Quotes of the Day

Governor Arnold Schwarzenegger pulled up in an SUV outside Mule Creek State Prison in the Sierra foothills. The Governor was in combat mode. Of all the legacies of dysfunction he had inherited from his predecessor, Gray Davis, the situation in the prisons was one of the most flagrant. Big campaign donations from the prison guards' union to Davis had ensured that the guards in 2002 won 34% wage increases over five years, and with overtime many were earning fat salaries; one pulled in more than the state's attorney general. But the work practices of the guards lagged. They seemed unable to curb gang violence among the state's 164,000 inmates and were admonished by a judge for using mass lockdowns to segregate prisoners racially. Some were accused of instigating gladiator-style prizefights in the cell blocks.

Standing inside Mule Creek, Schwarzenegger declared the state's entire prison system "broken." He lashed out at the wall of silence that he said prevented guards from speaking out about abuses committed by their co-workers. "We won't stop until we tear down the whole wall and see it on the ground in a pile of rubble," he said.

The Gubernator's pugilistic performance was not over. As he walked around the facility during his August visit, he spotted a small replica of the long conference table that stands in his Sacramento office; the table itself was built in the prison's carpentry shop.

Schwarzenegger couldn't stop himself from bragging: "I am the only one in the Governor's office who can pick it up."

Californians have come to expect such antics from their Republican Governor. At a typical event, he comes crashing onstage, delivers a macho statement of intent, metaphorically flexes his muscles, then roars away. Nothing could be more different from the distinctly undynamic Davis, who ended up a hostage of Sacramento's lawmakers and lobbyists and who certainly couldn't lift the Governor's conference table. In his first year in office, Schwarzenegger has proved to be a rousing political one-man show. In a quip that partly mocked his old Saturday Night Live caricature, he branded Democratic legislators who were blocking his budget as "girlie men." Just last week he trash-talked a group of nurses protesting his decision to delay a planned increase in nurse hirings, saying they were among the special interests who "don't like me in Sacramento because I am always kicking their butts."

The public loves the performance. Schwarzenegger enjoys a fairly stable 65% approval rating. What's more, California's economy has improved under his leadership. At the end of the Davis administration, 76% of California voters said they believed the state was going in the wrong direction, according to the nonpartisan Field poll. Today the figure is 38%, and 46% think things are heading upward. "There is a new sense of optimism in the state, new energy flowing from the Governor," says Gavin Newsom, the Democratic mayor of San Francisco and no automatic supporter of Schwarzenegger, who frowned on Newsom's February decision to sanction same-sex weddings in his city hall in defiance of the state's law.

But despite the feel-good sentiments, Schwarzenegger, who came into office promising to balance the state's books, has yet to implement any major financial reforms, and the bills for past borrowings are coming due. He has tried to use his popularity to go around the Democrat-controlled legislature, but governing through ballot initiatives has its limits. "Arnold is the 'stop the bleeding' guy," says Joel Kotkin, a Schwarzenegger supporter who is an economic analyst at the New America Foundation, a nonpartisan think tank based in Washington. "But I don't know if he is going to do the reconstructive surgery."

At the heart of Schwarzenegger's strategy has been careful deployment of his star power, which dwarfs the political power of individual members of the legislature. "He knows that for him to win, he has to use outside pressure, not inside deals," says Republican Congressman Dana Rohrbacher. When Democrats in the legislature balked at passing a $15 billion bond measure that Schwarzenegger put forward in November 2003 to prevent the state from going bankrupt, he appealed directly to the people in a special ballot last March. The bond measure passed easily. The Governor's spokesman, Rob Stutzman, is unapologetic about the end run. "The legislature is inherently not popular, the Governor is inherently popular, and we've shown we know how to use that, and will probably use it again," he says.

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 controversial—such as eliminating county school superintendents and raising the age at which children can go to kindergarten—and are certain to meet strong resistance in the legislature.

"It is very hard to see how it's possible to balance the budget fairly without asking the most fortunate of Californians to pay a little more," says the Democratic state treasurer, Phil Angelides, who says he plans to run for Governor in 2006. Angelides argues that Schwarzenegger has "a Bush-like approach to the budget, which is to say he borrows massively and the only sacrifice asked is by those who are less fortunate." Angelides points to four-figure increases in student tuition at state universities as well as hikes in premiums for many working families that insure their children through the state-managed Health Family program.

At the same time, Schwarzenegger is coming under attack by Republicans on his right who object to his progressive position on many social issues. Says state senator Tom McClintock, who ran against Schwarzenegger in the election that recalled Davis: "You cannot finance socially liberal programs with fiscally conservative policies. The math just doesn't work." Conservatives like McClintock think Schwarzenegger caved in too easily to Democratic opposition to a $1 billion cut in health and social services last year. They also disapproved of the Governor's support for a ballot initiative, passed handily in November, that provided $3 billion in state funds for stem-cell research over the next 10 years. Supporters argue that in the long term the state stands to gain from the potential discoveries, but meanwhile the measure adds to California's indebtedness.

Schwarzenegger's social liberalism tends to bolster his standing in a state known for its progressive politics. Besides endorsing stem-cell research, the Governor signed off on measures that would cut greenhouse gas emissions from cars 22% by 2012 (a move that nine automakers challenged in court last week) and allow hybrid vehicles to use carpool lanes on freeways. He created the 25 million-acre Sierra Nevada Conservancy, the biggest nature conservancy in the state. He signed a bill prohibiting sale of .50-cal. guns, and came out for a ban, to take effect in 2012, on force-feeding ducks, which is how foie gras is produced. "Arnold is the leading indicator of the revenge of the political moderates," says Paul Saffo, a director of the Institute for the Future, a Silicon Valley think tank. The Governor has deliberately created a distance between himself and the more conservative wing of the Republican Party. During the presidential campaigns, he appeared only once, in Ohio, for George W. Bush.

The Governor has brought a more fun-loving approach to Sacramento than his predecessor. The state capitol is now a tourist attraction.

Visitors, many from overseas, flow through the metal detectors at the building entrance and wander the corridors right up to the doors of his office, hoping for a glimpse of the Gubernator. "He is very mindful of that, so he walks about a lot," says Pat Clarey, his chief of staff. "It is kind of fun walking the hallways with him as the cameras go off." Schwarzenegger's mantra to the office staff is borrowed from the movies—"Action, action, action." Not surprisingly, a steady stream of celebrities drops by: Clint Eastwood, Tom Arnold, Danny DeVito, Anthony Hopkins, Jamie Lee Curtis. Clarey posts snapshots of the famous visitors on her office wall.

Looking down the line, Schwarzenegger is already collecting donations for his re-election campaign in 2006, although he has not yet announced that he will run. The fund has $1.1 million on deposit. His staff is "operating on the assumption of a re-elect unless he makes a decision otherwise," says spokesman Stutzman. And what about a constitutional amendment that would allow a foreign-born citizen to run for President? "He is in favor of amending the Constitution, but he thinks the amendment shouldn't be about just him," says Stutzman.

The talk of a presidential run "is one of these things that are always with us. Sometimes it can be fun and amusing, sometimes it's distracting." Whether or not Schwarzenegger attempts to follow in Ronald Reagan's footsteps from Sacramento to the White House, he has already created a stir in California politics. The question now is whether he can leave a permanent mark on the state by solving its ancient problems

• TERRY MCCARTHY