Texas vs. California: The California Conundrum

This is part two of a series examining the economic fortunes of both states.  Read part one here or here.

California, like Texas, has more than its fair share of economic problems.  The difference is that everyone knows about California’s problems; the state has been pretty up front and honest about it, whereas Texas is in complete denial about their issues, to the point of poo-pooing a $27 billion budget deficit.  Because deficits don’t matter, right Dick Cheney?

With current unemployment in California at 11.7% and a state government that’s possibly even more dysfunctional than our national government in Washington it’s hard to see brighter days coming.  But at least the state is realistic about where it is.

Governor Jerry Brown recently signed into law the 2011-12 California state budget.  In it are some pretty painful cuts—cuts necessitated by the Republicans’ refusal to even consider any kind of revenue increases.

Painful all cuts budget

The state budget cuts 22% of funding from the University of California system, and 25% from the California State University system (which means that tuition is going to be hiked again in both systems, after hefty fee hikes in the previous few years).  It calls for a $10 per unit increase in the California Community College registration fees; it cuts $744 million from the state courts; it cuts mental health programs; and a devastating $2 billion cut to MediCal, the state’s Medicaid program, among many other cuts to social and public services.  And of course there’s the closure of 70 state parks, pushing recreation further toward becoming the exclusive domain of the rich and powerful.

K-12 education was spared the axe…….for now.  But if projected revenue increases do not materialize, the budget contains a mechanism to automatically slash $1.5 billion from the state’s education system.

Still, according to the official state budget, education funding is $6 billion below what it was in 2006-07, and that has to change.  Long term the state is going to have to deal with its revenue problem (yes, a revenue problem) in order to restore funding to critical services, such as education, public safety, and public health.

Despite the draconian cuts to both state budgets, the major difference between California and Texas is that a huge majority in the California government realizes that the state’s budgetary shortfalls cannot be solved through cuts alone; that although no one likes paying taxes, they’re a necessary “evil” that must be a part of any reasonable and workable budget solution.  Revenue must be raised in order for the state to function, and for the state’s $35 billion in debt to be paid off.  It doesn’t happen without revenue, and revenue means taxes.

Prop 13:  The inspiration for “legislation by initiative”

Unlike in Texas, where a hard right wing ideology controls the state’s policies on taxation and spending, California is held hostage by its fourth branch of the government:  The voters.  The ballot initiative process that was instituted in California in the early 1900’s as a means to curb the influence of the Southern Pacific Railroad, has in the last three decades nearly completely hijacked the state’s legislature.  What was once a necessary tool to combat the influence and power of special interests in the state, has now become the most effective weapon of special interests.  And it all started with Prop 13.

California, like most states, was heavily dependent on the collection of property taxes as a primary source of revenue.  The property taxes are collected by the state and distributed back to the local governments to pay for essential services, in particular schools.  Texas is no different:  That state is heavily dependent on a higher than average property tax rate for state revenues.

But in the 1970’s, property values in California started to skyrocket.  And since property taxes were levied based on the value of the property, property taxes too went skyrocketing.  This sudden shock to the system did not sit well with California residents, and in 1978, Prop 13 was put on the ballot.

Prop 13 changed the system in a number of ways:  First, instead of setting the tax rates on the assessed value of a property, Prop 13 set a baseline value at which the property could be taxed.  That baseline would be determined by the purchase price paid by the current property owner.  This means that if a property was purchased in 1975, and the purchaser still owns that property today, the baseline property tax rate is the 1975 purchase price regardless of any increase in the property’s value over time.  Any property purchased prior to 1975 was assessed at the 1975 value.

Prop 13 also sets the property tax rate at a fixed 1% of a property’s assessed value, and limits the allowable increase to the rate of inflation or 2%, whichever is less.

Finally, Prop 13 modified the state’s constitution to require a 2/3 majority vote in both houses of the legislature in order to pass a budget or to raise taxes (2010’s Prop 25 changed that, reducing the requirement to pass a budget to a simple majority).  Taxes can also be raised via ballot initiative, but that would also require a 2/3 majority of the state’s voters.  Highly unlikely to happen.

Prop 13 also does not differentiate between residential and commercial property.

