JIM LEHRER: And Spencer Michels has our report from California.
SPOKESMAN: And to raise your right hand.
SPENCER MICHELS: Immediately on taking office this morning in Sacramento, Governor Schwarzenegger pledged to uphold what he called "California's golden dream by the sea." He said the task of fixing the state's huge economic problems was akin to his challenges as a body builder.
GOV. ARNOLD SCHWARZENEGGER, (R) California: I learned something from all these years of lifting and training hard: When I thought I couldn't lift another ounce of weight, what I learned was that we are always stronger than we know -- and California is like that, too. We are stronger than we know. (Applause) There is a massive weight we must lift of our state. Alone I cannot lift it, but together we can. (Applause)
SPENCER MICHELS: Ironically, Schwarzenegger's first official act will add to that weight. He announced he will immediately repeal an unpopular 300 percent increase in automobile registration fees, which would have raised $4 billion. Starting tomorrow, when the legislature convenes in a special session he has called, Governor Schwarzenegger will begin in earnest attacking the deficit. There is an estimated $15 billion gap between revenue and spending for the budget year ending in 2005, and the governor's own finance director has estimated it will grow to $62 billion by 2007 if not corrected.
GOV. ARNOLD SCHWARZENEGGER: Thank you very much, and may God bless California. Thank you very much. Thank you.
SPENCER MICHELS: Longtime Sacramento Bee political columnist Dan Walters says the governor's actions on the budget will be crucial.
DAN WALTERS, Sacramento Bee: If Governor Schwarzenegger can solve the state's budget crisis, which is monumental, his governorship will be a success. And if he can't solve it, it will be a failure. It's as simple as that. It's huge, it's what drove Gray Davis out of office, and it can no longer be ignored because it's eating the state alive.
SPENCER MICHELS: From the moment last august when he jumped into the race, Schwarzenegger has been asked for specifics as to how he would solve the state's financial problems.
GOV. ARNOLD SCHWARZENEGGER: We have in Sacramento a warehouse full of specifics now, and look what happened. What you need is leadership. That's what is missing.
SPENCER MICHELS: Specifics have only been hinted at thus far. Once elected, Schwarzenegger quickly appointed Donna Arduin, Florida's finance director, to the same post in California, and told her to audit the state budget.
GOV. ARNOLD SCHWARZENEGGER: Open up the books and let the people look inside, let the sun shine in. That's what we want to do here. And there is a lot of waste that we will find.
SPENCER MICHELS: In Florida, Arduin helped the governor cut taxes, but also cut social services. In California, Schwarzenegger has indicated all along that cuts of some sort are in the cards.
GOV. ARNOLD SCHWARZENEGGER: We must immediately attack the operating deficit head on. Now, does this mean we're going to have to make cuts? Yes. Does this mean education is on the table? No. Does this mean I'm willing to raise taxes? No.
SPENCER MICHELS: But what will be cut is still unclear. Republican Assemblyman Abel Maldonado says small cuts will add up. He was co-chair of Schwarzenegger's campaign, and was designated by the governor's transition team to speak for him.
ABEL MALDONADO, State Representative: There's a lot of things that could be cut, Spencer. Just this past year, there were pieces of legislation that came forward that would cut boards and commissions that were not necessary -- failed. A lot of little things that were in the budget that we need to start looking at.
SPENCER MICHELS: But larger reductions in social services, like child care and health benefits for the poor and elderly, some of which have already been cut during the Davis administration, are the last thing Democrats who control the state legislature want to see.
John Burton, leader of the state Senate, says lawmakers would fight such cuts.
JOHN BURTON, State Senator: If the choice is between putting a tax on multimillionaires or taking eye glasses and hearing aids from elderly people, we're going to be on the side of taxing multimillionaires. And if he's on the side of taking away eyeglasses, hearing aids and false teeth, there will be a fight and there will be a problem. And I don't think we put that up to the people. We'll see how the bully pulpit works.
SPENCER MICHELS: Surprisingly, a sale of $20 billion to $25 billion in state bonds is under serious consideration by Schwarzenegger. The bonds, sold to investors to raise needed cash, would allow the state to pay its bills and consolidate its debts. They would be paid off with interest, using future tax revenues. Even Republicans who normally oppose bond issues are now saying bonds would allow the state to avoid raising taxes. The fiscally conservative Howard Jarvis Taxpayers Association, which has argued that bonds encumber future generations, has switched positions. Jon Coupal is president of the group.
JOHN COUPAL, Howard Jarvis Taxpayers Association: Like a mortgage, there are appropriate reasons for going in to debt. This is very similar to parents whose child has robbed a convenience store and now they have to make restitution. They don't like doing it, but they have to do it.
SPENCER MICHELS: But while Democrats have traditionally supported bond measures, state controller Steve Westley, and others of his party, now say they don't like the idea of the state incurring debt for 20 or 30 years.
STEVE WESTLEY: I think it's not a good idea for the state. The governor-elect campaigned on a theme that he was going to come in, make the tough choices, and fix California's fiscal house. Now he needs to do just that. And I think by any standard the answer is not to sweep the problem under the rug by doing extended borrowing, it's to make the tough choices.
SPENCER MICHELS: Another device high on Schwarzenegger's announced priority list is a constitutional limit, or cap, on state spending tied to inflation and population growth. Such a cap exists in 29 states. John Coupal's taxpayer group strongly supports that.
JOHN COUPAL: California has a real problem with how it spends its money, and I think one of the things that a spending cap will do is it will enforce some degree of fiscal discipline that we have not had in about 15 years. Job No. 1 is stop the bleeding.
SPENCER MICHELS: The spending cap and the bond measure could be presented to the voters in March. But a spending cap does not sit well with some Democratic legislators who would have to agree to put it on the ballot.
JOHN BURTON: Every politician ... we're going to have a spending cap, you know, and then something happens. If you have a spending cap, what does it do if school enrollment goes up, or if more and more people get old and they need Medicaid or they need aid to the aged, blind and disabled. I mean, you need some flexibility or basically you put yourself in a straight jacket.
SPENCER MICHELS: The new governor has a few other ways he can try to increase state revenues. He may negotiate with Indian tribes, who mostly supported Governor Davis, to get more money from their casino business. They took in $3.6 billion last year, but paid the state just $130 million. They would want more slot machines in return for more payments. And Schwarzenegger has said he will ask the federal government and his fellow Republican President Bush to help the state, although he hasn't done so yet. Still, in confronting most budget problems Republican Schwarzenegger will have to deal often with the Democratic legislature. Whether his celebrity status and his landslide victory will help him there is a topic of much speculation.
JOHN BURTON: I've been there with Ronald Reagan, I've been there with a lot of people that are governors. You know, you take their issues as you think they affect the people of the state, not because, oh, boy, they are a movie star or they are a baseball player or they're a career politician, or what have you.
DAN WALTERS: His celebrity helps him. He's the first, the closest thing we've had to a free agent being elected governor in modern history. And as a celebrity, he commands media attention. Even LA TV will probably give up some freeway chases to cover this new governor. So he can use that bully pulpit to kind of marshal public support for whatever program he has.
SPENCER MICHELS: The new governor must submit a budget by Jan. 10. The embryonic recovery could help him. The state controller recently announced that because of a pick up in the economy, tax revenues this year will be $1 billion more than estimated.