Schwarzenegger's Failure in California

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In a letter to the Wall Street Journal, the financier Warren Buffett spoke of three houses he owns, two in Laguna Beach in southern California and one in Omaha, Nebraska. He bought his first Laguna Beach property in the early 1970s. In 2003, it had a market value of about $4 million, and because of the limitation of Proposition 13, carried taxes of only $2,264. The second Laguna house, located just in back of the first one, was purchased in the mid-1990s and its market value in 2003 was approximately $2 million. The second house, Buffett wrote, "simply because I bought it later than the first, carried taxes of $12,002 in 2003 ... these figures mean that the tax rate on the second house — same neighborhood, same owner, same ability to pay — is roughly 10 times the rate on the first house." The famed financer said his Omaha house, worth about $500,000, had a property tax bill of $14,401. Buffett's point: "residential property taxes in California are wildly capricious, tied as they are to the date of the purchase rather than the value of the property." Exactly.

As an adviser to Arnold Schwarzenegger's gubernatorial campaign in 2003, Buffett said California needed to address the inequities and unfairness associated with Proposition 13. The campaign quickly brushed Buffett aside, but Arnold should have listened. If he had, it could have made all the difference.

The governor, with his global fame, charisma and energy, would be a fine governor of an average state in an ordinary time. That, however, is not California — a massive cosmopolitan nation-state facing extraordinary challenges. Schwarzenegger began his term with tremendous political capital. Like Nixon going to China, Schwarzenegger as a pro-business Republican could have confronted and revised Proposition 13 to put California on stable financial footing.

A social liberal, however, Schwarzenegger was afraid of deserting conservatives on the tax issue. And his decision to eliminate the "car tax," which previously raised $3.6 billion per year, makes the governor personally responsible for $18 billion of the current $24 billion deficit. His first year focus on "waste, fraud and abuse" turned out to be rhetoric without substance. He hired an expert from Florida Gov. Jeb Bush who found little and quickly left Sacramento. An easy answer to the budget problem did not exist.

The state's last gutsy governor was Republican Pete Wilson, a former Marine willing to make tough decisions. In the deep recession of the early 1990s, the state faced an even deeper financial crisis than today. Staring at a budget gap one third of the general fund, Gov. Wilson assembled a bipartisan legislative coalition. According to Jim Brulte, the Republican Assembly leader at the time, Wilson, Democratic Assembly Speaker Willie Brown and the others quickly agreed to a plan that was half tax increases and half program cuts. Republicans hated Wilson for raising taxes, but he produced a budget that protected key programs and ended the massive shortfall.

Schwarzenegger presented himself to the public as a can-do action figure who would knock heads in Sacramento and bring sanity to a state that had gone off the tracks during Gray Davis' five years. But on the budget, Schwarzenegger, like Davis before, bet wrong that the economic good times would last and overextended the state's spending programs. For all the hoopla surrounding Schwarzenegger's election in 2003, the Terminator has been a timid governor, much like the man he replaced. Neither the Hollywood superstar nor the career politician had the combination of insight, political skill and grit to deal with the mounting fiscal crisis.

Modern California governors operate largely alone. They usually win election as moderates, liberal enough to please those who value infrastructure, education and social services but conservative enough to appeal to business leaders and fiscal hawks. Yet, once in office, they must deal with a legislature full of partisan ideologies. This is the difference between the Pete Wilson years and today. At that time, Republicans and Democrats had competent, experienced political leadership and the GOP had not yet declared war on its moderates. The leadership included Wilson, Speaker Brown and Republican legislative leaders James Brulte and Ken Maddy, both pragmatic conservatives.

However, angry that Speaker Brown dominated the legislature, state Republicans pushed and narrowly passed Proposition 140 in 1990. This established the nation's shortest term limits on assembly and state senate members, six years and eight years, respectively. Unintended consequences abound. Term limits weaken legislative leadership (assembly speakers now serve an average of only two years), accentuate partisanship and make long-term financial planning politically irrelevant. Kousser explains, "During boom times, nearly all of the legislature's leaders know that they will not be in power when the state goes bust, so they have no incentive to save for a rainy day."

In the old system, a veteran legislator could buck the party line and compromise on taxes, spending and the budget. Today, ideological flexibility is tantamount to political suicide. Because of gerrymandering, legislative races are not contested except during the primary when the party's base demands ideological purity — Democrats must be pro-union and Republicans must oppose any and all new taxes. Holding just 29 of 80 Assembly seats and 15 of 40 state Senate seats, Republicans in California have great power even though they are a distinct and declining minority in a heavily blue state. Why? Because of the two-thirds vote rule, GOP legislators can be pure to their principles. Living in a Proposition 13 world, the state Republican Party has little incentive to reach out to the moderates necessary to win a majority in the state house.