Don't Give Up on California Yet

As expected, California voters yesterday rejected all but one of the propositions on the statewide special election by 2 to 1 margins.  The lone exception was Prop. 1F freezing the pay of state officials and legislators in any year the state budget is in deficit.

This morning the spin has begun calling this a rejection of Arnold’s leadership or a vote of no-confidence in Sacramento politicians generally. Arnold’s favorability ratings are down, way down, but still twice the level of the State Legislature.

The last few weeks have heard the airwaves filled with dread over the fate of teachers, local governments, and state programs and services that will be cut if the ballot measures failed.  The unions and special interest groups which throw money at these matters have been on both sides of these propositions.

The practical consequence of yesterday’s voter rejection of the ballot measures is that the State budget deficit will grow from about $15 billion to about $22 billion.  So today we know the Governor and Legislature will have to go back to work and fashion a strategy that 2/3 of the Legislature will support and the Governor will sign.

Glass Half Full Theory at Work

There are two ways of looking at this situation.  Is California’s glass of wine half full or half empty?  How you answer that simple question will frame the strategy that eventually emerges from this challenge. But ponder this, even if these propositions has passed, California would still face the same problem.  These measures did nothing to solve the underlying structural deficit—they just bought the politicians’ time for recovery to pour money back into the state bank account before they had to make tough choices among competing programs and special interests.

The voters saw right through that game, and just like a parent who hears the kids running around upstairs instead of doing homework, the voters yesterday yelled out “ don’t make me come up there!!!”

Ironically, the voters of the Golden State seem to have more faith than our elected leaders—and seem more willing to break from the traditional approach to throwing money at problems in the direction of special interest or union considerations that produce the largest campaign contribution return on that investment.

This is not quite like the Proposition 13 revolt where the voters themselves–with the help of Howard Jarvis prescribed strict limits on the increases in property taxes allowed.  There was no voter prescription yesterday sent to the Legislative pharmacy to be filled, but the message was still the same.

We the voters want you—the Governor and Legislature—to get your homework done and solving the structural reasons the State budget falls into deficit every time the economy gets a cold.  This time that “cold” turned into a major recession-driven sickness and thus the deficit is mind-bogglingly larger.  But the problem is still the same and so are the solutions.

  1. California state revenues are highly volatile and dependent upon sources that produce lots of revenue in booming economic times but fall rapidly in recession.
  2. California spends more money than it raises in revenue in a weak economy and has no savings to fall back on when times get tough.
  3. California tax structure is an equal opportunity offender punishing both those that do well and those that have little and need help in like measure.
  4. California was born from the aspirations of manifest destiny and a search for gold and sees itself as a land of innovation and opportunity but increasingly its tax structure and regulatory burdens make it more profitable to live and do business elsewhere.
  5. California’s Constitution and state government structure was born in the Progressive Era so everyone is involved but no one is in charge but decisions are difficult to make and accountability is easy to avoid.

Expect to hear calls for reform from California’s political class.  But if you listen carefully their idea of reform is changing the things that frustrate them not those structural problems which vex us.  These “reforms” will likely include changing the requirement for a 2/3 vote in the Legislature to approve the state budget, ease term limits to provide more “experience” in Sacramento, and use state bonding authority to borrow more to bridge the gap.  The voters will see this as ‘more of the same’ and just say NO!

Give the People What They Want. . .

The principal takeaway from yesterday’s special election is resounding and unambiguous voter demand for leadership from the Governor and our State Legislature.

My advice to the Govenator is:

Attack the deficit like a shrewd businessman taking tough but decisive action to reduce the cost of state government and reduce the deficit gap to demonstrate to the voters that Sacramento “gets it” and to win support for other measures.

