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When The Going Gets Tougher: Unsolved Budget Problems, Pressure To Aid National GOP, To Test Governor Schwarzenegger

By Mark Baldassare, research director, Public Policy Institute of California
This opinion article appeared in the San Jose Mercury News on June 13, 2004

Seven months into the Schwarzenegger era, the political neophyte who left the silver screen for the Golden State's top job continues to wow an adoring public. Recent polls by the non-partisan Public Policy Institute of California showed that an astounding two of three Californians approved of the governor's performance. Perhaps most surprising was that a majority of Democratic voters said they have come to like the man many had mocked just last year as an action hero unfit for the role of state leader.

The reason for the glowing reviews is obvious: Gov. Arnold Schwarzenegger seems to have made all of the right political moves since he entered office last fall promising ``action, action, action.''

In a State Capitol that was infamous for its gridlock -- between the Legislature and the governor, and even within each of the two major parties -- he has already achieved an impressive number of high-profile accomplishments. The winning streak included rescinding the unpopular vehicle-license fee increase and securing hard-won support for the March bond measure to patch the state's enormous budget gap -- first from Democratic leaders and then from the public.

And now, the governor appears poised to execute what might be his most impressive political feat to date -- passing a state budget for the fiscal year beginning July 1 in a timely manner -- something that eluded the governor and Legislature in the waning years of the Davis administration.

But the reality is that Californians' impressions of the governor have changed far more than the underlying conditions of the state. This is mostly because the state's finances remain in the red. Schwarzenegger will have to deal with that reality over the next year -- at the same time he'll begin facing new political challenges. Top among the political hurdles is how to support the GOP president's re-election bid without alienating his Democratic backers, who he will need as allies to really solve the state's enduring fiscal and economic problems.

Without a doubt, the biggest policy challenge for the governor is tackling the budget gap. Indeed, even a public that is currently enthralled with its top leader is also fully aware that fiscal realities may come crashing in on them soon: The Public Policy Institute of California's polling last month showed that three in four residents describe the state's budget gap as a big problem -- unchanged from a year ago -- and as many residents believe the state is headed in the wrong direction as believe it's going in the right direction.

California still has a considerable way to go before solving its problems, and residents know it.

Key Problem Remains
Moreover, some of the governor's quick fixes may soon be in need of repair. The fact that the governor scaled back his proposals for deep cuts in health and human services was a big relief to Democrats, and that he held firm to his promise not to raise taxes was equally important to Republicans. Even the clear losers in the budget battle -- higher education and local governments -- were promised more money down the road if they would accept cuts in the upcoming fiscal year.

But in taking these steps, the governor has not addressed the central problem that the state has faced for several years -- there are still not enough revenues to cover expenses going forward.

Indeed, the independent Legislative Analyst's Office claims that after making deals that led to grudging acceptance by the aggrieved parties, the governor has left the state with a chronic budget gap of roughly $6 billion in fiscal year 2005-2006 beginning next summer, and in every year in the foreseeable future. This not-so-rosy budget-gap assumption is based on the prediction that the mild economic expansion now under way will accelerate only to a moderate pace. While a surprise economic surge could fill the state's multibillion-dollar budget hole, an unexpected economic slowdown would further widen the gulf between spending and revenues.

Worse still, the governor could be a victim of his own earlier success, because balancing the budget will be much more difficult now that vehicle-license fees used to pay for local government have been cut, and because voters in March approved permanent restrictions on future long-term borrowing at the same time that they agreed to float long-term bonds one last time to pay for the current budget shortfall and accumulated debt.

That leaves the state with only two options for returning to the promised levels of funding for local schools, city halls and county governments -- spending cuts in major state programs, or raising someone's taxes. The proposals to fundamentally reform the state's fiscal structure -- such as changing the way that property taxes and sales taxes are distributed -- have been put on hold in favor of political expediency.

The governor's much-ballyhooed fix of the state's troubled workers' compensation system could also complicate efforts to encourage job creation, which is the governor's preferred way to improve the state's revenue picture. The workers' compensation bill that passed in April, after the governor's negotiations with various interest groups, was aimed at lowering medical costs and curbing fraud and abuse in the system.

