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Following California off the cliff

California Gov. Arnold Schwarzenegger Credit: Wikipedia Commons

Heavy use of citizen initiatives is one of the clearest predictions of states that are in danger of following California “to the brink of insolvency,” according to an extensive survey of state financial problems by the nonpartisan Pew Center on the States. Oregon, looking toward a critical vote in January, is perhaps the next state in danger of insolvency; if voters reject a $733 million tax increase on upper incomes and corporations, the state will face a huge budget deficit even after cutting state spending by $2 billion in the 2009 legislative session.

Among the states with the most serious financial problems, the top seven all have a super-majority requirement for their legislatures to pass taxes without a popular vote, allowing a minority to deadlock revenue measures; and six of the seven endangered states make use of citizen initiatives and referendums. Across the country, the two work hand in hand; nearly every state with a super-majority got there via citizen initiative.

Washington falls into that category. A stronger economy and sounder state financial management keep it from the “endangered” list, although it still ranks 14th among the 50 states in terms of fiscal trouble.

Citizen legislation can create a combination of costly voter-initiated laws such as education mandates, maximum prison sentences, and health-care programs. If the state also requires a legislative super-majority, a minority of legislators (Republicans, in the case of California) can block revenue measures and force referral to the voters. In most cases, as in California earlier this year, voters have rejected the taxes to maintain the programs; yet the programs remain in the law. That has been the problem in Oregon, beginning with a 1990 initiative that capped local property taxes, forcing the state to pick up two-thirds of the cost of K-12 education, without an additional revenue source. Initiatives also stiffened prison sentences, again without additional revenue. Attempts over the years to balance the state’s reliance on personal and corporate income taxes with a sales tax have failed nine times, by substantial margins.

Adding to the state’s fiscal bind is voter enchantment with the “2-percent kicker,” a unique law dating to the 1970s when several legislators became angry with lowball revenue estimates by the state’s economist and enacted a law sending tax collections above the estimates back to the taxpayers. While the economy remained strong, the plan was popular, with families looking forward to checks; it was so popular that in 2000 voters wrote it into the state Constitution.

But with no way to sequester windfall revenues (PDF), Oregon lacks any type of “rainy day” fund like Washington’s to help cushion the fiscal storm that took place in 2008 and 2009. Oregon’s state revenue plunged 19 percent from first-quarter 2008 to 2009, one of the worst drops in the nation and even higher than in California. The Legislature responded by cutting $2 billion in state programs and passing $1 billion in tax increases. But the largest tax increase, $733 million, largely on high-income families and corporations, was referred by petition; its defeat in January would throw the state $733 million into the red. The Legislature meets every other year in normal times, but a special session to deal with that type of emergency is virtually certain.

The states ranked most in danger of fiscal collapse are generally progressive in social services; states with more conservative fiscal and social policies, resulting in lower spending, have weathered the financial storm in better circumstances. After California, states the Pew Center believes are most endangered are, in order of danger: Arizona, Rhode Island, Michigan, Oregon, Nevada, Florida, New Jersey, Illinois and Wisconsin. At the opposite end of the scale are (in order of fiscal health): Wyoming, Iowa, Nebraska, Montana, North Dakota, Texas, Pennsylvania, Utah, West Virginia and South Dakota.

Washington stays out of the “endangered 10” list primarily because of a relatively low rate of home foreclosures, and a drop in revenue of only 9 percent. The state’s financial management is also graded A-plus by Pew, one of only five states with such high marks for managing its finances. But the state faces serious budget deficits and a loss of thousands of high-paid Boeing jobs as the next legislative session convenes.

Washington’ financial stability dodged a bullet this month when voters rejected the latest Tim Eyman tax proposal, Initiative 1033, but as long as Eyman can make a living by crafting populist initiatives, Washington stands on the edge of the “endangered” list, at least in part due to citizen support for a system that can push a state into a fiscal abyss, as California has found and Oregon now fears.

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