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Propping Up California’s Budget

September 1, 2010
by John Wildermuth
an upside-down image of houses

The hugely popular Proposition 13 has had a cascade of unintended consequences.

Nobody ever called Howard Jarvis elegant or subtle. He was a gruff, curmudgeonly sort from the Republican political grassroots who had no problem saying what he meant, loudly and often profanely.

When he pushed Proposition 13 onto the ballot in 1978 over the objection of virtually every politician in California, Jarvis made no bones about his goals. He wanted to slash the soaring property taxes that were threatening to price many seniors out of homes they had lived in for decades and then make it harder for politicians at every level to raise taxes again.

Jarvis, his sometime associate Paul Gann, and their supporters called Prop. 13 one of the biggest reforms in the history of the state. It passed with 65 percent of the vote, and, to the cheers of millions both inside and outside the state, California’s tax revolt was born.

But 32 years later, the Jarvis-Gann initiative is being blamed for everything from the gridlock in the Legislature and the soaring student fees at California’s public colleges and universities to police cuts in Oakland and land-use battles in Los Angeles. There’s a continuing call to fix that reform.

It’s not that easy.

This November, the state’s 17 million registered voters will be asked to decide on the usual lengthy list of complicated ballot measures, each billed as a desperately needed step toward a new and improved California.

Whether it’s legalizing marijuana (Prop. 19), ending the two-thirds vote requirement to pass a state budget (Prop. 25), or adding $18 to the vehicle license fee to support state parks (Prop. 21), the overriding message from the supporters is the same: “Vote Yes and only good things will happen.”

But since voters don’t carry a crystal ball into the voting booth, how can anyone know what effect a ballot measure will have 5, 10, or 30 years down the road? It’s not that reforms, ballot measures, and other political initiatives won’t work as advertised. The concern is that they also can have wide-ranging and unexpected effects years in the future.

“Did Prop. 13 do what it was intended to do? Clearly, yes,” said Joel Fox, who worked closely with Jarvis and is founder of the Fox and Hounds website (for which the author is a contributor). “It kept people in their homes and slowed the growth of taxes.”

Jarvis, however, also expected that the business of government would go on much as it had before, with local governments learning to live within their new, sharply reduced means, perhaps with a bit of help from the state. But when cities, counties, and schools were suddenly faced with the need to slash social and health services—including libraries, school programs, and public safety jobs—then-Gov. Jerry Brown not only used the state’s multi-billion-dollar surplus to help make up for that lost property tax money, but also joined with the Legislature to set up new rules that kept local government looking to Sacramento for help.

“In Howard’s mind, tax money would be dispensed the way it always had been in the past,” Fox said. “Howard never intended to shift so much power to the state.”

But in government, as everywhere else, money brings control. Since Sacramento was now paying the bills, it also began making the rules, eroding the strong home rule provisions that have long been the basis for government in California.

That’s the last thing the conservative older voters who were Jarvis’s strongest supporters wanted to see, said Henry Brady, dean of the Goldman School of Public Policy at Berkeley. “If they knew how Prop. 13 was going to destroy local control over local spending, they would have been shocked,” he said. “These are people who were very invested in the idea of local control.”

The unintended consequences of Prop. 13 have had a cascade effect. Land-use policies changed as cities looking to shore up their budgets stopped promoting residential development, which requires them to provide costly local services, and began battling their neighbors for car dealerships and sprawling malls and retail projects, which bring in increasingly precious sales tax dollars.

With the Jarvis-Gann initiative slashing property tax revenue, California was forced to rely more on the state income tax to cover the bills, which brought problems of its own, Brady added.

Since money from the income tax rises and falls with the economy, substituting that volatile source of revenue for the far more stable property tax opened the door for the boom and bust cycle that has whipsawed the state budget for more than a decade. “That cycle lets the Legislature spend money when it’s there, even though they don’t want to make cuts when it’s not,” Brady said.

With the state holding the purse strings, the governor and the Legislature decide each year who the budgetary winners and losers will be. And with more services demanding their own slices of that limited state pie, the losers tend to be programs and institutions that have someplace else to look for money.

In the case of the UC system, students are that other source of income. Between 1990 and 2008, state support for UC dropped by 40 percent on a per-student basis. During that same period, student fees rose from $2,540 to $5,040.

Looking back a little farther, in 1985 California public universities together received about 11 percent of the state’s General Fund expenditures. For the 2009–10 budget year, it was about 5.7 percent.

