With the Iraq-plagued George W. Bush sliding down the toilet in California, the main thing going for Republicans in the Golden State is the action superstar turned fusion governor. Arnold Budget 2.0, more formally known as the governor’s May revision, is getting mixed reviews. (Arnold Budget 1.0, in January, was dead on arrival.) It is receiving praise across the board for its political adroitness and criticism for going only partway toward structural reform. Many, including legislative analyst Elizabeth Hill, see it as a buy-now-pay-later approach that achieves many reductions today in exchange for future spending tomorrow, bets big on an economic revival, and defers some hard choices to the future.

Schwarzenegger’s proposed $102.8 billion budget contains major reductions in education, local government, welfare and prison spending but is something of a relief to many Democrats who feared a harsher approach. The fearsome terminator has cultivated many Democrats, none more so than Senate President John Burton, the famously acerbic San Francisco liberal whom the governor has courted nearly as assiduously as he courted Maria Shriver, with an endless array of gifts and chats. Burton has definitely responded to the action superstar’s overtures. While expressing disagreement with some of Schwarzenegger’s latest budget proposal, he lauded the governor’s good intentions, saying: “I know he cares about people less fortunate than he is. Hell, we’re all less fortunate than he is.”

While it might be balanced this year, most analysts see it as unbalanced in the future, not getting rid of the structural deficit that emerged from the state’s continuing to spend heavily even after the collapse of the dot-com boom.

That is not how the many-time Mr. Universe — buoyed by the first increase in the state’s beleaguered credit rating in years, from squat to squat-plus — sees it. “This is a great budget,” he tells me. “A great budget. You know me, I focus on one thing at a time, but I work on many things at a time. It is all part of a large picture. Don’t focus on a negative piece.

“First we stabilize the finances of the government with the economic-recovery bond. We improve the climate for the businesses with the workers’-compensation reform. We grow the economy and figure out how we grow smarter to cut the sprawl and pollution. Now we move forward with a budget that starts cutting away but preserves essential services for the people.”

But that does not raise taxes, at least not yet.

“This is not the time to raise taxes,” says Schwarzenegger. “The economy is just beginning to revive. It is a fragile thing. The state already tells the businesses to do so many things. We need the businesses to stay here and succeed to generate the revenues we all want for good programs.

“You see,” he says, “I am trying to reform the budget and reform the economy at the same time. It is not just one thing, it is both. If we reform the economy, we have more revenues. To do that we need to cut business costs with workers’-compensation reform and energy reform, keep the businesses here and attract more business. We grow the economy to grow our revenues.”

Or, as his Uncle Jack put it: “A rising tide lifts all boats.”

“You will see,” says the ever-confident Schwarzenegger. “We get the budget done, then we do energy reform to cut more business costs and help the environment, we start on education reform, we use the Performance Review and Medi-Cal reform to do more structural reform on the budget. Then we see where we are.”

Needless to say, he is counting on things that haven’t happened yet.

Does he expect this year’s budget — which, despite its avoidance of the bloodiest health and welfare cuts, still seriously dings college students on fees and access to universities — to go through as is?

“We will work it through,” says the governor, who celebrates compromise as victory, “then we will have a compromise like we did on Prop. 57 and 58 and on workers’ comp, and everyone will be a winner.”

The governor brushes aside the complaints of students and their parents who would see their admissions to four-year state universities shunted aside for two or more years into crowded community colleges. “I took classes where I could,” says America’s most famous immigrant. “There is nothing wrong with going to community college. I went to Santa Monica College, I went to West L.A. College, I made it work for my bachelor’s degree,” he notes.

Of course, that is easy for him to say, since his career path has been anything but conventional, and he knows full well that few are as single-mindedly determined. And, while his future was not assured, he was already Mr. Universe when he came to America with his legendary gym bag and 50 bucks.


The combination of unexpected one-time revenue from a hugely successful tax amnesty and better-than-projected ongoing revenues was enough to avert politically bloody cuts in health and welfare programs proposed in the first version of the budget and to avoid temporary tax increases, at least for now.

The unanticipated revenues, by a fortunate coincidence, total roughly the same amount as contemplated in Schwarzenegger’s temporary tax-increase scenarios. “He is the luckiest man alive,” says one longtime L.A. observer of the Hollywood superstar.


As befits someone who has now embarked on his third extraordinary career, luck is only part of it. Schwarzenegger did deals with the teachers’ union, state university leaders, and local government honchos that would lead to reduced state spending for two years and more spending after that. He is buying time for his hopes to come to fruition. If they do not, he has the traditional tools of more cuts and taxes to fall back on.

There have always been scenarios for temporary tax hikes in the Schwarzenegger circle, usually for the few billion dollars matching this year’s revenue windfall. After the most recent time I reported that, Schwarzenegger himself allowed in a series of newspaper interviews that it might just be necessary, that perhaps he had been in “denial.”

The governor had been asked point-blank, at two press conferences, to make a hard-and-fast pledge not to raise taxes. He had artfully declined to do so, despite having veered more into anti-tax rhetoric in the recall campaign.

Schwarzenegger’s sometime mentor Pete Wilson raised taxes right away when he came into office with a huge budget deficit. But circumstance may have forced Schwarzenegger’s hand in the campaign. His friend and “chief economic adviser” Warren Buffett’s famous musings about the need to reverse Proposition 13 nearly cost him one of his few “issue anchors,” as his advisers called them, on the right, the Howard Jarvis Taxpayers Association endorsement, which he had to chase again for weeks because right-wing Senator Tom McClintock wouldn’t get out of the race. And Schwarzenegger leads a Republican Party that has grown used to saying no, for whom avoidance of any tax increase has become an article of almost religious faith.

The truth is Schwarzenegger articulated no real budget plan in his campaign, just a dodge — “Here is my plan,” he intoned in a TV spot, “audit everything, open the books, and then we end the crazy deficit spending.” He vowed that The Audit that would find billions in waste, fraud and abuse. (His polling indicates that most voters think between one-quarter and one-third of the state budget is wasted spending, a fanciful notion that explains why most voters have not wanted either cuts or, with few exceptions, tax increases.) But The Audit as such didn’t take place in the promised 60 days, and was a mechanism to bring highly touted conservative Donna Arduin in from Florida as his state finance chief. Arduin did an overview of the state’s tangled finances before being thrust into budget making.

Schwarzenegger’s approach was much like that of his signature movie characters, who would say “Trust me” with an ironic grin. As Arduin began with her patented social-service cuts, Schwarzenegger ran into an immediate problem on cutting aid to the mentally disabled, a mushrooming state program. And backed down. He instituted a long-range project promised in his campaign called the California Performance Review (CPR), which is the real Audit, looking for ways to perform the same governmental functions more efficiently.

Schwarzenegger took mock umbrage at my recent report that the CPR is behind schedule. “We will blow up the boxes,” he says, referring to his famous line in the State of the State address about remaking state government. “And you may be in one of the boxes, Bill.”

“We will do the CPR early next year,” he declares. “We will get the savings from it and move forward.” The administration had hoped for an accelerated reorganization plan for state government agencies this spring, but in the midst of Schwarzenegger’s busy agenda that fell by the wayside, a victim of internal dissension and opposition from lobbyists and other special interests.

But what if the savings don’t come, what if the economy doesn’t revive to the extent Schwarzenegger intends? Is it better to raise taxes early and get over the hit, as Schwarzenegger could clearly do despite the entreaties from some who’ve convinced themselves the recall was about tax avoidance, or do it before an election?


“It will work out,” says Schwarzenegger. That has always been his experience. Before he was governor.

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