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Lou Cannon: Reforming California

Can a fractured state heal itself? No one else will do it for us but there are fleeting signs of real leadership from Sacramento

National needs come first, so California can forgive President Obama for tapping Leon Panetta as his CIA director. But the nation’s gain is nonetheless California’s loss, for Panetta was a voice of common sense in a state that has lost its way. He leaves California on a high note as chairman of California Forward. Last year this fledgling bipartisan reform group played a leading role in a successful ballot campaign to persuade voters to wrest redistricting of an intransigent Legislature from the legislators and turn it over to an independent body. This was an overdue small step toward the goal of producing competitive legislative districts, beginning with the elections of 2012. Unfortunately, the state’s political system is now so dysfunctional that those elections seem a light year away.

Lou Cannon
Lou Cannon

For years, California has had a deserved reputation as a trend setter, and the trend it has been setting in recent years is one of fiscal brinkmanship. Unable to sell its bonds or pay its bills, California is in desperate straits, perhaps foreshadowing the economic circumstances that could confront the nation when the recession ends. At that point the United States and other industrialized nations will be awash in accumulated deficits, facing protracted belt-tightening and a lowered standard of living.

That moment is at hand in California, where the unemployment rate is 9.3 percent and Sacramento has endured more than 100 days of budget gridlock. The state cannot pay the vendors who supply it with goods and services. Gov. Arnold Schwarzenegger has furloughed more than 200,000 state workers under his control two Fridays a month, equivalent to a 9 percent pay cut, and more massive layoffs are under way. Facing a $42 billion state budget shortfall, Schwarzenegger and legislative leaders finally cobbled together an agreement that required both spending cuts and temporary tax increases. It was hard to swallow for the majority Democrats, for it reduced services for education and the needy, drawing denunciations from service and teachers unions. But it was even more indigestible to Republican legislators, who consider Schwarzenegger a Republican in name only and are easily frightened by bullying talk-radio commentators who pretend the state has enough money to pay its bills.

Not that the tax hikes are trivial. Under the original proposed agreement, the state would have imposed a 12-cents-per-gallon surcharge on gasoline, sales taxes would increase a full cent, pushing the rate in California’s most populous counties to 9.75 percent, and vehicle license fees would nearly double. It was too much for tax-resistant Republicans, who held out against the warnings of fiscal calamity as long as they could. Because California requires a two-thirds vote to pass a budget, the minority Republicans controlled the process. Schwarzenegger and the Democrats required three Republican votes to pass the budget compromise. Getting those votes eventually saw the elimination of the additional gas tax, although a .25 percent hike in the personal income tax remains part of the deal.

What has happened in California is a cautionary tale. Beginning in the 1940s under the leadership of Republican Gov. Earl Warren, the state was for the next half-century among the most resourceful and innovative in the nation. After squirreling away wartime revenues in what he called “rainy day” funds, Warren spent them on reconstructing schools, hospitals, roads and prisons. Subsequent governors followed suit. Democratic Gov. Pat Brown built freeways, a gigantic aqueduct to transfer water to arid Southern California from the northern part of the state, and the most acclaimed university system in the world. Republican Gov. Ronald Reagan was supposed to be a reaction to Brown’s excesses, but he proved a responsible governor who proposed and signed a progressive tax increase that was at the time the largest ever put forth by any governor of any state.

The Legislature played a significant role in this process, particularly after it was equipped with staff and expertise by the colorful Assembly Speaker, Jess Unruh, D-Los Angeles. His successors, Robert Monagan and Bob Moretti, were also able. Working across a partisan divide, Moretti and Reagan achieved a signal welfare reform. Warren, Monagan and Reagan were Republicans. Brown, Unruh and Moretti were Democrats. As partisans, they had demagogic moments but in times of crisis proved problem-solvers who cared more about their state than their party.

Panetta was emblematic of the age. In the 1950s he was an aide to the moderate U.S. Senate Republican whip, Thomas Kuchel of California. Later, after serving in the Nixon administration, Panetta became a Democrat. Elected to the House from a Central Coast district, he served eight terms before becoming budget director for President Bill Clinton and eventually his White House chief of staff. Panetta helped resolve budget deadlocks in the Reagan, George H.W. Bush, and Clinton presidencies. He retained this problem-solving mindset when he returned to California. Reflecting on the budget stalemate last year, Panetta told State Net Capitol Journal: “My hope is that people will become so disgusted with what is going on that they will demand good governance.”

