The great California fiscal earthquake

Some of you may remember the recall of former California Governor Gray Davis in 2003, soon to be replaced by grunting action start Arnold Schwarzenegger, who swept into office promising reform and conservative ideals. Davis was booted out of office mostly for being blamed for huge spikes in electricity rates -- when energy traders held the state hostage -- but he had also overseen an increase in state spending beyond growth in population and inflation during his term and was viewed as ineffectual.

A friend of mine was a top adviser to Davis at the time, and told me that Davis' biggest flaw was not standing up to his critics and fully explaining his decisions. When Schwarzenegger visited my friend's office and declared it a "perfect place for a (cigar) humidor," he knew things were going to be quite different moving forward.

So were Californians simply (a) unrealistic; (b) immature; (c) clueless or (d) silly to swoon over a well-meaning and likable Schwarzenegger, or were the state's future fiscal crises simply inevitable?

First, a story in Time magazine explains (hat tip: Patrick.net):

As 2009 settles in, California isn't quite the golden state anymore. School districts are expected to lose billions of dollars in financing for improvements and development, and health-care services for the elderly, infirm and poor will likely deteriorate. State employees are facing payroll cuts, unpaid leaves and a hiring freeze. Money for firefighting in parched Southern California is drying up, as is financing for levees in flood-plagued northern environs of the state. And that's just for starters as California faces a budget deficit of more than $41 billion over the next 18 months...

In December, unable to wait for a budget solution any longer, the state pre-emptively canceled $3.8 billion for 2,000 public infrastructure projects, such as new prisons, veterans' homes and highways...

If the state runs out of cash by mid-February, as has been predicted, hundreds of state vendors, such as electrical-supply wholesalers, food-service companies and building- and grounds-maintenance firms, will be sent IOUs from the state government...

California has found itself in this financial quagmire as a result of a perfect storm of events. "It really has been a combination of things that have created the monstrosity that we are now in," says Barbara O'Connor, director of the Institute for the Study of Politics and Media at Sacramento State University. She cites inflation, population growth and mandates (like Proposition 13, which placed a limit on state property rate taxes that resulted in restrictions on tax increases) as having a snowball effect over the course of 30 years. Add these to California's extremely high foreclosure rate and a global recession (approximately 1 in 4 jobs in the state has international-trade ties), and the deficit quickly adds up. In the past, the state would borrow or sell bonds to bridge the gap, but with the current credit crunch, few investors are willing to offer assistance...

Click here for full story.

Next, a big reason for the state's quandary is the way in which it creates its annual budget. That's why a group called California Forward is working to institute changes in the budget process. Led by co-chairs Thomas McKernan (CEO of the Auto Club) and Leon Panetta (the former Congressman and Clinton White House Chief of Staff whom President-elect Obama has tapped to head the CIA), they recently commissioned Beacon Economics to produce a report on what lies ahead for the state given reduced income due to the housing bust and the recession.

You can find the intro letter signed by McKernan and Panetta here.

You can find the entire report by Beacon Economics here.

If you're a California resident, I urge you to read this report -- and then contact your local State Senate and State Assembly representatives for your input.