The unintended consequences of Prop 13 have been to effectively handcuff the legislature from actually being able to legislate.  Despite the Democrats’ 52-28 advantage in the State Assembly and a 25-15 advantage in the State Senate, they are still two votes shy in both chambers to be able to pass any real fiscal legislation.  It has handed the minority 1/3 more power in the legislature than the majority 2/3.

With a growing state and a revenue stream that was cut off at the knees, and since nearly all of the property taxes collected was filtered back down to local governments, the state had to find another way to reimburse local governments for their expenses.  California had to find new sources of revenue.  Thus the state became increasingly dependent on a state income tax and state sales tax—the very taxes that Conservatives insist are stifling businesses, forcing them to leave the state.

Victimization of California’s schools

California’s schools have suffered the most from Prop 13.  California was once the national model for education and education standards.  The state’s k-12 school system was among the best in the country, and the universities were the envy of a nation.  Today, according to Education Week, California’s schools rank 30^th in the nation for academic achievement (Texas ranked 13^th).

Prop 13 was the beginning of a trend.  Special interests realized that they could bypass the state legislature and enact their own laws by putting them on the ballot.  The result is a lot of new, shiny programs that the voters have placed into law, but no new mechanisms to pay for them.  And since Prop 13 limits the legislature’s ability to raise revenues, the funding has to come from somewhere, and the state’s schools are the easiest target.

Despite efforts to better define them, funding mandates for the state’s schools are a bit murky and open to interpretation, making it easy to pull funding from schools to pay for other priorities.  According to the National Center for Education Statistics, California spends $9,830.13 per student per year on education, compared to a national average of $12,097.91 per student.  That fourth branch of government is stifling the state.  (Texas currently spends even less, tallying $8,047.74 per student.)  Legislators say that they have control of only about 10% of the state’s budget due to the initiative process, so in effect, the initiative process has made defunding schools the only option.

Conservative ideology invades California

One of the ways California was able to survive the implementation of Prop 13 was through the vehicle license fee—more commonly known as the car tax.

As the LA Times’ George Skelton tells us, the car tax went from 1.75% in 1935 to 2% in 1948 “where it remained for the next 50 years with hardly anyone squawking.”  The money was collected by the state, but went to the cities to pay for vital services.  After 50 years of tranquility, Republicans determined that the car tax was no longer tolerable and was stifling the California taxpayer, so Republican governor Pete Wilson whacked it down to 1.5%.

Wilson’s successor, Gray Davis–a Democrat–apparently caught the Republican bug and cut the rate to 1.3%, and then all the way down to 0.65% during the days of a booming California economy.  Then came the hammer:  Rolling blackouts and an economic downturn.  Davis came to his senses and upped the car tax back to 2%.

After successfully supplanting Davis in a recall election after making the car tax a major election issue, Arnold Schwarzenegger immediately busted the tax back down to 0.65%, and as Skelton argues, the state has never recovered.  Local governments depended on those fees, and without them the state had to find another way to reimburse them.

Since then—and because of the cut–the state has been mired in debt, struggling each year (until now) to balance the state’s annual budget through accounting trickeration and sleight of hand.  Had the car tax remained at 2%, or even Davis’ 1.3%, chances are that the legislature would not have had to find other ways to reimburse local governments for lost revenue, and California would not be mired in $35 billion of debt.

Public demands services, but someone has to pay for them

Look, it’s understood.  No one likes paying taxes of any kind.  Taxes are evil and despicable.  Taxes represent the government taking away our hard earned money.  But the thing is people also happen to like the things that taxes pay for an awful lot.  Things like roads; sewer and water systems; clean beaches and city streets; public safety, including the ability to prevent and solve crimes; state parks for everyone to enjoy; and yes, even a high quality college or university education that doesn’t cost a student $40,000 per year in tuition.  We like having clean water to drink and air to breathe.  We like having hospitals.  We like having a place to treat and house severely mentally ill citizens so that they don’t have to walk the streets aimlessly and potentially pose a threat to themselves and to society at large.  The public demands prisons and a criminal justice system to punish criminals.  All of these things cost money, and if the state didn’t provide them, then no one would—at least not at a cost that the average person could afford.

