The Blog

California at the Crossroads

A blockbuster budget crisis.

11:00 PM, Feb 4, 2009 • By BILL WHALEN
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

LAST JUNE, CALIFORNIA was abuzz over Tesla -- the car, not the inventor. That Arnold Schwarzenegger could convince the makers of the high-end, electric vehicle to relocate from Bill Richardson's New Mexico to the Golden State was hailed as skilled strong-arming by the strongman-turned-governator.

California seemed cutting edge, not to mention celebrity chic. Arnold, George Clooney, Kelsey Grammar and Will.i.a.m of Black Eyes Peas fame all have signed up for $92,000 Tesla Roadsters. Even Condoleezza Rice went for a spin at NASA's Moffett Field research park, sitting by in the passenger's seat as with her driver floored it to 110 mph ("This thing can move", she said afterwards).

Eight months later, the buzz is now buzz-kill. After failing to secure $100 million in venture-funding, Tesla indicated last week that its plans for an assembly plant in San Jose are all but kaput. Instead, the company is banking on a $450 million favor from Washington, which is an uncertain bet as the House and Senate haggle over their bailout packages. If that money materializes, it will be used to retool existing buildings, rather than breaking ground in the South Bay.

In a sense, Tesla's misfortunes epitomize those of California, whose economy (eighth-largest in the world) is at best stalled and at worst in a prolonged tailspin. The Golden State, the scene of approximately 250,000 property foreclosures last year, also led the nation with nearly 450,000 initial unemployment claims--roughly the combined total of the next four worst states (Michigan, Ohio, Pennsylvania and Illinois). California's unemployment rate rose to 9.3 percent last month; a year ago, it was 5.9 percent. Twice, in the past month, Standard & Poor's has downgraded the Golden State's economic recovery bonds. Moody's soon may follow suit, lowering the rating for California's general-obligation bonds. Financial houses apparently aren't impressed by the state's fiscal restraint, or lack thereof--over the past decade, state spending has soared 134 percent, to $131 billion.

In fairness, California's economy is a victim of circumstances beyond its control--not a historical first, for a nation-state whose fortunes tend to rise and fall with those of America's. Nearly two decades ago, the peace dividend from the end of the Cold War and the subsequent halt of so-called "defense steroids" from Washington laid waste to Southern California's aerospace industry, leading the state into its worst recession since the Great Depression. This time around, the nation's mortgage mess and the meltdown on Wall Street are principal culprits.

However, there's one important difference between the two Californias, then and now. In the 1990s, a Republican governor, Pete Wilson, was able to work with a Democratic State Legislature--sometimes politely, sometimes forcefully--to settle budget deficits and implement economic reforms. That kind of progress has eluded Schwarzenegger, who for three months now has been trying to bring both parties together to plug the $42 billion hole in the current and next year's state budgets (California's next fiscal year begins July 1).

It all began soon after the November election, with Arnold twice calling for special legislative sessions to close the deficit --something the Legislature normally wouldn't address until a new session convenes after the beginning of the New Year. Both times, no deal was reached--Democrats balked at proposed spending cuts; Republicans adhered to their no-taxes pledge. Schwarzenegger then tried to up the drama with dire prophecies of a looming "financial Armageddon" (you know times are strange when Arnold is channeling Bruce Willis films). Still, nothing was resolved in December.