Brown’s Gains in California Imperiled by Lingering Ills

Photographer: Justin Sullivan/Getty Images

California Governor Jerry Brown has benefited from a Democratic-controlled state house and a constitutional change making it easier to pass spending plans. Close

California Governor Jerry Brown has benefited from a Democratic-controlled state house... Read More

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Photographer: Justin Sullivan/Getty Images

California Governor Jerry Brown has benefited from a Democratic-controlled state house and a constitutional change making it easier to pass spending plans.

Napa Valley vintner Michael Marston voted for Jerry Brown in 2010, trusting the Democrat’s pledge that, with 26 years in California government, he could “lead a broken legislature out of a morass of poisonous partisanship.”

Three years later, Governor Brown has ended chronic deficits, the state’s credit rating is at the highest level since 2006 and a Federal Reserve Bank of Philadelphia index shows the world’s 10th-largest economy is the strongest in three decades. Still, Marston says he’s disappointed.

Unlike President Barack Obama, who has seen Republicans in Congress attempt to repeal his health-care overhaul and block his budget proposals, Brown, 75, has benefited from a Democratic-controlled state house and a constitutional change making it easier to pass spending plans. Brown is among U.S. governors including Democrat Andrew Cuomo of New York and Republican Scott Walker of Wisconsin who have won the broad legislative approval of their agendas that has largely eluded the president.

Yet even as Brown has succeeded in California, Marston, a political independent, says the governor has also pursued “Band-Aid” solutions for fiscal challenges while letting unfunded pension liabilities swell to more than $100 billion and leaving the most populous state’s tax system vulnerable to swings in growth.

“He knew how to fix the system,” said Marston, whose 2010 Marston Family Vineyard Cabernet Sauvignon sells for $115 a bottle. “He said he was willing to take on the kinds of reforms that needed to be done. He promised to deliver that and instead he has done the politically expedient thing.”

Someone Else

Brown may need voters like Marston if he’s to win an unprecedented fourth term next year. Fifty-five percent of voters approve of the job the governor’s doing, according to a USC Dornsife/Los Angeles Times poll released Nov. 11. Yet only 32 percent said they’d vote to re-elect him, and 37 percent said they’d choose someone else. The poll had a margin of error of 3.1 percentage points.

Brown is the longest-serving governor in California history by virtue of two previous terms from 1975 to 1983. He’s also been California’s attorney general and its secretary of state, as well as mayor of Oakland.

While Brown hasn’t said whether he’ll seek another term, he has a campaign committee with a $10 million war chest. Two Republicans have announced they’re running: former Lieutenant Governor Abel Maldonado, whose committee most recently reported $45,000 on hand, and Assemblyman Tim Donnelly, with $27,000.

Economic Uncertainty

“We have our budget balanced, but given the uncertainty with the economy, I don’t think we can say we’re out of the woods yet,” Brown said Oct. 14 in Los Angeles. “There are always things to do -- there’s water, schools, the environment, and there’s pensions and what to do with offenders after they’re released from prison.”

Brown championed a 2012 ballot measure that helped close deficits by temporarily raising the statewide sales-tax rate to the highest in the U.S. and boosting levies on income of $250,000 or more. He also resisted calls from fellow Democrats to spend more on social programs. He won plaudits from the the media such as Rolling Stone magazine, which in August hailed “Jerry Brown’s Tough-Love California Miracle.”

“I’ve done eight budgets,” Brown said in a 2010 campaign debate with Republican Meg Whitman, a billionaire and former chief executive officer of EBay Inc. (EBAY) “Most of them were on time. I know how to do it. I have the will power. I have the independence.”

Outside Control

Nathan Gardels, a onetime Brown aide who’s now a senior adviser to the Berggruen Institute on Governance in Santa Monica, said the governor deserves credit for easing the financial crisis he inherited. Yet he cautioned that the progress rests on economic recovery largely outside Brown’s control and tax increases that phase out starting in 2017.

As a candidate in 2010, Brown pledged to review California’s “complicated” and “ever-changing” tax structure, while enacting measures to reduce retiree pension costs and cut the state’s $2 billion tab for health and dental care for prisoners.

The state’s nonpartisan Legislative Analyst’s Office estimates that the higher taxes yield $6 billion a year, while saying the actual number is “subject to multibillion-dollar swings.” Income taxes provide the largest share of state revenue, followed by sales levies. Rates reach 13.3 percent on those making $1 million or more, the most of any state. Making top earners responsible for more revenue increased volatility.

Boom, Bust

“The top 1 percent pays 50 percent of the income taxes,” Gardels said in an interview. “We’re still subject to the same boom-and-bust cycles in this state.”

Brown also promised to end budget “gimmicks,” veto new spending not accompanied by additional revenue and require state departments to build their budgets from scratch rather than automatically increase previous spending plans, according to his 2010 campaign website. Some of those changes haven’t happened.

In May 2012, when asked why he turned to one-time fixes to close a $15.7 billion budget gap, such as using $240 million in construction funds to operate trial courts, Brown replied, “It’s perfectly legitimate to solve a one-time deficit with one-time revenues.”

Brown pledged to end the “poisonous partisanship” of the legislature and indeed faces less division among lawmakers. That’s because Democrats won two-thirds supermajorities in both the Assembly and the Senate in November 2012, leaving too few Republican votes to affect legislation.

Budget Fixes

Improving growth and budget fixes are helping California achieve its first surplus in almost a decade, while funding for schools and universities is on the rise. In the past fiscal year, the state chipped $7.3 billion from what Brown called its “wall of debt,” or recurring borrowing. His latest budget calls for paying off about 30 percent of the total by the end of June.