Another thing Jarvis likely never expected was that groups and organizations looking to preserve their share of state funding would use his own ballot-initiative tactics to guarantee their place at the front of the pay window.

In 1988, school groups pushed through Prop. 98, which requires a minimum percentage of the state budget be spent on K–14 education. As groups supporting such worthy causes as early childhood education, mental health services, after-school programs, and stem-cell research followed suit, ballot-box budgeting became an increasingly important part of both California’s political landscape and its financial predicament.

It’s enough to make public-finance experts throw up their hands in frustration.

To get the state’s financial system back in reasonable running order, “all the things that make California unique need to go, including term limits, property tax limits, and direct democracy,” said Alan Auerbach, a professor of economics and law at Berkeley. “They’re all crazy.”

But what may seem crazy from a public policy view looks very different when seen through the lens of politics. While politicians would like to picture California government as a fine watch, with each piece of its workings operating together in perfect synch, it’s really more like a Rube Goldberg device, where if you bump into the front end of the contraption, a very different result can take place at the other end.

In a state as large and complicated as California, unintended consequences of political actions are virtually guaranteed, especially as time goes by. And efforts to reform the reforms can bring unexpected troubles of their own. Yet “reform” is the mantra of virtually every politician in California, especially in an election year when all signs suggest voters are fed up with the status quo.

Calling for reform is a guaranteed applause line for any politician because, after all, who doesn’t want the state to work better, politicians to be more honest, and the budget to always run in the black? But while every politician, inside California and beyond, eagerly embraces the idea of reform, they all have very different ideas about what those reforms should be. And voters, busy with their own lives, don’t have time to navigate the ever-shifting sands of partisan political debate.

“There’s a consensus among voters that California is broken,” said Thad Kousser, a political science professor at UC San Diego. “But there’s not much consensus on a solution.”

That consensus is essential. Reformers can have the best ideas in the world, but it doesn’t matter if they can’t find a way to convince voters or legislators to enact them. “In the end, you need to get that 50 percent plus one,” added Kousser. “You’ve got to attach reform to things people care about, like telling them that eliminating the two-thirds budget requirement can mean more money for the University of California.”

Any plan for reforming the budget system has to start with the understanding that voters, now as then, like Prop. 13 and what it’s done for the state. A June 2008 Field Poll, done with the assistance of Jack Citrin, director of the Institute of Governmental Studies at Berkeley, found that 30 years after Prop. 13 was passed, and despite growing concerns, 57 percent of Californians would vote for it again, compared to 23 percent who would oppose it.

“Proposition 13 is incredibly popular with the people of the state,” Brady said. “You can talk to people about how the two-thirds rule on taxes is hurting the state’s finances and they’ll just say ‘That’s great.'”

That’s why in 2008, when the governor and the Legislature appointed a commission of politicians, business people, and academics and told them to put together a “21st Century tax structure” that, among other things, would “promote the long-term economic prosperity of the state and its citizens,” the first decision made by the commission was not to touch Prop. 13. Or why last year, when backers of a proposed state constitutional convention talked about making ground-breaking reforms to the way California is run, they also took any discussion of Prop. 13 off the table. Or why November’s Prop. 25, which would end the nearly 50-year-old rule for a two-thirds state budget vote, also promises right in the title that it “Retains Two-Thirds Vote Requirement for Taxes.”

But just because reform is difficult does not mean it can’t be done, and the state’s grim financial situation could help make it happen.

Shortly after Barack Obama was elected, Rahm Emanuel, his chief of staff, looked at the country’s desperate financial situation and suggested, “you never want a serious crisis to go to waste.” Although he was paraphrasing a 2004 statement by Stanford economist Paul Romer, the point is clear: It often takes dramatic troubles to convince people to make dramatic changes. That’s what happened in 1911, when voters, worried that politicians in the pocket of Southern Pacific were ignoring their interests, took a leap of faith and backed Gov. Hiram Johnson and the progressives, who promised to shake up the way California was run.

It occurred again in 1978, when voters ignored the frantic warnings of politicians from Gov. Jerry Brown on down and placed their bets on Howard Jarvis and Prop. 13.

A crisis can work the other way, too. In 1994, a California Constitutional Revision Commission was appointed while the state was in a deep recession. But two years later, when the commission’s final report was released, the crisis had ended and the state’s economy was on the upswing. Without the same desperate need for change, legislators could push those reform proposals aside without fear of voter complaints.

