By Guest Contributor Wendi Maxwell
Wendi Maxwell retired after 38 years in California state service. Currently, she is a consultant in adult literacy specializing in long range strategic planning and policy development.
The California Legislature recently enacted an $80 billion budget, cutting $23 billion from the previous year - a tricky process that attempted to save the state’s social safety net without raising taxes. After passage by the Legislature, Governor Arnold Schwarzenegger signed the budget and used his veto power to impose an additional $500 million in cuts. The budget relied on $8 billion in accounting maneuvers that some analysts call “kicking the problem down the road.” Mike Moritz, the British venture capitalist and former member of the Board of Directors of Google, Inc., called the state the “ghost of the future of the U.S.”
California’s budget balancing problem used to be a source of local embarrassment, an in-joke. This year, as the eight largest economy in the world teeters on the brink of insolvency with a 20 percent deficit – paying its bills with IOUs, laying off untold thousands of teachers, mandating state employees take three unpaid furlough days a month, and the majority leader walking out of budget talks – people outside the state started to notice.
How did California end up here? We went from being the Golden State to being the state that can’t pay its own way. Partisan politics certainly play a role in our current impasse, but there are structural problems that run much deeper and are more difficult to address. The current legislative impasse is a clear warning of what happens when good intentions go awry.
Direct Democracy
Way back in 1911, after five years of unabated corruption and bribery scandals of labor leaders and corporate executives, Governor Hiram Johnson sponsored legislation to add three components of direct democracy – initiative, referendum, and recall - on the ballot. They were overwhelmingly approved by voters and have played a pivotal role in recent California politics.
Californians are enamored with direct initiatives. With enough money, you can draft legislation, collect petitions, and get your bill on the ballot. Analysis of the repercussions of your bill is left to dinner table conversation and the talking points produced by television commercials both pro and con. The resulting legislation frequently earmarks funds specifically for the purpose of the initiative without necessarily identifying sources of revenue, and leaves legislators with smaller and smaller pots of unencumbered general funds with which to balance an increasingly out of whack budget.
California’s reliance on popular wisdom, through referenda, initiatives, and term limits, has had unintended consequences. Voters want services, but believe that they should be provided out of existing revenues.
Proposition 13 – The Tax Revolt
Many economists trace California’s current fiscal crisis to the 1978 Proposition 13 tax revolt, a citizen-led initiative created when property taxes were soaring and the state held a $5 billion surplus (real money in those days.) Proposition 13, the “third rail” of California politics, established several protections: no local tax increases without a vote of the people; no increase in property tax rates under any circumstances; increases in “special taxes” require a two-thirds vote. Currently, California is the only state to require a two-thirds majority vote for both raising taxes and passing a state budget.
The “supermajority” required for raising taxes means that a minority of votes in the legislature can block any attempt to raise revenues. If a bill should manage to pass through the Legislature, it still has to go on the ballot, where it can be blocked by the voters. The “no new taxes” mantra has become the golden rule of California politics.
The impact of Proposition 13 was immediate. Taxes on homes were immediately reduced by 60 percent. What taxpayers gained however, local governments lost. That first year, the collective cost to local governments was $7 billion. Roughly 27 percent of all revenue for cities, 40 percent of all county revenues, nearly half of school district revenues, and up to 90 percent of revenues for some fire districts disappeared the first year.
As the economy fluctuated, revenues began to fall, but demand for services increased. The population grew. Californians, a big-hearted group, wanted health care and preschool for children, expanded access to California’s world-class colleges and universities, care for the elderly and the disabled, better transportation, improved access to state parks, enhanced environmental protections. The cost of providing services that Californians wanted increased, while property taxes (with minor adjustments) stayed at their 1978 levels.
Term Limits
The California budget became increasingly difficult to balance. In 1990, voters, tired of partisan politics in the state capitol of Sacramento, staged a second revolt, establishing the nation’s most stringent term limits - three two-year terms in a lifetime for the assembly members, two four-year terms for state senators and all other elected officials. Designed to promote increased citizen involvement, term-limits instead introduced a dizzying number of legislators jockeying for position.
At its worst, the 1995-96 term stands out as an example of revolving door legislators with five assembly speakers, two Republican assembly leaders, two Republican senate leaders, and eight special legislative elections, including three recalls. Things have settled down now, although termed-out legislators still exert power through paid positions on appointed boards and commissions.
While term limits may not have restricted the ability of “professional politicians” to have continued employment, it may arguably have increased the background and diversity of those elected. Legislators however, have limited amounts of time to learn the complicated issues facing the state, and find it difficult to forge the strong coalitions needed to enact legislation.
How much money are we talking about?
In February, because of rapidly dwindling revenues, the state enacted $36 billion in solutions to what was then estimated to be a $42 billion General Fund budget gap. An additional $6 billion in solutions was placed on the ballot at a special election in May, but failed to pass. The state’s fiscal situation had deteriorated further by spring, requiring a reduction of $23 billion. The budget solutions adopted this year address the largest budget gap the state has ever faced, both in dollar amount and in the percent of General Fund revenues it represents.
This year’s budget relies on deep cuts to education and social services as well as mandated unpaid furloughs for 210,000 state employees, totaling 14 percent of their salaries. The budget reduces $6 billion from K-12 schools and community colleges over two years, $3 billion from the University of California and California State University systems, $1.3 billion from Medi-Cal, the state's healthcare program for the poor, and $1.2 billion from the state prison system. A dazzling array of accounting gimmicks, many of which are already challenged in court, account for reductions of another $8 billion.
Most importantly - what next?
The Bay Area Council, a group of influential business leaders, has called for a new Constitutional Convention, and received positive responses from many of the state’s newspapers and business leaders. Their call to action notes, “We believe California’s system of government is fundamentally broken. Our prisons overflow, our water system teeters on collapse, our once proud schools are criminally poor, our financing system is bankrupt, our democracy produces ideologically-extreme legislators that can pass neither budget nor reforms, and we have no recourse in the system to right these wrongs.”
The Los Angeles Times agrees, stating “it’s time to re-boot California.”
An initiative on the spring ballot 2010 calls for open primaries, creating a system designed to better balance ideological extremes through open elections. Other discussions focus on redrawing district boundaries, to better align gerrymandered districts and eliminate “safe” seats in the Legislature.
Some heretics even call for reexamination of the commercial property tax components of Proposition 13, although the personal property tax guidelines seem to remain sacrosanct.
Is there a way out for California? Is this indeed the “ghost of the future” for other U.S. states? Many questions remain, all of them complicated by financial projections that change daily, and dependent on a system that makes legislators’ and citizens’ jobs increasingly complicated.
Photo of Golden Gate Bridge by W.J.Kushlis July 1975