Image: Meg Whitman, Jerry Brown
EPZ  /  AP file
California gubernatorial candidates Meg Whitman and Jerry Brown square off during the second of three planned televised debates on Saturday at California State University Fresno.
By Tom Curry National affairs writer
msnbc.com
updated 10/6/2010 10:49:54 AM ET 2010-10-06T14:49:54

With its mammoth budget shortfall, dysfunctional legislature and 12.4 percent jobless rate — third-highest in the nation — California has been called “ungovernable.” But that reputation hasn’t stopped Democrat Jerry Brown and Republican Meg Whitman from waging a hard-fought race to be the next governor of the tarnished Golden State.

Brown, 72, served as governor 35 years ago and is running again at an age when most men are gardening or doting on their grandchildren. Whitman, the 54-year-old former chief executive of eBay, has spent $140 million from her own estimated $1.2 billion fortune on her quest for the governor’s mansion. They are locked in a tight battle, though the polls released this week showed Brown edging ahead. Whoever wins the election next month will be spending much of his or her time grappling with the state’s spectacular and seemingly hopeless fiscal problems.

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On Thursday, the legislature is scheduled to vote on a budget — 99 days after the deadline to submit it to Gov. Arnold Schwarzenegger. The blueprint, details of which have yet to be announced, must eliminate a whopping $19 billion projected deficit — nearly a quarter of last year’s $84.5 billion budget. And without a budget enacted, bills continue to pile up from unpaid vendors — almost $3 billion for goods or services since the fiscal year began July 1.

Despite the rising tide of red ink, the credit markets and bondholders that could switch off the state’s ability to borrow are unlikely to panic, because the “the prospect of outright default is very small,” said Daniel J.B. Mitchell, emeritus professor of management at the University of California-Los Angeles.

Terry Connelly, dean of the Ageno School of Business at Golden Gate University in San Francisco, agreed, saying those most affected are state vendors, the unemployed and university students. Vendors don’t raise a fuss because they “know they’ll eventually get paid” and don’t want to jeopardize their contracts, while the problems of the unemployed and university students “are not going to send hordes of people to the polls.”

An air of weary resignation
That’s especially true because most Californians tend to regard the state’s precarious finances as a chronic disease that must be tolerated since it can’t be cured.

The malaise dates at least back to 1991, says University of California-Berkeley political scientist Bruce Cain, when pundits questioned why Pete Wilson would give up his seat in the U.S. Senate to run for governor.

At the time, the state seemed as troubled as it does now.

Time magazine published a special California-in-decline issue that year titled "The Endangered Dream." Pessimists, it said, “are ready to conclude that California is over the hill, descending a spiral of environmental, fiscal and social calamities.”

While the magazine’s crystal ball might have been cloudy on some of those forecasts, the financial ills have rained down on the state where it never rains, at least according to song.

The ability of elected officials to control state finances are in part confined by a choice voters made 30 years ago when they passed Proposition 13, which strictly limited property tax increases and required a two-thirds vote of the legislature to raise other taxes.

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Proposition 13 forced the state to rely more heavily on income and sales taxes. But as the Public Policy Institute of California has noted, the income tax is “a volatile revenue source because it relies on a narrow slice of taxpayers (in 2007, the top 1 percent of filers paid 48 percent of the tax) whose earnings tend to fluctuate with the economy.”

That means the state is in dire need of private sector jobs — and the tax revenues derived from them. But at this point, there is no indication that is in the offing. In the 12 months ending in August, California led the nation in the number of jobs lost with nearly 113,000.

But it wasn’t primarily the budget process that got California into financial straits; it was its spending habits.

Habit of robust state spending
California ranked fifth among the states in state and local government spending by shelling out $8,820 per capita in 2007, the last year before the recession and the most recent for which data is available. It also ranked 18th in spending as a percentage of personal income.

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Either way, that spending hasn’t always produced the desired result.

In spending per pupil in public elementary and high schools, for example, California ranked 24th among the states in 2007, according to the National Center for Education Statistics. But on last year’s National Assessment of Educational Progress (NAEP) mathematics test for public school eighth-graders, the state ranked 47th out of the 50 states. On the NAEP reading test, California public school eighth-graders ranked 49th, beating only Mississippi’s students.

But cutting spending is nearly as difficult as raising taxes because the state is locked in by pledges made to public employees.

Video: ‘It’s about time,’ budget negotiators say (on this page)

According to a new study by political scientist Rod Kiewiet at the California Institute of Technology, the state faces the trade-off that most states now do: future public employee benefits vs. current needs. Funding public employees’ pension and retiree health care benefits requires more than $17 billion in annual contributions by the state, according to the Pew Center on the States.

“Four million Californians, or over 10 percent of the state’s population, are currently enrolled in public employee retirement systems. About 60 percent are currently working, 25 percent are beneficiaries, and 15 percent are former employees who will receive some benefits in the future,” Kiewiet writes.

“The number of state government retirees and covered dependents in California has been increasing by about 4 percent a year, a rate which is far more rapid than the growth of the population or labor force.”

How to solve pension problem
The pension problem has emerged as a key point of contention in the gubernatorial race.

Brown has proposed bargaining with state employee unions to raise the retirement age, which can be as young as age 50 for some public employees. 

“We're going to have to negotiate with the different employee groups, we're going to have raise (minimum retirement) ages, we're going to have to raise contributions, we have to stop this thing where they take the last one year and they spike it up and they use that as the measurement for their lifelong pension,” Brown said.

But in their first debate on Sept. 28, Whitman argued that her Democratic opponent would lack the political will to take on a key component of his support base.

"You cannot be beholden to the public sector employees,” she said. “If your campaign is funded by the public employee unions, it's going to be extraordinarily difficult to negotiate.” (Labor unions have donated more than $1.5 million to Brown’s campaign.)

Whitman endorsed raising the eligibility age for retirement benefits, but she also proposed a new retirement model for future state workers. New state hires are “going to have to come in under a 401(k)-style program like everyone in the private sector does today," she said.

Whether Whitman gets a chance to enact her plan depends on how voters react to the news that she employed an illegal immigrant Mexican housekeeper for nine years. The news, revealed at a press conference by attorney and Democratic Party supporter Gloria Allred, came two days before a Spanish-language TV debate between Whitman and Brown on Saturday. Since then three public polls have been released; all show Whitman slumping.

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With battle-weary Californians showing little enthusiasm for either candidate’s plans for shoring up the state’s finances, Brown and Whitman have turned to emphasizing how much they have invested in the state’s future.

Brown points to his lifelong political career as governor, mayor of Oakland and state attorney general, and to his family’s heritage — his father, Edmund “Pat” Brown, was governor from 1959 to 1967.

“My father, when I was only 5 years old, was elected district attorney of San Francisco, and I watched him become attorney general and then governor,” Brown said in the first debate.

For her part, Whitman said she couldn’t stand being on the sidelines watching the state’s descent into financial chaos.

“I love California too much to let it fail,” Whitman said as she declared her candidacy. “And I refuse to sit by and watch it happen.”

Msnbc.com's Alex Johnson contributed to this report.

Video: ‘It’s about time,’ budget negotiators say

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