Brown’s job gets tougher before he even takes office

Some honeymoon: No sooner had Jerry Brown been elected governor than the state’s budget deficit doubled and turbulence in the financial markets drove up costs for billions of dollars in planned state borrowing.

The events had nothing to do with Brown. But they were a reminder that a leadership change in Sacramento will not necessarily restore confidence that California is on the mend.

Brown’s election has not been greeted in the business world with the applause that came with the recall election that swept a Hollywood action hero into office seven years ago. The state was at the financial precipice then too, but there was a sense that radical change was afoot and that California’s grandeur could be restored.

Now, with the state still teetering, the pundits, the investors, the small-business owners who lament that California has lost its way — falling far behind less troubled economic giants like Texas as an attractive place to live and work — are skeptical that the advent of a new administration signals big improvements on the way.


It’s not so much that they dislike Brown’s outlook or ideology, though many do, but that they wonder if a turnaround is possible no matter who is in charge.

“We’ve become the state that can’t,” said Stephen Levy, director of the Center for Continuing Study of the Economy in Palo Alto. “The question is: Can we become the state that can again? The state that can pass a budget, deal with its water problems, nurture the economy.... The test will be if Brown can pull off what he says he can: tone down the rhetoric, be an effective spokesman for the state and turn California into a place that works.”

When former Gov. Gray Davis was recalled, there was a sense in the financial community that the state’s biggest problem was a leadership failure at the top. Soon after that election, the appetite for the state’s bonds grew. Some of it reflected a national trend, but analysts said then that it was also indicative of investor confidence in the new governor.

A survey of 680 California investors conducted by the Irvine firm Nuveen Investments weeks after Arnold Schwarzenegger was elected found a large majority expressing confidence that he would fix the budget and the state’s economy would improve within a year.


Now, less than two months after the state passed its latest budget on record, there is a broader disregard for California’s governance. It is too soon to gauge investors’ response in any scientific way, but opinion leaders are lukewarm.

“The impact of a particular leader one way or the other doesn’t make much of a difference, at least not immediately,” said Matt Fabian, an analyst with the research firm Municipal Market Advisors.

State finance officials suffered a brief period of heartburn last week when fewer investors than anticipated stepped up to buy short-term state bonds amid a loss of appetite for municipal paper nationally. Such bridge borrowing is crucial to keeping California’s coffers full until the flood of tax receipts arrives in the spring. The state had to set its interest rates higher than planned just to attract enough buyers, costing taxpayers tens of millions of dollars.

The governor-elect’s fixation with process is an encouraging sign to some. It’s the opposite of Schwarzenegger’s initial approach, which was to proclaim himself an outsider who would shake up the government. It was only after he became an insider, years later, that Schwarzenegger began to have some success in fostering incremental changes that he says could help put the state on firmer financial footing.

Those include revisions to the statewide elections system that he says could ease partisanship and a reining in of runaway pension costs. Schwarzenegger also managed to place modest state spending controls on the 2012 ballot in the form of a proposed constitutional amendment.

But Brown is cautioning voters to be patient. He won’t talk specifics, instead stressing the need to build bipartisan consensus, get every lawmaker invested in the budget process and have an honest discussion with the public about options.

“These changes are going to take a long time to implement,” said Christopher Thornberg, a principal at Beacon Economics in Los Angeles. “I have high hopes for Brown. He has pragmatic views. But I am open to being disappointed.”

Even though Californians voted a new party into the governor’s office, they did little to alter the Legislature. No sitting state lawmaker lost a bid for reelection, and six Assembly members advanced to the Senate.


Mark Paul, a former deputy state treasurer and coauthor of the new book “California Crackup: How Reform Broke the Golden State and How We Can Fix It,” is among the skeptics. He said California has “pretty much the exact same Legislature we had before” and a governor-elect who “is on the political spectrum in pretty much the same place as Arnold Schwarzenegger.”

Brown had a testy relationship with the Legislature when he was governor three decades ago, even though it was dominated by Democrats then too: His vetoes were overridden 12 times. No governor has been overridden since.

Now Brown will have to forge a budget while straitjacketed by voter-approved restrictions.

Lawmakers can’t raise taxes to build roads or fix the water system unless they give roughly half the funds to schools. The state must spend hundreds of millions of dollars annually on dance, cooking, music and other afternoon programs for students even as classroom teachers are laid off.

Voters also have required more spending in recent years — on high-speed rail, stem-cell research and satellite monitoring for parolees, adding billions to an already crushing burden. In addition, federal courts have control of portions of the state’s beleaguered and costly prisons.

Voters did do one thing on Nov. 2 that could make Brown’s job easier: They lowered the number of votes he needs in the Legislature to pass a budget. But that standard does not apply to raising taxes, and voters made it tougher to increase fees. They also put new restrictions on how revenue can be used.

Emily Raimes is chief California analyst at Moody’s credit rating agency. Asked if Moody’s has faith in Brown to successfully navigate the budget process, she said: “We’re in a wait-and-see position.”