Direct Democracy Could Be California's Undoing

Writing in the Financial Times, Christopher Caldwell puts his finger on the real problem with the budget in California where a bill was just passed to close a $26 billion deficit.

California’s problems are those of “direct democracy”. The state’s laws are shaped by plebiscites to a degree unmatched outside of Venezuela. In voting on “propositions”, which sometimes touch on detailed budgetary matters, citizens of the Golden State have stood up consistently for two principles: the state should provide vastly more services to its citizens, and citizens should pay vastly less to the state. In 1978, Proposition 13 halved government’s take from property taxes; a decade later, Proposition 98 required the state to spend 40 per cent of its “general fund” on schools. Adding to the problem is the requirement of supermajorities for raising taxes.

If not for the enormous tax revenues produced by two housing bubbles (peaking in 1990 and 2005) along with an internet stock bubble (peaking in 2000), legislators would already have faced the tough challenges that have stymied them recently.

Unfortunately, they're probably expecting yet another asset bubble to save them again as the solutions to the state's financial woes are clearly anything but long lasting.

But much of the budget plan hammered out on Monday consists of accounting tricks. Unable to go to the banks to borrow, the state is borrowing billions from local counties and communities by simply not disbursing the money it is supposed to. If cities really want their programmes funded, they can try the credit markets themselves. A payday that was supposed to come next June has been pushed back into July, so that it will fall in the following fiscal year. Another trick is the accelerated withholding of state income tax. Instead of deducting 25 per cent of taxes per quarter, the state will deduct 70 per cent in the first six months of 2010, so that 20 per cent of revenues from the next fiscal year will be brought forward into this one. This is not a solution. This is changing your phone number so you can get some rest from the bill collectors who are dunning you.

The really bad news is that, just when there appears to be some breathing room (these budget talks went on for, what, nine months), an update to revenue projections is likely to show that there is more "work" to do to make ends meet.

Until the economy rebounds (i.e., a new bubble begins to inflate), the state is likely to be in "perpetual crisis" mode, an inkling of what the future holds provided in this report.

But Gov. Arnold Schwarzenegger and legislative leaders said they might have to deal with more red ink in a few months if the state's economy doesn't turn around.

"We are still in troubled waters; there are still uncertainties," the Republican governor said. "We don't know how much longer our revenues will drop. We don't know if we may not be back in the next six months to make further cuts."

Legislative leaders said much the same thing.

"It's entirely likely we will ultimately see further declines in revenue, which will almost certainly require further budget action," said Assembly Minority Leader Sam Blakeslee, a Republican from San Luis Obispo.

This saga of the California budget crisis is far from over.

Comments

[Adam855]

They need to bite the bullet at some point and do one or a combination of the following in a permanent way:
A. Drastically reduce services
B. Raise taxes
C. Default on debt

It seems like their state constitution will also need to be altered to allow budgets to be passed by a simple majority instead of 2/3.

2009 Jul 27 05:13 PM

[Roger Knights]

D. Cut wages-and-benefits of gov't. workers by 25%. (A-C then wouldn't be needed.)

2009 Jul 27 05:46 PM

[debtacid]

Californians have discovered that the more taxes they pay, the less services they get. State gov is a black hole of corruption and waste. Besides, ballot measures to cut spending are routinely thwarted by activist judges.

2009 Jul 27 05:56 PM

[The Geoffster]

Democracies, like fiat currencies, are destined to fail because the people will always vote themselves the public fisc.

2009 Jul 27 07:41 PM

[Hillsfar]

In 1996, my parents bought a corner lot house with a pool in Orange County for about $170,000 (just about the end of the 1990 bust).

In 2005, homes on the street were selling in the high $400,000s.

Today, in 2009, homes on the street are still selling for about $300,000.

I suspect that prices will go down some more.

