Bill Totten's Weblog

Saturday, December 19, 2009

Golden State Fever

by Peter Schrag

Harper's Magazine Notebook (September 2009)

The great state of California is desperately ill: it has a chronic disease that's been ravaging it for more than thirty years. This year's symptoms include: a $26 billion, two-year budget deficit; a string of sudden multibillion-dollar cuts to schools, welfare, and health services; and the possible elimination of the state's college-scholarship program. In June, Governor Arnold Schwarzenegger threatened to shut down the government if the legislature - meaning its Democratic majority - didn't approve the combination of budget cuts and other reforms he demanded. In July, the state controller declared that California was about to run out of cash and began issuing IOUs to its creditors, followed shortly by the announcement from major banks that they wouldn't honor them.

California's problems date back at least to the passage of Proposition 13 in 1978, which cut local property taxes by nearly sixty percent, restricted all future tax increases, and badly confounded state and local authority. Proposition 13 was followed by a series of voter initiatives that capped or eliminated other taxes, limited spending, and imposed legislative term limits while at the same time approving popular spending measures and spending mandates without the revenues to pay for them. In the meantime, state expenditures increased faster than revenues, a pattern that continues to this day, with the difference made up by borrowing, deferrals, and various other accounting tricks. This year, at last, most of those options have been exhausted.

Who, or what, deserves the blame here? The governor, who in his first year in office cosponsored a $15 billion bond to pay off debts he inherited from Gray Davis, the man he had just ousted in a recall? Schwarzenegger promised that he would borrow just this once and then "tear up the credit card". But the credit card wasn't torn up, and the borrowing continued. Is it the hopelessly divided legislature, or the fatally convoluted and nearly incomprehensible tangle of state and local governing authorities, most of which are in fact the product of a generation of voter initiatives? Or does the rap finally belong to the voters, who with those initiatives have authorized increased state spending but provided no revenue to pay for it, and who, at the same time, refused to approve the reforms that might have helped unravel the knots into which they tied their representatives?

In the 1950s and 1960s, California was celebrated for its progressive political institutions, its public university system, its ambitious water projects, its freeways and parks, and, most important, its sense of optimism. But over the past three decades, the state has been transformed into a spectacle of undisciplined plebiscitary excess and democratic failure. California is hardly alone among US states in confronting a monstrous recession-driven budget deficit and a bungling legislature; what is unique is the magnitude of the damage, the dire position in which California now finds itself, and, as the world's eighth largest economy and the nation's most populous state, the likely consequences for the country as a whole.

No miracle cure is on the way. The fiscal compromises reached in recent years - those few that haven't quickly collapsed - have involved so much borrowing and fudging that they've done little but lay the groundwork for yet greater problems. At bottom lies the paradox implicit in the hyper-democracy of an initiative process beloved by the voters and the antidemocratic constitutional restrictions that they have voted in. The most stringent, which dates back to the Great Depression, requires a two-thirds majority in each house of the legislature to approve a budget or, indeed, any spending measure. Today's voters can't be blamed for this law, but they can be blamed for refusing to change it. Proposition 13 even added a provision requiring two-thirds majorities for tax increases (but not, it should be noted, for tax cuts). No other state requires legislative super-majorities for both budgets and tax increases. It is hyper-democracy set against non-democracy.

The super-majority requirements have allowed California's "starve-the-beast" Republicans, despite their being a minority in the legislature, to exercise de facto veto power over any spending plan. In the past year, the Democrats have accepted large spending cuts in programs, while with few exceptions the Republicans have adamantly refused to negotiate tax increases. The few who have supported raising taxes have suffered for it. In February, five Republicans, including the GOP leaders in the Assembly and Senate, broke the no-new-tax pledges they'd signed for the Washington-based tax absolutist Grover Norquist by voting for temporary tax increases sought by Governor Schwarzenegger. Their caucuses immediately replaced the two leaders; and now, two other Republican defectors face recall.

