California’s economy looks like it’s driving off a cliff. But we’ve already crashed over the railing and are now free falling towards certain doom.

The budget deficit has reached $26.3 billion, with negotiations on how to close the gap going nowhere. The state’s credit rating has dropped to its lowest level in years. California can’t pay its bills, and has begun issuing IOUs – to old, blind and disabled people who rely on state grants, recovering addicts in drug treatment programs, and those with developmental disabilities and mental health treatment needs. (Things are so bad that even the IOUs are being issued late.) The University of California, the Public Employees’ Retirement System, prisons, judges and lawmakers, themselves, however, still get paid cash. State workers, on the other hand, have begun taking three unpaid furlough days a month.

Per usual, it’s the old and the very young, the poor and the sick getting screwed by Sacramento. They don’t have a lot of money or loud voices, and so they are easy to ignore. And the draconian measures against the most vulnerable residents have only just begun.

Gov. Arnold Schwarzenegger has proposed dismantling the state’s health and welfare safety net services, suspending the Proposition 98 school-spending guarantee, and locking residents out of 220 parks to save money. Despite pleas from protesters in wheelchairs outside of his office last week, Schwarzenegger and Republican legislators have vowed to produce a cuts-only spending plan, and say they won’t support any tax increases to pay for services.

“SCHWARZENEGGER DOESN’T THINK HIS ROLE IS TO SIT AT A TABLE UNTIL THERE IS AN AGREEMENT AND KNOCK HEADS UNTIL PEOPLE APPROVE IT.’’

It got so bad that one of the Big Five – the top Democrat and Republican in both houses and the governor – left the bargaining table altogether. Protesting the governor’s demands for huge changes to California’s in-home healthcare, Medi-Cal and welfare programs, and the public employee pension system, Assembly Speaker Karen Bass, a Los Angeles Democrat, left the closed-door meetings, growling that Schwarzenegger “broke it. He should fix it.” (Bass has since returned to negotiations.)

It makes sense that as the car – California – races off a cliff, the driver – Schwarzenegger – should be held responsible.

“The governor is the titular head of the state,” says Rep. Sam Farr, who spent 12 years in the state Assembly before being elected to Congress in 1993. “It really takes the governor to lead.”

Farr says he toured Santa Cruz in 1989 with Schwarzenegger’s no-tax predecessor, then-Gov. George Deukmejian, after the Loma Prietta earthquake devastated Northern California. “The press asked him, ‘How are you going to find the financial resources to fix this?’” Farr remembers. “He said, ‘I’m a no-tax governor but this is a unique natural disaster and we have to have new spending.’ I thought that was a real profile in courage.”

Deukmejian then proposed a temporary sales-tax increase and persuaded fellow conservative Republicans to support the tax to repair infrastructure damaged by the quake.

In 1991, when newly elected Gov. Pete Wilson and the Legislature faced a record $14 billion deficit, Wilson said he would solve the problem through $7 billion in spending cuts and $7 billion in increased taxes. The Dems would decide the cuts, and Republicans would decide the taxes.

And then, says former Central Coast Assemblyman John Laird, once lawmakers reached a budget deal, Wilson called Republican legislators into his office, one by one, and secured enough GOP votes to pass the budget by two-thirds.

“That’s why I said, ‘I want Pete Wilson back,’” Laird says. “He had been a mayor and a legislator. He was pragmatic, and as he faced the problem he knew you had to make cuts and raise taxes, and he used the power of his office to persuade enough Republicans to approve it, and he got the budget out. He got the job done. Governor Schwarzenegger doesn’t think his role is to sit at a table until there is an agreement and knock heads until people approve it, and that’s what we’re missing right now.”

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If California has a bad driver, however, it’s also got a broken car.

Causes of the crisis are obvious; the critical question now is whether there’s the political will – finally – to solve them.

Start with Proposition 13: Voters approved it in 1978 to slow climbing property taxes, particularly on homes along the California coast. It worked – but it also cut income to local cities, counties and school districts by about 50 percent. And started the budgeting-by-ballot-box trend.

“Prop 13 was the bellwether for the new attention to initiatives as a business,” Farr says. “Campaign managers realized, ‘We can come up with something very emotional, put it on the ballot, and buy a constitutional amendment with an initiative.’”

These ballot measures have earmarked funding for public schools, mental health programs and medical care, all noble, worthy priorities for California to support with tax dollars. But while the initiatives mandate state funding, they don’t provide a source to pay for these new expenditures.

