SPENCER MICHELS: Arnold Schwarzenegger scored his biggest win since becoming governor, when California voters overwhelmingly approved a $15 billion bond issue in early March.
GOV. ARNOLD SCHWARZENEGGER: And tonight California, won a huge victory, not only for fiscal responsibility, but for bipartisanship. ( Applause )
SPENCER MICHELS: In the face of a massive $22 billion state deficit he inherited, the Republican governor had cajoled a reluctant Democratic legislature to put the bonds and a balanced budget measure on the ballot.
GOV. ARNOLD SCHWARZENEGGER: Vote 57 and 58, yes. This really makes you feel good.
SPENCER MICHELS: Schwarzenegger campaigned hard for the measures, raising and spending $8.5 million. Early polls showed them trailing badly, but they passed, as Democrats like Sen. Dianne Feinstein joined in the campaign.
GOV. ARNOLD SCHWARZENEGGER: We consolidate the debt, and then we refinance it and then we tear up the credit cards and throw it away, so that our politicians can never, ever do that again; never, ever spend more money than they take in.
SPENCER MICHELS: The victory of the two measures was widely perceived as evidence of the new governor's political clout. But no one has proclaimed that California's government is out of financial trouble, even though the state is experiencing an economic upturn. California still faces large budget deficits estimated at $7 billion a year, unless major changes take place. According to economist Stephen Levy of the Center for the Continuing Study of the California Economy, the bonds won't protect the state beyond this year.
STEPHEN LEVY: People may have interpreted because of the governor's optimism and his, you know, cheery nature that if we pass the bonds, everything will be solved. It's not true. We've cleared the old debt off, and we're immediately facing a new set of deficits if we don't take some -- some more steps.
SPENCER MICHELS: In fact, some Republican lawmakers, who opposed the bond issue all along, think its passage would do more harm than good. Tom McClintock is a conservator senator who ran against Schwarzenegger.
TOM McCLINTOCK: We've just made our problem worse by adding $6-and-a-half billion of interest costs and we've become the first generation in California's history to pass on our day-to-day expenses to our children. You can't borrow your way out of a debt. You run afoul of the first law of holes, which is when you're in one, stop digging.
SPENCER MICHELS: Since last summer, California state bonds have been rated the nation's riskiest by Standard & Poor's. Despite the passage of the new bond measure, S&P refused to raise the state's credit rating, keeping interest rates California pays high. S&P says selling the new bonds raises the debt level of every Californian to $1,800. But Steve Zimmermann, the financial firm's western director, says the vote could mean change, and so S&P has put the state on a "positive credit watch."
STEVE ZIMMERMANN: So what we're saying is there's a window of opportunity here. You've bought yourself some time, you know, perhaps the state can make decisions, the elected officials can make decisions that will reduce that budget deficit. Now, on the other hand, this window of opportunity could pass. If there isn't movement, we're back where we were.
SPENCER MICHELS: The governor says he wants to make long term reforms in welfare, health care for the poor, and workers comp. But according to deputy finance director H.D. Palmer, that will take time.
HD PALMER: The governor had made it very clear that we didn't get into this fiscal crisis overnight. We didn't get into it in a year. It's going to take us more than a year to get out.
SPENCER MICHELS: Schwarzenegger's proposed new budget for the year ahead follows promises he made when running for governor: He cuts spending and avoids raising taxes.
HD PALMER: California has been spending at an unsustainable rate for the last few years, and we need to bring that spending in line with the amount of money we take in in revenues.
SPENCER MICHELS: Schwarzenegger's budget proposals include cuts to many programs. The University of California will be unable to accept all qualified applicants for the first time, and has announced it will cut its freshman class by 10 percent and raise tuition 9 percent, after big increases in the last two years. In addition, state research funds are being reduced.
Community college students rallied recently at the state capitol to protest a 44 percent tuition increase to $26 a unit. Schwarzenegger himself attended one of California's 109 community colleges. Allocations to improve the state's roads are declining as well, as the state shifts money from gasoline taxes into the general fund. San Francisco Bay area rapid transit will not get money it expected to run new lines to San Jose.
