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The Crisis Isn't California's Alone

It's been a tough week for the Terminator everywhere but the box office. On May 19, California voters solidly rejected a series of ballot initiatives that would have provided Governor Arnold Schwarzenegger with short-term fixes to help patch the state's $21 billion budget deficit. Then, while in Washington, Schwarzenegger got the cold shoulder from Treasury Secretary Timothy Geithner and legislative leaders when he asked the federal government to help guarantee some of the state's future borrowings. Back in California on May 21, Schwarzenegger said he'd gotten the message and was asking his budget team to go back to the cutting board. "The people want Sacramento to live within its means," he said. It's a message politicians across the country have to come to grips with. According to the nonprofit Center on Budget & Policy Priorities, some 47 states face budget gaps in the 2010 and 2011 fiscal years. (Hats off to you Montana, Wyoming, and North Dakota.) The collective shortfall is a staggering $350 billion. Congress offered some relief with $140 billion in state funding packed into the $787 billion stimulus bill passed in Februrary. California is set to receive $8 billion of that. But the appetite in Washington to work out additional funding for the true basket cases like California is nil. "They all got something in the stimulus bill," says Brian Riedel, a senior policy analyst at the Heritage Foundation. "No other state has requested a special bailout." That leaves states turning to a mixed bag of revenue hikes and expense cuts. Governors have announced furloughs of state workers, layoffs, fee hikes, and across-the-board spending cuts. Sixteen states are enacting tax hikes and 17 others are considering doing so. "The size of the gap puts everything on the table," says Arturo Perez, a fiscal analyst at the National Conference of State Legislators. The California state legislature will now have to consider many more cuts. They'll range from relatively smaller items—a $4 million-a-year poison-control hotline that gets 900 calls a day—to sweeping cuts in health-care spending that will reduce coverage for 2 million poor state residents. "These are folks who may go to the emergency room, but they'll face the bills afterward," says Anthony Wright, executive director of advocacy group Health Access California. "If you're trying to lift yourself out of poverty, that won't help you." Tax Oil Producers Instead?California legislators had already passed $16 billion in spending cuts and $12 billion in fee hikes to tackle the current fiscal year's budget. Schwarzenegger says his own office has been reduced by 27 positions, to 147 people, and remaining staffers are taking a 9% pay cut. State legislators, though, say the governor's decision this week to stop pursuing short-term borrowings came as a surprise to them. Noreen Evans, a Democrat who chairs the budget committee in the State Assembly, says she was against borrowing more money to begin with. She thinks the fix lies in a number of spending cuts and tax increases—everything from putting a sales tax on tickets to sporting events to the $750 million a year that could be gained from taxing oil production in the state. "We should think about taxing oil producers before we cut health care coverage to 200,000 children," she says. Some see California's fiscal crisis as an opportunity to address structural problems with the state's government. California is one of only three states that requires its legislature to pass laws by a two-thirds vote rather than by a simple majority. That leaves it subject to recurring stalemates and compromises with the Republican minority. "If the legislature can pass a majority rule, it can more easily cut spending and raise taxes," says Rick Jacobs, whose Courage Campaign is pushing to eliminate the two-thirds rule. "Right now it is not responsible to the people of California," he says. "It's hamstrung." Louis H. Schimmel Jr., who directs the municipal finance staff at the Mackinac Center for Public Policy in Michigan, says the crisis gives citizens everywhere an opportunity to reassess the role of government. "We need to take a new look at everything and decide how much government we want," he says. Schimmel was called by the state of Michigan twice in the past two decades to oversee runaway deficits for the cities of Hamtramck and Ecorse. "I went in with the understanding I would not raise taxes or figure out how to get more money," he said. "I was just going to cut."
Palmeri is a reporter for Bloomberg News and Bloomberg Businessweek in Los Angeles.

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