Democracy is one of those words that can have a very broad meaning. To what ever extent you believe the state of California is a democracy, you should be aware that the ongoing economic crisis is putting severe burdens on "rule by the people."
Some would say that California is, in fact, a republic, not a democracy. See my America, Republic or Democracy? for an introduction to this topic for the United States. Most of the arguments apply to the state of California as well.
We certainly have very few elected officials compared to the size of the population (37 million). There are only 80 members of the California State Assembly and 40 members of the California State Senate. In most of the states of the United States there are far fewer voters in a district for a state legislative seat than there are for a member of the United States House of Representatives. But in California the Assembly districts are only lightly smaller than U.S. House seats (California has 53 Representatives in Congress). Each California State Senate seat represents almost 900,000 people and is larger than a congressional district.
That means only tiny percentage of people in the district have any meaningful access to their representatives. Which in turn means that interest-group lobbies rule. The most powerful lobbies in the state represent corporations, often ones that do business in the state but are headquartered in other states. Sometimes they are foreign (non-U.S.) multinational corporations. Other powerful lobbies include state employees unions and professionals like lawyers.
You might think with a small ruling political class, what government lacked in democratic representation would be made up in efficiency and unity of purpose. But the government of California is probably as inefficient as any on earth. It can't make decisions, unless it is making bad ones.
Blessed with natural resources, including a window on the economically important Pacific Ocean rim, and a talented people of diverse backgrounds, California has prospered despite the state government, not because of it.
The only thing our legislators are good at is blaming someone else for their incompetence. Generally speaking, those associated with the Democratic Party and those associated with the Republican Party cast the blame at each other at election time. That way few voters look closely at the legislative record of their own representatives.
If California were split into 2, 3 or 4 states, each state might be small enough to reform and govern itself. If California split from the United States, we might divide it up into 20 or so regions each with a population larger than many of the current united states.
A more likely solution would be up to the people themselves. They could create California-based political parties that made California issues the decisive factors in state elections. Most citizens can only devote so much time to paying attention to politics. Naturally, they pay attention to big-issue national politics: war and peace, and which Congressmen are cheating on their wives. So they vote for members of the California State Assembly and State Senate based on party identifications that have little to do with governing California.
Throw the rascals out should be the rallying cry for Californians in the 2010 elections. But the usual will happen: the power of incumbents is so great that none, or very few, will fail to be re-elected unless they are term-limited out. And when there is a term-limit reached, the party machines will have some hack ready to step in and play at politics the same as the old hack. The donors seldom change, just the political faces that their money buys.