By Lou Cannon - June 25, 2013

The Golden State has long been dismissed as a paradise lost.

The end of the Cold War and subsequent implosion of the military-fueled aerospace industry in the 1990s sent California on a downward spiral. The state struggled through three economic downturns in two decades, each time emerging with weaker infrastructure and higher debt. A dysfunctional state government in Sacramento ignored structural fiscal issues, relying on gimmicks to pass budgets that were balanced in name only. Bond markets and rating agencies were not fooled, dropping California’s credit rating to the second lowest of the 50 states.

The bottom truly dropped out during the Great Recession when California suffered record unemployment and a housing bust. Median family income declined 11 percent between 2006 and 2010. Prisons became so crowded that the federal judiciary intervened, ordering the release of thousands of inmates. Schools also suffered from overcrowding and teacher layoffs. California’s vaunted higher education system raised tuitions and turned away students.

As the once-bright California Dream faded, politicians became late-night television jokes. Gov. Gray Davis was recalled in 2003 just 10 months into his second term. His celebrity successor, Arnold Schwarzenegger, failed to deliver on his lofty promises of fiscal reform. Frustrated voters turned in 2010 to an unlikely retread, Jerry Brown, derided as “Governor Moonbeam” when he was a young and often unfocused two-term governor in the 1970s and early 1980s.

But lo and behold, Brown has led a remarkable comeback, both for himself and his state. After inheriting a deficit of $27 billion on a general fund of about $90 billion, Brown has turned California around, aided by a rebound in the construction industry and the housing market on which it depends. Early this month he signed a budget that has a surplus of $1.2 billion by Brown’s conservative estimate. The independent Legislative Analyst’s Office, which usually finds gubernatorial estimates too rosy, says the actual surplus will be more than $4 billion.

Brown has good reason to low-ball the surplus. Democrats won a super-majority in both chambers of the Legislature last year and are itching to spend money. Brown calls Sacramento “a big spending machine” and observes that California revenues are always volatile because they are heavily dependent on the state income tax. Brown put a hefty chunk of the surplus into a rainy-day fund to offset any future deficits. He has vowed to keep the budget balanced, a promise he has the power to keep because California governors have line-item veto authority and Brown is far more popular than the Legislature.

Brown, now 75, shares credit for the state’s fiscal turnaround with voters, notes George Skelton, longtime Sacramento columnist for the Los Angeles Times. In 2010, voters freed the Legislature from perennial fiscal gridlock by approving a ballot measure allowing passage of budgets by a simple (rather than a two-thirds) majority.

Last November, the electorate did even more by passing Proposition 30, which raised sales taxes and income taxes on high earners. Brown had promised as a candidate for governor in 2010 that he would not agree to any tax increase without voter approval. When Republicans refused to put a tax-increase proposal on the ballot, Brown did so himself. He gathered the necessary signatures to qualify the measure and then campaigned for it relentlessly, saying that schools needed the money.

After Proposition 30 passed, Brown said the new revenues should be funneled mostly to the state’s poorest school districts, many with large numbers of non-English-speaking students. California has one of the nation’s highest poverty rates, with one in five children (and one in three Latino children) living in poverty, according a study early this year. The Legislature balked but compromised, giving Brown most of what he wanted.

The governor’s willingness to tackle the tough issues has impressed Californians. He has a 51 percent approval rating in a University of Southern California poll and 48 percent approval in a survey by the Public Policy Institute of California. These are high marks for a Golden State politician. Brown is an odds-on favorite to win re-election if he runs in 2014, as most observers expect.

With Brown leading the way, California has on several fronts recovered the progressive footing it claimed in the days of Earl Warren, a visionary three-term governor in the 1940s and 1950s before President Eisenhower appointed him to the Supreme Court.

California was the first state to pass legislation implementing President Obama’s health care law, the Affordable Care Act. The state is also well along in expanding Medicaid, the federal-state program to provide health care for the poor and disabled, and expects to meet the Oct. 1 deadline for setting up online marketplaces known as exchanges, intended to allow individuals and families without health insurance to purchase affordable policies.

Obamacare excludes illegal immigrants, but California public officials, led by Los Angeles County, are prodding Washington for a waiver that will provide preventive care for the state’s estimated 2.6 unauthorized immigrants. Without it, they say, illegals have no choice except to go to county hospitals when they are sick, boosting local costs and taxes.

The attempt to create a truly inclusive health care system echoes the work of Earl Warren, the first big-state governor to advocate government-subsidized health insurance. His plan was defeated in the Legislature after strenuous opposition from the California Medical Association.

In the Warren years and for long afterward, the state was a magnet for Americans seeking a better life. A Life magazine article in 1943, the first year of Warren’s governorship, said that California was “irresistibly attractive to hordes of people,” quoting one of them as saying, “Mister, this is dreamland.”

That dream was beginning to fade when Jerry Brown first took the oath of office as governor more than 30 years later. During the two-term governorship of his father, Edmund. G. “Pat” Brown, from 1959 to 1967, California built universities, freeways and a gigantic aqueduct to transfer water from the state’s water-rich north to its parched south. Pat Brown was succeeded by Ronald Reagan, who preached conservatism while also vastly expanding the state park system and conserving its wild rivers. Jerry Brown succeeded Reagan.

In 1978, midway through Jerry Brown’s governorship, California voters rebelled against soaring property taxes by passing Proposition 13, a state constitutional amendment that still hobbles state and local government spending. Social critics such as Peter Schrag have traced California’s latter-day decline to Proposition 13, which put a lid on property taxes while also imposing perpetual government economizing that resulted in the closing of libraries and contributed to a crumbling infrastructure.

Proposition 13 remains an untouchable guidepost of California politics, but Brown partly circumvented it by winning approval of Proposition 30. To get Californians to raise their taxes, he became, as Business Week recently put it, “Governor Gloom.” Brown cut back on services, from education to medical care, and promised that more cuts would be necessary unless Proposition 30 passed. The strategy worked. As Business Week put it: “Brown scared California straight.”

Perhaps not completely. For all that Brown has accomplished, his state is not out of the woods. The combination of the state tax increase on high earners and the subsequent tax-the-rich levies imposed by the federal government means that those earning more than a million dollars a year face a combined federal-state income tax bill of 52 percent. Brown’s critics say that this will encourage some high-earners to move themselves and their businesses to other Western states such as Nevada and Washington, which have no state income taxes. It’s too early to know if this concern is merited.

But even if they stay put, California still faces fiscal obligations that are hidden in plain sight. The accounting gimmicks used by past legislatures to “balance” the budget created a $35 billion wall of debt as revenues were shuffled from one fund to another. The state owes the federal government $10 billion for unemployment-insurance payments.

California also has the highest public pension debt of any state except Illinois. The teachers’ pension fund alone wants $4.5 billion more a year. As the Economist observed, “This would immediately swallow up this year’s surplus and drain the budget for another three decades.” State Treasurer William Lockyer says that if politicians continue to ignore pension debt, state finances will implode. But his observation is not unique to California; the same could be said for at least 30 other states.

On balance, for the first time in the 21st century, California is thriving. With an improving housing market, reduced unemployment and increased funding for its hard-pressed schools, California once more resembles a golden state. Pat Brown would be proud.