    1. Cut State Payrolls by 20% across the board using this opportunity to streamline the bureaucracy and force each agency to prioritize both its programs and retain its most productive staff.  This can be done immediately by reducing all state employees regular work hours by 20%.
    2. Freeze salaries and benefits at current levels by declaring a fiscal emergency and postponing any planned increases including labor agreement cost of living or other raises for one year.
    3. Cut Transfer Payments by 20% to Schools, Local Governments and other recipients for one year.  Yes, these are painful, but they offer certainty and give the agencies time to work out their own mitigation measures.
    4. Declare a Tax Amnesty waiving penalties and the threat of legal action for any business or individual owing the state money who pays up by the end of this fiscal year.
    5. Reactivate the Little Hoover Commission and task it with the triage job of recommending reorganization of state departments, commissions and programs to reduce overlap, improve accountability by defining specific performance metrics to be published regularly.  Charge it with the goal of finding a meaningful level of structural annual savings—say $13 billion or 10% of the current total state budget before you submit your next budget.

Propose a permanent budget accountability fix to voters and put it on ballot as a Constitutional Amendment. My solution is the following:

“By April 1st of each even number year beginning in 2010, the Governor shall prepare and file with the Legislature a budget for the ensuing two years which reasonably balances expected total state revenue including any proposed tax or fee increases or decreases with total proposed expenditures.  The Governor’s proposed budget shall go into effect and have the full force of law on July 1st but the Legislature may adopt amendments to it by a 2/3 vote subject to the Governor’s veto authority. The Governor shall manage the state budget to keep it in balance at all times and may take actions to reduce expenditures or propose amendments to revenue necessary and prudent by filing any such amendments with the Legislature and they shall go into effect 30 days after being filed unless the Legislature by a 2/3 vote modifies or rejects them.”

Propose an overhaul of the State’s tax structure and put it on the ballot to broaden the tax base, reduce revenue volatility, encourage economic growth, and force programs and services to pay for themselves by:

  1. Create a flat, personal income tax structure taxing all income at the same rate, with no deductions, and simple enough for a postcard.
  2. Expand State Sales Tax to all goods and services sold including food, business services and internet-based sales of goods.
  3. Eliminate State Corporate Income Tax replacing the revenue by extending sales tax to all goods and services sold.
  4. Eliminate any State Tax on Capital Gains to encourage investment and job creation.
  5. Retain Prop 13 Property Tax Limits for owner occupied residential dwellings resetting the assessed value at the time the house is sold or if the house is replaced on the same lot.

Propose a Constitutional limit on state spending increases to the rate of consumer price inflation or population growth whichever is less and put it on the ballot.  Revenue collected in excess of the spending cap would be deposited in a State Emergency Fund until the fund reaches 10% of Total State Spending.  Amounts beyond that will be refunded to voters annually on a per capita basis.

California’s glass is NOT half empty, and as the sixth largest economy in the world we have options other nations can only dream of realizing.  Like it or not, California is the place of new ideas.  This is one of the benefits of being born in the Progressive Era where experimentation and faith in democracy flourish.  California voters are eager for change, but they want ‘change they can believe in’ not the kind that panders to special interest causes at our expense.

It would be easy to read into the polls that voters are telling politicians “a pox on all your houses” in their disgust.  This is not a partisan fight.  The voters resent the Democrats for pandering to every special interest cause imaginable and having no principles, or at least none that seem to protect average citizens if money is involved.  They just as disgusted at Republicans for failing to come up with new ideas and for using wedge issues like immigration to start food fights instead of fixing the problems we face.

As voters we have our own share of accountability for this mess. We use the initiative process to pass propositions that dedicate spending with revenue we know we do not have.  We try to compensate for a lack of state leadership by putting pesky and ill advised propositions on al manner of things in an attempt to do the Legislature’s work for it. We have allowed a legislative districting strategy to perpetuate itself in races that were largely non-competitive.  We revolted imposing term limits, but allow the legislature to continue be a full-time job which attracts only the political class eager and willing to grub for campaign contributions among those we sent them to Sacramento to supervise.

The Golden State is capable of producing plenty of gold now and in the future, but we need solutions to the structural problems which fragment our focus on creating and nurturing a vibrant, growing, innovative, clean and productive economy for our children’s’ future.  Arnold has made three attempts to provoke changes that confront these structural problems, each has failed, but he should not give up on us yet.