Sunday, January 09, 2005

OpinionJournal - A Tale of Two States - Reformer Schwarzenegger vs. stand-pat Pataki.

Sunday, January 9, 2005 12:01 a.m. EST

Republican Governors Arnold Schwarzenegger of California and George Pataki of New York both delivered State of the State addresses last week. But only Arnold sounded like a leader up to the task of moving his large and important state forward.

After a cautious first year in office, Mr. Schwarzenegger is looking more like the risk-taker who won a recall election against the conventional wisdom. Among other things, he wants to impose formal limits on spending, overhaul the public pension system, and end the ability of Legislators to draw their own district lines.

Back in New York, Mr. Pataki went on about an executive order "requiring all state agencies and authorities to begin using non-toxic cleaning products that are free of harmful chemicals." The state may be $7 billion in the red--a topic Mr. Pataki avoided--but at least its government buildings will be using safer window wash. State spending continues to increase faster than inflation, despite the highest state and local tax burden in the U.S., but the best Mr. Pataki could do is call for accelerating the phase out of the 2003 tax hikes that passed on his watch (and in part to pay for his earlier spending sprees).

In California, on the other hand, Mr. Schwarzenegger is facing up to that state's looming $8 billion budget shortfall. He noted that state revenues have increased this year but that budget formulas in place still dictate spending more than what Sacramento takes in. To fix the problem, he's advocating a constitutional change that would require across the board spending cuts if expenditures outpace revenues.

Just as important, Mr. Schwarzenegger dismissed tax hikes as a solution. "We don't have a revenue problem," he said. "We have a spending problem. We could raise taxes by billions but they would only further drive up spending by billions of dollars." All of this will be resisted by Democrats who control the state Legislature, but by setting down markers the Governor wins more bargaining leverage.

Mr. Schwarzenegger also wants to take on Calpers, the $140 billion public-employee pension fund. State obligations to Calpers have risen to $2.6 billion this year, from $160 million in 2000, and investment returns are down. Currently, Calpers covers state employees with a defined-benefit plan that not only leaves taxpayers responsible for a set payout at retirement but also tempts politicians with using that huge pot of money to serve their own political goals.

The Governor would ease pressure on the current system by offering new public employees defined-contribution plans that resemble 401(k)s. This would allow workers to invest their own retirement money, keep the account if they switch jobs and even pass it on to their heirs. A similar reform passed in Florida some years back, and has proven popular.

Most intriguing, and politically combustible, is Mr. Schwarzenegger's proposal for redistricting reform. A big obstacle to changing the political culture in Sacramento and other state capitals is the fact that incumbents are nearly impossible to defeat. Not one of the state's 153 Congressional and Legislative seats up in the last election changed parties. "What kind of democracy is that," said the Governor, before proposing that "an independent panel of retired judges--not politicians--determine California's" political districts. By holding this sword of Damocles over the heads of legislators--and if need be taking the issue to voters in a referendum--Mr. Schwarzenegger helps his chances of getting the other things he wants.

Come to think of it, Mr. Schwarzenegger sounded a lot like George Pataki circa 1994, the year he first won the Governorship. Back then Mr. Pataki was the one pushing for fiscal constraint and vowing to fight the special interests. That Governor Pataki has been pretty much AWOL since the end of his first term. Listening to him this week you wouldn't know that the state's fiscal problems today are on balance worse than when he took over 10 years ago. If Mr. Pataki wants to rediscover his political convictions, or at least an agenda, he might give Arnold a call.

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