Monday, July 07, 2008

UPSIDE/DOWNSIDE: California's fiscal woes largely of its own making + Rebuilding voters' trust is Job 1 in Sacramento


California's fiscal woes largely of its own making: the state faces a crisis, but many others are doing well. Much of the fault lies with . . . well, us.

By Evan Halper, Los Angeles Times Staff Writer

    July 7, 2008 — SACRAMENTO -- As Californians brace for big reductions in government services, the possibility of tax hikes and a long summer of budget bickering, they may be under the impression that everyone else is slogging through the same financial misery.

    Not so.

    • Schwarzenegger's budget plan too rosy, analyst says

      Gov.'s budget plan called too rosy

      Although the nation's sluggish economy and mortgage crisis have put the squeeze on a number of states, many are humming along fine, without dramatic measures to keep them in the black. Some even have multibillion-dollar surpluses. And almost none of the states that do have fiscal difficulties face shortfalls on the scale of California's.

      Analysts say the state's troubles stem largely from its budget system -- the most dysfunctional in the country -- and they look to California as an example of how not to do things. In a recent ranking of state policies by the Pew Center on the States, California scored D+ on fiscal management. The average grade was B-.

      "We have these problems that have long been understood, but we don't deal with them," said Jim Mayer, executive director of California Forward, a bipartisan think tank seeking to overhaul the budget process. "If we are going to fix this, we need to learn from what they have done in other places."

      Of the 46 states that began their fiscal year on Tuesday, California is one of just four that still have no spending plan. Lawmakers are nowhere near agreement on how to patch a $15.2-billion shortfall, and the budget will probably include borrowing, accounting shifts and other maneuvers that make money managers cringe.

      An outdated tax code, voter-approved initiatives that lock in billions of dollars for programs, inadequate oversight of spending and the lack of a substantial rainy-day fund all add to California's financial ills. Other states have addressed such issues with impressive results. But attempts at similar changes here routinely fall flat.

      Virginia has achieved a balanced budget and a stellar credit rating by constantly updating its spending priorities, improving its tax system and setting funds aside to be tapped during hard economic times. The state is zealous about oversight, embedding independent investigators in state agencies to monitor how they are spending taxpayers' money.

      Iowa, Maryland and Utah employ some of the same techniques, and there is momentum for such reforms in Ohio, Louisiana and Kentucky.

      It is not just small states with limited government services that have a firm grasp on their finances, officials at the Pew Center point out. Places that have large, diverse populations and spend generously have also figured it out.

      Some experts say the root of California's problem is its unusual requirement of a two-thirds majority for the Legislature to approve budget-related measures. That standard exists in only two other states, Rhode Island and Arkansas, neither of which is nearly as complicated to govern as California.

      Daniel J.B. Mitchell, a professor of public policy at UCLA, said the two-thirds rule has paralyzed a Legislature that is already intensely polarized. "The years go by and we don't address these fundamental things," he said, "and here we are in a budget crisis again."

      Every change to the budget threatens to cost someone big money. Special interests are organized and ready to protect their turf. They have the ear of lawmakers who, as a result of term limits, constantly have their eye on the next office and are reluctant to rile their political patrons.

      Gov. Arnold Schwarzenegger took a crack at forcing the state to, in his words, "live within its means" in 2005, when he called a special election to address state government issues. His plan was to put a strict limit on how much spending could grow every year. Democrats said it would strangle government and voters rejected it.

      Other states have taken a more moderate approach and succeeded. Over the last decade, many have adopted laws requiring them to build substantial reserves, some as much as 10% of the general fund.

      In Washington state, the first 1% of revenue the state collects automatically goes into such a fund. Georgia is weathering the economic downturn with ease, having built a rainy-day fund that equals about 10% of its budget. Nebraska, a state that spends just $3.5 billion a year, has socked away $500 million.

      In California, the leader of the Assembly's minority Republicans, Mike Villines of Clovis, says he is perplexed by why California is not building a significant reserve. He said the issue came up during a chat he had with Michelle Bachelet, the Socialist president of Chile, when she visited the Capitol recently.

      "She is a former communist, and she was talking about how you have to have a rainy-day fund to balance ups and downs," Villines said. "If it is good enough for Chile and a former communist, it should be good enough for California."

      Another area where change has been resisted is the state's reliance on income taxes, a volatile revenue source that plunges when the economy slows. Reformers are perpetually calling for revisions in the tax code that would bring more stability. Virginia, for example, has changed its tax code 15 times in the last 20 years to stay current.

      The roadblock in California is largely Proposition 13, which limits property tax increases. Longtime residents and businesses have some of the lowest property taxes in the country because of that citizen initiative. If the state were to rely less on income taxes, property taxes might have to rise.

      Lawmakers don't want to deliver that kind of news to voters. Proposition 13 is known in Sacramento as the "third rail" of California politics: Touch it, and your political career is dead.

      So California continues to get nearly half its revenue from income tax, and once again finds itself in trouble. That's not the case in most other states, which collect their revenues from a more diverse mix of sources.

      Beyond the revenue issue is how the state spends its money. California's financial oversight has yet to impress policy analysts.

