California does everything big, especially recurrent, intractable budget crises.
California’s latest fiscal calamity is an extension of its last brush with insolvency when the Dot.com bubble burst in 2001, leaving California with plunging revenues and soaring government employee pension obligations brought on by a raft of higher benefits for government union workers. The unwillingness of California’s Democrat-dominated political establishment to restructure government led to the historic 2003 recall of Gov. Gray Davis.
Arnold Schwarzenegger was elected on the promise of “blowing up the boxes” and “cutting up the credit cards.” A scant six months after his election, however, he pushed a ballot initiative to borrow $15 billion—essentially kicking the can down the road by avoiding difficult reforms. Rep. Tom McClintock (R.-Calif.), then a state senator, opposed the move, warning that budget cuts were needed, not more borrowing.
California’s revenues improved enough in 2005 and 2006 for lawmakers to approve back-to-back double-digit spending increases. Some of the new money went into debt reduction, but far more went to increased spending. There was little thought of fiscal restraint or restructuring.
The fiscal crash of 2008 hit California hard. The economic damage was papered over a bit by President Obama’s stimulus, but at the price of increasing future spending obligations. In early 2009, the legislature approved a $12 billion-per-year tax increase, the biggest tax increase in U.S. history at the state level. On May 19, 2009, voters rejected a plan to extend this tax for two years in exchange for minor budgetary reform by a 2-to-1 margin.
Schwarzenegger left office in 2010 with a $25 billion deficit and a 22% approval rating.
Democrat Jerry Brown won election for governor over Republican Meg Whitman by 13 points, convincing a public weary of the erratic Schwarzenegger that a Whitman election would essentially be a third term for the actor.
Gov. Brown immediately focused on the budget, but it was clear from the start that, with one notable exception, he was uninterested in government reform. Rather, Brown, like Schwarzenegger before him, would rely on taxes, short-term gimmicks and, failing public approval of a tax-increase initiative, draconian cuts as a way to pressure the voting public into warming up to taxes.
The main challenge for Brown was persuading four Republicans in the legislature to cast their votes to place a five-year, $60 billion tax-increase extension on the June 2011 ballot. Brown viewed this Republican support as vital: It would transform a partisan Democratic tax increase into a bipartisan effort backed by both labor and big business, improving the measure’s chances of winning voter approval. In addition to providing bipartisan cover, Republican votes to place the tax increase on the ballot would save government unions the $2 million cost to gather signatures to qualify an initiative.
Most outside observers thought that Brown would eventually find the four Republicans he needed. History also showed that a determined governor could almost always wear down opposition and get the two-thirds vote needed to quickly place a measure on the ballot. Amazingly, Republicans held firm and Brown suffered his first big defeat.
On Tuesday, March 22, Brown announced plans to bypass legislative Republicans with a union-led paid signature drive to qualify the $60 billion tax hike for a November 2011 special election. The delay in the tax vote from June to November would deny the state about $4 billion in revenue, assuming voters approved the taxes.
Brown is still negotiating with Republicans, who want government-employee pension reform, a state spending limit, and regulatory streamlining. But Democrats see pension reform and a spending limit as nonnegotiable items.
One last large unresolved issue hangs over California’s perpetually out-of-balance budget: the termination of the state’s redevelopment agency system. Redevelopment agencies, initially designed to combat urban “blight,” have transmogrified into powerful tools allowing local city council members to earn the allegiance of big developers. Redevelopment agencies now divert some 12% of local property taxes to pay the debt service on $88 billion in redevelopment bonds. Brown’s proposal to end redevelopment agencies lost by one vote in the state assembly, with conservative Assemblyman Chris Norby being the sole Republican to vote with Democrats on the measure, which would have redirected $1.7 billion in city redevelopment agency funds to school districts, counties, and the state to help close the budget deficit.
The fight to end or reform redevelopment agencies isn’t over, but these powerful and relatively anonymous government bodies are likely to survive by backing an agreement to extend their statutory life by 20 to 30 years in exchange for coughing up a few billion dollars today.
Sadly, such temporizing, reform-avoiding maneuvers are exactly what have gotten California into the fiscal trouble it faces today.