January 23, 2004 - From the January, 2004 issue

State's Economy Will Be OK, Hard Part Is Government Reform

In recent months, a spate of ballot measures have emerged seeking to reform state government and avoid the partisan deadlock and budgetary fiasco that has marred Sacramento over the last few years. Most of those calling for reform are policy leaders, former lawmakers, or interest groups. In this context, TPR is pleased to present the views of Nelson Rising, Chairman and CEO of Catellus. The following is an excerpt from Rising's remarks at the UC Berkeley's Fisher Center for Real Estate & Urban Economics recent policy advisory board meeting.

Nelson Rising

To start my comments, I'd like to read some headlines to remind you of how some of the national media has been covering California. "All Downhill In California: State Budget Woes Continue," "California To Its Creditors: I Owe You." And this is a good one, "California Crumbling: America's once golden state is being rocked by fiscal earthquakes today. The powerful aftershocks will reverberate for years to come, bashing the dreams of millions of residents and changing forever the way they live and work and play." And then, Time magazine even had a special, "California: The Endangered Dream."

However, this was 1991, and the three previous quotes were from 1992. Some things never change. The way the national media portrays California is pretty much that it's paradise, or paradise lost. Things were never quite as good as the national media thought when we were booming a few years ago, and I don't think they're nearly quite as bad as they think they are today. The headlines I just read to you had been said about us in the 1980s, and in 1992, and again today.

We do have an extraordinary ability to rebound. Remember in 1992, the California economy was pronounced dead. Particularly, Southern California paid the peace dividend with the Berlin wall coming down-our aerospace and defense industry was very much in disarray. Yet, here we are ten years later and the Southern California economy has recovered.

My view is that California's biggest strength is that our economy is extremely diverse.

I'm very optimistic we are going to rebound from the recession we were in-I think we're already out of the recession at this point. Our budget crisis is obviously a very big problem, but not a unique problem.

We have other problems as well. In the real estate business, the regulation is incredible. Getting entitlements in California is not rocket science, it's much more complicated than that. So, as we look at the overall problems we face-over-regulation, cost of doing business-they're there. They were there before. They've gotten a little bit worse. The thing that's really different about this year's budget crisis is that it's bigger. But, the issues are still the same. The fact that the budget crisis, at $38 billion, is larger than all state budgets, except for New York's, says that it's a pretty large issue. But there are solutions to that, and the most important solution is the rebounding economy.

But what I want to talk about is not that. The biggest concern that I'd like to focus your attention on is what I call the structural dysfunctionality of our political system in California. There are a lot of things to blame for this dysfunction, but I'll just focus on three: the initiative process, redistricting, and term limits. You take those three things, and you'll see what I mean by structural dysfunctionality.

The Initiative Process

Hiram Johnson and the progressive movement in the early 1900s, in desperation, trying to have some sense of citizen participation over a legislature and an executive branch that was totally in the hands of special interests, created the initiative process. Since that time, we've had probably close to one thousand initiatives. Many of those initiatives-not all-were proposed with noble purposes. People felt that the Legislature and executive were not responsive. And so, initiatives came.

Now we've seen initiatives that have basically, in my view, taken the position of the Legislature. Sometimes, when I go to the polling place and I look at what I'm voting on, I say to myself, "why isn't the Legislature dealing with this issue?" For example, "three strikes and you're out." That deals with our criminal justice system. Maybe, if we had a way to make sure we had judges who were chosen fairly, from the people's perspective, and that we had a Legislature that was doing their job, then maybe they could deal with somebody who had a very minor crime, on top of a very minor crime, on top of a major crime when he was a younger person who should go to jail for the rest of his life. I don't know that the ballot box is necessarily the way to deal with that. And there have been many others.

The left and the right have all participated in various initiatives over the years. But what's happened is that the cumulative impact of those initiatives has reduced the effectiveness and the ability of the Legislature and the executive branch to govern.



Every ten years there's a great event in California-we redistrict. It's done, as you would expect, with the tremendous amount of computer technology we have available to us in California-it's done with laser precision. And the end result is that every seat in the Legislature is a safe seat. Every seat in Congress is a safe seat. I'll give you an example. In November 2002, there were 153 elections. There were 53 elections for Congress, of which 49 were incumbents. Forty-eight of them won by more than more than 10%, and the other won by just under 10%. There's no general election jeopardy. Then we go to the Assembly. There were 80 seats that were voted on, and only14 were decided by less than 10%. In the state Senate, there were 20 seats up, and only one of them was decided by less than 10%.

Through our redistricting process, being a political process, we have created a situation where the members of the Legislature have no general election jeopardy. They have a primary to win, they win their primary, and then they're in. In a society such as ours, with this diverse population, we should govern between the 30-yard lines. It's very tempting, if you're a liberal, to govern from the 30-yard line to the goal line. And it's very tempting if you're a conservative, to govern from the 30-yard line to the other goal line. But, we need solutions in the middle.

Term Limits

Term limits were given to us by the initiative process. And that initiative process said, "hey this is not working, so let's figure out a way to do a quick fix." Another wise man once said, "for every complicated problem, there's a simple solution, which most assuredly is wrong." And so, because people were entrenched and they couldn't be removed by the election process, the simple solution was to put in term limits.

Well, let's look at what that means. A person can be in the Legislature for three terms. That means the leadership of the Legislature will be selected from people who have been there for four years. In other words, the Speaker will be beginning the first day of the fifth year in that body. From the standpoint of the state Senate, the leadership will be in the first year of their second term, which will be four years in the Legislature.

So we have this huge economy-fifth largest economy in the world-and we have a system which has term limits so that the institutional memory does not remain with that body. We have redistricting which has produced a polarized Legislature. And then we have initiatives that have taken away a lot of the flexibility. That's what I call structural dysfunctionality.

Let me just conclude my remarks on this from the standpoint of saying, let's see how those intertwining forces work in the context of this last year's budget. On one of the initiatives, we had basically said that 40% of the budget must be spent on K-12 education. I didn't say, "must be spent on quality K-12 education," it just said we have to spend that amount. There have been other initiatives, including one by our new governor, for a very noble purpose in after school education. But, that takes $500 million a year out of the budget. Is that a good thing? Yeah, I think it's a good thing to support after-school education, but the Legislature today must deal allocate funds to it whether or not they think it's an issue. It's there.

There are other initiatives about the budgeting process. For example, we have a whole series of taxes that are imposed on the people of California that were approved by the initiative process. The Legislature has no control over it. The gas tax can be spent only for a certain purpose, the tobacco tax can be spent only for a certain purpose. So, through the initiative process, we've greatly curtailed the ability of the Legislature or the governor to act.

On top of these challenges, we need a two-thirds vote to approve a budget, joining those great economic powers of Arkansas and Rhode Island as the only three states that require two-thirds of a vote for budget. With a two-thirds vote requirement of the budget, and with about 40% of the budget already committed, and with a polarized Legislature because of redistricting with no general election jeopardy, and with term limits, where the people who are going to be charged with doing this have little experience governing, there is little question that we are structurally challenged.

So, we will rebound from the economy. We will muddle through a lot of these issues, and we will be booming again. People will think we're paradise again, and then we'll have a recession and people will think we're paradise lost again. But in the meantime, now is an opportunity to solve these structural problems facing our government. As a major property owner throughout the state, we have a vary keen interest in what the politicians think and how they act. Through the law of unintended consequences, we in California right now are structurally dysfunctional, and now is the time to address these challenges.



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