Fitch Ratings raised California’s credit score to A, its sixth-highest level, in August after lawmakers passed a $96.3 billion budget in June that incorporated Brown’s more restrained revenue forecasts and set aside a $1.1 billion reserve. Standard & Poor’s raised its rating to the same level in January, the first boost from S&P since 2006. Moody’s Investors Service grades it A1, four steps below the top.

California’s relative borrowing cost -- the penalty that investors demand to buy its bonds -- has shrunk to a quarter of what it was in June 2011.

Voter Approval

An element of Brown’s success is voter approval of a 2010 ballot initiative known as Proposition 25 that made it easier for the legislature to pass budgets, requiring just a simple majority vote rather than two-thirds. It also said lawmakers forfeit pay when they’re late sending a spending plan to the governor.

The legislature has passed budgets on time every year since Brown took office. Before he returned, budgets in the state were routinely late, as much as 100 days in 2010.

Brown also took charge just as the state’s economy began to rebound from the recession that ended in June 2009. Per-capita personal income has climbed each year since then, buoying tax collections to the highest-ever this year, according to the Finance Department.

California’s gross domestic product, at $2 trillion in current value, is the highest in four years, according to data compiled by Bloomberg. California’s output ranks 10th in the world, ahead of India, Canada and Australia, according to the state Finance Department.

Rick Caruso, a Los Angeles mall developer and Republican who voted for Brown in 2010, said he hasn’t at all been disappointed in that decision.

Not ‘Ideologue’

“He’s just done a very good job of being a little bit bold and not too stuck in his own party’s belief system that has prevented things from moving forward,” Caruso said. “He is not an ideologue, which I like.”

When Brown took office, California’s unemployment rate was 12.1 percent, or 3 percentage points above the national level, according to data compiled by Bloomberg. In August, the latest data available, the state figure was 8.9 percent, or 1.6 percentage points above the U.S. number.

During the same timeframe, a Bloomberg stock index of California-based companies has climbed 41 percent, compared with 30 percent for the broader Standard & Poor’s.

Political Flashpoint

Brown returned to the governor’s chair when the pay and benefits of government workers had become a flashpoint in political battles between Republicans and Democrats in statehouses across the U.S. and helped give rise to the Tea Party movement for limited government. Though supported by unions, Brown said he’d address the pay and pension benefits of state workers.

“As governor, I’ll cap government salaries and pensions,” he said in an advertisement during the campaign.

Brown reached a deal this year with the state’s largest public-employee union that grants workers a 2 percent pay increase effective July 1, 2014, if revenue growth continues, and 2.5 percent a year later. If revenue fails to meet a minimum target, the entire 4.5 percent raise begins July 1, 2015.

The increases come on top of an end to furloughs -- unpaid days off three times a month beginning in 2009 -- that had amounted to a 14 percent pay cut.

Brown and Democratic lawmakers also reached a compromise over pensions that fell short of the governor’s goal of ending full pension guarantees for new workers.

Retiree Benefits

Brown in 2011 proposed 12 measures to change retiree benefits, one of which would place new employees in retirement accounts that blend a guaranteed pension and a 401(k)-style defined contribution plan.

Democratic lawmakers eliminated the hybrid provision from the bill Brown signed a year later, while raising the retirement age for new employees and capping pensionable income at $110,000.

Steve Smith, a spokesman for the California Labor Federation, which represents 1.2 million workers in 1,200 locals, said Brown pleased unions by signing a minimum-wage increase and winning passage of the tax-increase to finance schools. Unions disagreed with him on pensions, Smith said.

“He’s not beholden to anybody -- not business and not labor,” Smith said. “The only thing predictable about Jerry Brown is that he’s unpredictable.”

The state’s expenses on health and dental care for prisoners continue to rise, even as Brown and lawmakers shifted responsibility for some inmates to counties and worked to end federal oversight of prison hospitals.

Prison Costs

As a candidate, Brown said he’d reduce prison health-care expenses by cutting hospital and specialist visits by inmates, expanding telemedicine and standardizing pharmacy practices, according to his 2010 campaign website.

California budgeted $2.1 billion for inmate health, mental and dental care this year, up about 3 percent from two years earlier, according to state budget figures.

Brown spokesman Evan Westrup said that under a federal receiver appointed by the courts, Brown has little power to dictate changes to prison health care. California’s prison system is saving about $120 million a year in related costs by shifting inmates to county jails, and another $40 million by reducing pharmaceutical costs, Westrup said by e-mail.

Political Donations

Marston, who has made political donations to both Democrats and Republicans, was the second-largest donor to last year’s campaign for Proposition 31 to change the state budget process. The initiative would have lengthened the budget cycle to two years from one, shifted about $200 million in sales taxes to cities and counties, and empowered the governor to unilaterally cut spending during fiscal emergencies.

Brown didn’t take a position on the measure. It failed with 39.5 percent of the vote.

Marston said he doesn’t consider the governor a lost cause. He said he’s disappointed that Brown settled for compromises on worker pensions, backed a tax measure that increased revenue volatility and hasn’t pressed to stop lawmakers from pushing through legislation at the end of sessions without hearings.

“He has created a facade of improvement that covers a morass of unresolved, un-dealt-with issues,” Marston said.

To contact the reporters on this story: James Nash in Los Angeles at jnash24@bloomberg.net; Michael B. Marois in Sacramento at mmarois@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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