But so far, the law has failed to do the one thing that businesses wanted most from workers' compensation reform -- to drastically reduce their skyrocketing insurance-policy rates. One way to address this would be to go back to the drawing board to find other, more direct ways to provide rate relief, especially for small-business owners.

Without the cost-cutting element of workers' compensation reform, some employers claim that they will hold back on adding new employees in California, and slower job expansion can only increase pressure for spending cuts or tax increases.

Delicate Bipartisanship
And then there's politics. The Schwarzenegger administration has been widely heralded for its uncanny ability to bridge the partisan divide in Sacramento. GOP Gov. Schwarzenegger, together with his Democrat wife, Maria Shriver, have demonstrated the value of governing through a bipartisan coalition. The broad-based support currently in evidence in the state Legislature and among California voters will only become more important as the governor faces harder decisions on the state's finances, among other things.

The problem is, the governor will be confronting issues in the coming months that may well upset the key Democratic constituencies that have been his recipe for success to date.

One of those issues is a piece of unfinished business. Relations with heavily Democratic Latino voters -- the fastest-growing voter group -- will hinge partly on how the governor handles the issue of driver's licenses for illegal immigrants. Schwarzenegger had promised to look at alternatives to the law that was repealed in December because of his opposition, and include measures that would balance homeland-security concerns with the needs of undocumented residents.

But currently, the negotiations over this issue are reported to be difficult, and progress toward a solution that satisfies all parties has been slow. Lack of progress is likely to feed the lingering suspicions Latino voters have of GOP governors -- a holdover from Pete Wilson's support of Proposition 187, the November 1994 ballot measure that denied public services to illegal immigrants and their children.

The upcoming presidential election in November also poses a series of political risks with little upside for Schwarzenegger. Given his status as the top GOP leader in the nation's most populous state, he will no doubt be called upon to play a role in the Republican National Convention, which will probably endorse a party platform to the right of his own socially moderate views. In the fall, he will be asked to campaign for President Bush, whose approval ratings are seriously declining in California. Then, Schwarzenegger faces the prospect of campaigning for GOP Senate candidate Bill Jones against Democratic incumbent Barbara Boxer, who is a favorite among many of the Democrats who now support the governor.

But if he ignores the Republican ticket on the November ballot, he risks offending the GOP voters who are his staunchest supporters. In these elections, the governor has the unenviable task of balancing his GOP loyalty with his carefully crafted credentials as a moderate and independent voice.

Beyond that, the 14 state propositions on the fall ballot so far are a political minefield for the governor. These include a referendum to overturn a law requiring certain businesses to offer health insurance for workers who are uninsured, and initiatives that attempt to raise state revenues by expanding gambling on Indian and non-Indian lands, adding a 3 percent surcharge on telephone use that would be earmarked for emergency services, and requiring voter approval for any state budget legislation that would reduce local government revenues.

Because of his stature with voters, the governor will not be able to take a pass on the fiscal and economic measures on the ballot. And in taking a position, he will undoubtedly alienate some of the interest groups and voters who are in his corner today.

Harder Work to Come
Meanwhile, the governor's most controversial actions are yet to come. The work that began with his executive order in February, the California Performance Review, promises, in Schwarzenegger's words, to ``blow up the boxes'' and find ways to make government more responsive, effective and efficient.

The program's mission to save costs by eliminating government duplication and bureaucracy could help to reduce the state's budget gap, but it is sure to run into opposition from those whose state agencies and programs are targeted for cuts.

What's at stake is whether Schwarzenegger can make good on his promise to restore trust among voters who are deeply skeptical of business as usual in Sacramento. This effort to overhaul state government may be the best opportunity for him to parlay his current popularity into building a lasting legacy.

While the governor is off to a strong start, there are still many questions about his ability to solve the big policy issues confronting the state. Perhaps wisely, he chose not to spend his political capital the first time around with the budget, and he reaped the benefits of gaining trust and a more collaborative atmosphere than Sacramento has enjoyed in years. But unless the economy makes a miraculous recovery, he's not going to be able to pass on those tough choices again.

The sequel to his first seven months may allow us to judge whether he's not only personable and a good deal-maker, but a great leader as well.


PPIC Statewide Survey: Special Survey on the California State Budget, May 2004

PPIC Statewide Survey: February 2004

Just the Facts: California's State Budget