How California's Fiscal Woes Began: A Crisis 30 Years in the Making

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Peter Grigsby / Reuters

California Governor Arnold Schwarzenegger addresses a joint session of the legislature discussing the state's budget crisis and the necessary steps that must be taken to solve it.

With California a day away from issuing IOUs instead of paying its bills, Gov. Schwarzenegger and the legislature remain at odds over how to close a now $26.3 billion deficit. Schwarzenegger on Thursday ordered a third unpaid furlough day for 235,000 state employees. With its $1.7 trillion economy sputtering and 11.5% unemployment surging, California's difficulty in balancing its budget could affect the national recovery. But the Golden State's budget problems are hardly new. The seeds of them were planted more than 30 years ago.

They begin with the 1978 property tax revolt and the victory of Proposition 13. As California experienced a dramatic escalation in home values, property tax assessments skyrocketed. Especially vulnerable were seniors on fixed incomes. When then Gov. Jerry Brown and the legislature dithered, conservative activists led by Howard Jarvis put a seductively simple sounding proposition on the ballot. Under Proposition 13, the annual real estate tax on a parcel of property would be limited to 1% of its assessed value and this assessed value would only increase by a maximum of 2% per year, until a change in ownership. Voters responded and Proposition 13 scored a dramatic victory with 65% of the vote. Property tax rates dropped an average of 57%.

While homeowners celebrated, city, county and school district officials sat in stunned disbelief. There were predictions of drastic cuts to education and social services. But the ax did not fall as Sacramento, flush with a multibillion-dollar surplus, bailed out local governments and the schools. But the state rescue was accompanied by a loss of local control. As a result of Proposition 13, school districts, county governments and cities were forced to compete with state priorities for a slice of the state budget.

"In the first years after Proposition 13 passed, the state was able to get by because it had a surplus," says David Menefee-Libey, a political scientist at Pomona College. "But because the state is now responsible for funding local government and school districts the demands on state resources became too great. The second strategy followed by [Governors Gray] Davis and [Arnold] Schwarzenegger has been to finesse the fiscal crisis by using budget gimmicks and by borrowing to bridge the yearly budget shortfall. Now both options are exhausted."

Proposition 13 has proved to be a two-sided sword. "One side was to protect the people from the government suddenly and wildly raising property taxes," says Bob Hertzberg, a former Assembly Speaker and co- chair of California Forward, a bipartisan reform group. "That was done. But we didn't resolve how to pay for the services that people want. So we have created this crazy government structure in Sacramento held together by duct tape and bailing wire. It's not coherent and needs to be changed."

Proposition 13 further altered California politics by requiring a two-thirds majority for tax increases either at the state or local level. This requirement along with a constitutional provision requiring a two-thirds majority to pass a budget — the result of a proposition passed in 1933 — means it is far more difficult to raise taxes or pass a budget in California than in other states. For more than 30 years California has been living with a system of minority rule in which 34% of the legislature or a local community can stonewall the majority. Facing this post-Proposition 13 system, California's various interest groups have increasingly used the ballot box to protect themselves — but by so doing have mandated budgetary havoc.

For example, pre-Proposition 13, California public schools were among the finest in the nation. After Proposition 13, education spending per pupil dropped to 48th in the nation. The state's educators and parents then rallied behind Proposition 98, which by a complex formula apportions roughly 40% of the state budget to K-14 education. In the past three decades, other special interests have authored — and voters have passed — numerous ballot measures dictating that millions in state funds go to various pet causes. Many of these measures, including a preschool initiative sponsored by Schwarzenegger in 2002, mandate a program but fail to provide a source of funding. Each proposal alone might have merit, but collectively these ballot measures have locked most of California's budget in place. "Gradually, the voters' piecemeal decisions have bound the legislature in a straightjacket," says Thad Kousser, a professor of political science at UC San Diego.

Similar to the Red vs. Blue state clash in the nation as a whole, there are two Californias. Historically, there was the liberal north versus the conservative south. Since the days of Governors Pat Brown and Ronald Reagan, the clash has been between older, predominately Anglo voters, living in the suburbs and rural counties and largely voting Republican, and younger voters, more likely to be Asian or Latino or black or Middle Eastern, who are more prevalent in California's urban centers and hip suburbs and who predominantly support Democrats. As the state's population has become diverse and Anglo voters have seen their own children grow up and leave the public schools, there has been a backlash of the first against the second, as seen in conservative ballot measures such as Proposition 13 (property taxes), Proposition 187 (illegal immigration) and Proposition 8 (gay marriage). Conservative Anglos, a minority of the state's population as a whole, are vocal and continue to exert power beyond their census numbers because they vote in relatively higher percentages, and because GOP votes are required to pass a budget or enact new taxes under the state's unusual two- thirds majority requirements.