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Whitman Facing Brown for Statehouse Tests Anti Government Mood

She’s a billionaire businesswoman who says she wants to cut taxes and regulation to create jobs. He’s a career politician who says government is key to energizing an economy with a 12.4 percent unemployment rate.

The race between former EBay Inc. Chief Executive Officer Meg Whitman and former Governor Jerry Brown is a battle over how to manage the state with the most people, biggest economy and worst credit rating. Whitman, the Republican nominee, and Brown, the Democrat, will debate for the first time tonight in an election that underscores the fiscal tensions in U.S. states following the longest recession since World War II.

“In the years ahead, domestic politics everywhere is going to be about subtraction rather than addition,” said John J. Pitney Jr., a professor of American politics at Claremont McKenna College in Claremont, California. “California just got to the future first.”

The gubernatorial candidates agree the state is in trouble, with revenue that doesn’t keep up with spending and a polarized legislature that has yet to vote on how to fill a $19 billion budget gap, three months after the spending plan was due. State worker pension liabilities are underfunded by $42 billion, and the jobless rate is almost three percentage points above the nation’s 9.6 percent. California’s choices may be followed by other states with deficits, including Illinois and New York.

“California has historically been a policy leader,” said Scott Minerd, chief investment officer at Guggenheim Partners LLC in Los Angeles, which oversees more than $100 billion. “If it turns conservative and starts cutting taxes and spending, we’ll see more of that nationally.”

Limiting Taxation

With about 17 million registered voters, more than 20 percent of them independents, the state has been a proving ground for politicians and ideas. The first female speaker of the U.S. House, Democrat Nancy Pelosi, represents a district in San Francisco. Richard Nixon was a representative and senator from California and Ronald Reagan a two-term governor before they rose to the White House. Proposition 13 in 1978 set off a national wave of other tax limitation measures.

Whitman, 54, and Brown, 72, are opposites in background -- and in spending, at least on their campaigns.

Whitman is the biggest self-funded political candidate in U.S. history, having put $119 million of her own money into a race she has been running for more than a year, according to California Secretary of State records. Brown has a war chest of $28 million in contributions and didn’t air his first television ad until early September.

Climate Change Debate

A graduate of Harvard Business School, Whitman worked for companies including Walt Disney Co. and Procter & Gamble Co. before joining San Jose, California-based EBay in 1998. Her primary run against state Insurance Commissioner Steve Poizner was her first political outing.

Brown, attorney general since 2006, is the son of two-term governor Edmund G. “Pat” Brown. The younger Brown served two terms himself, first elected in 1974 at age 36, and was Oakland’s mayor for six years.

The race is a toss-up, according to RealClearPolitics.com, a website that averages the results of multiple polls, with Brown leading by 2 points. In a similar statewide match, three- term Democratic Senator Barbara Boxer is in a too-close-to-call contest with former Hewlett-Packard Co. CEO Carly Fiorina, RealClearPolitics says, with Boxer also 2 points ahead.

Of the eight statewide initiatives on the Nov. 2 ballot, Brown has said that one crystallizes the divide between him and his opponent: Proposition 23, which would stop enforcement of a landmark global warming law until the unemployment rate fell to 5.5 percent. The statute gives the state the power to establish programs to cut to 1990 levels emissions of carbon dioxide and other gases that scientists have linked to climate change.

Stalemate in Sacramento

Whitman, who has called the climate change law a “jobs killer,” says she would suspend its implementation for at least a year, though she doesn’t support Prop 23. Brown says the law propels job creation and underscores how government can work.

“Long-term economic growth requires investment in education, infrastructure, our environment and our kids,” Brown wrote in a budget plan he released on Sept. 16. “We can err by cannibalizing state and local government at the bottom of a recessionary cycle.”

The recession that began in December 2007 has only begun to ease in California’s $1.8 trillion economy, where the number of unemployed increased by 81,000 through August this year compared with 800,000 in the same period last year.

Its notoriety for stalemate in Sacramento predates the economic slump, and last week the state broke its record of 85 days without a budget.

‘Most Volatile’

The biggest U.S. issuer of municipal debt, California has missed its constitutional deadline to have a spending plan by the July 1 start of its fiscal year in all but four of the last 20 years. Budgets and tax increases require approval by a two- thirds vote, a so-called supermajority neither party can muster.

Standard & Poor’s rates the state A-, its fourth-lowest investment grade and the lowest among its peers.

The extra yield investors demand on 10-year California bonds fell from 1.53 percentage points above AAA rated municipal securities Dec. 9 to 1.19 percentage points yesterday, Bloomberg Fair Value Index data show.

“California is probably the most volatile municipal credit market,” said Thomas Dalpiaz, senior vice president at Advisors Asset Management Inc. in Melville, New York, managing $250 million in municipal bonds. “If you’re going to buy them you have to make sure your clients can withstand the headlines.”

‘We Live Here’

Whitman would get legislators to pass budgets with a law forcing them to forfeit pay, expense accounts and reimbursements if they didn’t act on time. Brown says he would employ old- fashioned political arm-twisting.

“California is not on our buy list right now,” said Brent Thomas, a money manager at Capital Performance Advisors in Walnut Creek, California, which has $700 million under management. “Even though it should be. We live here.”

Whitman, who says government’s job should be to encourage innovation, not impose regulation, would eliminate the $800 annual tax business people pay to operate a limited liability corporation and repeal California’s tax on capital gains, which has generated almost $7 billion annually over the past decade.

To make up for the lost funds, Whitman says she would save $15 billion by eliminating 40,000 government positions and finding efficiencies in the health care and welfare systems.

The $814 billion in U.S. stimulus spending hasn’t created enough jobs to justify the expense, Whitman said in an interview after an Aug. 24 campaign stop in City of Industry, California.

‘Increasingly Skeptical’

“My targeted tax cuts will lead to hiring,” she said.

Whitman’s position as a business-savvy outsider isn’t a sure vote-getter even in an election year where incumbents are unpopular, said Frank Gilliam, dean of the school of public affairs at the University of California, Los Angeles.

“Americans have become increasingly skeptical about the efficacy of government,” Gilliam said. At the same time, “the faith they put in the private sector also seems unfounded. They’re caught between a rock and a hard place.”

Brown casts himself as a politically experienced pragmatist. To create what he has promised would be 500,000 clean-energy jobs, Brown say he would speed up permitting for wind and solar power plants. He says he favors sales tax reductions for businesses that buy manufacturing equipment, and that he would ask voters whether to cut programs or raise taxes if legislators can’t reach consensus.

‘Race to Watch’

“How far people want to change the government will only be known when the people are fully engaged in the process,” he said in a June 1 interview at his Oakland campaign headquarters.

While they both agree that state employee retirement benefits should be reduced, Whitman has called for a 401(k)-like defined contribution plan to replace traditional pensions for new employees. The state must pay $3.9 billion this fiscal year to the pension fund, known as Calpers, to finance retiree costs, up from $145 million a decade earlier. Calpers, the largest public pension fund in the U.S., has $213 billion of assets under management.

“California is leading the country in its problems,” said Pitney of Claremont McKenna College. “This is the race to watch because America, this is where we’re heading.”

To contact the reporters on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net; Michael Marois in Sacramento at mmarois@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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