The American Interest
Policy, Politics & Culture
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Riding the Ratchet

California is broke. Ungovernable, too.

Published on September 1, 2009

In the siege of a city, each of the final days plays out much like the one before, the monotony belying the imminent danger. Early on one particular brilliant and beautiful day last June, a kind of siege played out at the California State Capitol. Health advocates gathered on the west steps to rail against Governor Arnold Schwarzenegger’s proposed cuts to Medi-Cal services for seniors and the disabled. On the north steps came a group of school support workers whose purple shirts—the ubiquitous uniform of the Service Employees International Union (SEIU)—read, “Save our schools, fix this mess.” In the days before the capitol grounds had been a stage for AIDS patients, in-home caregivers pushing profoundly disabled people in wheelchairs, and school moms in flaming yellow construction paper crowns (to signify how burning mad they were over education cuts), with their kids carrying hand-painted signs asking, “Arnold: Do your children go to public school?” As the Sacramento weather moved from balmy to baking, the routine of continual crisis seemed to mask California’s inexorable creep toward what Schwarzenegger, an old hand in the apocalyptic school of branding, has called “fiscal Armageddon.”

Inside “the building”, as its denizens call the state capitol, Senate President Darrell Steinberg, an earnest Sacramento Democrat, rose to implore the Republican minority to vote for a stopgap bill to delay California’s looming insolvency. He called the bill a “painful but necessary” measure to slash about one-eighth of the state budget. As he pleaded, a few blocks down the Capitol Mall an announcement by State Controller John Chiang underlined the urgency of the crisis. Without swift action, he said, in a week he would have no choice but to begin paying many of California’s obligations—to contractors, scholarship students, welfare recipients and taxpayers awaiting refunds—with IOUs (later dubbed “Arnold Bucks”). Senate Republicans were unmoved. They would cast their votes, necessary under California’s system of minority rule on fiscal matters, only for a “complete solution” to the state’s $24 billion budget gap. As usual, that solution went undetailed, but everyone understood what the California GOP meant: no tax increases, and no Republican fingerprints on the corpses of the public services their constituents love to get, but hate to pay for.

With legislative gridlock reconfirmed, lawmakers headed off across the street, lobbyists in tow, to Frank Fat’s, the Cosmo Café or the Citizen Hotel to attend one of a dozen campaign fundraisers (“Sponsor $3,900, ticket $1,000”). The dwindling corps of reporters rushed back to their offices to file accounts of government dysfunction. Two of the state’s veteran journalists summed it up in the June 25 Los Angeles Times: “Simply put, California today is ungovernable.” A week later the first IOUs were issued.

There’s plenty of evidence to support that hypothesis. But like a lot of the other stories about California, this one leaves out a central reality: California teeters on the precipice because the state’s conservatives want it that way. It’s the perfect opportunity to achieve Grover Norquist’s dream of making government small enough to drown in a bathtub.

California found its way to “Arnold Bucks” by way of a combination of the Ratchet and the Great Recession. The Ratchet is a process set in place by Proposition 13, the 1978 Jarvis-Gann property tax initiative. Prop. 13 is most famous for rolling back and capping the property tax rate in California. But its lesser-known provision, which requires a two-thirds vote in each house of the legislature for any tax increase, has arguably been more consequential. Combined with California’s pre-existing rule requiring a two-thirds legislative vote for budgets and appropriations (California alone requires supermajorities to approve both spending and taxes), it has given anti-tax conservatives an effective veto over state fiscal policy, despite their having been in the minority for all but two of the thirty years since Prop. 13 passed. They have used that veto to block tax increases and ratchet down the state’s tax base at every opportunity by demanding tax breaks for favored industries or activities.

The Ratchet was cranked most furiously during the dot-com bubble of the late 1990s. As the hot money from IPOs and stock options flooded in, California cut the corporate tax, income tax and, most precipitously, the property tax on vehicles. When the bubble burst and the hot money evaporated, the ratcheted-down tax base could no longer support the base of public services. The Ratchet, however, turns one way only: Revenue lost by majority vote can only be restored by supermajorities, which have been nowhere in sight. Its budget permanently unbalanced, California patched over the gap for most of this decade with gimmicks, massive borrowing and a temporary boost from the housing bubble. But when that second bubble burst, the whole state economy shuddered from the explosion. In California, as in other states that lived the fantasy of vertically propelled house prices, the earthmovers and backhoes have been parked, the mortgage offices shuttered, the granite countertop installers idled. New foreclosure notices outpace new housing starts by more than ten to one.

