Arnold's Budget Legacy: The Problem Persists

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"Here's my plan," an earnest Arnold Schwarzenegger said in one of his most detailed TV ads during the 2003 recall campaign. "Audit everything. Open the books. And then we end the crazy deficit spending."

But it wasn't so simple. And now, as one of the most iconic governors in American history bids his farewell, polls suggest that very few Californians think he's fixed the state's dysfunctional budget system.

My detailed look back at the governor's record on the state budget aired on this morning's edition of The California Report. And again, it's far more complicated than the sales pitch the Republican movie star made in the weeks leading up to the recall election of October 7, 2003.



It's important to remember that governors don't, by themselves, write state budgets... a fact that Schwarzenegger found out the hard way more than once. Budgets are the ultimate political compromise, shaped as much by public perception (and blown constitutional deadlines) as they are politics or, occasionally, sensible policy. Accordingly, the budgets that he signed into law didn't always reflect his preferred path forward.

Yet even when budgets seemed to include many items that Schwarzenegger disliked, he proclaimed them to be "fantastic" examples of good governance. And while a governor is only one actor, he does set the budget agenda and wields the ultimate power play: the veto.

Perhaps the best way to examine the Schwarzenegger budget legacy is to start with the macro picture.

For today's story, we used the annual fiscal outlook of the nonpartisan Legislative Analyst's Office, along with some additional LAO number crunching help, to find that the average annual growth rate in general fund spending since Governor Schwarzenegger took office has been 3.3%. That's substantially lower growth than under some of his predecessors, but also a rate ratcheted downward by the global recession as much as his own demands.

(Sidenote #1: While Schwarzenegger's office hasn't offered details to back up the governor's recent statement that average spending growth was only 1.3%, former budget director Mike Genest wrote a recent op-ed that says the average is 2.4% -- a number that appears to be based on the size of the 2003-04 budget after being recrafted by Schwarzenegger and not the budget as it stood on the final day of the previous administration, a perhaps more fair way to understand what existed before the new Guv's tinkering began.)

You can see a chart based on the LAO data here (PDF), a chart with modest growth in most major general fund categories but major growth in two areas in particular: prisons and borrowing. The dilemma in corrections certainly preceded Schwarzenegger, but it was one he was unable to resolve, with a lot of spending in recent years driven by a federal court-controlled prison health care system.

Borrowing, though, is a story unto itself. Keep in mind that the 12.7% increase in the LAO fiscal data actually is limited to infrastructure debt -- some that was pre-Schwarzenegger plus the first costs of the massive bond package the governor convinced voters to ratify in 2006. That figure does not include some of the most hotly debated borrowing: the 2004 Proposition 57 "deficit bonds" that Schwarzenegger cast as "economic recovery bonds," which totaled $15 billion. That debt payment, now ensconced in one of those only-in-Sacramento budget maneuvers (the "triple flip"), reflects a very early decision by Schwarzenegger to embrace and enlarge a deficit borrowing plan from his predecessor, rather than cut spending or raise taxes to the needed levels when he took the oath of office.

The governor's characterization of the borrowing was also unique. "It's not new borrowing, it's refinancing," he said in a February 2004 appearance on a radio talk show in San Diego. But it was, in the end, new borrowing -- so much so that the final $3 billion in "deficit bonds" weren't sold until 2008, long after Schwarzenegger inherited debt. The $15 billion obligation, once expected to be paid before he left office, is now scheduled to be on the books until 2017.

(Sidenote #2: The mechanics of how to account for the Prop 57 bonds in the early budgets may also explain the discrepancy between the LAO and the Guv's ex-budget guru Genest on average spending growth these last seven years.)

Getty/Max WhittakerIt also wasn't the last time the governor would push creative proposals... or explanations. The 2008 pitch to borrow future lottery revenues certainly falls into this category. And while the governor called that proposal a "gift from the future," other times he criticized politicians who he said wanted to delay the day of budget reckoning by always pushing to "kick that can down the alley."

No budget action under Arnold Schwarzenegger was as controversial -- then or now -- as his lowering of the state's vehicle license fee, the infamous "car tax" raised and reviled during the previous administration (which had implemented a cut in the fee that, under yet another administration, was considered temporary). The fee was wildly unpopular, no doubt, but the new governor's action was one for which there was no money.

"At the time he repealed the vehicle license fee increase, there was a $10 billion deficit in the state budget," says Democrat John Laird, former chair of the Assembly Budget Committee. "And that added $4 billion."

The extra burden on state revenues didn't seem to matter by 2006, when an unexpected windfall suddenly evaporated all of the partisan fights and cleared the way for the only on-time budget of his tenure. "I have always said that a budget is much more than just about numbers," said a beaming Schwarzenegger on June 30, 2006. "It is about our values."

But neither Democrats nor Republicans in the state Capitol seemed to fully trust the governor when it came to the budget. Democrats excoriated the governor's annual attempt to reduce spending on health and human services; Republicans lamented that he didn't cut enough, especially in boom years like 2006 and 2007 (the latter being the year in which the governor proclaimed a "zero deficit."')

"We should have controlled spending better than we did," says Republican Roger Niello, a former vice-chair of the Assembly Budget Committee.

