In 1999, then-Gov. Gray Davis was considered a potential vice presidential pick and future presidential prospect. In 2007, supporters of Arnold Schwarzenegger suggested a change to the Constitution so the Austrian-born governor could run for president. Within two years, both were fighting for their political lives.
It was the stock market. The points at which Davis and Schwarzenegger garnered national attention corresponded with bull markets – 1999 was the peak of a 50 percent increase in stock prices, and 2007 a 40 percent rise. When stock and other markets rise, so do California’s tax revenues because the state taxes capital gains at very high rates. That gives governors extra money to hide problems, avoid cuts, promote new programs and reap high approval ratings.
But when bull markets inevitably end, California’s revenues decline – and so do the poll numbers and national aspirations of its governors. They must make painful budget cuts and raise taxes. The stock market drop after 1999 crushed Davis’s standing and led to his recall in 2003. The 2008-09 market crash soured Californians on Schwarzenegger.
Now in 2015, Gov. Jerry Brown has been the beneficiary of an even bigger bull market, up more than 60 percent since he took office. Once again California has record revenues, the governor is popular, and commentators are pitching that governor for president.
But what happens when this bull market ends?
Brown doesn’t have to be a victim of the same pattern that felled Davis and Schwarzenegger. But to avoid that fate, Brown and the Legislature have to act now to solve four core budget issues: employee pensions, health care costs for retired employees, explosive growth in Medi-Cal spending and a tax system overly dependent on unpredictable revenues.
All four problems have worsened since Brown took office, so much so that even the bull market hasn’t been able to hide all their consequences.
Despite a 25 percent increase in revenues, spending on most state services is lower than before the Great Recession, crowded out by Medi-Cal, pensions and other retirement costs. Unfunded retirement obligations have increased more than $40 billion, portending even higher spending on retirement costs down the road. Medi-Cal’s share of spending has grown 35 percent since Brown took office and now consumes one-sixth of the budget. The state is more dependent than ever on unpredictable capital gains.
The four problems are hard to solve. But not solving them is even harder on the public. After their bull markets ended, Davis, Schwarzenegger and lawmakers imposed cuts and increased fees that hurt our most vulnerable citizens. They had no choice because neither they nor their predecessors had addressed these issues.
So far Gov. Brown has pursued the same approach. But the next bear market will inflict even greater damage because the problems have grown bigger.
All bull markets end, but that doesn’t have to mean an end to effective state government. As Brown and the Legislature finalize the budget, they should consider these points. It’s time to break the cycle.
David Crane, a former economic adviser to Gov. Arnold Schwarzenegger, is a lecturer and research scholar at Stanford University and president of Govern For California, an advocacy group.