ARNOLD'S FIRST YEAR NEXT BUDGET COULD BE BIGGER TEST FOR POLITICAL NEWCOMER.

Byline: David M. Drucker Sacramento Bureau

SACRAMENTO - With his crisis-filled first year in office behind him, Gov. Arnold Schwarzenegger remains on the offensive as he prepares to address a number of outstanding problems - including a state budget that is still running a deficit and burdened with debt.

Schwarzenegger, a Republican one year into an abbreviated three-year term and no longer the novice he was upon his inauguration last Nov. 17, has set ambitious goals for himself: Prison reform, overhaul of the energy system, implementation of the California Performance Review and making government more transparent to the public.

But it is Schwarzenegger's second state budget, which he will submit to the Legislature less than eight weeks from now, that could ultimately define his stewardship of the state.

The state expected to face a $6 billion deficit in the next budget year, and Schwarzenegger's spending plan could have the largest impact on any re-election effort, which if it comes would begin about a year from now.

``People don't remember balanced budgets,'' said former Republican official and Claremont McKenna College government professor Jack Pitney. ``But if the budget is out of balance, you can't do the things people remember you for.''

Schwarzenegger assumed office last year with California's treasury on the verge of bankruptcy and its business community nearing mutiny over record costs for workers' compensation insurance. Today, with those crises at his back and basking in the glow of his third successful election campaign since leaving Hollywood for politics, the governor faces problems slightly less urgent but no less daunting.

Discussing those issues with reporters recently, the governor appeared confident and focused, though in some cases he declined to specify exactly how he plans to neutralize problems and enact his agenda.

His proposal to fix the state's dysfunctional electricity infrastructure is already public and under way, while the California Performance Review - Schwarzenegger's ``blowing up boxes'' plan to overhaul state government - is still being finalized. Administration officials say a significant portion of it will likely be written into his 2005-06 budget proposal.

Schwarzenegger is currently negotiating new gambling compacts with five Indian tribes, and it is still possible his 2003 campaign promise to open up government to the public and ``let the sun shine in'' will be included in his 2005 legislative agenda.

But according to the governor's closest aides, and judging by the tenor of his own recent comments, making California more business-friendly and improving the long-term health of the state budget remain his top priorities.

``We want to, again, strip away some of the regulations, which is very important. We want to make sure that businesses continue to boom and come back to the state,'' Schwarzenegger said when asked about his plans for his second year in office.

``Because as you know, there are all the different governors that are putting their billboards up in California to show that they are actually having a better business environment and all that. We want to prove that we have the best place to do business.''

Schwarzenegger, perhaps recognizing the view of many analysts that accomplishing his many goals - especially creating 100,000 new jobs per year - depends upon his ability to solve the state's lingering budget problems, indicated that doing so remains the linchpin of his ongoing effort to rebuild California's economy.

``Our big challenge is to come and get together the revenues and the spending. And so, therefore, we will have to be very, very disciplined this year. Very, very disciplined. There will be no extra spending. I will not spend an extra dollar than we make on revenues, that's for sure, even if that means we have to make certain cuts. But we have to be disciplined, that's the bottom line''

As he did last year, Schwarzenegger is ruling out tax increases, a policy underscored in comments made by his new finance director, Tom Campbell, a former Republican congressman and state lawmaker from San Jose who is currently serving as the dean of UC Berkeley's Haas School of Business.

Many are troubled by the governor's strategy.

``When he starts to strip away regulations to protect people from greedy corporations, we're going to see lots of looting and pillaging,'' said Jamie Court, a spokesman for ``ArnoldWatch.org,'' a Santa Monica-based group that is a regular critic of the Schwarzenegger administration.

``This governor is way out of touch with the public, but that's because he's almost a billionaire.''

State Treasurer Phil Angelides, a Democrat who will likely run for governor in 2006, added to his constant criticism of Schwarzenegger's budget policies, saying recently the governor's fiscal strategy is too dependent on borrowing and asks nothing of the affluent. He said programs that help working families are being cut and California's chances of competing in the job market are being undercut by lower spending on public schools and higher education.

``What he needs to do is live up to promises he made to the people of California and adopt a budget that is balanced, fair, and invests in our future,'' Angelides said in an telephone interview. ``What bothers me is his budget agenda remains very Bush-like.''

Assembly Speaker Fabian Nunez, D-Los Angeles, who is not calling for tax increases, is more muted in his critique of the governor.

Nunez, said spokesman Gabriel Sanchez, believes that avoiding tax hikes depends upon the state taking in an adequate amount of revenue - whether from new or old sources - so that the government can continue to pay for taxpayer-funded education and health care. He also wants to ensure that Schwarzenegger's desire to free businesses from onerous regulations does not leave consumers and workers unprotected.

``You try and find that balance,'' Sanchez said.

Schwarzenegger has sprinkled conciliatory rhetoric in between strong comments. But he never suggested any intention of backing away from his agenda in the year ahead.

``We are going in a positive way, pro-business, pro-environment, pro- workers. This is all pro. We move forward in a very positive way.''

David M. Drucker, [phone]

david.drucker(at)dailybulletin.com

CAPTION(S):

3 photos

Photo:

(1 -- color) Gov. Arnold Schwarzenegger will submit his second state budget to the Legislature less than eight weeks from now; it could define his stewardship of the state.

Stephan Savoia/Associated Press

(2) Accompanied by their children, Christopher, right, and Patrick, Arnold Schwarzenegger kisses his wife, Maria Shriver, before taking the oath of office as California's governor Nov. 17, 2003.

Rich Pedroncelli/Associated Press

(3) Following an Oct. 31, 2003, press conference, Governor-elect Arnold Schwarzenegger comforts Jana Miller of San Antonio Heights, who lost everything in the Grand Prix Fire.

Keith Birmingham/Staff Photographer