California: Something's Got To Give

Arnold must cut electric rates, woo business, squeeze the special-interest bloat out of the budget, and soothe political wounds. Whew!

In the end it was less a political campaign than a promotional tour for a superstar's latest flick. Criss-crossing the state in a white Learjet, setting down for 15-minute photo ops, actor Arnold Schwarzenegger tossed out scripted one-liners with the charm of a pitchman before heaving "Join Arnold" T-shirts to adoring throngs. And at most stops, there were props to make his point. In San Diego, he brandished a "broom" to symbolize his intention to sweep Sacramento clean of cronyism and gridlock. In Costa Mesa, a wrecking ball fell from a five-story crane to smash a beat-up Buick, symbolizing how Schwarzenegger intended to pulverize the tripling of auto taxes that Gray Davis approved as the movement to recall him intensified.

To get elected, Schwarzenegger shrewdly tapped into the well-known voter resentment of a state that's battered and broken, governed by a balkanized and dysfunctional political system. Now, as the 56-year-old bodybuilder transitions to Conan the Governor, promo stunts will need to give way to forging policies and the nuts and bolts of political dealmaking to try to implement them. Electric rates are among the highest in the nation, as are the regulatory burdens and costs of doing business. Indeed, runaway premium hikes for workers' compensation threaten to send businesses out of state.

California's fundamental problem, though, is its structural budget deficit, which could top $8 billion next year. The budget has been larded by years of special-interest gimmes and look-the-other-way hikes. "What we have to do is open up the books, do the audit, and find what the waste is," pledged the governor-elect at his first press conference on Oct. 8. Yet the core reason for the deficit seems intractable -- and one that clearly did in Schwarzenegger's predecessor: a ballot-initiative system that lets voters mandate spending with a 50% majority and a state constitution that requires the legislature to pass taxes with a two-thirds vote. If Schwarzenegger is to succeed, he'll have to tackle the ballot-and-budget morass head on. And he'll have to close the budget deficit by cutting Ronald Reagan-like deals with a Democratic legislature, which could force him to back off from several of his campaign promises.

Can he do it? Schwarzenegger, who takes over in mid-November, has only 75 days to put together a budget plan that has eluded Davis and the legislature. Edward E. Leamer of the University of California at Los Angeles, who sat on Schwarzenegger's 18-person economic-development team, says he recommended raising taxes and freezing spending for three years. The goal: to persuade bond agencies to raise the state's credit ratings and help save $1 billion in interest.


Doing so, however, would require the new governor to ditch his campaign promise of no new taxes. So first he'll likely look for savings by trying to roll back salary and pension hikes for such politically powerful groups such as prison guards, which donated generously to both Davis and legislators. And he can cut deeper into the state's 200,000-person workforce, getting more than the $1.1 billion the legislature got this summer by cutting the personnel budget 10% and ending redundant state offices such as the Office of Managed Care.

It would take an enormous political fight -- and equally strong political skills -- to get there, but former State Controller Kathleen Connell estimates that Schwarzenegger could cut billions from the state budget through such measures.

Beyond healing the budget, an equally critical task will be reassuring a jittery business community that California can again offer an environment in which corporations can thrive. "In no regard can California be seen as favorable to business," says Ross C. DeVol, director of regional studies at the Milken Institute, a think tank that estimates the costs of doing business in California at 28% higher than the national average, behind only Massachusetts and New York. Indeed, in an open letter published in newspapers across the state on Sept. 22, business heavyweights including Intel CEO Craig R. Barrett, Hewlett-Packard CEO Carleton S. Fiorina, and Charles Schwab CEO David S. Pottruck urged California's top officials to take steps to mend the state's economy and prevent more businesses from fleeing. Among their pleas: no new taxes, no new burdensome regulations, and an end to 11th-hour legislative surprises.

They'll be watching Schwarzenegger closely. For the business community, no issue is more pressing than the out-of-control workers' comp system, which requires California companies to pay $5.23 for each $100 of payroll. That's tops in the nation, according to the Oregon Consumer & Business Services Dept., and roughly 60% higher than states such as Texas and Nevada that regularly steal California companies. "California is not as much a competitor as a hunting ground," quips Texas Governor Rick Perry, who says he increasingly gets calls from high-tech executives such as Fiorina. Hewlett-Packard Co. is moving 500 jobs to Houston from a Roseville (Calif.) plant. Perry says he expects more such calls.


Fixing workers' comp will be no simple task. Costs are sky-high because the politically popular program includes a medical plan that allows extended treatment for things like chiropractic care and permits steep legal awards for pain and suffering. "It's a loony-bin kind of attitude," says John Lawrence, owner of 269-person Lawrence Equipment. His rates have skyrocketed to $364,000 a year, leaving him contemplating a move to Arizona.

But even if the new gang gets nowhere on workers' comp, there are several other important and more easily achievable steps they could take. For starters, halting a planned rise in unemployment contributions from employers scheduled to go into effect next year would help. Many companies would also like to see the retention of the Manufacturers Investment Tax Credit, which is set to expire at yearend. The likely loss of that tax credit is one reason the 565-person computer maker Wyse Technology Inc. will eventually move its last California-based manufacturing facility, says CEO John Stringer. Wyse has already set up plants in Texas and Taiwan.


The energy mess Schwarzenegger inherits will also keep his hands full. Nothing demonstrated California's disarray more than whole swaths of the state going dark in the winter of 2001. The crisis left California saddled with costly long-term contracts that have kept energy costs well above the national norm. Schwarzenegger will have to renegotiate those contracts, a step that eluded Davis. He has a strong card to play: Some of those same power producers want to build plants in the state. So the new governor should insist that the quid pro quo for new plants is a return to the bargaining table.

Sticking to his no-new-taxes pledge will be another matter. Made during the heat of the campaign to win over the Right, it won't play in Sacramento, figures Jean Ross, chairman of the nonpartisan California Budget Project. He figures two-thirds of the budget is already earmarked by ballot initiatives for things like education and health care. Likewise, a promise to deep-six an auto-tax hike could also fall by the wayside.

That may not be the end of the world for Arnold: Ronald Reagan got to the statehouse on a no-new-tax pledge, then ended up accepting a tax hike. But if Governor Schwarzenegger is going to succeed, he'll have to be as deft getting out of real-world jams as his muscle-bound characters are in the movies.

Corrections and Clarifications "Something's got to give" (News: Analysis & Commentary, Oct. 20) incorrectly stated that Wyse Technology Inc. was moving. CEO John Stringer says the company will eventually move its last California-based manufacturing facility but has no plans to move its headquarters from San Jose, Calif.

By Ronald Grover and Christopher Palmeri in Los Angeles, with Ben Elgin in San Mateo, Calif., and bureau reports

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