California, heed mess in Argentina

May 28, 2003

Sacramento Bee

By David Abel and Rick Cole -- Special to The Bee - (Published May 28, 2003)

Don't cry for us, Argentina. California is following its own path toward political and financial meltdown.

Argentina's newly elected president faces a debt burden so crushing that three of his predecessors have come and gone in the last two years. California's recently re-elected governor faces a recall while trying to pass a budget before the state runs out of cash this summer.

Argentina's tragic ruin is full of colorful drama. But with less flair, California's leading actors are setting the stage for an equally unhappy ending.

Last year, California floated $12 billion in bonds to fund electricity purchases, the equivalent of taking out a mortgage to pay your utility bills. The state hocked tobacco settlement funds, borrowed from trust funds and used other gimmicks to "balance" last year's budget. Last month, the Legislature approved pension bonds, which is like borrowing money on your house to put money in your retirement account. Now, another $10 billion bond is proposed to cover debt.

Goldman Sachs warns this is "the financial equivalent of a high-wire act" that could require ever more debt to pay debts coming due. No wonder state Finance Director Steve Peace admitted: "The problem is not over once the budget is passed."

It's been the same for 25 years. When Sacramento failed to deal with the growing revolt against soaring property taxes, voters approved Proposition 13 to slash them by nearly two-thirds. To evade the political consequences of dire service reductions or raising other taxes, a bipartisan bailout was arranged.

In the quarter-century since, both parties have failed to establish a fair and stable system to pay for California's public services. All we've had is crisis management, crass opportunism and unintended consequences.

In January, Gov. Gray Davis vowed to veto any budget that didn't reform state finances.

"Every crisis presents an opportunity for change," Davis said. "We would be failing in our duty to those who elected us, however, if we pass on the tough decisions and do nothing to permanently fix what we know to be broken. As California leaders address the fiscal crisis now before us, we must seize the opportunity to develop a new fiscal blueprint for California. We must design a new foundation for meeting the needs of an already changed California."

Now Davis says reform must wait until after a budget is passed. Then what? After mortgaging their future, Argentines awoke to find their democracy paralyzed, their fate in the hands of bankers. We ignore their example at our peril.

Californians must demand a new direction: fundamental reform this year.

What kind of reforms are needed?

* Financial stability that protects basic services from riding a roller coaster.

* Tax restructuring for a 21st century economy.

* Protection of local government revenues, including a swap of volatile sales taxes for property taxes.

* Fiscal sanity to stop long-term borrowing for short-term operations.

* Budget accountability to make tax and budget decisions by majority rule.

* Sensible planning to curb sprawl and spur investment in housing, education and transportation for future prosperity.

* Government consolidation to eliminate obsolete fiefdoms.

Sacramento shelves are stacked with expert reports proposing long-overdue reforms. The time has come to write them into law. Similar reforms are actually working in other states, but California, once a model, has fallen behind. Since 1978, our leaders have failed to put our fiscal house back in order. Now is the time to stop squandering our wealth and potential -- before it is too late.

David Abel chaired the Speaker's Commission on State/Local Finance, which issued its report in 2000; and the Speaker's Commission on the California Initiative Process, which delivered its report in 2002. Rick Cole is the city manager of Azusa, in Los Angeles County. He can be reached at rcole@ci.azusa.ca.us.