California's Dysfunctional Democracy Leaves Bleak Budget, Future

For decades, California was the state of dreams, the home of Hollywood, sunshine, and a boom that extended from defense spending to dot com and high tech, one that produced the revenue to invest state dollars in schools, universities, and freeways. It became America's fastest-growing large state. Now it is an object lesson for the whole nation on what not to do.

Today, as historian Kevin Starr puts it, California has become "a reality in search of a myth that had once been believed in."

It's not simply the national recession that's the dreambuster. It's also the state's inability to govern itself. What ought to be done cannot be done in a state so out of control that its deficit, now $26 billion, grows every day by an estimated $25 million and its governor, Arnold Schwarzenegger, jokes that his finance director has been placed on a "suicide watch."

California is effectively bankrupt, with bleak prospects. It is ranked at the bottom of all states as a place in which to do business. High-tech companies have virtually given up on California. Hence it is bleeding jobs, and its ever shabbier public schools are an extra impetus for people to vote with their feet and head out. No fewer than 80 percent of Californians think that the state is on the wrong track.

California is forced today to pay its bills through IOUs. Only it's not "Brother, can you spare a dime?" but "Brother, can you spare a billion or two?" The numbers are stunning: $3.2 billion in IOUs in July. But the people who are to be paid by the state cannot, in turn, pay their own bills or salaries with IOUs. Recently, Fitch, one of the three big credit-rating agencies, downgraded the state's bonds (already the lowest-rated such bonds in the country) to BBB, within spitting distance of junk.

Public rage is intense. Schwarzenegger's approval rating has dropped to around 35 percent. He was beaten on several major statewide ballot initiatives a few years ago, and his inability to persuade the electorate is now being extended to the Legislature.

Where is the worm in the apple? In a dysfunctional idea of democracy. California uniquely has a Constitution that requires a two-thirds majority to approve a budget. Since the state is partitioned among many different constituencies of extreme political views, its very size and diversity are a formula for gridlock. It has been next to impossible to get two thirds of Californians to agree to anything constructive. And not only that. California also has to cope with the consequence of giving voters the ability to assert their will directly through the state's freewheeling system of ballot initiatives. All it takes is an organization with money to go around the Legislature and put a proposal through a state plebiscite, something that has occurred a stunning 71 times in the past decade alone.

This is why California is stuck with a grotesquely narrow revenue base. The state gets 55 percent of its revenue from income taxes. In most states, the revenue base is one third property tax, one third sales tax, and one third income tax. In a state of 38 million people, 144,000 in the top income bracket pay virtually one half of all income taxes! This is unsustainable. It is driving out the very people California needs to create and propel new enterprise. California clearly needs a broader tax base that doesn't depend so much on a relatively small number of wealthy residents (who can and are leaving the state). But when a Republican governor tries to control worker pensions and other health and welfare benefits, the Democrats think that it is only the "selfish rich" who object to their spendthrift ways.

They confront Schwarzenegger with the argument that the budget process should not be used to jam through public policy. Yet at the same time, they are supporting an Obama administration that does the same thing.

The public wants the state's problems to be fixed without higher taxes. But lacking adequate revenue, California had to slash programs in healthcare, welfare, and education when it finally agreed on a budget this week. And that's even with assistance from the federal stimulus program.

In fairness to California, it is not alone in its financial bind. Indiana, Arizona, Mississippi, and Pennsylvania also went into the final days of their fiscal years facing the prospect of a shutdown of public agencies or paying bills through IOUs. Cumulatively, the Center on Budget and Policy Priorities estimates there will be $166 billion in state deficits in 2010 and $160 billion to $180 billion in deficits for the 50 states in 2011.

There is a movement in California to call a convention to tear up its 130-year-old Constitution and start over with something more appropriate to the modern era. Until then, the gold in the Golden State will be tarnished. "California, here I come!" is in danger of becoming "California, here I go!"

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