California Facing Hard Choices--but There Are Choices
A prominent California businessman spoke confidently, at a private luncheon last week, about a resurgence of American industry.
“The outlook for U.S. business in two to three years is good, very good,” said Don L. Gevirtz, chairman of Foothill Group, a Santa Monica-based commercial finance company. “You’ll see so many new products coming from new companies, it will amaze the rest of the world. American business is far ahead.”
Yet on California, and especially Southern California, USC graduate Gevirtz was far less optimistic. He is worried about a lack of cooperation among the region’s many governments and institutions, worried about lack of education and development for the region’s poor. The state budget debacle left Gevirtz, as it left so many Californians, concerned and saddened.
The contrast between confidence on business and concern for California is instructive and may offer clues to solving the state’s problems.
In business, Gevirtz, 64, an entrepreneur who co-founded Foothill in 1969, sees companies coping. They are working off “overcapacities,” he says, assets, operations, staffing levels acquired during the 1980s, often with borrowed money, that make no sense today.
U.S. companies are slimming down, reorganizing into new companies thanks to “$2 billion in venture capital pouring into the marketplace.” The money is there to back intelligent plans and disciplined management, says Gevirtz.
Economists across the country agree with him. “U.S. companies have paid down debt and restored their balance sheets,” says David Resler, the New York-based economist of Nomura Securities. “We will recover in 1993-94, and do very well in world markets,” says economist Paul Getman of Regional Financial Associates, a consulting firm near Philadelphia.
But there is little confidence that California is coping. Instead, the state seems to be reeling from problems. Last year, to balance its budget, the state government raised sales and income taxes--and aggravated an already deepening recession.
Last week, after two months of wrangling, the state adopted a budget that cuts general fund expenditures for the first time in 50 years--a tough call in a recession that has driven the state unemployment rate to 9.8%.
Inevitably, in the Golden State there is widespread talk of the end of the golden era. Gloom is not local; nationally, there is talk of the end of the American Century--a mood captured by Forbes Magazine in a 75th anniversary edition which poses the question: “Why, when we have it so good, do we feel so bad?”
But the point of the anniversary edition, and of California’s reality, is that this need not be the end of anything.
The roots of the state’s budgetary problems lie in an unwillingness, among Californians and Americans at large, to make hard choices.
First, in 1978 California voters approved Proposition 13, which capped the property tax. Perhaps understandable at the time as a voter reaction to rising taxes, the draconian measure crippled local government and hurt public schools. California, which built its modern economy on education, ranked seventh in educational spending in the 1970s. Now it ranks 35th.
But Prop. 13 didn’t stop citizens from demanding government services. Instead, it drove municipalities to borrow, helping to balloon California’s bonded indebtedness to an estimated $130 billion--just as the national government ballooned the federal debt to the highest level in U.S. history.
Washington is the other root of Sacramento’s problem. While the federal government boasted of cutting bureaucracy during the 1980s, it was cynically passing heavy responsibilities onto the states--for Medicaid, for prisons and many other mandated programs. It passed the buck but not the dollars, forcing California’s state treasurer to borrow even more through the municipal bond markets--and in the process lower the state’s bond rating.
The fault lies not in politicians but in ourselves, writes scholar James Q. Wilson of UCLA in the Forbes anniversary issue. “Expectations are that government should have a balanced budget and yet spend more on education, health care, crime control” and every whim of every citizen group.
But now the reckoning has come. Last week, Gov. Pete Wilson effectively lowered expectations in a budget that says the state will begin to live without easy borrowing, or tax increases.
Yet, ultimately, solutions lie not with politicians but with citizens and intelligent judgments. It is not enough to say simply “cut the budget” or “stop big government.” Like a business choosing investments, a state must choose expenditures.
For California, elementary education is both necessary and dividend-paying. The state faces a particular need in the next five years because of growing student enrollments from families new to the state--and to the country. The students are raw material of a future citizenry and work force--or they are future problems. But make no mistake, their fate is everybody’s business.
Gevirtz with his businessman’s eye notes that in some areas of Los Angeles that have suffered neglect, commercial buildings have become worthless because of the threat of crime. The lost value of those buildings affects the value of all.
So choices must be made about what to pay for and what to let go. As with U.S. business, this need not mark the end of an era but the beginning of intelligent planning and disciplined management.
And at a time like this it is well to remember that California was built not on gold, but brains and integrity. This is the state of Gov. Hiram Johnson and the reforms of 1911 that gave California a public service unparalleled in the nation. And it is the state of Govs. Earl Warren and Pat Brown, who built institutions to nurture the opportunities of a growing population.
