Governor Arnold Schwarzeneggers proposed budget has been called a stillborn document by Democrats, but the real problem, to borrow Alan Greenspans phrase about the stock-market bubble, might be the governors irrational exuberance. Even some Republicans in this town arent thrilled about the spending mess. Arnold should have raised taxes last year, says one ranking Republican. This deficit this year keeps going up, $7, $8, 9, $10 billion. Next year will be worse. We cant keep borrowing money. I dont see how you do it without balancing cuts with taxes. Last year, Schwarzenegger aggravated the problem with his popular termination of the states car-tax hike and patched together a budget by winning a vote of the people to make the massive borrowing constitutional. This time around, rosy predictions got the best of the action superstar. Schwarzenegger talked himself into believing that the states economy would boom. The economy is coming back in a big way, he told the Weekly last spring in explaining why he was not pursuing a temporary tax hike. This will lift the budget. We have to think positively. But despite his strenuous boosterism, the state has trailed the rest of the country and lost 25,000 jobs in December. All these things fit together, he said, encouraging the businesses, workers compensation reform, the performance review, MediCal reform, big new money from the gaming tribes, all these things will float the budget. Schwarzenegger talked himself into believing that his California Performance Review would lead to big savings through new governmental efficiencies. Estimates ranged up to $30 billion. But the Legislative Analysts Office expects far less. Schwarzenegger talked himself into believing that his MediCal reform plan would save millions. But the plan was late and still needs federal approval. If its approved and not blocked by the Legislature, it would save $144 million rather than the $400 million the administration touted last year. Schwarzenegger talked himself into believing that his deals with Indian casino tribes would yield big new revenues, upward of $300 million per year and a one-time gain of $1 billion. They will yield a mere $16 million this year. Schwarzenegger said he would present a budget with no more gimmicks and no more borrowing, and while there are fewer gimmicks, there is still massive borrowing some $3 billion worth. He and his people adopted a no-new-taxes stance, even though they havent cited any studies demonstrating the damage of a temporary tax increase. And while the performance review came up with many ideas for governmental efficiency, it never got around to examining the efficacy of mushrooming state tax expenditures, that is, loopholes. Like any giant superstar, says an Arnold associate in Hollywood, Arnold believes in the power of positive thinking. If he says it will happen in his career, it will happen. It always has. It isnt a reality- distortion field, its a reality-creation field. But reviving an economy and righting a government are of a different order of complexity and magnitude than winning a world championship or creating a movie franchise. The assertion of will can be weakness, not strength, when it amounts to denial of reality. Now, with his stated expectations about this years finances shredded by reality and in the wake of fresh reports that school performance is again sliding, he is reneging on his deal last year with the education community to make up for fewer state funds than schools were legally due this fiscal year. In January, the prestigious RAND Corporation reported that the states per-pupil spending and student performance both rank near the bottom of the nations 50 states. The governor says he wants to be a builder after the fashion of the legendary Governor Pat Brown, but he is reneging on his promise to invest in the states failing roads and highways. In fact, his budget would take $1 billion earmarked for transportation from the gas tax and use it to paper over the budget deficit. This is no way to build a legacy. Assembly Speaker Fabian Nuñez promises a series of hearings around the state on a Democratic alternative: No budget will be crafted in backrooms with the fingerprints of ideologues and corporate interests all over it. We will let the interests who have been protected by this budget have their say, but they will have to take their place with all the others. I know from my own experience that government isnt a monster that needs to be starved, says Nuñez. This refers to a Schwarzenegger quip perhaps a rhetorical sop to his partys hard right at a Sacramento Bee editorial board meeting. In it, he spoke of starving the beast of government rather than feeding it with revenues that havent materialized, an echo of right-wing pamphleteer Grover Norquist. The Democratic road show has been under way. It includes most of Californias statewide elected officials. Treasurer Phil Angelides, Attorney General Bill Lockyer, Controller Steve Westly, state schools chief Jack OConnell and Lieutenant Governor Cruz Bustamante are all pitching in. Democrats are focusing initially on Schwarzeneggers education cuts, and record borrowing, with interest costs on new bonds exceeding any likely total for temporary tax increases. Later, say strategists, they will emphasize the budgets toll on senior citizens, with the proposed cut in pay for in-home health workers to the minimum wage, making it more likely that seniors will have to choose more expensive nursing homes, draining private savings and costing the state more money. Top Democratic operatives across the board believe Schwarzenegger has overreached this time. Perhaps he has. His great successes in the November election came when he worked in a bipartisan manner on ballot initiatives. When he listened to core Republicans around him and tried to take Democratic legislative seats in districts he carried in his own election, his strenuous efforts fell flat. Are we seeing the real Arnold in this budget? We saw much the same thing with his first budget proposal last year. Within a few months, after Democrats began negotiating with him, its hard, bloody edges had softened considerably. But his resistance to any new taxes does seem tougher than a year ago, even inaccurately so. Schwarzenegger claimed last week that all the polls show 2 to 1 opposition to any new taxes. Actually, private and public polls show substantial support for some new taxes. The Public Policy Institute of California poll shows just 34 percent support for Schwarzeneggers current position of using only spending cuts to bring the budget into balance; 51 percent want new taxes in the mix. So with that argument dispensed with, why the hesitation on taxes? Is it geared to something other than appeasing conservatives? Schwarzenegger finance spokesman H.D. Palmer says that one problem with tax increases is that You would have to raise taxes by $6.5 billion before every dollar goes into non-educational spending. Before that point, 54 percent of the revenue would go to education. In other words, to raise $3 billion to avert cuts in social programs, over twice that amount would have to be raised in taxes because of the Proposition 98 education-funding mandates. Unless Schwarzenegger, who is railing against autopilot spending, wants to ignite a second fight with the education community by finding another way around Proposition 98 or suspending this provision altogether. Perhaps in a bid to build support for this move among Democrats, he has moved the tax option off the table. Meanwhile, the budget picture is clouded by partisan bickering over Schwarzeneggers touted reform package on reapportionment, merit pay for teachers, state-worker pensions, and spending limits, which Schwarzenegger threatens to make a giant special election showdown later this year. Compromise is possible, but the governors approach of hostile bluster one day and sweet reasonableness the next is baffling and annoying Democrats. Were getting whiplash trying to figure out which Arnold to deal with, says strategist Steve Maviglio. We think there is an internal battle between the Republican politicos and the folks that want to work to actually get stuff done. Maybe the governor should abandon his predilection for rosy scenarios, dispense with the rhetorical shifts, settle any internal squabbling, and simply dump the borrowing and gimmicks he said would be absent from this budget and present a real balanced budget. Whatever it looked like, it would not be pretty. But by delivering on the straight talk about the budget that recall voters thought they were getting, it would be a good starting place for finally solving this crisis.