News & Views from 465 California Street

The Value of Rectitude

Clint Reilly
Jul
28
2009

Where was the standing ovation when our elected leaders managed to “fix” the state’s $26 billion budget gap? Blame it on drama fatigue.

Like a tiresome game that drags on for years, Sacramento’s increasing dysfunction and dwindling credibility has simply exhausted the state. The serial budget cliffhangers are a turn-off.

A disenchanted public sits on their hands while newspaper editorial boards offer only tepid praise.

The daunting size of the original gap startled everyone, including legislators. But the accounting legerdemain employed to close it has given rise to rampant skepticism.

As Sacramento Bee columnist and unparalleled Capitol observer Dan Walters noted in his July 22 column:

“Desperate to ‘score’ revenues or savings on paper and claim to have balanced the chronically imbalanced budget, they often draft decrees that are slammed into law without any thought of long-term consequences.

“The latest dead-of-night budget deal between Gov. Arnold Schwarzenegger and legislative leaders offers multiple examples of desperation-tinged policymaking…”

At a recent Los Angeles press conference, representatives of the League of California Cities called the latest budget agreement a “Ponzi scheme” and a “smoke and mirrors scam” for taking nearly $2 billion from cities and counties. A lawsuit is on the way.

When corporations miss their earnings and revenue guidance to analysts and stockholders over a couple of quarters, the stock price is pounded relentlessly.

California, however, produces multi-annual shortfalls like a herd of cows churns out manure. Long years of such irresponsible policymaking now threaten our core asset.

There is one thing worse for California than a budget gap: a credibility gap.

Think about it! What happened to the U.S. financial system when nobody believed they could trust Lehman, Bear Stearns, Bank of America or AIG? What happened when public trust in loans, mortgages and bonds guaranteed by these institutions evaporated?

The greatest crisis of confidence since the Great Depression detonated a devastating collapse that may cost taxpayers $26 trillion before all the wreckage is cleared.

Standard and Poor’s analyst Gabriel Petek recently told the Wall Street Journal that despite the budget deal, California’s credit rating still isn’t completely safe. Because the deal relies on “unconventional” fixes and overly optimistic revenue forecasts, the Golden State’s rating, already the lowest of the 50 states, could plummet further.

California has been unable to purge a culture of deception and white lies that has shaped fiscal policy since 2000. The most insidious effect of the perennial budget crisis in Sacramento is that we are destroying California’s credibility to the nation and the world.

Rectitude is an honored value. Trust comes when a company or an entrepreneur has a reputation for honesty, integrity and candor on financial matters. Doctoring the numbers undermines confidence and destroys the relationships between people and interests necessary to successful enterprise.

Nowhere is the destructive power of financial mistrust more clear than the trillion dollar meltdown of credit markets in 2008 and 2009. The fact that investors no longer believed in the value of money, loans, homes, office buildings, derivatives, swaps and other financial instruments nearly destroyed global markets and severely compromised belief in a system of pure capitalism.

There are numerous other fiscal train wrecks throughout history, from South American currency devaluations, to the Asian financial crisis in the late 1990s, to the Great Depression.

By practicing grift not thrift, California is squandering credibility won over decades of leading the way in government, business, innovation and education.

By perennially manufacturing numbers that nobody believes, the politicians in Sacramento are destroying our most valuable currency – the solid gold reputation that made California an economic and social leader throughout the world.

Comments (6)

  • It’s quite scary when you hear the State you love and grew up in has to issue IOU’s. I remember the 80′s when Silicon Valley was a bunch of orchards and yet budgets were balanced. At least that’s what i read in my hot off the press morning edition Mercury News. Nowadays, you hear about all types of scandals, budgetary problems, and yet we’ve grown as a people and an economy since then. There are few, if any orchards now, but instead multi-national tech companies and McMansions dotting the landscape. Even the state budgets have grown comparatively speaking. Why then, is there a deficit?

    I think government has gotten too big. Government wasteful spending has to be reeled back in and now that the Wall Street stupidity has induced massive deflation everywhere, we have to revalue assets (because tax revenues are based on those valuations) and not be in shock nor denial of the real numbers. We were living in a bubble (and still are). It is clear we’ll be running into recurring deficits time after time if we don’t get to the root source of the problem. What are the potential solutions?

    It is the same as it has always been. The leaders, or those entrusted with the overseeing of our assets and revenues (“budgets”) need to deploy those precious assets and revenues to maximize the most effective return on those resource outlays. That should always be the job of leaders, and if they have any practical sense, they would do what they know deep down is right, for the common good, for the betterment of the whole by making the effective and efficient choices. It is a big ship our elected leaders steer. All we ask is they lead us in the right direction.

    This “Me-First-ism”, “My self-interest first-ism”, worse, “my special interests first-ism”, has got to stop and if it takes getting new idealistic folks in there with fresh ideas and a wholesome goodness of character, then that’s what the people should work tirelessly to vote in.

    Corruption and gridlock is never good for any government, much less what has become a parliamentary democracy. The system needs to be altered to fit the changing dynamics of our needs and our economies. Else, we find ourselves in this position multi-annually, fiscal year after year. We need to all get back to producing more, conserving where it’s necessary, so we can offer and give more. Or even save for a deflationary day.

