Legislative Muscle

There are plenty of challenges ahead, but Schwarzenegger is a big winner for now.

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Arnold Schwarzenegger aced his biggest test yet as governor, muscling through two propositions designed to relieve California’s whopping budget gap, and by hefty margins. Working with the Democratic legislature, the governor won points for bipartisanship and resolve and gave one more indication that critics who had him pegged as a political dilettante were probably wrong.

Even so, there are plenty of fresh tests ahead, and it’s an open question how long Schwarzenegger and the Democratic legislature can maintain their love-in, especially in the face of California’s considerable — and continuing — financial woes. The Hollywood ending is still a long way off.

The two propositions, 57 and 58, were in effect referendums on Schwarzenegger himself, and they passed by a landslide on Tuesday. Proposition 57, which authorized $15 billion in bonds to help balance the budget, passed by 63 to 37 percent; Proposition 58, which mandates balanced budgets and rainy-day reserves, was approved by 71 to 29 percent. Even with the bond alleviating some of the budget crunch, California will still be anywhere from $7-$12 billion in the red, come budget approval time, July 1.

Talk of Schwarzenegger being a “uniter” isn’t all PR hype; the success of the propositions was a collaborative achievement. The deficit and spending-cap measures were Schwarzenegger’s ideas—after a proposed plan of limiting future spending was roundly rejected by Democrats in the legislature—but they were placed, willingly, on the ballot by Democrats who dominate the legislature. State-wide polls originally showed little support for the props, but Schwarzenegger, aided by the state Democratic Party, environmentalists, and unions was able to win over skeptical voters. And when it looked like support was dwindling, U.S. Sen. Dianne Feinstein, helped drum up votes from Dems.

California Senate leader John Burton said:
“It was a collaborative effort, and it wasn’t the governor alone. If the Democrats opposed this thing, it would have gone in the (toilet).”

But give credit where it’s due. Schwarzenegger accomplished something that Gray Davis never could. The San Francisco Chronicle writes:

“No question: The twin victories were a triumph for Gov. Arnold Schwarzenegger, who sold voters on backing him. He pulled together a bipartisan armada of allies and stuck to his no-taxes pledge, a feat that solidifies his claim as Sacramento’s uber-leader.”

Still, it’s not necessarily going to be smooth sailing for Schwarzenegger from here on out. In fact, getting the propositions passed, as tough as that was, may turn out to be his easiest hurdle. The legislature is split over how to solve the shortfall—that is, inevitably, on whether to raise taxes or reduce spending on popular government-funded programs. As the Los Angeles Times notes, “Aside from their mutual enthusiasm for borrowing, Democrats and Republicans have shown little sign of willingness to compromise on the core conflicts.”

California senator Tom McClintock, a conservative Republican who lost to Schwarzenegger in the recall election, says Schwarzenegger’s success with the ballot initiatives portends
one of two outcomes.

“I think there are two possibilities, and I don’t know which one will materialize. One is that the Legislature has been stunned by the magnitude of the governor’s ballot victories and will be more deferential to his policy reforms. The other is that the Democrats will begin to cash in political chits for wholeheartedly supporting these two propositions, upon which the governor [based] his success or failure.
I don’t know which way it cuts.”

The Los Angeles Times writes that passing the bond measure is all well and good, but it’s just a start. Celebrations need to make way for concrete plans for the budget:

OK, that’s enough.
Now start balancing the state budget. This will be a lot more painful than folding all the old debt into a bond issue.Lawmakers in past years kept shoving off tough decisions, piling up red ink rather than cutting favorite programs or enacting temporary tax hikes. Those shortfalls born of political cowardice are still piling up.

State Controller Steve Westly, who campaigned with Schwarzenegger, said he thinks the governor has strong momentum in California and on Wall Street:

“People are sick and tired of partisan politics. I think there is a sense of momentum out there, not only in the state, but on Wall Street, that the state is getting its act together. That is a big deal.”

Another obstacle is fixing the $29 billion worker’ compensation insurance system—a mammoth program where employers pay to cover workers injured on the job. Businesses say the enormous insurance costs are driving them, and jobs, out of California.

Foreseeing a huge jobs loss, lawmakers are seeking to cut costs, they are focusing on two of the most politically potent portions of the system: lawyers for injured workers, who are strong supporters of Democrats, and insurance companies, who are strong supporters of Republicans — particularly Schwarzenegger.

Unfortunately, all this talk of Schwarzenegger’s ability to draw support will be a moot point if the bond leads where some critics think it will. down the drain. Columnist Adam Sparks writes in the San Francisco Chronicle:

The Terminator is proposing the state’s largest bond in our history. It will have the taxpayers tied up mercilessly for several generations to come.

However, the legislative budget is so out of whack, with current spending $3.5 billion higher than state revenues, that this bond will be obsolete before it’s even passed. In fact, even with the bond’s passage, the Terminator will already have to rely heavily on yet more short-term borrowing to balance just the 2005-06 budget.

The bond proposal is less than a Band-Aid. It doesn’t make the hurt go away, it allows the Legislature to ignore the fiscal discipline it needs and then it punts the current deficit problem to your grandchildren. The kids won’t have to worry about what kind of inheritance they’ll be getting: It’ll be a bill.

Plus, it’s not clear that Wall Street is thrilled about the California bond measure, the size of which is unprecedented. The $15 billion bond is far too big to be sold in one piece, and will be split up into several deals. Most analysts say that, at least, it will hurt the prospects of other states and cities to garner their own deals. The Wall Street Journal (subscription):

[T]he state will now flood the market with what promises to be the biggest municipal-bond deal ever. That has the potential to hurt the price of municipal bonds across the country at a time when strapped state and local governments are tapping debt markets themselves.

The size of the $15 billion offering “will test market capacity,” said Phil Angelides, California’s treasurer, who had opposed the bond measure. It also raised concerns in some quarters about California’s growing debt burden. The state already has about $30 billion in general-obligation bonds outstanding, and voters on Tuesday approved a separate $12.3 billion bond measure to improve schools.

The issuance is so big it could draw attention away from other states and cities trying to raise debt, said Jamie Iselin, a manager at Weiss, Peck & Greer Investments. To sell it and the separate $12.3 billion in education bonds, investment banks likely will have to attract investors from other states, where the bonds have less tax advantage. Buyers outside California wouldn’t have to pay federal taxes on the bonds’ income but could pay a state tax, while California residents wouldn’t have to pay either. Still, “This will push other deals to the side,” or at least make them costlier to get done immediately, said Mr. Iselin.”

But if, for a moment, we look beyond problems with the budget, this sort of bipartisan lovefest, unimaginable under previous governors, certainly represents progress. According to a Los Angeles Times poll, Schwarzenegger’s popularity level is running at 61 percent. (Voters generally have a negative view of state legislators’ performance.)
The margins of support that Schwarzenegger commanded for his propositions show how popular he is, for now, around the state.

And anyway, if he has any trouble with the legislature, he can always take his plans straight to the voters.


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