Nostalgia casts a powerful spell. To paraphrase Colin Powell, we all have misty memories of a time that never was when all the men were brave and all the women were virtuous. In truth, California government had its share of charlatans, smear-artists and politicians who lined their pockets. The state became an environmental beacon only after its skies and waterways were polluted; it moved too slowly to deal with urban unrest. Despite these deficiencies, California’s political system worked effectively more often than not in the mid-20th century. Big things got done.

What went wrong? The explanations of California’s descent into dysfunction embrace the usual suspects: term limits, the two-thirds rule, abuse of the initiative process, a lack of focus on state government by a media that once put Sacramento under a spotlight. William Hauck, who served as an aide to Moretti and Republican Gov. Pete Wilson and is now president of the California Business Roundtable, traces the dysfunction to the late 1990s when the Legislature began to ignore the state constitutional requirement of a balanced budget and spend more on state services than it was receiving in revenues. It did so through a series of gimmicky budgets that relied on transfers of money, overestimation of future revenues, and bond sales. Because of the state’s reliance on the income tax, its revenues are volatile and during the dot-com boom exceeded estimates.

Gray Davis, the much-maligned Democratic governor elected in 1998, recognized this and proposed spending part of an extra $12 billion in revenues on one-time expenditures and saving the rest. Instead, the Legislature plowed the money into existing programs and saved nothing at a time the state was strained by an electricity crisis. Davis was re-elected in 2002, but the dot-com collapse left the state in a fiscal hole, which he tried to fill by tripling the vehicle tax. Voters turned against Davis, and in 2003 recalled him and replaced him with Schwarzenegger.

Ever since, California has been governed by mirrors. Schwarzenegger could have balanced the budget with a tax increase but felt hamstrung by his campaign promises not to raise taxes. The Democrats, who more or less perpetually control the Legislature, could have averted calamity with slight reductions in services but were unwilling to stand up to the education lobby and other powerful state unions that bankroll their party. The Republican minority was even more fearful of its base. A few Republicans privately conceded — to Panetta, among others — that a tax increase was necessary but added that they would face well-financed re-nomination challenges within their party if they supported even a mild tax hike. The lack of leadership has been stunning.

“What’s missing is that there aren’t people up here who came here to do something, like Unruh and Moretti,” observed George Steffes, a lobbyist who was once Reagan’s legislative liaison. “There’s no one who says, ‘This is the right thing to do and I’m going to do it even though it might cost me my seat in the next election.’”

During the past year, glimmers of light have emerged in the political darkness. The Democrats have new, realistic leaders who are more willing than their predecessors to bite the bullet on budget cuts. Schwarzenegger, using the growing recession as his cover, has at last come to terms with the need for tax increases, even on the signature issue of the vehicle tax that propelled him into office. The budget deal will now include some provision for a spending cap on which voters will have the final say in a subsequent election. In addition, voters in 2010 will also get to decide another proposed constitutional amendment, this one to establish an open primary system. Much like the redistricting measure, it is aimed at breaking the stranglehold of hyper-partisanship that has taken over both parties.

Forty-three of the 50 states are hurting as the recession gathers force, but California would still be in fiscal crisis even if the downturn ended today. Legislative analyst Mac Taylor, who favors budgetary reforms and a “rainy-day” fund, estimates that only half of California’s $42 billion shortfall is attributable to the recession. This sort of fiscal realism is slowly pervading Sacramento, where politicians who for the past decade were content to kick the can down the road have begun to acknowledge that the state must come to terms with its insolvency. California Forward, Panetta’s legacy, is doing its bit with a myriad of innovative budget-reform proposals. The state has scores of infrastructure projects ready for construction, and California will receive $80 billion over the next two years from the federal stimulus bill. Reform is in the air. Perhaps California will even regain the ability to govern itself.

— Summerland resident Lou Cannon is a longtime national political writer and acclaimed presidential biographer. His most recent book — co-authored with his son, Carl — is Reagan’s Disciple: George W. Bush’s Troubled Quest for a Presidential Legacy. Cannon also is an editorial adviser to State Net Capitol Journal, which published this column originally.

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