San Diego Business Journal

Political Will Could Shape State's Major Reform
Politics: Recall Makes Even Skeptics Feel That Change Is Finally Possible

BY HOWARD FINE

It's a refrain that's been heard over and over, first during the budget crisis and now in the recall campaign: California's political and government system is broken and in dire need of change.

A huge budget deficit, a gridlocked Legislature, an out-of-control workers' compensation system, the list goes on. As the recall campaign heats up, candidates from Arnold Schwarzenegger to Arianna Huffington are saying they want to fix state government. In announcing his candidacy on "The Tonight Show," Schwarzenegger said he wants to "pump up" Sacramento.

Easier said than done.

What's ailing California is a toxic combination of electoral restrictions, a quirky budget process, an inability to agree on the need to slash spending or raise revenues , even if only temporarily , and the tendency of legislators to enact laws that impose additional costs on businesses.

To fix the system will take a sustained effort in three major areas.

One is the electoral process, tackling such areas as party primary elections and the reapportionment process. Another is fiscal reform: making changes to the state's budget process, taxation system, and state and local government finances. The third area is improving the state's business climate.

Numerous road maps already exist: several studies and reports have been issued over the years on fixing various aspects of state government, including a major report on revising California's constitution issued in the mid-1990s. The challenge is to muster the political will to make the changes outlined in these and other studies.

In normal times, the political will has not been present. But, with the unprecedented recall election coming on the heels of the largest-ever budget deficit in state history, these are not normal times. And that gives hope even to the skeptics that changes can be made.

"If you had asked me six months ago, I would have said the political will is not there to do many of these things. Now, with this recall, the tectonic plates underneath California's government are shifting. Things that were not possible before are now becoming possible," said Stephen Frates, senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College.

He should know, having served on the California Constitutional Revision Commission, which issued a lengthy report in 1996 recommending dozens of changes to state government.

Much depends on who becomes governor after the Oct. 7 recall election. If an outsider like Schwarzenegger is elected, then some see more of a chance for significant reforms.

"There is a very deep anger out there among the people. It's aimed at the governor because that's the only available target right now," said Bill Hauck, president of the California Business Roundtable, who chaired the California Constitutional Revision Commission. "If someone were able to tap into this anger and channel it, that could be a very powerful force for making these long-stalled changes."

Hauck and others who have studied state government say the window for significant change is likely to be small. Once the economy picks up again or a new governor's honeymoon period wears off, public anger may subside and the status quo re-establish itself.

Consider the Constitutional Revision Commission Report, which was commissioned during the depths of California's last fiscal crisis in the early 1990s but wasn't completed until 1996. By that time, the economy was booming again and all but a handful of the three-dozen recommendations were shelved.

The need for reform is most apparent in the electoral process , specifically the 2001 redistricting of state legislative districts in which legislators themselves carved out areas with heavy majorities for the party of the incumbent.

"When you've got districts that are 70 percent Democrat or 70 percent Republican, it leads to extremists from both parties dominating the Legislature," Frates said.

Taking the reapportionment process out of the hands of legislators and giving it to a bipartisan or nonpartisan commission would remove the temptation for legislators to draw districts to preserve their own tenures.

Open Primaries

Another often-discussed proposal is opening up party primaries so that Democrats and Republicans wouldn't be restricted to their respective candidates. California voters passed such a measure in 1996, but the Democratic and Republican national committees sued, saying it restricts the ability of a party to choose its own candidates. In 2000, the U.S. Supreme Court overturned California's open primary.

Now, state Controller Steve Westly and former Los Angeles Mayor Richard Riordan are exploring ways to open the primaries that would pass court muster.

Then there's term limits. While resoundingly popular when passed in 1990 as a way to stem career politicians, the law's effect over the past decade has been to lower the level of experience in the state house, especially when it comes to complex issues like the budget.

While California voters have repeatedly rejected attempts to overturn term limits, many business and civic leaders believe voters will support a measure that makes some adjustments.

"The real problem is the six years in the Assembly," said Bob Stern, president of the Center for Governmental Studies in Los Angeles. "That's just way too short a time to build up experience."

While many proposals have foundered, Stern and others believe that a carefully crafted measure that limits lawmakers to a total of 14 years in the Legislature may pass muster.

"You can open up the choice of whether to serve all that time in one house or the other," he said. "That would allow some people to build up 10 or 12 years' experience in the Assembly or the Senate."