The collapse of house prices and construction has hit hardest at inland California, where the frenzy of speculation and building has been greatest. But the contraction has struck wealthier coastal areas, too. On a Saturday afternoon this past spring, shops decorated with signs of distress (“For Lease”, “Going Out of Business Sale”, “Everything Must Go”) outnumbered the shoppers strolling West L.A.’s trendy Melrose Avenue. A salesman idled alone in the window of the Diane von Furstenberg boutique, hopefully eyeing a rare well-dressed passerby. Across the street, the Marc Jacobs store was empty. With fear and uncertainty everywhere, even designer Coach bags have been snapped tightly shut.

The result has been a vertiginous plunge in tax revenue, dragging the state budget to fiscal depths unplumbed since the Depression. A spending plan passed last September, before the collapse of Lehman Brothers and much else, was already tens of billions underwater by November. In February, with the state’s till pretty much cashed out, legislative Democrats and the governor, peeling off a handful of Republicans, agreed on a $40 billion budget fix. Alongside spending cuts and temporary tax increases, it featured tax breaks for homebuilders and Hollywood producers, and a huge permanent tax cut for multi-state corporations; even in hard times the Ratchet does not rest. By late May, after cranky voters rejected $6 billion worth of those “solutions” in a special election, another $24 billion hole, this one amounting to roughly one dollar in four in the current budget, had opened beneath the state.

Governor Schwarzenegger’s response was to swing his old Conan the Barbarian sword: Totally eliminate CalWORKS, the state’s welfare-to-work program (and presumably leave 1.4 million children and parents to live in the streets); end Healthy Families, the California version of the federal-state child health insurance program (and leave 940,000 children uninsured); and end college scholarship grants and reduce support for public universities. He also proposed shortening the school year, closing most state parks, and selling off state properties like San Quentin Prison and the Los Angeles Coliseum (dumping real estate assets into the worst market in history apparently being his idea of how “to run government like a business”). The crisis requires “a transformation of what services Sacramento can provide”, he told lawmakers, but it requires no tax increases, not even those he himself had proposed in January. By his Administration’s own estimates, Californians this year will pay a smaller share of their incomes in state taxes than at any time in the past three decades.

California is not alone in its fiscal turmoil, of course. Few states have been untouched by the downturn, and several are grappling with even bigger budget demons when measured in percentage terms. But just as California insists on its own air quality standards, it demands its own stories to explain its plight. Some of those stories arise from the Left, but the most popular come from the Right.

According to conservative talk radio, blogs, newspaper website comment threads and Republican politicians’ press releases, California is in trouble because businesses, oppressed by the highest taxes in the country and out-of-control spending, are moving out of the state, taking jobs with them. Meanwhile, illegal immigrants are flooding into the state, stripping its public services budget to the bone. These tales have real pedigree, drawing on anxious narratives of comings and goings that have long dominated California political talk. California has always gazed at itself in the mirror and worried about its attractiveness: Will they keep coming (or might they even leave)? In 1878, when Californians first dared to think about regulating and taxing the railroads, opponents warned that if such measures passed, “we should be shunned by all the world. The emigrant would avoid us. Capital would keep away from us.”1 In that tradition, the Sacramento Bee recently reported that from 2004–07, 275,000 people left California for “the old Dust Bowl states of Oklahoma and Texas”, twice as many as came the other way. Legislative Republicans held a hearing in Reno this past April to showcase former California business owners who said they had been driven to Nevada by a hostile business climate. Deep in its own economic doldrums, Nevada was no doubt grateful for the free publicity.

Yet even while doubting its own charms, California has regularly worried that, in the words of the infamous Pete Wilson campaign ad of 1994, with its shadowy images of unauthorized immigrants dashing through traffic at the border, “They keep coming.” In his famous 1868 essay. “What the Railroad Will Bring Us”, Henry George weighed the price of opening California to the world. “Would we esteem ourselves gainers if New York, ruled and robbed by thieves, loafers and brothelkeepers; nursing a race of savages fiercer and meaner than any who ever shrieked a war-whoop on the plains; could be set down on our bay tomorrow?” During the Depression, the Los Angeles police chief sent 125 cops to the Oregon and Arizona borders to set up a “bum blockade” to keep out the “indigent influx.” The Chamber of Commerce wrung its hands over the “horde of undesirables” migrating to the state: “200,000 are here––more keep coming––they’ll soon be voters––what can we do?” Throw in a reference to illegals and “anchor babies” and you have a ready-made tweet fit for any conservative Twitter stream.

