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Reason Foundation

The Wall Street Journal

Schwarzenegger Gives Up

His effort to reform Sacramento? Terminated.

Shikha Dalmia
August 28, 2006

Arnold Schwarzenegger is following the wrong script. After taking over as governor in 2003, he was expected to vanquish business-as-usual politicians in Sacramento--and pull California from the brink of fiscal ruin. Instead, he has decided to put his own political future ahead of the economic survival of his beloved Golden State. How else to interpret his recent move to join ranks with his opponents in Sacramento to put a pork-heavy $37 billion bond infrastructure proposal on the November ballot?

Mr. Schwarzenegger's move officially marks the end of his grand plans to reform Sacramento, earning him kudos from many California Democrats. Sen. Don Perata, the most influential Democrat in the state Legislature, and Senate Assembly Speaker Fabian Nunez have praised Mr. Schwarzenegger's leadership and pledged to campaign with him this fall to promote the initiative. Making joint appearances with prominent Democrats while he is campaigning for re-election will help cement Mr. Schwarzenegger's image as a political moderate, something he has been trying hard to cultivate in this bluest of blue states since last year. That's when the state's public unions accused him of right-wing partisanship, and defeated the bold reform initiatives he put on the ballot to curtail their influence on state government and politics.

The real issue, however, is what this bond measure will do to California. Few doubt the need for California to invest in its crumbling infrastructure. But this is an infrastructure bond in name only. The four big-ticket items in the bond--which is two times bigger than the biggest bond in the state's history--are $2.6 billion for housing, $10.4 billion for K-12 schools and universities, $3.1 billion for levee repairs and $19.2 billion for transportation.

The housing bond is simply welfare masquerading as a capital project. A bulk of its money won't fund general infrastructure--an acceptable use of general-obligation bonds like these--but such things as cheap multifamily dwellings for low-income families, and down-payment assistance for first-time home buyers.

The education bond is equally misguided, given that 40% of the state's $94 billion general-fund revenues are already constitutionally earmarked for education. Moreover, California voters approved a total of $25 billion for school-construction bonds in 2002 and 2004 to reduce overcrowding. If there is still not enough money for new schools, it is not because of lack of state spending, but abject waste by individual districts. If anything, this handout will encourage more waste by undercutting districts' need to explore the kind of public-private partnership responsible for Inderkum High School in Sacramento being completed a month early and $2.5 million under budget. In this case, a private developer built the school and district authorities used their public dollars to lease the facility from him.

In contrast to schools, California has genuinely underinvested in its levees and transportation. Yet it is unclear that general-obligation bonds that mortgage the wallets of all future taxpayers are the best remedy. To the extent that levee repair, for instance, would benefit mostly those living in the flood plains, at least part of the cost ought to be recovered through special assessments on them.

California has also been routinely raiding the transportation dollars it raises from gas taxes for other general fund needs--a fact obvious to anyone who has ever battled traffic on the San Diego Freeway. Yet only about half of this bond's revenues are slated for actual road building. Instead, $4 billion is going to mass transit even though mass transit's share of commuters, never large, has dropped by 9% since 2000.

Even after the proposed $19 billion transportation bond and the $384 billion in planned transportation spending by the state's biggest three regions (Los Angeles, the Bay Area and San Diego), California's traffic congestion will actually be worse in 2030 than it is today because the state is choosing pork and pet transit projects instead of prioritizing and adding much-needed highway capacity.

There are better ways of generating steady revenues to fund transportation and other needed infrastructure that don't involve giving Sacramento's politicians a ready excuse to dip into the pockets of future taxpayers. Among them, notes Donna Arduin, Mr. Schwarzenegger's former finance director, are things like privately built toll roads and congestion pricing. "These were things that were recommended to him back when he first took office," she says.

It is disheartening that the governor--who claims to have been inspired to enter political life by the small-government ideas of Milton Friedman and Adam Smith--has ignored these measures, especially now when government spending in California is touching the stratosphere. Indeed, despite the fact that California's economy has rebounded after the dot-com bust, pouring $7 billion more than expected into the state's coffers this year, the state's 2006-07 budget still shows a deficit of $7 billion. California has the dubious distinction of being one of only eight states showing deficits instead of surpluses right now.

"That would not have been the case had the state simply held its spending increases to the expected gains in revenues," laments Tom McClintock, a Republican state senator who is running for lieutenant governor this year and who has refused to endorse any of the bond measures except for the one pertaining to levees. "This would have covered inflation, population increases and then some."

The deficit is not all Mr. Schwarzenegger's fault, of course. He deserves much credit for killing Gray Davis's notorious car tax and reforming California's job-killing worker compensation laws, both of which have paved the way for California's economic recovery and generated revenues for the state.

But the bond proposal suggests that Mr. Schwarzenegger has given up on even trying to put California's fiscal house in order--his core promise when he took office. Instead, he has flipped the script, deciding to buy off special-interest groups by throwing even more money at their pet causes.

Ms. Dalmia is a senior analyst at the Reason Foundation. An archive of her work is here and Reason's California-related research and commentary is here.


Shikha Dalmia is Senior Analyst


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