Bill Hauck, president of the California Business Roundtable and head of the revision commission, learned his lesson. “Changes have to be made in the middle of a crisis, not after the crisis is over,” he told a 2009 Sacramento meeting on government reform.

The national economy may be slowly improving, but California is still mired in recession and likely to lag behind the recovery of the rest of the country. That gives the state a window for reform.

But Californians looking for some reform magic that will keep state coffers endlessly filled at no cost to taxpayers will need to face reality. “In 1960, California’s average income was 135 percent of the national average,” Brady said. “Today it’s 105 percent or almost right in the national middle. Now we need to decide whether we want to lose those services we had 50 years ago when we were a rich state or do we want to pay to have those services.” That nod to reality should include rejecting solutions that might sound simple, useful, and logical, but could in the end make a bad situation worse.

In his January 2010 State of the State address, Gov. Arnold Schwarzenegger called for a constitutional amendment that would require the state to spend more on higher education than on prisons. He wanted a 7 percent maximum on corrections and a 10 percent minimum on universities, almost the reverse of the current numbers. “Spending 45 percent more on prisons than universities is no way to proceed into the future,” the governor pleaded. “What does it say about any state that focuses more on prison uniforms than on caps and gowns?”

It’s hard to disagree with the sentiments, but Schwarzenegger’s plea is, at its roots, another call for the type of ballot-box budgeting that has made it so hard to both corral the deficit and send California’s limited resources where they are needed most.

Locking up 10 percent of the budget for UC and CSU, combined with other earmarks like Prop. 98, “would constrain spending choices for over half the state budget,” said a report by the Legislative Analyst’s Office, which recommended the proposal be shelved. “This could make it more difficult for the Legislature to shift funding to cover new cost demands in other areas that may be a legislative priority….”

Schwarzenegger’s proposal is an example of how the business of government has been turned on its head. In Auerbach’s view, many state problems could be solved by letting legislators and the governor do the job they were elected to do. “The only option is to put more trust in government,” he said. “California actually has a reputation for good governance. As much as we like to complain, we’re not Illinois, we’re not New York, we’re not Louisiana.” But in a July Field Poll only 16 percent of California voters believed the Legislature was doing a good job and 79 percent were convinced the state was careening in the wrong direction. So trusting the people driving might be too much to ask.

There are plenty of suggestions for budget reform making the rounds in California. Besides the measures on the November ballot, California Forward, a nonpartisan public-interest group, has been circulating a list of reform principles in the hope of having the Legislature take them up.

Tax reform groups are talking about putting a measure on the 2012 ballot that would call for a split property tax roll and allow more frequent reassessment of commercial property. San Francisco Assemblyman Tom Ammiano has introduced a bill, AB 2492, that would make it easier to determine when a business has changed ownership, which triggers reassessment under Prop. 13. And throughout the state there’s a growing feeling that it’s time to do more than put another short-term bandage on California’s gaping budget wound.

“There are no easy answers,” former Democratic Assembly Speaker Robert Hertzberg and businessman Thomas McKernan, co-chairs of California Forward, said in a May letter to legislative leaders. “But the current crisis does provide California with the opportunity to finally address the long-neglected need for lasting and fundamental budget reform.”

In 2005, philanthropist and venture capitalist Noel Perry founded Next 10, a nonpartisan effort to get Californians to think about the future they want for their state. Earlier this year, he joined with the Institute of Governmental Studies at Berkeley, the Bill Lane Center for the American West at Stanford, and the Center for California Studies at Sacramento State University to put together a new website,, as a one-stop shop for information on reform in the state.

The introduction to the website gives Perry’s reasoning: “Every route to meaningful reform will depend on informed and motivated voters like you agreeing to turn good ideas into reality at the ballot box.”

But even with widespread agreement on the need for a California 2.0, an upgrade to the way its government is run, there are plenty of people, both in and out of politics, who fear the upheaval those changes will bring. It means “upsetting public institutions,” Hauck said in the 1996 introduction to his commission’s recommendations. “The advocates for the status quo are more numerous and better organized than those who will support these needed changes.”

The very fact that there’s a continuing discussion about the need for governmental reform shows that there’s interest. California’s ongoing budget crisis and the statewide anxiety it has provoked can provide an impetus for hard-won change, even if it’s done incrementally. “Muddling through with a group of piecemeal reforms might be the best we can hope for,” said UCSD’s Kousser. “I can’t list one thing that would completely change politics and government in California, but I can list four or five little things that taken together would make a big difference.”

John Wildermuth is a long-time California political writer.
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