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Reason Foundation

Los Angeles Times

What Schwarzenegger Didn't Do

Evaluating the governor's first year

George Passantino
October 8, 2004

One year ago Thursday, amid record-setting budget woes, California voters did the unthinkable and recalled a sitting governor with extensive public experience, replacing him with a celebrity. So how do things look now?

Clearly, Gov. Arnold Schwarzenegger has fought hard to attract jobs and economic development to the state. He has traveled to other states, recruiting businesses to come to — or return to — California. He also vetoed a number of bills that would have further undermined the state's still-recovering economy, including a minimum-wage increase. Perhaps most important, he resisted tax increases.

Moreover, Schwarzenegger demonstrated how his popularity and celebrity can help shape policy. By threatening to run a ballot initiative that would dramatically alter the workers' compensation system, he cajoled the Legislature to compromise and adopt a number of needed reforms.

However, efforts to restore the state's fiscal stability have not been as successful. The legislative analyst's office still estimates the state budget deficit to be at least $6 billion for each of the next two years. And although the Wall Street credit agencies have increased the state's credit rating (something that wouldn't have happened without the recall), California's ratings are still among the lowest in the nation.

Adding to the downside, Schwarzenegger's attempts to implement a watertight limit on spending died in the Legislature, though voters did approve important limits on borrowing.

Schwarzenegger's "to do" list for the coming year must make terminating the state's ongoing fiscal crisis his No. 1 priority. For starters, he should focus on overhauling the state's organizational structure and reeling in an out-of-control state personnel system.

You don't have to dig very deep to understand why the state's structure needs to change: California maintains four separate tax-collecting entities — a job that could be done by one.

In another illustration of the state's wasteful duplication, the Department of Personnel Administration and the State Personnel Board have spent taxpayer dollars and several thousand legal hours over the last few years battling one another in court over which entity has authority for various aspects of the personnel process.

The recent 2,500-page California Performance Review identified $32 billion in potential savings over five years, including eliminating more than 100 boards and phasing out 12,000 government jobs through attrition and retirements. Now that the plan has been evaluated at public hearings across the state, the review commission will meet Oct. 20 to assess the suggestions. Once the report is in, the governor should quickly implement a comprehensive reorganization plan.

Schwarzenegger will also need to focus on fixing a personnel system that grew rapidly under Gov. Gray Davis and continues to reward everyone. The California Performance Review panel found that more than 99% of state employees eligible for a "merit raise" received one — meaning actual merit is not rewarded. The governor should pioneer new ways to motivate public employees through actual merit-based pay systems, empowering them to cut bureaucratic red tape.

The city of San Diego's underfunded pension plan has grabbed national headlines recently. To avoid a similar crisis in the state's pension system, Schwarzenegger can revamp it by following the lead of the private sector and shifting away from expensive and risky "defined benefit" plans that pay a guaranteed, formula-driven wage to retirees.

Moreover, Schwarzenegger should make it clear that he will veto any new pension benefit increases until the system is on stable footing.

To ensure the state's future, Schwarzenegger may need to continually leverage his broad public appeal to pressure the reform-phobic Legislature into action. For now, he needs to set his sights on long-term solutions to the state's continuing budget deficit and fiscal crisis. After all, that's what the recall was all about.

George Passantino is director of government affairs at Reason Foundation. He served as a director on Gov. Arnold Schwarzenegger's California Performance Review.


George Passantino is Senior Fellow


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