California is a fiscal mess: it needs a grand bargain that will never happen

Californians just voted down ballot initiatives whose purpose was to bring fiscal balance to California. While I voted for them, I understand why the electorate (thhe small share that voted anyway) didn't like them. They were poorly worded (as are many initiatives), and still didn't get at the fundamental problems facing California. California ranks fourth in the country in per capita state and local government spending, and yet government services--particularly schools--are disappointing.

But voters themselves are partly responsible for the mess California finds itself in. Proposition 13, passed 31 years ago, leaves California with a property tax system that is inequitable, and a school funding mechanism that decouples funding from performance. Bill Fischel and others have shown that schools funded with local revenues--particularly property tax revenues--perform better than schools that are funded remotely. Because property taxes are so limited in California (one pays property taxes based on the value of a house at the time of purchase, rather than current value), a large share of school funding flows through Sacramento. When people's houses are paying for school, they have a strong incentive to make sure the benefits provided by the schools are larger than the taxes they are paying, lest their property values fall. I have little doubt that one of the reasons California public schools--once among the best in the country--have fallen so far is because of how they are funded (note: using property taxes to fund schools does create a problem for those places where property values are low, so there is a role for some state funding of schools. I will write more about this in another post).

On the other hand, it is also striking how hide-bound and inflexible public employees unions behave in California. When I ask long-term Californians why the state has such large fiscal problems, they almost inevitably list the Prison Guards Union toward the top of the list. When Mayor Villaraigosa suggested that city employees in Los Angeles take pay cuts so that he wouldn't have to lay people off, the unions balked. When I listen to union officials on the radio, it is clear that they place the interests of the median voter in their union above those of the state (this is only natural).

For California ever to return to fiscal stability, it will need to repeal Proposition 13 and reign in its unions. To put it crudely, the right would dislike the first of these ideas, the left would dislike the second. This is why the ingredients of a grand bargain would be to do something about both. Unfortunately, because both have strong constituencies behind them, it is doubtful that anything ever will happen, and California will lurch from crisis to crisis.

Despite this, I like living here...