Tough Love for California.  House Chamber, Washington, D.C.  June 11, 2009  M. Speaker:  Gov. Schwarzenegger of my home state of California has called for the federal government to underwrite as much as $15 billion of Revenue Anticipation Notes that the state has to issue to avoid insolvency.

I think that would be a colossal mistake, and that such an act would not only dig the nation deeper into the hole it is in, but would actually make California’s fiscal condition worse.

 Today, California faces a paradox: despite record levels of spending and borrowing, it can no longer produce a decent road system, educate its children, or lock up its prisoners.

 Those who blame the recession for California’s budget crisis profoundly misunderstand the nature of that crisis.  Even before California’s revenue began to shrink, the state government was running a chronic $10 billion deficit and piling up unprecedented debt.

 The recession is merely the catalyst; the underlying cause is rampant mismanagement of the state’s resources.  California spends $43,000 per year to house a prisoner while many states spend just half that.  California spends over $11,000 per pupil, but only a fraction of that ever reaches the classroom.  California has one of the most expensive welfare systems in the country and yet one of the worst records of moving people off welfare. 

 And that’s never seemed to bother California’s governor and legislature.

 They are like the shopkeeper who leased out too much space, ordered too much inventory, hired too many people and paid them too much.  Every month the shopkeeper covers his shortfalls with borrowing and bookkeeping tricks. 

Ultimately, he’ll reach a tipping point where anything he does makes his situation worse.  Borrowing costs are eating him alive and he’s running out of credit.  Raising prices causes his sales to decline.  And there’s only so much discretionary spending he can cut. 

 That’s California’s predicament in a nutshell.  California’s borrowing costs now exceed the budget of the entire University of California and the reason for the loan guarantee is that their credit is exhausted.  They have just imposed the biggest tax increase by any state in American history and it has actually reduced their revenues and made their budget gap wider.   

 Although there are many obsolete, duplicative or low priority programs and expenditures that the state can – and should – abolish, there aren’t enough of them to come anywhere close to closing California’s deficit without directly impacting basic services.

 Sadly, California has reached the terminal stage of a bureaucratic state, where government has become so large and so tangled that it can no longer perform even basic functions. 

 Simply stated, there is now no substitute for a fundamental restructuring of the state’s major service delivery systems and restoring the efficiencies that once produced a far higher level of service at far lower cost that what we see today.

 Restoring that efficiency will require the governor and the legislature:
• to wrestle control from the public employee unions,
• to dismantle the enormous bureaucracies that have grown up over the service delivery level,
• to decentralize administration and decision making,
• to contract out services that the private sector can provide more efficiently,
• to rescind the recent tax increases that are actually costing the state money and
• to roll back the regulatory obstacles to productive enterprise.

These are changes that cannot be implemented overnight and that will not begin producing results for some time. 

 This brings us to the fine point of the matter.  What Churchill called history’s “terrible, chilling words” are about to be pronounced on California’s failed leadership: “too late.”
 
A federal loan guarantee or bailout may be the only way to buy time for the restructuring of California’s bureaucracies to take effect, but the discussion remains academic until and unless the state actually adopts the replacement structures, unburdens its shrinking productive sector and presents a credible plan to redeem the state’s crushing debt and looming obligations. 

Without these actions, federal intervention will only make California’s problems worse by postponing reform, continuing unsustainable spending and piling up still more debt.

In short, if California won’t help itself, the federal government cannot and should not.