The Race for Governor of California

Capitalism depends on a well-functioning government. And vice versa. What most people don’t realize is that California’s State Government is equivalent to a fortune 50 company. Its 2018-2019 proposed budget is $190 Billion* and it employs up to 260,000 full-time employees.

Overall, the public sector in CA plays a very significant role in supporting the state’s GDP. Today the federal government spends $356B annually in the state; and state and local governments spend $581B. State and local governments additionally spend $429B in interest. Cumulatively (not counting dollars twice) the public sector’s overall spend equates to a little more than 12 percent of the state’s GDP. Only two other industry categories rank higher: finance, insurance, real estate, rental, and leasing represent 22 percent; and professional and business services 12.7 percent.

In order to remain in business, the state looks more and more to CA’s personal income tax (PIT) to fund a large majority of its activities. Currently, 70 percent of the state’s general fund is supported by CA’s PIT and 40 percent of the PIT can be attributed to a little more than 70,000 tax payers. When Jerry Brown began his first governorship in 1975, California’s general fund budget was under $10 billion and the sales tax was the largest source of state revenue. Sales taxes have dropped to around 30 percent, from its peak of 50 percent two decades ago. To put this in better context, sales tax is still linked to a 20th century manufacturing economy and not as much to today’s shifting service economy. L.A.’s economy is almost 90 percent service oriented today.  

The good news is that job growth in CA continues to expand – the unemployment rate recently fell to a record low of 4.4 percent. But not every Californian is benefiting from this growth and for those who aspire to be the next Governor of California they have a great opportunity to strengthen the relationship between the public and private sectors in order to strike a better balance between the need to implement social policies that improve the lives of ten of millions of Californians, and an economic agenda that fosters more investment in CA’s strengthens – its people, innovation, technology, education and infrastructure, to name a few.

Before they can do that they must get elected and then prepare themselves to the multiple challenges they will face immediately following their victory on November 6, 2018.

The most significant determinant of their success in office will be their ability to not let short-term pressures and demands for immediate results overshadow the necessity of establishing a solid administrative base for their four year term.

These are four critical areas they will need to address in order to establish a solid foundation for the new administration:

  1. Select administrative appointments to the immediate office of the Governor and the Cabinet.
  2. Construct a state budget proposal in preparation for a January 2019 State of the State address.
  3. Develop a economic development strategy that drive investments in CA’s economy (better tax climate, incentives, regulations, etc.)
  4. Find political support and revenues to fund initiatives linked with infrastructure, housing, education and health care, etc. and get things done!

Secondly, they must develop a strategy to manage their time between the increasing global demands of the job with the day to day governing of the state. CA is now the 5th largest economy in the world and the governorship now plays an enormous role in shaping international treaties and agreements, along with some federal policies and multinational corporate investments. Climate change is one great example that touches on all three points. It is real and world leaders continue to look to and work with CA’s leaders in the arenas of public policy and the business world to develop and advance initiatives that will accelerate the adoption and implementation of sustainable energy policies and programs linked to – autonomous vehicles, solar, microgrids, wind, geothermal, to name a few. Leadership will also require making sure these programs benefit all communities throughout the state.

Thirdly, the governor’s influence over local government has also grown throughout the past few decades due to state court decisions on public school funding and ballot initiatives such as Proposition 13. But the landscape on these issues continues to shift and the new Governor will ultimately have to weigh in on whether the 2013 CA law that created the new Local Control Funding Formula is having in making student funding more equal or as some critics say less equal.

Proposition 13, a tax protection measure in place to hold back taxes on homeowners and businesses, is also under attack. One initiative that is currently being pursued, called Split Roll would increase taxes by $6 billion to $10 billion through an annual reassessment of commercial property in CA. If passed this would potentially affect the rent payments of hundreds of thousands of small and minority-owned business and non-profit foundation throughout California, putting a damper on economic growth.

This issues goes back to the balance of capitalism and government. The solution is always somewhere in the middle. A continual one-way platform of finding new and more creative ways to increase taxes to fund state government’s social policies and pensions will only produce sustained success for all if it is balanced with better economic policies. Especially in light of the recently passed federal GOP tax policies (loss of state and local deduction and cap on mortgage interest and elimination of home equity interest deduction, etc.) that will impact CA’s taxpayers starting in 2018.

Overall, there are numerous opportunities and challenges that the next Governor of CA will face and the trends show that Sacramento is already working on the three most critical issues that most economist would say are the most important in providing a better quality of life for every human being – shelter, education and healthcare.

May the candidate with the best ideas, passion and determination win, for it is all of us who will be the beneficiaries of their success.

*($131.7 billion from the General Fund, $56.1 billion from special funds, and $2.5 billion from bond funds.)