2009 Jul 27 11:48 PM

[sbrode2]

Having lived in Ca for over 40 years I will tell you that "Direct Democracy" is a symptom of failed government. This means that citizen disqust of government rises to the boiling point, invoking action. California is a classic example of big government, Union Controlled, ideaologicly driven government - a petri dish of what is growing in the Obama government and the direction the US is going in. The "What is good for the State" has been driven by what is good for me (re-election types). Special interests have shut down Income Tax producing Jobs (ie: lumber industry, farms in central valley (protect the fish darter) oil royalties from off shore oil. Special interests and spineless legislators have developed this problem of many years.

2009 Jul 28 09:10 AM

[Zmartmoney]

This is the classic "inmates running the asylum" management problem. The lack of statesmen with reproductive organs in our country is appalling and symptomatic of where we are heading with the Obama team - "We want it all and we want you (someone else) to pay for it." This is socialism at work in its teenage years - young and yearning for hope and someone else's change. The Socialists have made good on their promise to change our country in only one generation, by taking over our educational system. We used to do education in this country - now we do training. There's a big difference and all those trained seals are now barking upon command of their masters. Return to your seats, fasten your seatbelts and put your tray tables in the upright and locked position.

2009 Jul 28 11:05 AM

[JohnB]

We need "paygo" for the California initiative process. We're always willing to vote for new expenditures (jails, high speed rail, stem cell research, ...) but never willing to pay for it. Occasionally we will require someone else to pay for it, e.g., taxing millionaires for mental health!

2009 Jul 28 11:48 AM

[Gregman2]

The state employee unions--the benefits and retirement killed the goose.

2009 Jul 28 12:54 PM

[Chancer]

Article fails to fully identify and explain CA's problem.

Initiatives that lock in using general revenue have been well intentioned, but flawed, as a symptom of governing failures and mismanagement by primarily the state legislature with complicity by governors.

Prop. 13 and the 2/3 majority required to raise taxes have been the protective "dams" to hold back a "flood" of drastic tax increases that would occur if liberal politicians (in the pocket of public sector unions) enacted tax increases with near monopoly power.

The real problem with CA state and local costs is public sector wages in excess of private sector and other states by 45%. Lavish pensions and benefits are on top of that. When public sector union contracts are negotiated, the side who represents the public (taxpayers) namely legislature/governor rolls over for whatever the unions want out for their support or to stop unions from opposing their re-election. Liberal legislature and governors pay the unions back for their support.

In addition, CA has yielded too much power to environmental activist groups to make law with judges to control energy policy to stop offshore drilling and to CAUSE CA wildfires with bad forestry policy. For example, forests in Mexico (absent environmentalist interference) do not have similar wildfires.

This all makes for a broken system. Citizens have used initiatives as their only option.

What would help (probably by initiative):

1- Requirement that in event state budget is not passed in balance (without gimmicks and borrowing) within 60 days, all CA state employee wages must be cut by whatever % is necessary to balance budget. Public sector employees would then pressure legislature to not be wasteful with spending as their own wages would suffer.

2- Create elected state board (although I hate new bureacracy) with mandate to cut state and local (city, county) wages by up to 45% to make comparable to CA private sector and other states. Board would set maximum for all state and local jobs. Board could also re-set benefits and pensions to reasonable rates with a cap on pensions at $100K annual maximum. This board should be private citizens- not former politicians nor government employees (for more than 6 months). This would probably obsolete the need for unions. (If liberals believe government "helps" us, why do they need unions to protect members from their benevolent government?)

The spending problem is primarily the cost of state wages. The train wreck heading for us is explosive pensions. Politicians save up vacation pay to their last year of employment so they can increase the pension calculation. 6 months vacation pay equals 150% pay in their last year. The state then uses the average of the last 2-3 years to calculate pensions. This practice should be stopped.

3- Require that intitiatives for new spending or to allocate revenue must have a new revenue source.

There is a petition for a new initiative to make the CA legislature a part time 3 month job. The pay cut may not be that great, but if removes the full time professional politicians. They would also have 75% less time to pass ridiculous new socialist laws.

The state constitutional convention idea has already been hi-jacked by liberals wishing to use to get even more monopoly power.

2009 Jul 29 04:47 PM