California faces a mammoth $24 billion budget deficit and potential bankruptcy. As its governor somberly told legislators last week, "California's day of reckoning is here."
But will politicians interpret this fiscal judgment day strictly as a dollars and cents accounting? Or will they also grasp its larger message – that fundamental budgetary and political reform is needed in this "ungovernable" and "dysfunctional" state, to name two commonly used adjectives?
That's not to underplay the importance of fiscal sobriety in the world's eighth-largest economy, which is an innovation generator for America and the world.
Indeed, the Golden State has been on a spending binge, up about 40 percent since Gov. Arnold Schwarzenegger took office in 2003. It risks running out of cash in the near future. It has the lowest credit rating of the 50 states, which sure puts a crimp on borrowing.
The governor proposes drastic cuts to meet the shortfall, projected for fiscal year 2010, which starts July 1. He would eliminate the state's welfare-to-work program, CalWorks, and health insurance for 1 million children. He would stop funding state parks, furlough nonviolent offenders, and significantly cut spending on public education – including phasing out college aid to poor students.
To put this in perspective, almost every state faces a deficit in this time of deep recession. While none comes even close to having to fill a $20-billion-plus budget hole, several are actually in worse shape if you compare the size of their deficits to their overall budgets.
Other states, too, are considering furloughing prisoners and cutting parks and education funding – though none is making such deep cuts to welfare, and several are increasing taxes, which Mr. Schwarzenegger so far refuses to consider.
Neither can one chastise California as purely a runaway spender. Population growth and a staggering increase in health costs account for much of the budget increases. But unreasonable rises in the prison population and decades of arm twisting from powerful lobbies such as state-employee unions have also taken a toll.
Beyond the kinds of spending trade-offs that other states are having to make, California stands unique in its convoluted budgeting process – and that's the more fundamental fix that needs to be made.
Voters have themselves become accountants through ballot initiatives. This greatly restricts the ability – and flexibility – of legislators to actually manage the state's finances.
Meanwhile, California is one of only three states that requires a two-thirds majority of legislators to approve a budget. This makes for high political drama each year, but not timely spending plans. It also impedes accountability: Which party do voters throw out if it's everyone's fault?
Extreme politics, exacerbated by term limits and voting-district gerrymandering, impede the budget process further.
For years, Californians – voters, legislators, governors – have known about these underlying issues. But budget gimmicks have allowed them to kick the can of reform further down the road.
Now the state has run out of road, and thankfully interest in reform is building. Voters hinted at it when they said "no" to more short-term budget fixes in May. Legislative leaders are also looking at ways to change the budgeting process. A grass-roots movement to hold a constitutional convention is gathering support among businesses and residents.
None of these changes could occur quickly enough to solve this year's problem. But this year's problem just might spur such changes.