POLITICAL LIFE SINCE THE NOVEMBER 2005 defeat of his “Year of Reform” special-election initiatives has been a whirlwind of change for Governor Arnold Schwarzenegger, who has thoroughly revamped his political operation. The Weekly has learned that just before the upheaval began, the governor received an anonymous letter alleging serious financial mismanagement and improprieties in his political operation. The letter triggered an unprecedented round of questioning of the governor’s political consultants by his legal counsel.

The “letter was a stupid smear and 1,000 percent bullshit,” said Mike Murphy, who until last month was the man in charge of Schwarzenegger’s political operation. He referred questions to the governor’s lawyer, Tom Hiltachk.

The letter alleges that some $2.5 million was ripped off from the Schwarzenegger political operation in “under the table compensation,” which was purportedly accomplished in a variety of ways, from kickbacks to signature gatherers to unusual commissions. (Schwarzenegger was paying as much as $3 per signature in some cases in his late-starting special-election campaign operation’s bid to qualify ballot measures.) Questions were also raised about lucrative media buying — which had long been a source of contention and competition within the team — and fund-raising events and overhead.

“The allegations in the letter were outlandish,” says Hiltachk.

Hiltachk acknowledged that although Schwarzworld is a place of control and confidentiality agreements, this marked the first time that the governor had asked his legal counsel to question his political consultants about their financial and other practices. After first saying that he was unaware of previous rumors about malfeasance, which, according to sources, Schwarzenegger ignored, his attorney acknowledged having heard them and dismissing them. These rampant rumors, which not infrequently surfaced in daily newspapers, sometimes with Republican names attached to them, had previously alleged that Schwarzenegger was being taken to the cleaners by his political consultants. Hiltachk, like the Schwarzenegger consultants before them, says he thought the claims were “sour grapes” from people who weren’t making the money.

Yet this time, with the anonymous letter in hand, he proceeded to contact and question individual members of then–Team Schwarzenegger about them.

Asked why he would bother, Hiltachk says: “It was my obligation to Arnold and Maria to let them know the charges had been checked out.” Why was this letter, “unfounded” as earlier rumors were said to be, any different from those rumors? Hiltachk had no direct answer but repeated his line about his obligation to Arnold and Maria. His conclusion after investigating, he says, is that the charges were “unfounded.”

And yet, soon after the questioning ended, Schwarzenegger began making major changes in his political operation. Whatever the merits of the charges, says an informed source, “this helped crystallize his thinking that he needed to make big changes.” The governor had the biggest, most expensive political operation in California history and nothing to show for it but four big defeats, a tired fund-raising cadre, and $8 million gone from his personal bank account.

Murphy, frequently absent while working for other political clients and corporate clients and pursuing potential Hollywood projects, became viewed as “an absentee political manager.” After being replaced as chief strategist by Bush adviser Matthew Dowd, Murphy became a “volunteer.” Although not all the consultants had supported the special election, an entirely new core group emerged.

See Bill Bradley’s blog for more on the shakeup in the governor’s office at www.newwestnotes.com.

LA Weekly