DATELINE: CALIFORNIA

Back from bankruptcy

Jeffrey Chester October 15 1984
DATELINE: CALIFORNIA

Back from bankruptcy

Jeffrey Chester October 15 1984

Back from bankruptcy

DATELINE: CALIFORNIA

Jeffrey Chester

Just one year ago California was almost bankrupt. The worldwide recession and a taxpayers’ revolt over property taxes had diminished government revenues and crippled the state’s once-healthy economy. The state faced a budget deficit of $1.5 billion. For an 11day period in August, 1983, the treasury was completely out of money and it had to borrow other funds to meet its financial obligations. Despite the financial crisis, California’s new Republican governor, George Deukmejian, 56, was determined to be faithful to his campaign pledge not to raise taxes. Instead, he instituted deep cuts in bloated government programs and he looked for new sources of state revenue. Now after months of austerity Deukmejian’s gamble appears to have paid off. He has transformed the whopping deficit into a projected $l-billion surplus; he has reduced unemployment to eight per cent from a 1983 high of 11 per cent.

When Deukmejian began his fouryear term in office in January, 1983, he

discovered that the state treasury had notified about 100,000 recipients of income tax refunds that they would receive registered warrants—legal ious —instead of cheques. The state’s AA + bond rating—a federal credit rating —dropped to AA. According to state finance director Jesse Huff, the state’s economy had “run into a wall,” and there was a growing realization that desperate financial measures would be needed. Said one state finance official: “Lenders, including rich oil sheiks, descended on Sacramento like locusts, eager to lend us money and take everyone out to dinner. We never ate so well.” The precarious financial situation that Deukmejian inherited was the legacy of the creative but impractical Jerry Brown, his predecessor in the governor’s office. Brown’s Democratic administration was known for its innovation in such areas as alternative energy initiatives and new social services, not for fiscal restraint. Bankers and advisers had warned Brown in 1981 that the state government’s income was dangerously low, that its cash reserves were insufficient and that its good credit rating was endangered. But during his last year as governor, Brown, who was in the midst of an unsuccessful run for the U.S. Senate, ignored the signs of economic trouble. Said Michael Gagan, a chief

deputy state treasurer and a confidant of Brown: “We had gone for over a year without a balanced budget and without any plan. Brown did not want the true picture of our deficit known until after the November, 1982, Senate elections. He did not want to let the cat out of the bag.”

Deukmejian’s response to the deficit was an 18-month “recovery program” of striking austerity. He began by chopping $1.1 billion from the budget that the Democrat-controlled legislature presented to him. While holding to his campaign promise not to raise taxes, he enhanced state revenues by a further $1 billion by closing tax loopholes and by changing fee structures like vehicle permits and university tuition. As well, Deukmejian turned down the Democrats’ demand for new spending. Said the governor’s assistant press secretary, Kevin Brett: “The governor drew a line in the sand. Our revenues in 1982-83 were to be $22 billion, with projected revenues for 1983-84 of $23 billion.” The Democrats wanted Deukmejian to increase taxes and spending but he held the line, saying the extra billion saved would “retire the deficit.” Faced with a painful economic crisis that demanded quick resolution, the Democrats reluctantly agreed.

Deukmejian’s economic program has its detractors. Critics condemn him for his drastic cutbacks in such social services as the home meal program for ill senior citizens and the worker health and safety enforcement program. Others charge that one person’s “revenue enhancements” may be another person’s tax increase. An estimated $18 million came to the state’s coffers from a tax on home video rentals; changes in vehicle licence fees brought in another $120 million; a change in property taxassessment rules netted a whopping $290 million. The governor also increased student fees at California’s public universities and colleges and, for the first time ever, imposed tuition fees at community colleges. Robert Fairbanks, editor of California Journal, an influential monthly magazine on state politics and government, claims that some of those fee increases are really higher taxes. Said Fairbanks: “The adjustment of automobile licence fees was an obvious increase in taxes, especially in this state, where you cannot live without an automobile. In fairness, though, when most people think of taxes, they think of corporate or sales taxes, and he did not raise those.”

Deukmejian’s adept performance won him the praise of the state’s fiscal conservatives, including that of the crusty Howard Jarvis, best-known for coauthoring California’s Proposition 13, a law that in 1978 strictly limited the local

property taxes municipalities and school districts could impose. Said Jarvis: “Every promise Deukmejian makes he keeps—you do not find that many politicians with that much guts.” But the governor’s relationship with the state legislature remains troubled. The Democrats are firmly in control of both the state senate and assembly—as they were during Brown’s administration. Deukmejian comes out of the same conservative mould as one of California’s earlier governors, Ronald Reagan, and he is gaining a similar reputation as a deficit beater, a budget slasher and an

opponent of liberal policy on environmental and social issues. According to most Democrats, Deukmejian has undermined or reversed liberal initiatives on welfare, medical care, air quality standards, toxic waste control and alternative energy development. John Vasconcellos, a leading Democratic legislator, says: “With a $31-billion budget you’d think California could afford to fund water and air environmental protections. The governor’s cuts in our water protection program will mean reducing the testing of drinking water supplies.”

The majority members of the legislature, accustomed to a governor who shares their liberal political persuasion, in January, 1984, refused to approve Deukmejian’s appointment of his proposed finance director, Michael Franchetti. They also withheld the funds that would allow the governor and his family to move into a new governor’s mansion. Indeed, only some of the governor’s programs have survived the legislature’s vote, since its members reluctantly agreed to pass his austerity measures in January last year. Said one legislature staff member: “Deukmejian could not get a Mother’s Day resolution passed here. His attitude is that the legislature is both corrupt and irrelevant, and he will be swept out of office. His staff is incredibly arrogant.” David Roberti, a Democrat from Hollywood and the Senate pro tern president who has been leading his party’s battle with Deukmejian, accused the governor of “a dictatorial approach to adopting programs that does not leave any room for public debate.” Added Roberti: “He does not want to compromise. He just insists that we surrender.” As well, Roberti maintains that the governor’s budget cuts go far beyond the need for fiscal prudence.

In spite of the cutbacks in social programs he has instituted, Deukmejian remains popular with the public, who apparently perceives him as a good manager of the state’s resources during troubled economic times. For California that represents a clear move to the political right and a return to traditional values. According to California Journal’s Fairbanks: “The people of California got tired of flirting with new ideas and looking for the promised land. You do not get the sense that Deukmejian is a prophet, that he has any broad vision to create something new. Instead, he preaches the old, solid virtues—jobs, security, a chicken in every pot.”

The rapid turnaround in California’s finances has also greatly increased Deukmejian’s stature on the national political stage. Two prestigious magazines, Forbes and Time, have praised his no-nonsense approach to politics. At the Republican National Convention in Dallas in August, Deukmejian played a prominent role. Republicans quietly mentioned his name as a possible presidential or vice-presidential candidate in the 1988 election, unless Reagan appoints Deukmejian—a former California attorney general—to the U.S. Supreme Court first.

If, as political analysts believe, California is a harbinger of sentiments and attitudes that will soon be popular in the rest of the United States, Deukmejian’s rising star suggests that the American conservative movement has yet to reach its zenith.