A recent poll showed that California's voters, barraged by press reports of public boondoggles, believe that state spending could be cut by as much as $20 billion, more than twenty percent of the current budget, without affecting essential programs. This is a myth, of course, because spending has been cut and services have not been maintained; the borrowing has only allowed services to degrade more slowly. After Proposition 13 passed, virtually all public-school summer programs were canceled; school counselors, librarians, and nurses were laid off by the thousands; playgrounds and swimming pools were closed; and maintenance of all public facilities - parks, schools, roads - was sharply reduced. This summer both of the state's public university systems again raised tuitions, furloughed employees, scrapped classes, and in the case of the twenty-three-campus California State University system, announced that they would take no new students for the spring 2010 semester.

Since 1978, Californians have enacted, via initiatives, a series of taxing-and-spending limitations even as they voted in favor of costly unfunded programs, a process known as "ballot-box budgeting". These initiatives have included harsh mandatory criminal sentencing laws, which have tripled the prison population at a cost of $49,000 a year per inmate; a $3 billion bond for stem-cell research (total cost with interest: $6 billion); a $10 billion bond for planning a high-speed rail system, which passed last November even as the state was entering its present crisis; plus additional bonds for natural-disaster-prevention projects, parks, and hospitals, and a $500 million annual expansion of after-school programs. None of these initiatives included a cent of additional revenue; all were sold as something-for-nothing, no-cost, tax-free.

Schwarzenegger, who as governor has bitterly complained about the state's autopilot spending programs, supported the stem-cell bonds; and in the year before he ran for governor he cosponsored the after-school initiative, which helped to establish his good-guy credentials and pave the way for his eventual campaign. Worse yet, the day Schwarzenegger took office in 2003 he fulfilled a campaign promise to cut the state's vehicle-license fee, despite the fact that it would cost the state some $6 billion in revenue annually and that California's motorists had been paying the "car tax" without complaint since the 1930s. The man Schwarzenegger replaced as governor, Gray Davis, had in fact cut the tax in 2000, with the proviso that if things turned bad, it would be returned to its original level. Lowering the tax in good times, however, proved far easier than raising it in bad ones, and the restoration of the car tax became a prime item in the list of particulars that brought Davis down. Finally, because the state had assured local governments (which had always received the car-tax money) that it would replace the lost revenue from its own funds, the cut appeared on the state's books as a spending increase. Schwarzenegger and the tax-cutters then lumped that into their complaint about California's out-of-control expenditures.

A credible case can be made for attributing much of the blame for today's governmental crisis to the legislature's decision, made shortly after Proposition 13 passed, to use the state's surplus - it had one in 1978 - to bail out the cities, counties, and local schools. But that largesse served only to reinforce the belief among voters that the services they had grown to rely on could be maintained without the taxes necessary to pay for them. Howard Jarvis, the curmudgeon who was the main force behind placing Proposition 13 on the ballot, had attacked those who warned of disaster for the schools and other services as "marinated bureaucrats and over-animated popcorn balls". But a generation of bailouts has only proved him right. Now that the surplus is long gone, the left coast's lotus-eaters are addicted to a bailout habit sustained by unsupportable borrowing and payment deferrals. When state legislators cut funding to the municipalities, local officials accuse them of betrayal and immediately begin drafting initiatives to force the return of the money, which they are - wrongly - convinced was theirs to begin with.

A generation after the passage of Proposition 13, the condition of California's highway system, once exemplary, is rated among the worst in the nation. California's K-12 class sizes are the largest or second-largest in the country, and its overall per-pupil spending, once among the top ten in the nation, has sunk to the bottom third. This summer, Chancellor Don Griffin of the City College of San Francisco added a new expedient: anyone who contributed $6,000 to preserve a course from cancellation could have the class named in his or her honor. The Proposition 13 formula, under which property values are reassessed only after a sale, has created glaring tax disparities between identical neighboring homes, with longtime owners paying taxes based on decades-old purchase prices while new buyers have their taxes calibrated on the much higher prices they paid. Something similar is true of commercial property. If Macy's plans a new store across the road from a Penney's whose property tax is locked in at 1975 prices, Macy's enters the market with a significant tax handicap.

