Why California can't be governed

Ever wonder why we Californians seem to have so much trouble governing our finances? Well, it wasn't always this way, and, as a 7th generation California native, I can personally attest to a huge variety of changes, instituted in large part by a populace that moved from *other* areas to then impose their own will on the rest of us (such as freebies for everyone but no way to pay for it).

Being lucky enough to be born when I was, I enjoyed a solid public education, a safe neighborhood, friends and neighbors who shared similar values, an enviable infrastructure and a state-supported university system that was among the best of the world.

When it changed, it just wasn't due to Prop. 13, although that was the start of it. I remember joining my family to protest the proposition (my first foray into politics), and when a cigar smoke-smelling Howard Jarvis waddled by and told my brothers and I, "Why don't you go home and learn to read?" I'm sure he didn't realize that home schooling would become the savior for many of today's families.

The L.A. Times has an opinion piece on what ails California, and it's a quite instructive. From the article:

After Proposition 13 passed, then-Gov. Jerry Brown and the Democrat-dominated Legislature realigned -- "tangled" would be more accurate -- the relationship between state and local governments by effectively shifting control of remaining property tax revenue to Sacramento. In a crisis atmosphere, they radically transformed California's political landscape, taking power and responsibility for health, welfare, schools and other local services away from city councils, boards of supervisors and school boards, thereby establishing today's chaotic maze of overlapping jurisdiction, which defies efforts at accountability...

Proposition 13 also ushered in an era of ballot-box budgeting, as fiscal initiatives became a favored special-interest tool to take control of public fund expenditures. A series of post-13 initiatives -- including measures creating the lottery, financing public schools by mathematical formula and earmarking revenues for special programs, from mental health to medical care -- established an exquisitely complex state budget calculus that has hamstrung the rational operations of government...

The once-a-decade process of redrawing political maps based on the census has created an increasingly partisan Capitol atmosphere. Reapportionment has become essentially an incumbent protection effort, as lawmakers craft districts that are either safely Democratic or safely Republican. In this way, the crucial contests are party primaries, not the general elections. Because primaries draw the most partisan voters, the most conservative Republicans and the most liberal Democrats tend to win the nominations that guarantee election in November. The dynamic locks in ideological polarization in Sacramento, where lawmakers have little motivation to compromise...

Despite the claims of backers, the 1990 term-limits initiative did not get rid of career politicians -- it simply changed the arc of their careers. Instead of spending decades in the same Assembly or Senate district seat, legislators position themselves for the next office -- or job as a lobbyist -- as soon as they arrive in Sacramento...

Since Proposition 13, state government has become increasingly dependent on volatile sources of revenue -- the sales, corporation and progressive personal income taxes -- that generate annual shifts in tax collections corresponding closely to the business cycle. When economic times are good, as during the dot-com and housing bubbles, money pours in and there's little political incentive -- in fact, term limits create a perverse disincentive -- for long-term financial planning. When revenues contract, the Capitol has rarely made real spending reductions, preferring to wait for the next boom...

California is one of only three states requiring a two-thirds legislative vote to pass a budget, one of 16 requiring a two-thirds vote to raise taxes -- and the only state to require both. The budget requirement has been in the Constitution since the New Deal; the tax restriction began with Proposition 13. In the polarized atmosphere of Sacramento, the two-thirds rules effectively hand a veto to the minority party. Under these conditions, stalemate and deadlock on key fiscal issues have become the political norm...

In the next few weeks, a blue-ribbon commission is set to recommend sweeping changes in the tax system to stabilize revenue collections. Voters last fall approved Proposition 11, which takes away the Legislature's power to draw its own districts in favor of an independent commission. Next year, as they elect a new governor, Californians also will vote on a system of "open primary" elections aimed at aiding moderates, and they also will probably decide on one or more initiatives to dump the two-thirds budget vote requirement.

California Forward, a bipartisan good government group financed by major foundations, is crafting proposals to conform government systems and processes to modern management methods. And the business-oriented Bay Area Council is pushing initiatives for a state constitutional convention, the first since 1879, to wipe the slate clean and build a new, rational structure for state government.

When will the housing market rebound?

I was recently asked by Beacon Economics and the State of California Controller's Office to write an article on the timing of a housing rebound for their monthly Summary Analysis Report, a .pdf of which you can find here. Here are some excerpts:

Following multiple months of dire news on California’s housing market, more recently a combination of factors are starting to show the beginning of stabilization in the state which has practically defined sub-prime lending gone sour and greedy speculators reaching beyond their means. While the real estate market is certainly still bad – and is likely to remain so through the end of 2009 – there are some definite signs of hope for 2010 and beyond.

First, the bad news. After a temporary dip in foreclosures during the last quarter of 2008 due to moratoriums and procedural changes in the way lenders handled loan defaults, by February of 2009 the combination of default notices, auction sale notices and bank repossessions in California rose to nearly 81,000 properties – the most of any state and representing a 5% increase from January.

When compared with February of 2007, foreclosure activity spiked up by 51%, with auction sale notices alone skyrocketing by nearly 180%. And, whereas the percentage of loans in California entering foreclosure had been far less than those for the overall country as recently as the first quarter of 2007, by the end of 2008 the ratio had flipped, or 1.36% (California) versus 1.01% (U.S.). Furthermore, the ratio for loans already in foreclosure in California leapt from just 0.17% in the middle of 2005 to 4.19% by the end of 2008 – nearly 100 basis points above that of the U.S. (3.3%)...

At the same time, no matter how many incentives home builders pile onto sales contracts – estimated by one of the country’s largest public builders to exceed $50,000 – they’re still finding it almost impossible to compete against substantially discounted existing homes, over half of which are foreclosures...

Even with pricing declines of $100,000 from the 2006 peak to under $350,000 for a new home by the end of 2008, that median sales price was still nearly $100,000 higher than for both existing single-family homes and condominiums. Consequently, sales of new homes have continued to steadily decline, reaching just over 10,000 units in the fourth quarter of 2008 – a drop of 73% since the peak reached during the second quarter of 2006...

Still, there do remain a couple of wrinkles for a sustained housing rebound. One is that banks, wanting to avoid further depressing prices, have been sitting on foreclosures and only doling them out to the marketplace in small amounts. Should they release a larger group of properties at once, prices could fall further – although that could encourage even more buyers to snap up the new discounts...

Another concern is the much-heralded S&P/Case-Shiller Index, whose primary flaw (like all housing indices) is its inability to accurately gauge the quality of its paired home transactions. For example, if a home that sold at the peak of 2006 sells again as a gutted, semi-destroyed foreclosure in 2009, the decline in value speaks more to structural changes in the home itself than an accurate reading of the local marketplace. Consequently, some critics contend that this index can over-state swings in the marketplace -- especially price declines -- and magnify equity losses in areas with greater foreclosures...

Yet even the Case-Shiller Index is showing a flattening of price declines, and that’s because buyers are starting to show up with visions of low mortgage rates and potential positive cash flow. Finally, as the programs initiated by Realtor groups, home builders, and the federal government begin to gain traction -- and as lenders have learned which loan modifications work best --we may see a slowing of foreclosure activity and a rebound to a more market-based housing market sooner rather than later. But patience is still warranted.