"Our wallet is empty, our bank is closed, and our credit is dried up," Governor Arnold Schwarzenegger told a rare joint session of the California legislature early this month. "People are writing California off. They are talking about the end of the California dream."
If only that was hyperbole.
California, home to 38 million people, or 13 per cent of Americans, faces a stunning $24.3 billion (U.S.) budget shortfall. The state controller, John Chiang, warned last week that California is "less than 50 days away from a meltdown in the state government."
The Golden State will run out of cash to pay its bills by the end of July.
Yes, this is California, which by some accounts derives its name from the tale of a fictional paradise conceived by the Spanish adventure writer Garci Rodriguez de Montalvo in the 16th century. With a GDP of $1.8 trillion, California’s economy is the size of Brazil’s. California is still home to Silicon Valley and Hollywood, still boasts the second-largest U.S. defence industry and third-largest oil business, still ranks first among farm states.
But for such a blessed piece of real estate, California cannot seem to handle money. It has missed its constitutional budget deadline for more than 20 years running and often begins its fiscal year without a budget.
If only Schwarzenegger and the state legislature had spent at the combined rate of inflation and population growth, California would be coping with a $5.2 billion deficit. But California has been spending beyond its means for more than a decade. It has one of the largest poor populations in the United States and among the highest budgets for social services. It pays its more than 400,000 state employees above-average wages and salaries.
In vain, California treasurer Bill Lockyer has made the argument to Washington that California is no less "too big to fail" than the recipients of Wall Street bank bailouts. Indeed, the impact of sharply reduced state spending and the prospect of 60,000 state-employee layoffs at a time of near-record 11 per cent unemployment in California will be considerable.
But the White House repeated this week that the Golden State is on its own, apart from California’s prodigious share of U.S. President Barack Obama’s $787 billion stimulus package passed in February.
If only California was an isolated case. But 47 U.S. states are struggling with budget gaps, totalling an estimated $350 billion.
"California’s state government, saddled with anachronistic revenue and spending processes, has no choice but to contract at the worst time," said a UCLA Anderson Forecast released this week.
The plain fact is that the day of reckoning has arrived for Californians over state services they have demanded yet refused to pay for in this polarized state of spendthrift liberals and ideological tax-haters.
Since a successful 1994 ballot measure calling for a "three-strikes" sentencing policy, California’s $13 billion tab for prisons has come to exceed what the state spends on higher education. A voter-approved ballot initiative expanded state health-care eligibility to children and low-income women, accounting for $2.9 billion of the current shortfall. Voters have secured limits on university tuition hikes; approved bond issues for scores of new highways, parks, zoos, beaches and community swimming pools; and insisted on high minimum spending on everything from roads to environmental protection.
But Californians have also resisted funding these expenditures except through mounting debt. A fierce anti-tax tradition dates back to the infamous Proposition 13 of 1978, which not only capped property taxes, but imposed a permanent requirement of a two-thirds supermajority of legislative votes to approve any tax increase high quality business cards. California is the only state with such a gridlock-inducing measure. It currently holds a heavily Democratic-controlled legislature hostage to a small but determined anti-tax GOP minority.
Last month, California voters overwhelmingly rejected a Schwarzenegger package of spending cuts and modest tax hikes far milder than the governor’s current Draconian proposal – an expression of a populist anti-tax mood that even Dems have taken to heart.
"We got what we wanted, but we’ve never figured out how to pay for it," Stephen Levy, director of the Palo Alto-based Center for the Continuing Study of the California Economy told the San Jose Mercury News earlier this year.
"Everybody’s got somebody to blame, but in the end these are services people wanted. Look at the screaming when you close a swimming pool, let alone try to cut education."
That was in February. Sure enough, since then, some teachers and students have threatened to go on hunger strikes over a proposed budget that would reduce teacher pay that has already been cut, lay off many instructors and increase class sizes.
No one is certain of the endgame for a budget that might not be hammered out on schedule, but remain unresolved through the summer, well past the start of California’s next fiscal year July 1.
High-stakes games of chicken are de rigueur for California lawmakers at budget time. Democratic legislative leaders have recently given in to voter sentiment with a proposed budget that cuts spending by more than $11.4 billion, not too far short of Schwarzenegger’s demand for $15 billion in spending reductions.
But the Democrats are holding out for at least some tax increases. And the governor vowed again this week he will shut down the state government rather than sign a budget bill that includes a dime of tax hikes or new user fees beyond those included in his own budget proposal. A stalemate would almost certainly result in California losing its single-A Standard & Poor’s credit rating, already the lowest in the U.S., in turn raising the state’s debt-service costs.
Optimists are inclined to think the unprecedented severity of this budget crisis will prompt the kind of climbdown on both sides that the Democrats already have demonstrated by accepting deep cuts in programs such as AIDS/HIV treatment and health care for one million children of low income families. The Democratic legislators have held out only against Schwarzenegger’s call for the outright elimination of many social-service programs.
However this drama plays out, serious thought finally will have to be given to fixing an unworkable system in which pet initiatives are too easy to get onto the ballot, and a legislative supermajority on tax hikes that makes those ballot measures impossible to finance.
Of course, California has a deserved reputation as a trendsetter. Schwarzenegger, a moderate Republican, took the lead on stem-cell research immediately after then-president George W. Bush vetoed it earlier this decade. And recently Schwarzenegger has pushed for the highest automobile fuel-economy standards in the country.
With its above-average birth rate, and as a magnet for immigrants from abroad and elsewhere in the U.S., California is forecast to reach 46 million residents by 2030. A pacesetter in so many other ways, California will have to become a leader rather than laggard in fiscal responsibility if its long-term prosperity is to be assured.
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