Tangle Of Revenue

On the fiscal front, topping the list of proposed reforms is reducing the threshold for legislative budget approval from two-thirds to 55 percent. An initiative to do just this is circulating for the March 2004 ballot, although Republicans and anti-tax groups oppose it.

Other steps that could be taken: making the budget process two years, requiring a reserve of at least 3 percent of the general fund, and re-instituting spending caps. Spending caps are likely to encounter the most resistance, particularly from Democrats and their traditional allies in education and among public employee unions.

"We need to keep spending in line with revenues and spending caps are an essential tool to do this," said former state controller Kathleen Connell, who is now an L.A.-based investment adviser.

This can be a tricky process. One of the main factors in the current budget crisis was the sudden run-up in income taxes during the dot-com and stock market bubbles of the late 1990s. Instead of either putting these revenues into a reserve fund or spending them on one-time projects, legislators began or expanded government programs, thus committing those one-time funds to permanent programs.

One solution is to broaden the state's revenue stream, primarily by extending the sales tax to services or by altering Proposition 13 to allow greater taxation of business properties. Both steps would run into substantial opposition from business and anti-tax groups.

Local governments, meanwhile, have long complained that whenever the state gets into financial trouble, it taps into their revenue streams to help balance its own books. That happened in the early 1990s as the state took nearly $3 billion in property tax revenues and diverted them to fund education. It happened again this year, though on a smaller scale, as the state kept $1 billion of the vehicle license fees destined for local governments.

An even larger problem is that since the passage of Proposition 13 in 1978, local governments have become more reliant on sales tax revenues, which has sparked competition for auto malls and big-box retailers at the expense of housing and manufacturing. But attempts in recent years to wean cities off this dependence on sales tax , through revenue-sharing or revenue-swapping proposals , have sparked fierce resistance.

Workers' Comp

On the business climate front, there is near unanimity on the most immediate need: extensive reform to the state's workers' compensation system, which has seen costs explode in recent years thanks to a shakeout in the insurance market, continued run-up in medical costs, an unwieldy claims system and recent benefit hikes.

"Fix workers' comp and I believe a lot of the complaints about the business climate will go away," said Rod Kiewiet, professor of political science at the California Institute of Technology.

A package of reforms that would place limits on fees charged by medical and chiropractor clinics is working its way through a bicameral conference committee. But business groups say that won't be enough to stem the rising costs of the system.

"We need to fix the way we handle permanent disability benefits, vocational rehabilitation and especially reduce litigation in the system," said California Chamber of Commerce president Allan Zaremberg.

More broadly, a major complaint is the perception of an anti-business bias in the Legislature. Business groups say this bias is demonstrated in the repeated willingness to pass major new mandates on business, such as the paid family leave bill last year.

But many of these programs are popular with voters and not likely to be scaled back.

"Businesses may complain about some of these requirements, but voters have told legislators they want programs like a generous family leave policy," Kiewiet said.

A pickup in the economy would make it easier for employers to absorb such costs. But rather than stimulating business development, the state Legislature has recently moved in the opposite direction. The just-concluded budget deal suspends the manufacturer's investment tax credit and reduces other tax credits for business.

Also, state Democratic leaders recently proposed scrapping the hike in vehicle license fees and replacing it with an increase in income taxes for those in the highest tax brackets. Many small business owners file their business taxes on their personal income tax reforms and would thus be hit by such a hike.

Zaremberg said the guiding principle of the Legislature should be, "First, do no harm." Then, progress can be made on other more long-standing issues, like reducing lawsuit abuse or streamlining regulations.

Daunting Task

Enacting even a small portion of these reforms is a daunting task, no matter how serious the current crisis in state government.

"These changes would have upset every status quo interest in Sacramento," Hauck said, referring to the 1996 report. "No doubt today those same interests will rise up to oppose such measures."

The key question therefore is whether the popular anger now aimed at all things Sacramento will be enough to overcome these entrenched special interests, including public employee unions, trial lawyers, lobbyists and the elected officials themselves.

Pivotal to that effort will be the ability of someone to go around the special interests and appeal directly to voters.

"If someone not tied into the special interests that now dominate Sacramento , an outsider like Schwarzenegger for example takes over in the governor's post, then that person will be able to come up with some bold ideas," Stern said. "If there is resistance to those ideas, then he or she could use the initiative process as a bludgeon to force the Legislature to act."