Time to Run California Like a Business

If California were run like a business, it would be shut down by now. But because it’s run like a state, California continues to operate--without a budget or cash in the bank--by handing out IOUs to employees, vendors and citizens entitled to tax refunds.

So far, the state is getting away with it. As California’s political leaders go on arguing over a budget that just won’t balance, banks are honoring an estimated $2 billion of the state’s promissory notes--which pay 5% interest. They will accept the IOUs until the end of July, which is more than banks would do for a private business with growing debt, a falling credit rating and declining prospects.

A private company in California’s financial condition would have to reorganize--sell some assets, choose which businesses to stay in, which to eliminate.

Ah, but there’s the point: state and local governments increasingly are going to have to make those choices, too. For today’s budget crisis in California and many other states is the last hurrah of old-fashioned public finance, in which governments provide a variety of services financed by taxes and tax-exempt municipal bonds.

Bond markets are growing impatient, for one thing. Moody’s Investors Services last week downgraded California’s bond rating for the second time this year. And the rating agency threatens further downgrades, which would raise the state’s cost of borrowing and reduce values for current bondholders.

“We rate on ability and willingness to pay,” says George Leung, a Moody’s vice president. “And while there’s no question of California’s ability, willingness is another matter.” California’s governor and legislators, Moody’s is saying, are not merely incompetent but untrustworthy.

The charge may be exaggerated, but there’s no denying that California’s political leadership has been dropping the ball for years in bringing new business to the state and in coping with problems that all states must deal with.

California’s crisis is severe but not unique. Most of the 50 states are in poor fiscal condition, and many face tremendous problems. And most of the roots of those problems, let’s be clear, lie with costly and untouchable programs, not with rascal politicians.

We’re talking about costs such as Medicaid, the health- care program for the poor that has become a $100-billion national expenditure, rising 22% a year, with state governments paying half the cost.

On prisons, California spends more than $2 billion a year on jail building and maintenance, a cost made all the more expensive by legislators mandating sentences to demonstrate how anti-crime they are. On education, California pays massively--$25 billion from state and local government on public schools alone--even though school performance is sub-par. California, like many other states, has reached a financial impasse. New ideas are needed. But new ideas are not forthcoming. Instead, the annual budget debate has become a painful exercise of trying to reconcile obligations and resources. .

What is needed is a new understanding of how to cope with the big burdens on state finances such as Medicaid, education and social peace, while at the same time devising ways to pay for many other state goals and programs.

A well-regarded new book, “Reinventing Government” by David Osborne and Ted Gaebler --endorsed by Pete Wilson as well as Bill Clinton and others--offers tips and ideas, but no magic bullets on the big programs.

Health maintenance organizations to reduce health care costs, reform schools for youthful offenders and school vouchers for poor children are all good ideas but not revelations.

Far more interesting, and in tune with ideas emerging in other countries, are the book’s thoughts on privatization.

Highways, for example, can now be turned into toll roads with the blessing of a new law that allows states to combine gasoline taxes with private investment. States can save on road construction and gain annual income from a cut of the tolls.

Similarly, private contractors can run airports, as has been done in Albany, N.Y.--not to mention Toronto and London--with the state gaining annual income that can be used for other purposes such as training its labor force.

New ideas are in the air, but California may not be listening. Proposals for four California toll roads are tied up in lawsuits, from legislators, environmental groups and others. And ideas about contracting airports to private operators have been rejected huffily, as if the Golden State were offended by mere commerce.

Which is ridiculous because California--taking in 600,000 new immigrants annually--can use all the job training it can get. The state has just stood by while BMW, the German auto maker, chose to build a plant in South Carolina--which pledged $20,000 per employee in training assistance. Now, the Audi division of Volkswagen reportedly is considering a U.S. manufacturing plant, but no effort to attract it is likely from California.

In the last decade, the state watched federally funded technical projects on microelectronics and computers, semiconductor technology and even the study of earthquakes go to other states.

For years the state has been getting poorer, and now it may be in real trouble. The issues go beyond any single budget to philosophy of government, which is changing. Just as global competition forced U.S. industry to restructure in the 1980s, so budget pressures are forcing choices to be made about public services and public finance in the 1990s.

One way or another, California must respond.

“We’ll come out of this decade much different than the way we went in,” observes Steven Gold, director of Rockefeller Institute’s Center for the Study of the States. Given today’s budget troubles, that’s a very welcome outlook.