The California Meltdown

Gentry was right about Reagan failing to win the nomination; the result was the Richard Nixon presidency. Meanwhile, California fared well enough under Governor Reagan, who was elected to the first of two terms in 1966. Displaying a pragmatic streak that would help him when he finally won the presidency on his third try in 1980, Reagan proposed a $1 billion tax increase ($6.4 billion in today's dollars) that was then the largest tax increase in the history of any state--and a progressive tax increase at that. This tax bill, opposed only by a right-wing fringe, won bipartisan approval, erased an inherited deficit, and kept California solvent for many years. During the remainder of the 20^th century, California survived actual earthquakes as well as fires and devastating droughts. Governors and legislators of both parties rose repeatedly to the occasion, mostly notably during the 1991 recession when the aerospace industry imploded at the end of the Cold War. To meet that challenge, Republican Gov. Pete Wilson worked with Democratic Assembly Speaker Willie Brown to close an immense budget gap through a combination of spending cuts and tax increases.

Times have changed, and not for the better.

In the wake of voter rejection last week of five ballot measures designed to ease a long-running budget crisis with tax increases, spending controls and borrowing, California faces a budget shortfall estimated by nonpartisan legislative analyst Mac Taylor at $24 billion and could run out of cash by July. Until now, the state's fiscal plight has been an abstraction for most Californians, but it will soon impact nearly every aspect of public life.

Republican Gov. Arnold Schwarzenegger, rebuffed in his overtures for a federal bailout by the Obama administration, says he has no choice except to slash spending. The revised budget he submitted to the Legislature this month would furlough 5,000 state workers, release as many as 20,000 low-level inmates from overcrowded prisons, reduce spending for all levels of education, and mothball health and welfare programs that serve 1.4 million poor people. California would become the only state without a poison control system, no small thing for parents. The state's Poison Action Line currently receives some 900 calls every day.

Leaders of the Democratic-controlled Legislature are scheduled to meet later this week to come up with a counterproposal they acknowledge also will include hefty budget cuts. Borrowing will be part of the package, but State Treasurer William Lockyer has warned that the state's low credit rating will limit the amount of the loans. No Sacramento politician has running room. An April survey by the venerable Field Poll found Schwarzenegger with a job approval rating of 32 percent and the Legislature at a pitiful 14 percent. The unpopularity of the governor and the Legislature makes it impossible to put yet another budget plan on the ballot.

"The people are telling us, 'Don't bring this problem to our doorsteps'," Senate President Pro Tem Darrell Steinberg said after last week's election.

Other states have suffered during the current Great Recession. Forty-seven states have cut back on various programs or raised taxes or fees. State revenues, like unemployment rates, are lagging indicators that rebound only after a recession ends. But in the magnitude and nature of its fiscal problems, California is in a class by itself. Legislative analyst Taylor says that only half of the state's budget gap can be attributed to the recession while the remainder is structural and persistent.

Multiple explanations are offered for California's predicament. Some commentators blame Proposition 13, approved by the voters in 1978, which required a two-thirds vote of each legislative chamber for tax increases, or the state Constitution, which has long mandated a two-thirds vote to pass the budget. Liberals blame the Republican legislative minority, which has used the two-thirds rule to block any budget with a tax increase. Conservatives blame Democrats for refusing to accept a spending cap as the state spiraled deeply into debt. Both sides fault Schwarzenegger and his Democratic predecessor Gray Davis, and some criticize the voters and California's initiative process. While limiting the Legislature's ability to raise revenues, voters have approved several measures requiring expenditures, a practice called "ballot-box budgeting." The New York Times led its story on the defeat of the recent ballot measures by asserting that "direct democracy has once again upended California."

All of these explanations have a grain of truth, but none adequately accounts for California's fiscal meltdown. Blaming direct democracy is especially lame; California has lived successfully with the initiative and referendum for nearly a century and ballot measures have helped the state pioneer on environmental issues, mental health, and the medical use of marijuana. Proposition 13 perhaps sets the bar too high, but it did not prevent Pete Wilson and Willie Brown from getting a two-thirds majority to solve the severe fiscal crisis of 1991. The much-maligned Gray Davis proposed a budget during the dot.com boom that would have set aside some of the extra tax revenues then pouring into the state treasury and used others for one-time expenditures. His fellow Democrats in the Legislature instead plowed the money into ongoing programs. Schwarzenegger was similarly ignored by the Republican legislative wing when he proposed a realistic budget with a mix of cuts and tax increases.

The constant in the California fiscal mess has been a refusal of the Legislature to address the structural deficit, contends William Hauck, president of the California Business Roundtable. Hauck, a onetime aide to Gov. Wilson and two Democratic Assembly speakers, traces the origins of the crisis to the almost forgotten energy crisis of 2000-2001 when state-subsidized utilities were forced to pay extravagant prices for electricity on the spot market to avoid rolling blackouts. This crisis, made possible by a partial deregulation of energy passed unanimously by the Legislature and abetted by the market manipulation of Enron, left the state in a financial hole from which it has never fully recovered. Instead of fixing the structural deficit, the Legislature repeatedly has kicked the can down the road with one-time fixes, budget gimmicks, and internal borrowing.

New gimmicks keep popping up. Schwarzenegger recently sent up a trial balloon of selling off state assets, including San Quentin Prison and the Los Angeles Coliseum. Such actions would face legal challenges, and they would hardly make a dent in the state's financial hole. The governor priced the assets he named at $4 billion, an optimistic figure in the state's depressed real estate market, and one that would, in any event, still leave a $20 billion budget gap.

Now, as the governor and Legislature ponder what to do next, the only certainty is that Californians in all walks of life are about to feel the pain. Government layoffs will swell the unemployment rolls in a state where the jobless rate is already 11 percent. Poor children may lose their medical coverage. Hard-pressed schools are cutting back on all but essential activities, with music and art programs being favorite targets. Class sizes are growing. Student fees for higher education have been increased, and thousands of applicants to the state's two university systems will be turned away this fall. Economist Stephen Levy warns that California may be "eating its seed corn" with these education cuts because they will reduce the supply of skilled workers. Meanwhile, refund checks for state income taxes have not been mailed. Some state parks are shuttered. Courts in Los Angeles County are closed a day each month. Cities have put the state on notice that they could face bankruptcy if state financial aid is reduced.

All of this falls well short of the horrifying fantasy of The Last Days of the Late, Great State of California. But what happens in California in the months ahead may indeed signify the end of the California dream.