But the largest and most controversial cuts are in health and welfare, including reducing health benefits for the poor, lowering payment rates for providers of care, and making it more difficult to get enrolled in aid programs. One example: the state's in home support services, which provide help at home for disabled Californians, will lose financing. Kathryn Simpson receives about $3,000 a month for staying at home and taking care of her 17-year-old severely disabled son. Sam Simpson was born with brain lesions.
KATHRYN SIMPSON: I have to feed him, I have to bathe him, I have to dress him, and I have to make sure medically that he's stabilized. Look at me. Good job. Do another one. He has severe coronary disease, severe respiratory disease. He requires around the clock medications, around the clock observation to make sure that he's still breathing. He has a severe seizure disorder.
SPENCER MICHELS: Simpson, who is a nurse, says the state saves money by paying her $10 an hour to care for Sam, far less than it would pay for outside nursing care and hospitalization.
KATHRYN SIMPSON: I think it has kept us intact as a family, and has prevented Sam from being hospitalized over and over again. If this in-home support service program is eliminated via Schwarzenegger's budget cuts, Sam will end up in an institution.
SPENCER MICHELS: The state gets no help from the federal government when family members provide the care, and that made this program -- with 60,000 aid recipients at a cost of $365 million -- a target for state elimination.
HD PALMER: We are not proposing to reduce any of the other medical care that those individuals receive state funding for. It's another example of trying to strike a balance in a difficult fiscal environment between letting a program continue to grow in an unsustainable rate, or to go in and drastically curtail benefits or eligibility.
SPENCER MICHELS: Democratic legislators like state Sen. Sheila Kuehl are resisting that kind of cut.
SHEILA KUEHL: The cuts that are proposed in the governor's initial budget that he gave to us in January are really awful. I think our job is to try to talk him out of some of them, and replace those with very moderate tax increases on the wealthiest people of the state.
SPENCER MICHELS: Kuehl and other Democrats face tough odds in convincing Schwarzenegger to raise taxes. But, she says, there's a chance, especially because the governor has appointed some Democrats to his administration.
SHEILA KUEHL: I think the interesting thing is the kind of tug and pull in his office among various advisors, some of whom are very, very conservative, some of whom are liberal, each of whom has a solution for him; none of the solutions are the same.
SPENCER MICHELS: Republican lawmakers say they have no intention of raising taxes, and even though in the minority, their votes would be needed. Oakland Mayor Jerry Brown, who faced budget battles himself as governor, says that Schwarzenegger's dilemmas are hardly new.
FORMER GOV. JERRY BROWN: We've always had cuts, and we always had taxes. Ronald Reagan increased taxes more than anyone. Pete Wilson raised taxes, I believe, something like -- was it $9 billion or $12 billion? Huge. And the fact is when the moment comes, when you either have to do some real damage or tax some more money out of the private economy, people generally take some money out of the private economy.
SPENCER MICHELS: Brown has been impressed with Schwarzenegger's performance thus far.
FORMER GOV. JERRY BROWN: I think he's doing well. He has a lot of exuberance. He's smart, he's disciplined, he focuses on what he needs to do, and even when things are not going his way, he doesn't let that on. And that exuberance and that confidence, that's what Reagan had, and that's what Roosevelt had. We'll see how far it takes him, but so far it's impressive and it's powerful.
SPENCER MICHELS: But Schwarzenegger's deal-making with Democratic majority, especially over the bonds, has bothered some of his fellow Republicans.
TOM McCLINTOCK: Well, I think it's a mixed bag. His popularity stems from a very conservative message that he has delivered throughout the campaign. So he's done a number of things right, but borrowing $15 billion to continue to spend at unsustainable levels was a serious mistake.
SPENCER MICHELS: Schwarzenegger's next big tests are under way already. He is once again threatening to go to the voters if the legislature won't reform the state's expensive and highly controversial workers' compensation system. And he also still has to work with the legislature to approve his budget.