Tough Love for California

Statement

Winston Churchill once said, "Americans can always be counted on to do the right thing…after they have exhausted all other possibilities." California's leaders are now putting that maxim to the ultimate test.

A generation ago, California government spent about half what it does today after adjusting for both inflation and population growth. Yet it boasted the finest public services in the nation, including a free university education for every Californian who wanted one.

Today, California faces a paradox: despite record levels of spending and borrowing, it can no longer produce a decent road system, educate its children, or lock up its prisoners.

Those who blame the recession for California's budget crisis profoundly misunderstand the nature of that crisis. Even before California's revenue began to shrink, the state government was running a chronic $10 billion deficit and piling up unprecedented debt.

The recession is merely the catalyst; the underlying cause is rampant mismanagement of the state's resources. California spends $43,000 to house a prisoner while many states spend just half that. California spends over $11,000 per pupil, but only a fraction of that ever reaches the classroom. California has one of the most expensive welfare systems in the country and yet one of the worst records of moving people off welfare.

And that's never seemed to bother California's governor and legislature.
They are like the shopkeeper who leased out too much space, ordered too much inventory, hired too many people and paid them too much. Every month the shopkeeper covers his shortfalls with borrowing and bookkeeping tricks. Ultimately, he will reach a tipping point where anything he does makes his situation worse. Borrowing costs are eating him alive and he's running out of credit. Raising prices causes his sales to decline. And there's only so much discretionary spending he can cut.

That's the state's predicament in a nutshell. California's borrowing costs now exceed the budget of the entire University of California and it is increasingly likely that it will fail to find lenders when it must borrow billions to pay its bills in July.

Ignoring dire warnings, Gov. Schwarzenegger and legislators from both parties earlier this year imposed the biggest state tax increase in American history, including a 14 percent increase in the statewide sales tax (by a penny per dollar). The month before it took effect, sales tax revenues had declined by 19 percent. The month following the sales tax increase, they plunged 51 percent.

Although there are many obsolete, duplicative or low priority programs and expenditures that the state can -- and should -- do without, there aren't enough of them to come anywhere close to closing California's deficit.

Sadly, California has reached the terminal stage of a bureaucratic state, where government has become so large and so tangled that it can no longer perform even basic functions.
Fortunately, we have a model that we know works. A generation ago, it produced a high quality of public service at a much lower cost. It maximized management flexibility and it required accountability at the service delivery level. It recognized that only when commerce and enterprise flourish can we finance the basic responsibilities of government.

Restoring this efficiency will require a governor and a legislature with the political will to wrestle control from the public employee unions, dismantle the enormous bureaucracies that have grown up over the service delivery level, decentralize administration and decision making, contract out services that the private sector can provide more efficiently, rescind the recent tax increases that are costing the state money and roll back the regulatory obstacles to productive enterprise.

Alas, we don't have such leaders and even if we did, the systemic reorganization of the state government can't be accomplished overnight. Restructuring the public schools would take at least a year; prisons at least two; and health and welfare three to five years before serious savings could be realized.

This brings us to the fine point of the matter. What Churchill called history's "terrible, chilling words" are about to be pronounced on California's failed leadership: "too late."

A federal loan guarantee or bailout may be the only way to buy time for the restructuring of California's bureaucracies to take effect, but the discussion remains academic until and unless the state actually adopts the replacement structures, unburdens its shrinking productive sector and presents a credible plan to redeem the state's crushing debt and looming obligations. Without these actions, federal intervention will only make California's problems worse by postponing reform, continuing unsustainable spending and piling up still more debt.

In short, if California won't help itself, the federal government can't and shouldn't.

That's called tough love, but sometimes it's necessary when a prodigal child exhausts every other option and still obstinately refuses to do the right thing.

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