Democrats get this.  Republicans don’t.  But with the legislative rules the way they are, even with overwhelming majorities, Democrats are powerless to do anything about it.  Well, not powerless exactly, but rather not vicious or ruthless in any way that would send a message to Republican districts.  Democrats by and large are for fairness, usually to their detriment.

But there is light at the end of the tunnel.  2010’s Prop 20 changed the state’s redistricting process to remove it from politicians’ hands and theoretically eliminate the gerrymandering that plagued the state and created a huge partisan gulf.  And as mentioned, Prop 25 amended the state constitution to allow the legislature to pass a budget bill with a simple majority, reducing the annual gridlock that prevented an on-time passage of the state budget every year—or sometimes passing one at all.  The state’s primary election system has also been amended, allowing only the top two finishers in a primary election—regardless of party—to advance to the general election.

Slowly but surely Californians are starting to get it.  But there’s still a long way to go.  The state must wean itself off of the insatiable dependence on the direct democracy approach that is paralyzing the state.  The state cannot hold its legislators accountable if they are not directly responsible for the problems and if they are not allowed the tools to fix them.

Let the legislators do the job they were sent to Sacramento to do instead of asking the voters to do it for them.  And if the legislature enacts egregiously unpopular laws, then there’s a mechanism built into the state constitution for the voters to deal with it:  A referendum.  Via referendum the voters can directly voice their disapproval of the actions of the legislature, and California could be governed much more efficiently.

Without the myriad of ballot propositions writing new programs into law, legislators from both parties would then have more freedom to determine how best to use the state’s financial resources.  They would be able to more effectively streamline the government and put money where it’s really needed instead of into programs that are no longer useful but are mandated by the initiative process.  And if the voters don’t care for a legislator’s actions, they are free to make that displeasure known through a process called an election.

To learn more about California’s unusual system of governance, see the April 23^rd, 2011 edition of the British publication The Economist.  You can read the special report main story here, with more in dept insights into what has made the state tick here, here, here, and the story of Prop 13 here.  There are other subscription only portions to the special report.  If you don’t have a subscription, I highly recommend finding the issue in your local library.

 

Texas vs. California: Is the Lone Star State’s economy really that much better off than the Golden State’s?

A preliminary look at the numbers may say yes, but they’re largely misleading, and they don’t tell us the whole story about what’s actually going on in Texas.  That’s not to say that California’s got it going on, though……..

Texas Governor Rick Perry’s flirtation with a run for the White House in 2012 has generated a lot of talk about his state’s economic record during his tenure.  And the numbers cited with his sales pitch are quite impressive, if only at first glance.  In other words, they sure sound good, but really, things aren’t quite as rosy in Texas as Perry and national Republicans want everyone to think.

By now everyone who’s been paying attention has heard or read about the numbers; that Texas has created more jobs than all other states combined in the last five years (an assertion that Politifact rated as only half true).  That out of all of the jobs created in the United States since the official end of the recession in 2009 45% of them have been created in Texas.  Conservatives tell us that Texas’ low tax rates (Texas has no state income taxes, and a 6.25% state sales tax rate), and its business friendly regulatory environment (i.e. there practically are none) have led to a boom of economic growth unparalleled in the rest of the United States.

Texas is doing so well, Republicans tell us, that it should be the model for economic growth for the rest of the country.  Texas is doing it right, they say, and the proof is the number of businesses that have relocated to Texas and the number of jobs created.  And don’t forget that Texas can boast a balanced budget, right?  No economic woes on that front.

California, in comparison, is a mess.  High unemployment.  High state taxes.  Businesses fleeing California in record numbers to escape the regulatory quagmire that supposedly stifles business growth along with those high business taxes.  The long term prospects for California are bleak, whereas the sun shines on Texas every day.

Given all of the assertions above, the California economic model is a disaster and the Texas model is a shining beacon to all.  And taken at face value without any look at the underlying contributing facts, those assertions would probably be right.  The problem is that things are never quite as simple as they seem.  Sure, Texas has some nice statistics to tout, but statistics rarely tell us the full story.  The devil is in the details, and it’s those details that have rained on Texas’ glory parade.