The state’s sorely outdated tax system only exacerbates matters. Lawmakers enacted its sales tax during the Great Depression, “when we were a country of goods, and so we taxed goods,” says County Supervisor Jane Parker.

“The biggest growth in our economic structure has been in the services sector, so maybe we’re not taxing the right thing. What if we lowered the sales tax, but applied it across the board to goods and services, all kinds of services? If we’re really serious about making sure we have the revenue stream to do the business of California, we need to keep up with the times.”

To make matter worse – much worse – California’s two-thirds legislative vote requirement to pass a state budget effectively cedes control to the minority party.

“It empowers the Republicans to block a budget without offering a proposal, and that’s completely dysfunctional,” Laird says.

Adds Farr, “We can go to war on a simple majority vote. We can take away life and property with a simple majority vote. If it’s worked for 200 years for a nation, why does it have to be different for California?”

“WE CAN GO TO WAR ON A SIMPLE MAJORITY VOTE. IF IT’S WORKED FOR 200 YEARS FOR A NATION, WHY DOES IT HAVE TO BE DIFFERENT FOR CALIFORNIA?”

Because we’re different in California, and we like it that way. Despite our disasters – fiscal, natural and otherwise – we’re the Golden State. We elect movie stars as governors. We captivate the country’s imagination with our Silver Screen images, and we feed it with our fruits and vegetables. Our progressive politics – like the first-in-the-world greenhouse gas emissions reducing legislation and San Francisco Mayor Gavin Newsom marrying gay couples on the courthouse steps – herald national and international policy to come.

But now, off a cliff and plummeting toward destruction, has California become ungovernable? Many of the state’s brightest thinkers and policy makers say no. Perhaps it’s brilliantly f****d up, but it’s not beyond repair.

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A blue-ribbon commission meets Thursday, July 16 (webcast at www.cotce.ca.gov), to discuss a new tax structure, which former Central Coast Assemblyman Fred Keeley calls “the most massive change in the history of the tax code in the state.” Its recommendations, likely to be finalized by the end of the month, will then be turned over to the Legislature for adoption. Meanwhile a nonprofit called California Forward (www.caforward.org) drafts a series of initiatives for the 2010 ballot intended to reform the budget process – and governance in general. Both are bipartisan (former Central Coast legislators Bruce McPherson, a Republican, is a member of California Forward, and Keeley, a Dem, serves on both).

“We have a budgeting procedure and a governance system that’s way out of date, and that’s what we’re addressing at California Forward,” says McPherson, who served in the state Senate and as Secretary of State.

At a conference call late last week, California Forward members “continued our conversation about what should be included in the packages, of reforms that will go to the ballot in 2010, one is a governance package, one is a budget and fiscal package,” Keeley says.

The group has yet to make any final decisions – that will likely happen in the fall – but its ballot initiatives will address issues like: lowering the two-thirds budget vote requirement; implementing a two-year budget cycle; requiring ballot initiatives that increase costs to identify a source of revenue other than the General Fund; setting a spending cap; changing term limits; strengthening local control of revenue at the city and county levels; and others.

On May 19, the day after Californians voted down a series of budget-related ballot measures, a group of business leaders and political reformers formally launched a campaign to call a constitutional convention – the state’s first in more than 130 years.

“California’s government suffers from drastic dysfunction – our prisons overflow, our water system teeters on collapse, our once proud schools are criminally poor, our financing system is bankrupt, our democracy produces ideologically extreme legislators who can pass neither budget nor reforms, and we have no recourse in the system to right these wrongs,” wrote Jim Wunderman, in an editorial for the San Francisco Chronicle. Wunderman is the president and CEO of the Bay Area Council (www.bayareacouncil.org), a business group leading the charge to call a convention. “It is our duty to declare that our California government is not only broken, it has become destructive to our future. Therefore, are we not obligated to nullify our government and institute a new one?”

The Bay Area Council plans to put two initiatives on the November 2010 ballot. One would authorize voters to call a convention directly (without a two-thirds vote of the Legislature), and the second would choose 400 residents to serve as “citizen delegates” at the convention.

