Going For Broke

Using the initiative process, Californians have fiscally handcuffed their governor, legislature and local governments.
November 2003
John E. Petersen
By John E. Petersen  |  Columnist
John E. Petersen was GOVERNING's Public Finance columnist. He was a Professor of Public Policy and Finance at the George Mason School of Public Policy.

The recall election and its heavy rhetoric aside, California has a fiscal crisis for which the voters in that state are largely responsible. California, so often a national trendsetter, provides a cautionary tale on taking direct democracy to an extreme. Using the initiative process, Californians have, over the years, handcuffed and marginalized their governor and legislature, not to mention local governments. The fiscal implications have been painful up to now. Today, they are disastrous.

Once celebrated for its efficient government, moderate taxes and excellent schools, the state through the 1970s and into the late 1980s had almost-consistent AAA ratings from all three credit rating agencies. With numerous budget deficits in the 1990s, the state's rating began to sink, and California is now the lowest-rated state in the nation. Standard & Poor's, for instance, gives it a BBB. Another notch drop and the credit markets may close down the Golden State's bonding ability.

The economy has had a hand in the rocky nature of the ratings, but the credit agencies are clear about the self-inflicted sources of difficulty. The requirement that there be a two-thirds majority of the legislature to adopt a budget has led to a dysfunctional tyranny of the minority. In the closing hours of this year's budget passage--a $100 billion budget that had a big $12 billion hole in it--the deficit was increased when, to get the budget passed, the majority of the legislature had to, in effect, buy off two Republican lawmakers by awarding them increased spending in their districts. The irony, of course, is that the minority Republican Party has been staunch in pushing for budget cuts instead of tax increases.

Another structural problem has been the corrosive impact of term limitations. The vision was that this populist notion would do away with the professional politician. One would see farmers laying down their plows to go to Sacramento for a short stint to bring government back to the people and stave off the special interests. Just the opposite happened, of course. Politicians lost interest in long-term impacts (since they would not be around to see the consequences) and, upon election, looked forward to the next office rather than doing a job worthy of staying elected to the present one. And, of course, the knowledge gained by experience and the need to develop friendships across the aisle went by the boards. The only stability in government (not to mention the money for enormously expensive campaigns) is to be found in the special interest lobbies, the role of which was elevated by the term limits of the increasingly irrelevant legislators.

To the quagmire of legislative dysfunction has been added the undisciplined amending of the state constitution by the initiative process. This is perhaps the most destructive device ever invented in the name of accountable government. Again, California suffered the curse of unintended consequences. When originally enacted, the initiative was meant to wrest government away from the big corporations that had a stranglehold on the state legislature. Until the early 1910s, U.S. senators were elected by the state legislatures, and the "progressive era" brought reforms in many states to rein in the power of the wealthy on state legislatures. As accountability improved, the initiatives for constitutional amendment by direct vote fell into disuse.

By the 1970s, fears of big government and high taxes gathered steam. Proposition 13 in 1978 led to a severe limitation on the real property tax and set off an avalanche of changes in California government. It also sparked a firestorm of initiatives, many directed at limitations on taxes and spending, while often imposing new programs that required funding. In California, the number of initiatives spiraled from nine in the 1960s to 61 in the 1990s. Even as the state plunged into deficit, yet another initiative--Proposition 53--was on the October recall ballot. It required that 3 percent of the state's general-fund revenue be spent on infrastructure. It lost.

But as a result of all the other micro-managing referenda, the governor and the legislature have control over maybe 15 percent to 20 percent of the state budget. The rest is locked up in mandated spending. The history of these ballot measures, ranging from guaranteed minimum spending on schools to maximal "three strikes" sentencing of criminals, shows a march of forced allocations of the state budget that are not matched with ways to pay for them. Talk about kids in the candy store.

The California tale shows what happens when the hard-headed notions of fiscally responsible and business-like government run head on into enshrined notions of grass-roots democracy and a popular distrust of the politicians. The resulting jury-rigged structure of weak government and electoral indiscipline fashion a toxic fiscal cocktail when they're mixed with a volatile economy and deeply divided, highly partisan politics.