“California is effectively bankrupt,” writes Mort Zuckerman in a recent issue of U.S. News and World Report. In July, the director of the Center for Continuing Study of the California Economy tells the New York Times, “California is now the state that can’t.” A week later, a columnist in the Financial Times, the staid international business publication, declares, “California’s laws are shaped by plebiscites to a degree unmatched outside of Venezuela.”
When and where did California go so wrong? In addition, what can be done to make it right? I took these questions to Marin state Senator Mark Leno (D–San Francisco).
“In February of this year, we passed our ’09-10 budget; it was the earliest in the state’s history and it was balanced,” Leno says. “Since then, our revenue has fallen from last year’s $101 billion to $77 billion this year; that’s a drop of 25 percent of revenue—it just evaporated.” In all, says Leno, the Legislature has “resolved” a $60 billion budget deficit. “In February, it was $36 billion and now another $24 billion. That’s historically unprecedented: it’s just a huge sum of money considering our entire budget totals about $85 billion.
“There isn’t just one thing,” says Leno. “Rather, it’s a combination of many things that got California into its current predicament.” For starters, he cites Proposition 13, an anti-tax measure approved by voters more than 30 years ago. “Its impetus was that escalating taxes were causing seniors to lose their homes,” says Leno; “however, it limited taxes on commercial properties as well.” As a result, he now feels “homeowners are ‘subsidizing’ the taxes of commercial property owners whose buildings, which don’t turn over as often, are way under-assessed.”
Leno points out that when Prop. 13 passed, property taxes, income taxes and sales taxes each provided a third of California’s revenue stream. “Currently, however, as a result of Prop. 13, property taxes have fallen from that one-third formula and the state is overly dependent on income taxes, which are volatile, as we’re presently experiencing.” Corporate income and capital gains taxes have also fallen precipitously, Leno says. “Few states have such a small amount coming from property taxes as we do.”
A second cause of California’s cash catastrophe, says Leno, is Gov. Schwarzenegger’s abolishment of the state vehicle license fee. “The governor came to Sacramento chanting, ‘Let’s cut up the credit cards.’ Instead, what he did was cut the state’s vehicle license fee and, in essence, create a new spending program. That’s because the state’s general fund had to continue paying these fees to the cities and counties in order to keep them whole—and now that has cost the state $35 billion since the governor took office. That’s been a huge burden, and the governor now knows it.”
A third reason for California’s crisis, Leno says, is the ever-increasing costs of the state’s Department of Corrections. “One example is our ‘three strikes law,’ ” he says. “We’re the only state not requiring a serious or violent felony conviction as a third crime—this means stealing a bike from a garage can result in a life sentence.” In making his point, Leno points out “it costs $49,000 a year to house a prisoner; because of health care costs, that amount doubles at age 50 and triples at age 60.”
Admittedly at times discouraged, Leno volunteers a fourth cause of California’s calamity: “And then in 1996, term limits took effect,” he says. “So now we have even-less-experienced legislators making all these decisions.”
As California’s possible way out, Leno points to the levying of an oil severance tax—“22 states in the country currently tax those who extract oil from their lands”; altering Prop. 13 and allowing commercial properties to be reassessed—“that alone would result in $3 or $4 billion of revenue a year”; and lowering the threshold to pass the budget to a majority, rather than a two-thirds vote of the legislature—“this is a key reform needed in California.”
As for a key component of change in California, Leno points toward November 2010. “For our next governor we need someone who’ll speak honestly to the voters—and that is politically risky, but it must be done. We also need a good administrator, someone who can root out the waste, fraud and abuse we all know is there.” That definitely sums up my point of view. What about you?