      Neal Johnson, director of the government performance project at the

      Pew Center on the States, said other places look carefully at how well government programs are meeting their objectives when deciding how much cash to provide them. Agency heads must show results, inefficiencies are rooted out, management techniques that have proved effective in the private sector are encouraged.
      But such an approach "has not gained traction in California the way it has in other states," Johnson said.

      California's fiscal woes largely of its own making - Los Angeles Times



      George Skelton

      Rebuilding voters' trust is Job 1 in Sacramento

      George Skelton: Capitol Journal | From the Los Angeles Times



      July 7 2008 — SACRAMENTO — Here's Sacramento's problem: It desperately needs more tax money to provide the services the public wants. But the public doesn't trust Sacramento to spend any new money wisely.

      Polling shows that Californians are concerned about possible program cuts -- not only in public schools, but in health and welfare services. The same polls also show that people don't want to pay higher taxes -- from their own pockets anyway -- largely because they don't trust politicians with the money.

      That's a fine kettle of fish as we wind up a long weekend celebrating the 232nd birthday of our democracy, a republic dependent upon trust in our elected representatives.

      "I don't think I've ever quite seen the level of frustration and distrust with Sacramento that I'm seeing now," says veteran political consultant Rick Claussen. "People are ready for a revolution -- just waiting for someone to take them there.

      "If I were to qualify a measure for the ballot that would return the Legislature to part-time, tie their pay to performance . . . or recall the entire Legislature with one vote -- I swear to God it would pass."

      Pollster Mark Baldassare, president of the Public Policy Institute of California, says "trust in both the federal and state governments is near or at an all-time low. People are thinking that neither party does a very good job at fiscal management."

      A statewide Baldassare poll in March showed that only 32% of Californians "trust the government in Sacramento to do what is right" most of the time. That's roughly the same ugly view of the politicians the public held around the time it was recalling Democratic Gov. Gray Davis and replacing him with Republican Arnold Schwarzenegger in late 2003. Only three years earlier, however, nearly half the public trusted Sacramento.

      The venerable Field Poll, over the years, has shown a roller-coaster ride for legislators' popularity. In May, only 30% of voters approved of the Legislature's job performance. In March 2007 -- following a landmark year of bipartisan achievement -- 42% approved. But in 1988, the lawmakers enjoyed 57% approval.

      To quote Don Vito Corleone in "The Godfather": "How did things ever get so far?"

      Of course, a cranky anti-government attitude is part of the American DNA. So the current distrust of Sacramento has much deeper roots than late budgets and double-talking politicians.

      The public psyche never has recovered from being lied to day after day -- month after month -- by American presidents during the Vietnam War and Watergate scandal. Now add to that corrosive tandem the suspiciously hatched, ineptly run Iraq war.

      Back in the '60s, many also turned against government during civil rights struggles. The movement was morally right, but the Democratic Party lost its "Solid South."

      In California, the Democratic Legislature and Gov. Pat Brown enacted a landmark open housing act that barred racial discrimination in home sales. That might seem innocuous today, but in 1963 it enraged property owners. The real estate industry repealed the act in a bitter ballot brawl whose fury hasn't been matched since. Courts repudiated the voters, frustrating them again.

      Tack on to the public's list of government grievances the runaway property taxes that Gov. Jerry Brown and the Legislature failed miserably to address before it was too late. The resultant Proposition 13 in 1978 shrunk local tax revenue and shifted more power -- and fiscal responsibility -- to Sacramento.

      Californians further soured on Sacramento after an FBI sting in 1988 led to corruption convictions for 14 lobbyists, staffers and legislators. That begat term limits, a two-by-four slam at the Legislature that crippled its ability to perform for the public.

      Then in 1996 the Legislature unanimously passed -- at the behest of Gov. Pete Wilson and special interests -- arguably the worst bill ever: electricity deregulation. That led, on Davis' watch, to power company profiteering out of the pockets of electricity consumers while Sacramento appeared foolish and helpless. Next up: Davis' recall.

      Much of all this follows a sad Catch-22 pattern: Public distrust leads to impulsive public actions that result in more Sacramento insecurity, straitjackets and inaction -- and more public distrust.

      I called some veteran pols and asked them the Don Corleone question.

      "There's an incredible generational divide in this country between the generation that lived and fought in World War II and their kids, the baby boomers," says Democratic consultant Darry Sragow.

      "The World War II generation was committed to big institutions. Big government did a whole lot of things, not the least of which was to win World War II. Baby boomers grew up totally mistrusting big institutions. That comes out of their life experience. Anybody who lived through Vietnam and Watergate came away with the conclusion that government is inept and politicians are corrupt."

      That's the broad picture.

      Here are more detailed views:

      "People think Sacramento is spending more money than they want to tolerate," says longtime Democratic consultant Joe Cerrell. "They think they've been had. And the feeling is bipartisan."

      Stu Spencer, the dean of Republican strategists: "In Sacramento, they don't think ahead. They don't face up to the long-range problems. Sometimes they don't even recognize the problems. People lose confidence in government when it doesn't care for them in the long haul."

      Blame rigid term limits. Loosen them.

      So how else does trust get restored? Knock off the petty partisan politics.

      Declare a moratorium on new spending programs. Reform budgeting. Stress government efficiency. Raise taxes temporarily to make ends meet honestly. Just do it. Show leadership.

      And most important, says Sragow, "shoot straight with the people."

      Now that would be revolutionary.

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