Arnie of a Hundred Days

On 14 October 2010, Arnold Schwarzenegger, the Governor of California and former "Terminator" actor, was photographed on the steps of No. 10 Downing Street meeting his friend and British Prime Minister, David Cameron. Mr Cameron joked with the gathered reporters that the Governor would help to "terminate the budget deficit", before the pair turned and walked back into No 10. There is little doubt that the deficits of both the UK and California would be amongst the topics the two politicians discussed.

On 02 October 2010, California had entered its fourth month without agreement on the State's budget. During the previous July, Governor Schwarzenegger had declared a fiscal state of emergency and ordered that a large majority of California's public sector employees would take three days unpaid holiday per month - "furlough Fridays". Exempted from this Governor's decree are those employed by State agencies involving public safety - fire, police, forestry protection (over 40 per cent of the state is forested) - and revenue generation agencies like the Franchise Tax Board.

It was further decreed that until a budget settlement could be agreed, 200,000 State workers would be paid only the legal minimum.

This was the second year in succession that such an emergency had been declared by Governor Schwarzenegger. In July 2009 with the deficit reaching $26 billion similar emergency measures were taken with the first and third Fridays of every month furloughed until the end of the State's financial year in June 2010. A statement issued by the Governor in July 2010 said:

"Without a budget in place that addresses our $19 billion deficit, every day brings California closer to fiscal meltdown.

"Our cash situation leaves me no choice but to once again furlough State workers until the Legislature produces a budget I can sign."

Mr Schwarzenegger estimated that California would run out of cash this month (October) if no agreement were reached.

Trouble had been long brewing. Back in early January 2010, Governor Schwarzenegger had outlined the State's 2010/11 budget proposing a reduction of just over $3 billion from the year previous, totalling $82 billion. This rolled back California's budget to 2004 levels and was a reduction of $20 billion on the 2007 budget. Education would be spared cuts but there would be significant reductions made in health, welfare, transport, prisons (partly by early release) and environment sectors. These cuts were "unavoidable".

California has been hit hard by the global recession. Los Angeles-Long Beach is the USA's largest port and the world's fifth biggest and suffered from a marked downturn in trade. The State has the nation's third highest level of unemployment which stood at 12.4 per cent in September 2010, in contrast to a national average of 9.6 per cent for the same month. This is more than double the State's level of unemployment in 2007 of 5.9 per cent. Some cities in California's Central Valley, like Modesto (pop 211,000) have unemployment levels exceeding 17 per cent.

Revenue from State income taxes which are graded up to a maximum of 9.3 per cent have dropped when the pressure on the welfare budgets have seldom been greater. Income taxes, not reaching a level of $40 billion in the 2008-2009 financial crisis, led directly to California raising its Sales Tax by one per cent to 8.25 per cent. Districts and municipalities were further permitted to add a further percentage or two, usually for specific infrastructure improvements, resulting in much of the State having the highest Sales Tax in the nation.

More misery is heaped on the State due to America's mortgage crisis. At present, California has the fourth highest level of mortgage foreclosure notices. These notices are issued in three stages: default notices, auction sales notices and bank repossessions. Over 340,000 California properties are under some form of foreclosure as at September 2010 according to RealtyTrac.

Joseph Pisani of CNBC News reported on 14 October 2010 that the State's foreclosure activity rose in September on both a monthly (2.53 per cent) and annual (1.10 per cent) basis and that banks were taking ownership from homeowners at a record pace of 102,134 in September 2010. California, with over 37 million people has a truly large economy of over $1.8 trillion and if it were a stand-alone country, would have the world's ninth biggest GDP but as can be seen from the above, wide disparities exist.

Dealing with this financial crisis has not been easy for or kind to Governor Schwarzenegger, a Republican Governor, though more to the centre-right, with a predominantly Democrat State Legislature. The BBC's Peter Bowes remarked earlier this year: "...in his final year in office, this was not the budget Mr Schwarzenegger wanted. He was elected on a pledge to fix California's economy but it has gone from bad to worse."