The truth behind the numbers……

The numbers cited sure look impressive, but a closer look tells a slightly different story, and even in comparison to the rest of the economy, it’s far from impressive.

According to the Bureau of Labor Statistics, overall nonfarm employment in April of 2009 in Texas stood at roughly 10,343,000 Texans employed.  Two years later in April of 2011, that number increased to 10,554,000, for an increase of just 2%.  Unemployment in the state in April 2009 stood at 7.2%.  The current unemployment rate has risen to 8%.

Even more damning, though, are the wage figures.  As noted by a story in The American Independent, the figures are not adjusted for the differences in the cost of living, so there is some leeway in the interpretation, but still the facts are not in Texas’ favor:  The average wage in Texas in December of 2007 was $790 per week, or $41,000 per year.  California, in comparison, had an average weekly wage of $850 or $45,000 per year.  The national average at the time was $750 and $39,000, respectively.

Fast forward to today and in Texas nothing has changed.  Average wages are $790 and $41,000, equal to the current national average.  In California the average wage has risen to $930 and $48,000.

Even worse, according to The American Independent story, in 2010 550,000 workers in Texas were working at jobs that paid at or below the minimum wage, or 9.5% of the state’s hourly workforce, tying them with Mississippi for the largest percentage of minimum wage workers in the U.S.  In California the minimum wage workforce tallied in at less than 2%.

Since what economists dubbed the end of the recession in 2009, California has seen its average wage increase by 9.3%, as opposed to a 0.6% increase in Texas.  From 2007 to present, Texas saw a 150% increase in the minimum wage workforce, and 16% since 2010.

Massive budget problems

Despite all of this alleged growth and expansion of jobs and the Texas economy, the state is still facing massive budget shortfalls.  Sure, they tout a “balanced budget,” but they relied on parlor tricks and a lot of help to get there.

Recall that in 2009 Rick Perry had some choice words for the Obama administration about the stimulus program and the “bailouts” to Wall St. and to the states.  He pledged that over his dead body would his state seek a handout from the federal government, and he would not accept any stimulus money from Washington.

But the state was facing down a $6.6 billion shortfall in the 2010-2011 budget, so at the same moment that he denounced the stimulus, he held his hand out and snatched $6.4 billion in stimulus funds, allowing the state to close its budget hole.  The state didn’t raise taxes, and it didn’t have to raid its “rainy day fund” that had $9.1 billion in cash sitting there.  Crisis averted thanks to the American Recovery and Reinvestment Act.

With no stimulus dollars to lean on for the 2012-2013 budget, Texas faced a $27 billion shortfall according to the state comptroller.  And with tax revenues expected to be down by over $15 billion from the last budget term (the Texas legislature meets every two years, and the budget is done in two year cycles), things don’t look to be getting any better.  The legislature already had to dip into that rainy day fund to the tune of over $3 billion to cover an unexpected gap in the 2009-2010 budget.

The remaining $6 billion in the rainy day fund, according to even Republican state lawmakers, is already accounted for in the new budget.

Sure Texas lawmakers will tell us that the 2012-13 budget is balanced, but it took a series of parlor and accounting tricks to get there (and for the record, California Governor Jerry Brown vetoed a budget approved by California Democrats that included similar such gimmicks).

Gone is $4 billion in funding for k-12 education.  There are also massive funding cuts to higher education and public services.  Gone is $10 billion for child support services, even with 25% of the state’s children living in poverty.  The legislature also pushed a due date back by one day of over $2 billion in education funding, rolling that bill over onto the 2014-15 budget cycle.

It is expected that some 50,000 teachers statewide will lose their jobs due to this new budget.  This despite an expected increase in school enrollment by 80,000 students.  Texas is already one of the least educated states, ranking dead last in the nation in the percentage of the population over age 25 who have earned a high school diploma.

The coup de grace, though, is the deliberate underfunding of state Medicaid programs to the tune of $4.8 billion.  It’s a program that Republicans want to do away with anyway, and with a hard right wing Republican dominated state government, why should they fund it?

Texas, by the way, leads the nation in the percentage of its population without any healthcare coverage at all, with 26.8% of the state uninsured.  Not good for the second largest state in the Union.