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California at the Crossroads

A blockbuster budget crisis.

11:00 PM, Feb 4, 2009 • By BILL WHALEN
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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.

By January, Schwarzenegger tried a more muscular approach. Rather than a lengthy, conciliatory State of the State Address, similar to his "post-partisan" sermons in past years that elated Democrats and alienated Republicans, Arnold instead spoke for only nine minutes--just enough time to declare his love for Maria Shriver, say times are tough, and tell the 120 lawmakers in attendance to get to work. Meanwhile, in this new age of post-partisan depression, the governor picked fights with two powerful foes. He suggested shortening California's school year, which hardly amused the deep-pocketed California Teachers Association, and he issued an executive order furloughing up to 238,000 state workers for two days every month, until June 2010. That should begin this Friday, now that a judge has denied a state workers' appeal. What do those two actions have in common? They've generated a lot of media attention, which Schwarzenegger sorely needs to rally a state electorate that perhaps has been distracted by the drama in Washington.

What Arnold needs is a tipping point--something California may have at last reached this week, with the State Controller now refusing to send out tax refunds, welfare checks, and student grants due to the state's cash crunch. It hasn't deterred the governor from remaining publicly optimistic. "I always know when I sit down [with legislators] when there is what I call the 'kabuki,' when there is no interest in getting anything done," Schwarzenegger told reporters late last month. Now, he said, "I see the will during the negotiations."

More likely, all parties involved in California's budget dance--the governor, the legislature, taxpayers, and special interests--will have to choose one of three divergent paths. They are:

Watchful Waiting. Otherwise known as papering over the mess, in this scenario--sadly, a time-honored tradition in Sacramento--a term-limited governor (Arnold leaves office in January 2011) and lawmakers raise taxes, enact modest spending cuts, stir in a healthy dose of federal bailout money (California could receive as much as $32 billion from Washington), then cook the books to claim balanced budgets for this year and next. The big losers would be Republicans, for ceding their ground and going along with a raft of tax increases that would make conservatives wince.

Theoretically, that could include new taxes on appliance and furniture repairs, gold, veterinary care, alcoholic drinks, amusement parks and sporting events, plus higher vehicle registration fees and a crackdown on medical professionals who buy goods from out-of-state vendors.

Fiscal Liposuction. For Republicans to budge on the budget, Schwarzenegger might have to talk Democrats into accepting not just spending cuts, but a hard spending limit. Last year, GOP Assembly Leader Mike Villines came up with such a plan, capping new state spending by adding together the annual growth in both state inflation and population (about 5 percent growth). Such a measure, because it's a constitutional amendment, would require a two-thirds approval by the legislature, which means bringing the Democratic caucus on board (Democrats control nearly two-thirds of both legislative houses). Ironically, to cut spending over the long haul, Arnold likely would have to pass out more pork in the short-term. And, because the amendment would require voter approval, Republicans would have to add a poison pill to deter a nasty ballot fight by liberal interest groups--i.e., make new taxes contingent on passage of the spending cap. All of which makes the cap an uphill climb.

Radical Reconstruction. A third option would be to call a constitutional convention --either the legislature making the call, or voters bypassing Sacramento and placing a convention call on the ballot themselves, as occurred with the 2003 recall election. Such an effort, if begun in earnest this spring, could produce reforms appearing on the California ballot as early as June 2010, when both parties hold their gubernatorial primaries. Schwarzenegger reportedly toyed with this idea back in 2004, when it became apparent that the legislature didn't share his zeal for reform. As for the size and scope of the reforms, the San Francisco-based Bay Area Council, which is meeting in Sacramento later this month to outline the next steps in making the convention a reality, has suggested starting with an easing of term-limits, amending the two-thirds requirement for passing budgets, and reforming California's initiative process. And conservatives would have to drive the debate, as they effectively did during the recall when the focus was on the state's car tax and granting driver's licenses for illegal immigrants.

Think of it as a possible sequel to the recall that swept Schwarzenegger into power--and a script that Arnold might have a hard time resisting. For if Schwarzenegger became the star of the show, as he did in 2003, it might be his one last best chance to depart the political stage in a way that's decidedly--well, cinematic.

Bill Whalen, a Hoover Institution research fellow, analyzes California and national politics.