2008. I thought, “
While the beginning of the Great Recession is often dated to the financial market meltdown in September 2008, the crisis came earlier and harder to California than to the rest of the country. This was because of the scale of our housing market and the impact of the mortgage meltdown. California’s already legendary property values skyrocketed during the 1980s and 1990s, and homeowners started using the ever-increasing equity in their homes to fund retirement plans, finance college costs, or buy vacation homes. But now people were falling behind on mortgages and losing their homes at double the national rate. By some estimates, more than $630 billion in value was gone, lost, disappeared, and with it went tens of billions of dollars in tax revenue.
Part of the blame belonged to the federal government, which allowed fast and loose subprime mortgage deals. In the past, a 25 percent down payment had been required. What’s more, quasi-government entities Fannie Mae and Freddie Mac were encouraged to increase loans to low-income borrowers in order to stimulate the economy and expand the culture of home ownership. This helped fuel the housing bubble. Just as I’d learned from Milton Friedman, when the federal government meddles in markets, the states pay the price. Californians suffered in part because of a federal fuckup, and as governor, I was caught short.
I didn’t have much money to work with, but I used every bit of cash I could get my hands on to respond. We desperately tried to accelerate infrastructure bond spending to build highways and rail lines, build new roads, and repair old bridges. We found money for job programs to retrain construction workers losing their jobs. We persuaded big lenders to freeze interest rates for more than one hundred thousand home owners most at risk. We hired more than one thousand people to staff state call centers to advise mortgage holders in trouble and help people with unemployment benefits.
Just before Christmas, US treasury secretary Hank Paulson visited to discuss the subprime mortgage crisis. He and I held a “town hall” meeting in Stockton, and I listened to him talk about “minimizing the spillage” of the housing downturn into the overall economy. At that point, I was still willing to describe the problem as a “hiccup” in my comments to the audience. But I had a bad feeling about it. I flew to Washington not long afterward for a governors’ conference where Alphonso Jackson, President Bush’s housing secretary, gave a speech about how the American Dream of owning a home was alive and well. I knew Alphonso slightly and cornered him during the break to ask what was really going on. “It doesn’t look good,” is all he would say. The expression on his face alarmed me. He showed more concern than he’d shown onstage.
I decided that we should throw out the economic forecasts for fiscal year 2008 and budget for zero revenue growth. In our boom-addicted state, zero growth in the Sacramento budget would be much more painful than it sounds. We were facing $10 billion worth of automatic increases in pensions, education, health care, and other programs that were protected by law or federal funding mandates. So if state revenues stayed flat, the only place to come up with the funding was cuts in other programs that weren’t so protected. The choices were really tough. If we reduced spending on prisons, we had to let prisoners out and maybe make neighborhoods less safe. If we cut education, what did that say about our concern for our children, the most vulnerable of our citizens? If we cut health, were we saying we really didn’t care about old people, or the disabled, or the blind?
In the end I decided to cut all programs 10 percent across the board. It’s painful to have just endorsed things that you now have no money for. For example, I had supported a bill to strengthen foster care so kids would not wind up on the street. I believed such bills would ultimately reduce state expenses in health care and law enforcement because some foster care children get in trouble once they’re out on their own. But after passionately advocating this plan, I had to withdraw it when the financial crisis hit. I felt terrible, and I looked like a schmuck, backing out on a commitment we wanted to make but could no longer afford.
The final working days of December 2007 were devoted to a procession of interest-group advocates and community leaders whom I’d invited to the cabinet room near my office. I felt I had to look in their eyes and tell them myself what we were up against financially. The consequences of cuts are not just dollars, but people. Talking about fiscal responsibility sounds so cold when you have a representative for AIDS patients or poor children or the elderly sitting across from you. “Democrats are getting screwed, Republicans are getting screwed, we’re all getting screwed,” I told them. When I asked for their input, to my surprise, they thanked me for leveling with them. Many offered helpful advice.
It galled me that some of this pain could have been avoided. Even before I was elected in 2003 I’d insisted that the boom-and-bust nature of California’s dynamic economy created a huge downside risk in the event of a bust—and that California desperately needed a cushion. I’d tried to put in place a rainy-day fund that would have accumulated $10 billion by now, but I’d failed to convince the legislators or the voters to adopt one with rules stringent enough to keep the money locked up until there was a major emergency. Well, it was starting to rain, and I was forced to make unpopular decisions that nobody, least of all me, was happy about.
By spring 2008, state revenues were in a steep plunge. The budget deficit widened by $6 billion between January and April alone. And that was still months before the financial crisis went global.
I endorsed John McCain for president that January, even before the primaries ended. The senator from our neighboring state had helped me for years, particularly in the hard days of 2005, when John spent an entire day riding around Southern California with me on my bus campaigning for my doomed reform initiatives.
At the same time, as the presidential campaigns unfolded, I did not criticize Hillary Clinton or Barack Obama. The truth was that on the biggest issues, particularly the environment and building a new energy economy, I thought any of the candidates would be better than the current administration. I told an audience at Yale: “President McCain, President Obama, or President Clinton will all shift this country into a much higher gear on climate change. All three candidates will be great for the environment. So things will immediately pick up speed after inauguration day.”
I skipped the Republican National Convention that August for the first time in twenty years. I was stuck in California wrestling with the budget, but indirectly my absence reflected a much larger concern. The growing conservatism of the party didn’t appeal to me or to the vast majority of California voters. This tilt toward the far right became obvious when McCain chose Sarah Palin as his running mate. At the time of her nomination, I praised her as a smart, courageous leader and reformer. But ultimately I decided that I didn’t like the polarizing effect she had on the country.
If you visited the Schwarzenegger household that fall, you got a real blast of political diversity. I had a big John McCain poster on the front door. And in the living room stood a life-sized Obama cutout. The kids, for the first time, seemed politically engaged; the drama of the presidential election interested them much more than my job. I’d always teased Maria about coming from a family of political clones, but that was no problem in our household. One of our kids was a Democrat, one was a Republican, and two were independent/decline to state.
When it hit in late 2008, the Great Recession more than wiped out the progress we had made through years of discipline and cuts. Looking ahead to the next budget year, 2009–10, which began in July, we faced a combined gap for the current year and the coming year of $45 billion. In percentage terms and dollar amount, that was the biggest shortfall California had ever faced—in fact, it was the biggest shortfall any state had ever faced. The deficit was so huge that you could close all the schools and all the prisons and fire every state employee and still be in the hole.
Even when I took actions to save money, the budget got worse. With the collapse of the financial markets, we had to kick in billions of dollars to cover shortfalls in the public-employee pension system. I pushed hard for changes that removed the worst pension abuses, but it wasn’t enough. Meanwhile, prison spending soared, thanks to sweetheart contracts signed years before by previous governors as well as increases ordered by federal judges who actually took over parts of the system. I’d worked to save more than $1 billion by making controversial changes, including cutting out automatic pay raises for guards and reforming our parole policies. I had to fight the fiercest labor union in the state—the prison guards—at the same time I had to push hard against my strongest supporters in law enforcement, like the sheriffs and police chiefs. We proposed treating more nonviolent felonies as misdemeanors, shipping more prisoners out of state, and creating alternatives to prison for lower-risk offenders, like GPS monitoring and house arrest. We won major battles on those fronts, but prison costs still rose. In fact, we were now spending more on prisons than on universities.
The budget battles became like the movie
Early 2009 was the worst. Budgets are normally negotiated in June (and often into the summer, on and on).