Circumstances, largely beyond the Governor's control, have dealt Mr Schwarzenegger a pretty rough hand, but he is the visible pinnacle of the State's government and so represents where the buck stops. His approval ratings languish at about 33 per cent. The reasons are not difficult to understand.

Programmes enacted in boom times with high tax receipts; most generous pay and pension deals for largely unionised public sector workers, some embedded with legal protection; high cost social programmes cherished by Democrats whilst Republicans generally favour lower taxes so as to attract new inward investment - this list could be expanded greatly. To an outsider like myself, it appears that Californians want Europe's welfare systems but vote down any attempt to raise the taxes required to pay for them.

Add to this that some eight per cent of the State's population are illegal immigrants, higher if the State's true population is closer to 39 million as some studies suggest, and very stiff competition for that inward investment from the likes of Texas and North Carolina...There's many a country easier to run!

However, a breakthrough was achieved on 02 October 2010 when a budget deal and, as importantly, a plan to resolve California's $19 billion deficit was finally agreed upon. Just as well for the State's already poor credit rating of BBB.

On 08 October 2010, Governor Schwarzenegger held a press conference in the Central Valley city of Fresno to tell his audience that, 100 days late, he had, at last, signed off the State Budget at 8.30am that morning. He told them that he had got what he had asked for back in January 2010: no tax increases, a reform of the budgetary system and comprehensive pension reform, whilst protecting education, public safety and foster care.

Despite his low poll ratings, the "Governator" might just have been able to squeeze home in 02 November's State elections if the Constitution of California allowed a third consecutive term in office. Strange things happen in this now predominantly Democrat State.

This would be most unlikely according to Daniel Knowles' article headline in the Telegraph on 14 October 2010: "There's a lame duck in Downing Street (but it's Arnie, not Dave)" and Mr Knowles proceeds to highlight some of the similarities facing both the UK and California and their respective political leaders.

It's true that Mr Schwarzenegger has managed to alienate both left (by going too far) and right (not far enough) with his deep spending cuts and political and budget reforms. Unable to go for that third consecutive term might well have emboldened the non "Running Man" to stick to his guns as he had nothing to lose. He acknowledged as much speaking in Fresno when he said that future Governors and Legislatures would reap the benefits of his persistence, and of course, California.

After appealing to the Obama administration for help with no real success, Mr Schwarzenegger was caught between a rock and a hard place. That hard place included the cost of servicing all that debt. Bloomberg News on 05 October 2010 broadcast a headline: "Illinois pays more than Mexico as cash strapped states sell bonds abroad". If this doesn't yet apply to California, only a little more red ink and it will. It's the discipline imposed by the money markets that will force politicians of left and right and on both sides of the Atlantic, to stick with the economically sound but politically unpopular.

Maybe the time has come for a more honest appraisal by politicians of the possible and prudent in an age of austerity. Writing in the New York Times on 21 June 2009, Jennifer Steinhauer highlighted the deep cuts to social programmes that even California's Democrats were prepared to accept. Ms Steinhauer quoted Bruce Cain, a political scientist at University of California, Berkeley: "...All of this against a backdrop of economic uncertainty, scarcity and increasing doubt about what a public good is, and whether things that we used to think of as public goods, like higher ed, should really be privatized because it mainly enhances the personal income of those who attend."

Without doubt there are many lessons Prime Minister Cameron can learn from the experience of Governor Schwarzenegger, the spat regarding Child Benefit being a tiny foretaste of the political discomfort to come. David Knowles' final paragraph in that Telegraph article should give the PM encouragement:

"David Cameron needn't be too concerned...Unlike their California compatriots, British politicians are not so trapped by a web of special interests or voter initiatives: difficult measures can be pushed through here. Both California and the UK desperately need reform, but whereas Mr Schwarzenegger struggled to deliver, Mr Cameron seems to be doing rather well. Eventually, that ought to pay off at the ballot box."