And again, the budget was the most significant ongoing fight between the governor and legislators. From labeling them in 2004 as "girlie men" to in 2008 saying the Legislature was a "kindergarten" as a budget crisis was debated, Schwarzenegger never found firm footing with the 120 men and women who comprise a co-equal branch of government. Perhaps it's worth noting that the 2006 on-time budget mentioned above was also one crafted largely by the legislative leaders and not in meetings with Schwarzenegger.

A retrospective look at the Schwarzenegger legacy on the state budget also should include the governor's long-running attempt to impose some new constitutional control on state spending. A 2004 effort turned into a more meager balanced budget amendment ("So watered down that it became meaningless," says GOP ex-legislator Niello) and a "rainy day" fund that even the governor no longer supports; a 2005 attempt became the centerpiece of his special election that ended with his worst political defeat ever; a 2008-09 proposal was rejected by the voters, either because they hated it or hated its conjoined tax increase. This past summer, he convinced legislators to put a spending limit proposal in front of the voters again in 2010.

But reliance on automatic control mechanisms never seemed to square with Schwarzenegger's frequent lamentations on other automatic budget formulas, each approved by the voters (including the one he cut his political teeth on in 2002).

"Don't misunderstand me, I have nothing against formulas," he explained when I asked him about the apparent contradiction in January 2005. " But we should have formulas that make us fiscally responsible."

In that same answer, Schwarzenegger said he was simply "narrowing" the options for elected officials. Earlier this month -- almost six years later -- he lauded other budget restrictions through the years as measures that had "tightened the noose."

Of course, at that same event, the departing governor compared the state budget's woes to "fault lines." Fault lines, as Californians well know, are evidence of destructive natural events that can't possibly be avoided. And the use of that metaphor seems to reveal a lot about the state's most obvious governance problem, one a newcomer thought he could easily arm wrestle into submission in those heady days of late 2003.

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About John Myers

John Myers is senior editor of KQED's new California Politics & Government Desk. He has covered California politics for most of the past two decades, serving previously as Sacramento bureau chief for KQED News and most recently as political editor for KXTV News10 (ABC) in Sacramento. In 2014, he was named one of the nation's top statehouse reporters by The Washington Post. Follow him on Twitter @johnmyers.
  • Suzanne

    I remember when Pat Brown was governor. We Californians had the best education, were leaders in science and innovation, and we took care of our own. I appreciated Jerry Brown’s first governorship, even though he decided to take that unfortunate safari trip. If it weren’t for the passage of Prop 13, he would have ended the year with a surplus in the State’s coffers. His term as Mayor of Oakland improved that city a great deal. I am glad he is coming back as Governor for another term. I was born and raised in California and know what a difficult State it must be to govern because of the diversity of the people and their constant drive to improve and reinvent themselves. But when Arnold became governor, I moved out of California. I couldn’t bear to see my beloved State ruined and/or torn down by this foreigner who had no clue about Californians. His recent attempt to sell State buildings is the absolute lowest! Welcome back Jerry Brown!

  • Alan

    Taxpayers are leaving California and the unemployment rate is quite a bit higher than the unemployment rate in the rest of our nation.

    Taxes are way too high in California and the biggest challenge awaiting the new Governor is to cut spending and cut taxes. Services can be contracted to private companies in order to achieve huge savings.

  • Reilleyfam

    “services can be contracted to private companies” HAAAA! What a crock! Private contractors rip off the govt worse than unions and they just declare bankruptcy and walk away – complete unaccountability. And of course only companies with inside political connections will get the contracts and inflate the prices and rip off. Ask anyone in govt who handles private contracts with vendors about waste, fraud and abuse NOW.

  • Peter

    Alan has a point: The Legislature has to stop believing that they can get away with offering everyone housing, food, health care, transportation and education just because they ask for it. But his two observations are simply ignorant. Cutting off people in the middle of a severe recession who’ve worked their whole lives, just to protect a bunch of greedy millionaires is as stupid as legalizing theft. Secondly, current state law already provides for the use of contractors when it saves money, so there are no “huge savings” available here. Finally, “taxes are way too high” is only true if you think a huge, urbanized, industrial state like California should collect taxes equivalent to Alabama’s or North Dakota’s taxes. California has three of the nation’s ten largest metropolitan areas, borders a lawless country, and therefore does well in that it ranks in the middle for all fifty states in taxes collected per $100 of annual personal income. Nevada has far lower taxes and regulations than California, yet their unemployment rate is worse than ours. Canada has far higher taxes and regulations than the U.S., yet they nearly escaped the Great Recession. Whitman and the rest of the GOP tried to make the same bogus arguments. They know that Bush I and Clinton raised taxes and the economy boomed in the 1990s, while Bush II cut taxes in 2001 and 2003, yet the economy gave us mediocre growth, followed by the 2008 catastrophe. But these people are plutocrats who beat these irrational drums in hopes of enriching the top 1% at the cost of impoverishing the rest of us.

  • BugMeNot

    Taxes are too *low* in California. The ultra-wealthy and big businesses get away with legal theft, using our infrastructure and not paying anything, while the rest of us get soaked to make up a bit of the difference. Meanwhile, the GOP plutocrats have convinced people like Alan that we can get world-class services without paying for them, and that private contractors which are actually more expensive would save the state money. And just as a final way to laugh at us, the plutocrats convinced enough people that tax increases should require an undemocratic two-thirds super-majority to pass, instead of just 50%+1, so that we can’t stop the state from going bankrupt even when we do finally realize that tax increases are necessary.