airports, much lacking in ports, in particular, with this great 16-mile long Los Angeles - Long Beach port, we need to really strengthen security.

We complicate all that with a presidential election when life is most difficult. But, Harry Truman had it right, ‘When the going gets tough, the tough get going' and I think my message to you is that during a crisis, just like a family, the American people come together wherever we are from, wherever our families are from, whatever political government we might march to, it is critical that we come together and that we do the right thing for our country. We see that our homeland is protected and that our people will always remain strong.

9/11 was a real defining moment in the history of the United States because it showed what open people we are: how easy it is to cross our borders; how easy it is to develop terrorist cells within our country. Those things must stop. There are a lot of misimpressions I think about the Patriot Act and I serve on the Judiciary Committee and I played a role in the six weeks we considered the Patriot Act. And I would like to tell you, ladies and gentlemen , I will do anything I can to see that the people of this great country are protected and there is nothing in the Patriot Act today that is not already given to law enforcement in tackling racketeering crime or in narcotics apprehension.

It is a clear lesson that if you do not get to terrorists before they strike, it is too late. Remember that two hijackers spent six months in San Diego living in the community and our counter-intelligence operations did not share information about them.

And virtually all of the hijackers came to this country on valid visas, so clearly we need to address visa reform and tighten our borders. I was astonished to see that there are 22,000 places in America where aircraft are used and there are no regulations or control. We passed a bill to change that.

Clearly, there is much to do in Congress. What do they say? Many miles to go before we sleep.