None of these stories bears much relation to California’s reality. About a third of states have a bigger tax burden than California. Even before the current round of cuts, California’s state government spending represented a smaller share of the economy than it did three decades ago. In 2007, it had the second-lowest ratio of state employees per resident in the United States, behind only Illinois.2 Rigorous studies by economists at the Public Policy Institute of California have found that the coming and going of firms has had “a negligible effect” on jobs and the economy. Unauthorized immigrants are not eligible for most public services. Were they to vanish overnight (taking their tax payments with them), the state would be only a couple billion dollars closer to solvency.

Some day, historians may wonder why conservatives discounted their own success over the past three decades in removing California from the top ranks of high-tax, high-public-service states. The answer is that they see work still to do. “Republicans hold the strategic advantage right now”, Jon Fleischman wrote at the end of June on FlashReport, the state’s leading conservative blog, urging Republican lawmakers to not be tempted to put state solvency ahead of principle: “Let’s take that opportunity to accomplish a complete victory.” When Schwarzenegger and the legislature struck a deal at the end of July to staunch the flood of IOUs, it delivered $15 billion in cuts to schools, universities, social services, local governments, and prisons, but no tax increases.

It’s hard to know how enduring the conservative budget victory will be. Californians, who regularly tell pollsters they want more of all public services except prisons, will not be pleased when their children’s classrooms, already the most crowded in the nation, grow more crowded still. Economists at UCLA forecast that budget cuts and layoffs of public workers will deepen and prolong the recession in California, just as they will in other states. (Ironically, the pain will be greatest in the poorer inland areas represented by Republicans, whose economies depend more heavily on social service dollars and the employment provided by prisons.) Whether public displeasure over service cuts and their economic effects ultimately translates into political support to get rid of the Ratchet is an open question—Californians also tell pollsters that they don’t want to pay higher taxes for those improved services.

But the crisis has given life to a new narrative about California, the one about its ungovernability. A stigma like that, one would think, has got to lead to some sort of change. Last year the Bay Area Council, the San Francisco business group representing the likes of Google and Intel, announced that nothing short of a constitutional convention can fix what ails the state. Long aloof from state politics, the global giants have discovered that the marquee features of California public life—unbalanced budgets, underfunded and underperforming schools, congested roads, $100,000-per-year prison guards, gold-plated pensions for cops and firefighters—may not be good for business after all. Such radical thinking quickly vaulted the Council to the head of a movement that is spurring town hall meetings across the state and attracting growing coverage in what’s left of the press. If the state legislature does not issue its own convention call by the September end of session, the Council is ready to take the question to the ballot in 2010.

If a new convention is to succeed at making California more governable, it will need to get below current anxieties to a deeper stratum of concern. The fact is that, after 150 years of peering over the horizon to see who’s coming to settle and guess what change they will bring, California is no longer a state of arrival. Population growth by natural increase now outpaces migration by three to one. Californians, especially the native born and the young, are less likely to migrate than the residents of all but three other states. By the time today’s California youth reach middle age, native-born Californians will make up the state’s majority for the first time in its history.

“We always assumed we could import the people we need”, says Dowell Myers, the University of Southern California demographer who’s written most extensively about homegrown California. “Before we could get the best from Iowa.” No longer. Middle Americans who once thought of “California” as a byword for “opportunity” now see it as a signal of dysfunction. For the baby boomers who make up the biggest piece of the electorate, California’s ability to create a homegrown workforce is personal, touching every part of their remaining years. Without new blood and new money coming into the state, they need to be asking who will answer the 911 call when there’s trouble, who will care for them when they’re sick, and, above all, who will buy their houses when they need to sell them.

One of the little girls who gathered outside the state Capitol in June to plead for her school’s funding knew the answer to those questions. “Your future depends on my education”, read her sign. Her voice, and her story, is not yet strong enough to break the siege inside “the building.” But with enough IOUs and shuttered parks, with enough homeless children in the streets, and enough teacher layoffs, new leadership from the movement for constitutional change may help her carry the day. Behind the ungovernability narrative is a growing but still unevenly distributed awareness that California’s future, unlike its past, will be homegrown. That awareness, at least, is a start.

1Record Union (Sacramento), June 17, 1878, quoted in William Deverell, Railroad Crossing: Californians and the Railroad, 1850–1910 (University of California Press, 1994), p. 47.
2“State and Local Government Employees: Where Does California Rank?”, Center for Continuing Study of the California Economy (October 2008).

Mark Paul, senior scholar and deputy director of the California program at the New America Foundation, was formerly deputy editorial page editor of the Sacramento Bee and Deputy Treasurer of California.