Proposition 13 and the state and local tax-cutting measures that came in its wake have rendered the average citizen incapable of deciding whom to hold accountable for political failures. Since the state has effective control of the allocation of local property taxes, whose fault is it if the streets in Modesto go unpaved or the roofs leak at the public schools in Downey? City hall or the school board, for neglect and mismanagement, or Sacramento for failing to appropriate the funds? Over the years, California's voters have approved a convoluted school-funding formula that hardly anyone understands, imposed legislative term limits that have driven experienced lawmakers and the best professional staff out of the capital, and recalled a duly elected governor. As each new initiative imposed additional constraints on the legislature, both its ability and its willingness to respond to new situations became more attenuated, which brought only more voter frustration and more initiatives.

The result has been near-paralysis. The Democrats, committed to protecting services (and the public-sector unions whose members represent a major source of campaign cash), have found it difficult to make deals with an increasingly cult-like GOP that refuses to raise taxes (and is also increasingly prone to blame the state's economic problems on illegal immigrants). But over the years, both sides at the very least managed to agree on the budgetary legerdemain that allowed them to avoid statewide gridlock. Most of those accounting tricks have now been used up - and the accumulated debts can't be deferred much longer.

This spring, as the warning signs that California was about to fall off the fiscal cliff increased, there was talk in Sacramento of a federal bailout similar to the ones provided to GM and the big Wall Street banks. The contention, which is probably correct, was that without the innovation and energy of a California that can pay its bills, maintain its transportation system, and run its great university research laboratories, America itself would not recover.

More broadly, California's governmental problems raise questions with national implications: How is it that the bluest of blue states finds itself still locked into a thirty-year-old tax-revolt mind-set? What does it mean if California's voters, who are still two-thirds non-Hispanic white, are unwilling to support adequate public programs for a society in which the beneficiaries are increasingly Latino and Asian, of whom a sizable share are undocumented aliens?

In June, the Washington Post reported that California's request for a bailout from the Obama Administration had been "turned back". Shortly thereafter, Schwarzenegger's office issued a statement denying that the governor had ever asked for a bailout and insisting that the state would get its fiscal house in order without help from Washington. But Schwarzenegger's six-year record of failed efforts to accomplish fiscal solvency left more than a little room for doubt.

A month later, Schwarzenegger announced that a deal to balance the budget had been struck. After comparing his negotiations with the legislature to a "suspense movie", the governor laid out the terms: $15 billion in cuts to state services, a sum close to what California's voters thought could be culled from the budget; in an odd reversal of the earlier Proposition 13 bailout, there would be $2 billion in "loans" from city and county governments; $1.7 billion in revenue from speeding up corporate and personal income-tax collection; and - this is California, after all - $1.8 billion in "accounting maneuvers", including shifting state payroll payments into the next fiscal year and disappearing the loss.

The agreement does nothing to address the fundamental legislative problems California faces, and with which it eventually will be confronted. California must still modify the initiative process to end the free-lunch illusion of ballot-box budgeting. It must, like nearly all other states, allow a simple legislative majority to pass budgets. It should lengthen legislative term limits so that there is again some useful sense of the past in Sacramento and, more importantly, so that there will be politicians who understand that they could still be around when the chickens hatched today come home to roost. The multibillion-dollar corporate-tax loopholes, which, with the support of both Democrats and Republicans, have been lobbied into the tax code even in bad times, must be closed. And, finally, Proposition 13 must be revised so that at the very least the state's large corporations pay taxes based on something that resembles the current value of their properties. All that will take a lot of doing, but if it doesn't happen, California, the nation's sickest state, may never be cured.


Peter Schrag was for many years the editorial-page editor and a columnist for the Sacramento Bee. His new book, Not Fit for Our Society: Nativism, Eugenics and Immigration, will be published in the spring.

Bill Totten


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    Cynthia Beattie Mcgill

    By Anonymous Cynthia Beattie Mcgill, at 12:07 AM, December 20, 2009  

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