Can former eBay CEO Meg Whitman save California?

I've always been a fan of eBay -- I've used to sell cars for my family, bought out-of-print sheet music and a studio-quality keyboard, so it's interesting that former CEO Meg Whitman, who has also worked with Bain & Co., Disney and Hasbro, has thrown her hat into the ring to run such an unwieldy state. Many voters have grown apoplectic with Governor Schwarzenegger, who has broken many promises but has basically said, "I can't run again for anything, so what are you gonna do?" So what would she do differently? From a Fortune magazine article:

One reinvention is California, which is more critical to the recovery of the U.S. economy than any other state. Twelve percent of Americans live here. Ten percent of Fortune 500 companies have headquarters here. California's GDP, at $1.8 trillion, makes it the eighth-largest economy in the world. In the past year more people have lost jobs here than in any other state. More homes have gone into foreclosure. More banks have failed. And as Whitman notes, businesses are moving out at an alarming rate, most often citing excessive regulation and intolerable taxes. For top earners, California's taxes are the highest in the U.S. And to what end? California's credit rating is the lowest in the nation.

The other reinvention is the businesswoman who wants to be CEO of the state. Meg Whitman, 52, wasn't born in California - she's from New York's Long Island, and went to Princeton and to Harvard Business School. But she has spent almost half her adult life here. She worked for Disney in strategic planning in the '80s, moved back East, and then returned in 1998 to become CEO of a tiny e-commerce startup. With her big-business knowledge base (from stints at Bain & Co., Procter & Gamble, and Hasbro), she built eBay from 30 employees and $4.7 million in revenue to 15,000 employees and almost $8 billion in revenue.

Her experience growing a large organization and coming to know some of the company's 300 million registered users - 12 million in California alone - fortified her belief that "less government is simply better," she says. She's appalled that California has nearly doubled state spending during the decade through 2008. And she abhors the new budget that Gov. Arnold Schwarzenegger, a fellow Republican and a tarnished model of reinvention himself, muscled through the Democrat-controlled legislature a few weeks ago.

A deal had to get done because California was broke and overdue on $2.8 billion in taxpayer refunds and payments to state contractors. But the new budget that Schwarzenegger signed imposes $12.5 billion in tax increases and $5.4 billion in additional borrowing, along with $15.7 billion in spending cuts...

As for Schwarzenegger, he took office in 2003 after voters recalled Gov. Gray Davis and won reelection in 2006, but he can't run in 2010 because of term limits. His public-approval ratings have tumbled to 38% as he's lost favor mainly with his own Republican Party.

The flailing GOP isn't likely to help Whitman if she makes it past the primary (California's voters are 31% Republican, 44% Democrat). The general election would involve Democratic heavyweights in an era when the party's brand is riding high. The rival nominee could be San Francisco Mayor Gavin Newsom, Los Angeles Mayor Antonio Villaraigosa, or attorney general Jerry Brown, an energetic campaigner who was governor from 1975 to 1983. Brown displays a mix of ridicule and respect when he describes candidate Meg's positioning this way: "'I ran a business. I can buy my campaign. I have zero experience in government. I want to take on the most difficult state government job in America. Therefore, make me governor.' That's her campaign....

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California Governor Schwarzenegger gets serious about budget in State of the State address

As politicians dither and California continues to fight a $42 billion budget deficit, California Governor Arnold Schwarzenegger has requested that lawmakers forgo getting paid until a resolution is reached. From an L.A. Times story:

Describing California's monumental budget deficit as "a rock upon our chest," Gov. Arnold Schwarzenegger broke from tradition in his State of the State address today with a blunt vow not to advance any policy agenda this year other than resolving the state's fiscal crisis.

As lawmakers sat before him in the Assembly chamber, Schwarzenegger said they had put their partisan beliefs above the interests of Californians, and he asked them to forgo own their salaries if they fail to pass the next budget by the deadline in June...

"Addressing this emergency is the first and greatest thing we can do for the people," Schwarzenegger said. "The $42-billion deficit is a rock upon our chest, that we cannot breathe until we get it off. It doesn't make any sense to talk . . . about education, infrastructure, water, healthcare reform and all those things when we have this huge budget deficit."

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The great California fiscal earthquake

Some of you may remember the recall of former California Governor Gray Davis in 2003, soon to be replaced by grunting action start Arnold Schwarzenegger, who swept into office promising reform and conservative ideals. Davis was booted out of office mostly for being blamed for huge spikes in electricity rates -- when energy traders held the state hostage -- but he had also overseen an increase in state spending beyond growth in population and inflation during his term and was viewed as ineffectual.

A friend of mine was a top adviser to Davis at the time, and told me that Davis' biggest flaw was not standing up to his critics and fully explaining his decisions. When Schwarzenegger visited my friend's office and declared it a "perfect place for a (cigar) humidor," he knew things were going to be quite different moving forward.

So were Californians simply (a) unrealistic; (b) immature; (c) clueless or (d) silly to swoon over a well-meaning and likable Schwarzenegger, or were the state's future fiscal crises simply inevitable?

First, a story in Time magazine explains (hat tip: Patrick.net):

As 2009 settles in, California isn't quite the golden state anymore. School districts are expected to lose billions of dollars in financing for improvements and development, and health-care services for the elderly, infirm and poor will likely deteriorate. State employees are facing payroll cuts, unpaid leaves and a hiring freeze. Money for firefighting in parched Southern California is drying up, as is financing for levees in flood-plagued northern environs of the state. And that's just for starters as California faces a budget deficit of more than $41 billion over the next 18 months...

In December, unable to wait for a budget solution any longer, the state pre-emptively canceled $3.8 billion for 2,000 public infrastructure projects, such as new prisons, veterans' homes and highways...

If the state runs out of cash by mid-February, as has been predicted, hundreds of state vendors, such as electrical-supply wholesalers, food-service companies and building- and grounds-maintenance firms, will be sent IOUs from the state government...

California has found itself in this financial quagmire as a result of a perfect storm of events. "It really has been a combination of things that have created the monstrosity that we are now in," says Barbara O'Connor, director of the Institute for the Study of Politics and Media at Sacramento State University. She cites inflation, population growth and mandates (like Proposition 13, which placed a limit on state property rate taxes that resulted in restrictions on tax increases) as having a snowball effect over the course of 30 years. Add these to California's extremely high foreclosure rate and a global recession (approximately 1 in 4 jobs in the state has international-trade ties), and the deficit quickly adds up. In the past, the state would borrow or sell bonds to bridge the gap, but with the current credit crunch, few investors are willing to offer assistance...

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Next, a big reason for the state's quandary is the way in which it creates its annual budget. That's why a group called California Forward is working to institute changes in the budget process. Led by co-chairs Thomas McKernan (CEO of the Auto Club) and Leon Panetta (the former Congressman and Clinton White House Chief of Staff whom President-elect Obama has tapped to head the CIA), they recently commissioned Beacon Economics to produce a report on what lies ahead for the state given reduced income due to the housing bust and the recession.

You can find the intro letter signed by McKernan and Panetta here.

You can find the entire report by Beacon Economics here.

If you're a California resident, I urge you to read this report -- and then contact your local State Senate and State Assembly representatives for your input.