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The Money That Fueled California's Election Revolt

How Governor Arnold Schwarzenegger and state business leaders bankrolled Proposition 14 to toss out party primaries

Arnold Schwarzenegger ends his seven-year run as California's governor with a 23 percent approval rating and a $19.1billion budget deficit. When the former action movie hero heads out of Sacramento in January for good, he can take some solace from the fact that he orchestrated an effective alliance with business leaders to push through a ballot initiative that just might change the way the state is governed.

Californians voted enthusiastically on June8 to approve Proposition14, a measure that will replace primaries with wide-open elections by 2011. Schwarzenegger's political action committee, plus and some prominent California executives, raised $4.6million to promote the referendum. What united most of them was a distaste for the vintage California brand of partisan politics that ultimately doomed the governor's efforts to cap government spending, something that might have averted the state's fiscal crisis.

"It makes me sick, this state is so dysfunctional," says Los Angeles real estate developer Brian Harvey, who contributed $100,000 to support the measure. "I think this will attract more moderate candidates." Other backers such as Netflix (NFLX) Chief Executive Officer Reed Hastings ($257,000), Hewlett-Packard (HPQ) ($100,000), and the California Chamber of Commerce ($720,000) hope that the new system, in which the top two candidates chosen by all registered voters would face off in general elections, will bring more moderation to California politics. "I'm a lifelong Democrat, but I'm a centrist," says Los Angeles philanthropist Eli Broad, who gave $100,000 to the Prop14 cause. "Because of labor interests on the left and antitax folks on the extreme right, nothing gets done."

Adam Mendelsohn, a Republican consultant tapped by the governor to run the ballot initiative campaign, says he had anticipated spending as much as $15million to win. Instead, he supervised a low-key push with radio ads that asked voters if they were happy with the status quo.

Proposition14 had been denounced by labor groups and the state's six recognized political parties, some of which may mount a legal challenge. "The whole purpose of this is so the Chamber of Commerce can try to get business-friendly Democrats elected, who don't support global warming, environmental legislation, or labor protection bills," says John Burton, head of the state's Democratic Party. "This isn't going to change anything."

Schwarzenegger's political action committee also financed and won a 2008 anti-gerrymandering referendum that took the authority to determine the boundaries of electoral districts away from the legislature and put it in the hands of an independent committee. Together the two measures represent a shot at a legacy for a governor who runs the state with the lowest credit rating of any in the U.S.

The bottom line Schwarzenegger and his allies hope their Proposition 14 victory will help end California's political gridlock.

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau. Follow him on Twitter @chrispalmeri. Marois is a reporter for Bloomberg News in Sacramento.

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