While a constitutional convention would undoubtedly generate interest among typically apathetic voters, it’s got its own fatal flaws. Recommended constitutional changes coming out of the gathering would then need to be ratified by voters at a future election, 2012 at the earliest, which means that any modifications – to the budget process, campaign finance or term limits – are years away. Once it’s called, some lawmakers say it would be impossible to govern what topics are open for discussion. So, for example, anti-abortion activists could put the issue on the table, alongside general government and budget reform. And there’s the question of money. A 2008 convention in Illinois cost that state $23 million. Considering California’s already billions of dollars in the hole, it’s unlikely that the state is going to foot the bill for a multi-million-dollar affair.

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A few other possible fixes seem more feasible. Farr suggests a constitutional revision commission, similar to the one he staffed in the 1960s, supported by Democrats and Republicans alike.

“It was essentially a clean-up process,” Farr says, “looking to other state constitutions, looking at inconsistencies, making the language appropriate. The group’s recommendations came out, article by article, and as they finished each article, it would go to the Legislature, and then to the voters.”

Voters approved the last of the commission’s work in 1970.

“We’ve got to go back to the basics,” Farr says, “find a way of building credibility. We need to clean up our constitution and modernize it. We’re trying to run a modern nation state on third-world law.”

There’s another reform-minded commission already in place: The governor’s Commission on the 21st Century Economy. They’ve got a daunting task ahead – recommending changes to the tax system, intended to stabilize revenues. And an impressive lot of policy wonks: heavyweights like Chair Gerald Parsky, who served as a Treasury Department official under presidents Nixon and Ford, and advised Sen. John McCain on foreign economic policy during his presidential candidacy. Conservative economist Michael Boskin’s a senior fellow at the Hoover Institution, and a Stanford professor. On the other end of the political spectrum, there’s Berkeley Law School Dean Christopher Edley Jr., who worked for President Clinton in a variety of capacities – as special counsel and economic policy advisor, among others – and he’s tight with the Obamas. Santa Cruz Tax Collector Fred Keeley served as Assembly speaker and also sits on the California Forward board. And the list goes on.

It’s a disparate group, half appointed by the Republican governor, and half by the Democratic Legislature, but they all agree on one important point: California’s revenue system – primarily personal income and sales tax – needs stability. It sees huge windfalls in good economic times, and then massive losses during downturns, like the current recession. Whether the group can agree on how to fix this, however, remains to be seen.

So far, the commission’s zeroed in on a tax package championed by Parsky and the conservative members of the group that would eliminate the corporation tax and the state sales tax, add a new “business net receipts tax,” and adjust the personal income tax to a 6 percent rate, allowing deductions for mortgage interest, charitable contributions and property taxes.

“The first package on the table, whether intentionally or not, would have the effect of taking the overall tax burden and shifting it from very high-income folks, to middle-income and lower-income folks, and I’m not supportive of that,” Keeley says.

Late last week, he and Edley proposed an alternative they call the “Blue Plan,” which would reduce the capital gains rate, the state sales tax, and the corporation tax all by 2 percent; adopt a carbon-based fuel tax, allow cities and counties to ask their residents to increase existing sales tax by up to 1.5 percent; change the non-residential property tax rate from 1 percent to 1.5 percent; and establish a rainy-day fund, in addition to requirements on the state’s tax expenditures.

“On July 16 in San Francisco, there will be a thorough analysis of what I call the ‘Red Plan,’ the more conservative plan,” Keeley says. “And there will be a request that the same level of analysis be applied to the Blue Plan.

“At the July 22 meeting in L.A., we’ll see if we can take the Red Plan and Blue Plan and negotiate a Purple Plan. That will be the consensus project.”

All of these efforts should help bring stability and sanity back to the Golden State – but not soon enough to ease the pain of this year’s $26.3 billion shortfall.

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“There’s a stalemate. We are at an impasse,” says Sen. Abel Maldonado, a Republican who represents the Central Coast and cast one of the crucial votes in the state’s last budget go-round. He, and a few other Republicans in both houses, crossed party lines and supported the budget deal that called for new taxes. He also campaigned for new tax measures on the May special election ballot.

“And the people in California said no to that,” Maldonado says. “I heard their message loud and clear.

“The governor has asked us for a budget that has three things: number one, cuts, number two, reform, and number three, some money shifting. The question is, where are the cuts? Where are the shifts coming from? Where are the reforms? I think we all, in this building, know that it’s going to be a budget with no new taxes.”

Inside and outside of the building, we all know it’s going to be ugly. And it’s going to hurt.