    Interesting Factoid: California was once the world’s sixth largest economy, representing 12% of the nation’s population, still offering 30% of all welfare and government subsidies in the nation. We are 1 of 50 states in the Union. We can’t continue to give nor fund at that rate, especially if our revenues are shrinking. We need to manage our resources more shrewdly or figure out how we are going to produce more. As for the social and moral decay, i believe that stems from an over-consumption habit and that “Me First” mentality. Seeing beyond self should be the new paradigm. With that said, politics always seems to revert to self-interest. People are inherently self-interested. What ever happened to the implied social pact?

    Thank you for yet another straight to the point article.

    Posted by: Don Nguyen | July 28th, 2009 at 12:28 pm

  • I have been reading your column 3-4 times a week for several weeks now. The first time I read it, I thought you were a liberal, not a huge leap in thought for any newspaper in California. However, your last several columns slamming the CA legislature as being in the pocket of Unions and lobbyists and especially the column referenced above, it would seem to me that you are conservative or possibly even bipartisan. (Which would be extremely refreshing.)

    Anyway, the reason I am writing is because what you state in the above referenced column is all very true. But you, and anyone else who writes about the problems with our state government never mention:
    1. The people, by name, who are most responsible for the problems we face.
    2. That those people should absolutely NOT be voted back into power.
    3. Who should be voted into power and why. Such as our respresentatives should actually have financial/fiscal knowledge of the economy and business accumen. They must be more than just an idealogue. Especially when those ideas are in contrast to what the majority of the people want.

    If you agree with me, I would love to see one of your columns with the above information. It is discouraging that the same deficient people continually get reelected and things continue to get worse.

    Thank you for listening.

    Best Regards,
    Shelly M

    Posted by: Shelly M. | July 29th, 2009 at 7:43 pm

  • Clint,

    I have read somewhere that insanity is the state in which you don’t agree with 98% of the people around you. That is the state I find myself in at present.

    Then there is you who puts my ideas into words. I’m still insane because you and I are in the 2% who want to fight the system.

    I am writing you in response to your Culture of Capital-ism which I read in the IJ on July 21st.

    It is absolutely imperative that we have a constitutional convention, not only for the state but for the federal government as well.

    I think that such a convention might make a worse government than we have already but to do nothing means being led deeper and deeper into disorganization and chaos.

    Suggestion:

    Could we manage to write an initiative concerning our inability to pass a budget that would balance where we spend according to what we have, tax when we need and cut when we need to, maybe a little of both and act like we understand what fiscal responsibility is all about? I would like rules like: Any item being put forward has to be settled in 6 hours. If not settled it goes to an arbitrator (not a legislator) who decides what to do. We are actually giving the government to this person but you would think that any legislator would avoid this like the swine flu and make sure some compromise was found. I think we need rules of engagement. I remember going and watching the legislature during the time of Willie Brown. He bullied everyone to do what he wanted. I know he had the purse strings regarding re-election but I also know he got things done. We have no one like that now. A putz for a governor and a bunch of Orange County losers who will bring the state into crisis on every issue.

    I like the idea of attacking the institution rather than the individuals.
    Individuals will fight back but the institution is something different. I realize the incompetent legislators we now have will fight to keep the status quo but if we could keep a steady barrage of truth telling of how bad the institution has become maybe a good initiative or the making of a constitutional convention could be forth coming.

    But, we simply must do something. We are certainly doomed with the present state of affairs.

    I have seen the Reform Cal.com concerning a part time legislature. I smell a fish here. It looks like bad losers republicans trying to gain control. I like Spotswood idea of having only one house of 120 elected representitives. It might help relieve the log jam a little. But I would like more sweeping changes.

    However, I don’t think Liberal minded people like me can do this. The conservatives must get pissed at what the legislature has become and insist on changes and not changes just to get themselves elected.

    Larry

    Posted by: Larry | July 29th, 2009 at 7:46 pm

  • If California spent at the rate of inflation and population growth we
    should have a $15 billion dollar surplus. We have some of the highest
    taxes in the US and our state cannot still get it right. Why? Because
    the democrats want bigger government, more spending, and more services
    continually. Cut the shit! Enough already. Your way does not work,
    and Obama will soon turn the whole nation into what California already
    is. You always blame Wall Street. Blame the deadbeats who do not pay
    their mortgages. If they would of kept up we would of never had this
    mess happen. None of them complained while they were spending their
    home equity lines. Now they want loan mods. Please.

    Posted by: Tyler B. | July 29th, 2009 at 7:48 pm

  • For a change it is nice to see the face of reality, Somehow Sacramento doesn’t get it. The way they are going there is little or no chance the annual charade will end in the next decades. That is unless the state goes into bankruptcy.

    Posted by: Dan | July 29th, 2009 at 7:49 pm

  • Clint;

    I have been reading your column for a long time. Although I disagree with you on many points, I’ve always enjoyed the clarity and thought that you put into your column. As a libertarian leaning Republican, I just thought I would let you know that you have my respect and my ear.

    Keep up the good work.

    Posted by: Bob Van Cleef | August 1st, 2009 at 12:45 pm

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