As California has spent the last six months or so struggling with imminent financial collapse, I've considered how the state's structural governing challenges, mostly embodied in Proposition 13, led to its problems, but was looking for a better analysis. Luckily, the Prospect's own Harold Meyerson deploys his WaPo real estate and California expertise in a nice column on the subject.
Amid the inflation of the late 1970s, however, the California model began to crumple. As incomes and property values rose, Sacramento's tax revenue soared -- but the parsimonious Democratic governor, Jerry Brown, neither spent those funds nor rebated them. With the state sitting on a $5 billion surplus, frustrated Californians grumped to the polls and passed Proposition 13, which rolled back and then froze property taxes -- effectively destroying the funding base of local governments and school districts, which thereafter depended largely on Sacramento for their revenue. Ranked fifth among the states in per-pupil spending during the 1950s and '60s, California sank to Mississippi-like levels -- the mid-40s -- by the 1990s.
...But the problem with Proposition 13 wasn't merely that it reduced revenue. It also made it very difficult to increase revenue. Raising taxes now requires a two-thirds vote of the legislature, though in 47 other states a simple majority suffices. California has become overwhelmingly Democratic in the past two decades, but Republicans have managed to retain footholds -- representing just over one-third of the districts -- in both houses of the legislature.
... Because California is so much larger than any other state, and its unemployment rate among the nation's highest, the collapse of its capacity to spend will counteract some of the effect of the federal stimulus and retard the nation's recovery -- much as its aerospace slump retarded the recovery of the mid-1990s. The Obama administration ignores California's plight at its own -- and the nation's -- peril. The nation's banks are stuck with so much bad paper from California mortgages gone awry that a huge contraction in state spending would make their assets even more toxic. In the short term, the only way to avoid a further downturn may be a federal loan to the state.
Now that's an unpleasant proposition. Meyerson also notes that former E-Bay Executive and John McCain surrogate Meg Whitman is running for governor on a platform of cutting business taxes in the state that faces a $21 billion deficit and extremely low tax burdens on the wealthy, which is just disappointing. But, there's one upside to the potential of giving a federal loan to the state: It could be contingent on Californians repealing Proposition 13 and coming up with some kind of sane way to manage their finances in the future. If there's anything we've learned about giving loans to institutions that are too big to fail, it's that they should come with requirements for sustainability.* And no bonuses for executives.
-- Tim Fernholz
*The other thing we've learned, of course, is that nothing should be too big to fail, but unfortunately I'm not sure there's a way to shrink the California sector.
