New hope for CA?

Historian Kevin Starr thinks the latest budget agreement could become a watershed event for the state. "Schwarzenegger and the Republicans have forced a renegotiation of the social contract that has long existed in California of munificent social spending and public-union compensation," Starr tells Barron's. "As a bellwether, California figures to lead other states in reining in unfettered growth in state budgets." Starr figures there will be a political swing to the right in the state, no matter who becomes governor in 2010.

The frequent budgetary dust-ups in the state argue for a number of reforms, many of which are gaining real support. Almost everyone agrees a rainy-day fund of 15% or so of any budget should be created against the inevitable downturns in the national and state economies. This is particularly important, because California relies heavily on volatile revenue sources such as personal income taxes paid largely by the rich. A drop from a combined income take of $15.6 billion in fiscal 2007 from capital gains and stock options to a projected $6 billion or so was a major factor in blowing a hole in this year's earlier proposed budget of $95.5 billion.

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Finally -- and this could be essential -- some in California are calling for a constitutional convention to do away with the Progressive-era reforms of the existing state constitution. California voter initiatives, or propositions, whereby voters can arbitrarily change the constitution, have done much harm over the years. Most infamous was Proposition 13 of 1978, which by limiting property-tax increases to no more than 2% annually forced school districts and local governments to rely more and more on state funding. A devolution of power back to local and county entities would make eminent sense.