The Arnold Show

JOHN DECKER / SACRAMENTO BEE / ZUMA
DIRECT APPEAL: At a Stockton mall, the Governor in July asked voters to press for passage of his budget

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The latest move by the Governor's team is to threaten the legislature with a redrawing of the districts that elect them. Because the statehouse now determines voting districts, the current map generally ensures that incumbents face minimal challenges to re-election. That promotes the election of politicians who tend toward the extremes of their parties, and the resulting polarity in the statehouse produces gridlock. Schwarzenegger wants to set up a panel of nonpartisan judges to supervise redistricting. If, as expected, the legislature opposes the idea, he is considering going back to the people in a special election. "It is one option we have, definitely," says Mike Murphy, a senior adviser to Schwarzenegger. The Governor has also floated the notion of reducing the legislature to a part-time body.

Schwarzenegger's popularity frustrates the Democrats. "The guy is amazing. Stuff seems to bounce right off him," says Lance Olson, general counsel for the California Democratic Party. "Maybe someday some of it will stick, but so far he seems to be getting away with it." Others point out that the Governor's star appeal doesn't always translate into power. In the November elections, Republicans didn't pick up a single seat in the legislature despite Schwarzenegger's appearance at Republican rallies across the state. "Arnold has always said politics is like show business," says Art Torres, chairman of the California Democratic Party. "But the fact is, [his political events] are not producing political action."

Nor has Schwarzenegger resolved California's core problem: the state habitually pays out more than it takes in, and what it takes in is restricted by Proposition 13, a 1978 ballot measure that tightly limits property taxes. Despite hopes that Schwarzenegger would take on Prop. 13, senior aide Murphy says the Governor "doesn't believe in changing" it. Some $15 billion in bonds tided the state over for this year, but by early January, Schwarzenegger's administration must come up with a budget to plug what nonpartisan state legislative analyst Elizabeth Hill estimates will be a $6.7 billion deficit for 2005-06.

For the 2006-07 fiscal year, Hill expects past borrowing to swell the shortfall to $10 billion.

To be sure, the business climate in California has improved during Schwarzenegger's year in office. "His No. 1 goal in signing or vetoing bills was to turn the California economy around and bring jobs back to the state," says Richard Costigan, the Governor's legislative secretary. Early in his administration, Schwarzenegger pushed through reforms in the state's workers'-compensation system, whose spiraling costs had been a major complaint of business owners.

He also vetoed bills to raise the minimum wage and force smaller companies to provide health insurance for all their employees. The state may be seeing the fruits of those policies. In the past 12 months, unemployment in California has fallen from 6.7% to 5.7%. In the first half of this year, personal income increased 5.6% (compared with 5.1% for the nation as a whole), and taxable sales were up 6.1%.

California's exports increased 20% in the first three quarters of 2004, after falling 26% in the preceding three years.

While Silicon Valley has yet to recover from the dotcom bust, other parts of the state's economy are booming, including tourism, hotels and construction. The number of housing permits issued rose 4.4% from January to October. The defense industry, which lost 150,000 jobs with the end of the cold war in the early 1990s, has begun to grow again as a result of the wars in Afghanistan and Iraq. In the past four years, defense investment in California has increased 44%, and last year the state got $30 billion in military contracts, much of it in high-tech areas in which the state has a long-established lead, such as guided missiles, navigation and communications equipment, and unmanned aircraft. Wall Street has raised California's credit rating one notch above junk-bond status, though it is still lower than all the other 49 states.

But that new economic energy is not likely to solve California's fiscal crisis. Says analyst Hill: "It is very unlikely the state could grow its way out" of debt. She suggests that all options, including spending cuts and tax increases, be considered.

Schwarzenegger has repeatedly said he won't hike taxes but has been unable to get Democrats to agree on new spending cuts. And he has not been the cost slasher he promised to be. For example, after vowing to take back $300 million in pay and benefits promised to the prison guards, Schwarzenegger was bargained down to $108 million in savings for the state. (And despite his pledge at Mule Creek, he has done nothing to get guards to testify about abuses in the prisons.) In the coming year, the Governor's team promises to carry out some of the 1,200 proposals to streamline state bureaucracy that were set forth in a statewide review ordered by Schwarzenegger. They included the consolidation of 91 state agencies into 11 and the cutting of 12,000 state jobs, and could generate savings of $10 billion to $32 billion over five years. But many of the ideas are controversialsuch as eliminating county school superintendents and raising the age at which children can go to kindergartenand are certain to meet strong resistance in the legislature.