ARNOLD'S TAKE GOVERNOR SOUNDS OFF ON BUDGET, TAX HIKES.

IN a rare sit-down interview with the press, Gov. Arnold Schwarzenegger met with reporters and editors of the Daily News for more than an hour Thursday to talk about his budget proposal, his efforts to reform state government and his vision for the future of California.

Below are some of the highlights of the conversation:

Schwarzenegger: As you know, I've been sent to Sacramento to do one thing, and this is to fix California. And there's, of course, many different opinions on how to do that, many different philosophies ... But one thing we know for sure, whatever it was in the past five years, the five years before I came into office, did not work. It's that simple.

So all you have to do - in order to be a little bit simple here - is do the opposite, and then you will be home free. ... So what I'm doing is basically trying to change all that with what's going on in Sacramento. ... I'm not talking radical changes here. I'm just talking about just normal things that everyone here knows are the only ways that we can fix the problem. ...

Now of course, their hype in their big, big campaign is: ``He's cutting, he's taking things from us! He's taking things from you, from you, and from you and from everybody!''

But the fact of the matter is we're not taking anything from anybody. We're adding 4.2 percent on spending. We're giving education $2.4 billion more of the state funding, $2.9 billion altogether. We're giving health and social services $1.2 billion more. We're giving higher education $380 million more. We're increasing per-pupil spending (by) $362, all those things. We are putting more money in, but we are going to live within our means. ...

People say this is going to be a big battle and a big war and all this; well, that's what I was sent to Sacramento for. I wasn't sent up there to hang. I wasn't sent up there to have a good time and just kick back and do business as usual.

Daily News: Do you find it ironic that the way to solve this problem appears to be to go to the people, but in fact the state got into this problem by many of the mandates that lock in spending that were approved by the people rather than the Legislature?

Schwarzenegger: Well, yes, but you have to understand that when people approve something, that they don't always have the chance to see the whole picture, so that makes it very difficult for the people. ... I don't think the people know, for instance, what Prop. 98 really is. ... In every meeting I have about Prop. 98, everyone says no one (in Sacramento) has figured it out yet, the whole thing, because it's so complicated. So how do you expect the people to vote on something like that? ...

We have to look at those formulas, and we have to just say, OK, those formulas are great, but should our spending go above revenues, then let's just cut percentage-wise ... across the board, and take from every department, including the Governor's Office, including from prisons, including from health care, from everywhere across the board. That is the idea. This way we live fiscally responsibly. And there's a lot of people who are fighting that because it's rattling their cage ... The special interests are fighting all those things, and I'm more than happy to fight that fight.

Daily News: Democrats want to raise taxes. With redistricting, pensions, the budget and education reform on the table all at the same time, is there any circumstance that if the Democrats would compromise and work with you and actually come to an agreement on these issues, you would agree to some sort of tax increase?

Schwarzenegger: I just think that the tax increase is counterproductive.

Right now we have an $8 billion structural deficit. If you raise the taxes, let's say $8 billon, what do you think your spending has to be? Spending doesn't have to be $8 billion; it will be automatically almost $12 billion because now (under Proposition 98), you owe almost $4 billion more on education. So now you add that to the $8 billon, now you need $12 billion. Now you need to raise $12 billion, but now you owe another $2 billion to education because you raised even more money. That incline of spending will eventually fall backward because of the way the formulas work. ...

Also, we don't want to take any money out of the private sector. We have seen last year how well we are coming back. Our economy is coming back. We've created more jobs than anywhere else in the country. Everything is great. Our credit rating has gone up three times. Everything is going terrific. People are seeing that there is action here. ...

We want to continue that. We don't want to rattle the cage here and just say, hey, let's all of a sudden now increase taxes. ... We can do it without raising taxes.

Daily News: You've taken a much more aggressive approach this year than you did last year. Is there something about the experience you had last year that you regret or that you learned about Sacramento that's changed your perspective?

Schwarzenegger: Not really. That's why I had this analogy in the State of the State address: We've stopped the bleeding; now we have to heal the patient. ... Anyone can tell you, if there is a problem where someone has an accident, he's lying on the side of the road, got multiple injuries, bleeding - the first thing you do when you see him is you don't try to solve all his health problems. You say, how can I stop the bleeding and how can I get him as quickly as possible to the hospital? Stopping the bleeding, stabilize the patient, that's exactly what we did the first year ...

Then, when you go to the next year, now you have time ... time to sit down and to have our brainstorming sessions and to have our retreats and to really look at it in a solid way of now, what are the challenges of the next year, what do we need to do to really create the momentum to go in the right direction? This is why I compare it to healing the patient.

Daily New: Is it true that you favor changing the term-limits formulas, maybe letting the legislators stay in office longer in order to get them to buy into the plan?

Schwarzenegger: I'm always happy to listen to all of those ideas. ... There are different discussions and debates going on, but no, I did not throw that on the table to say, hey, open it up so we can settle this and all go home in peace. It could come up, but this is not my idea to make it part of the negotiations.

Daily News: When you talk about merit pay for teachers, it's something that, as you know, has considerable opposition from teachers unions. How are you going to do it?

Schwarzenegger: Well, I think that we have to push forward with it. The important thing is to let discussion go on out there ... Anytime you do something where there's a change, there will be people who are worried about it, those people that want to be comfortable. And then there's others that say, I welcome that, this is a new idea, we need a new approach here because whatever is (being done) right now doesn't really work that well. So it's an idea that should inspire people. It's like in the private sector, where (performance-based pay) makes people work harder and people become more inspired to do well ...

The question is just how to implement something like that. What is the best system? And we're working on that right now. ... Of course the unions are against it, but we hope that the unions will come to the table and work on it with us. I don't see them as the villains. I see them like, be our partner. This administration feels that this is the right way to go. People should be judged on performance, not just showing up.

Daily News: Officials at the Los Angeles Unified School District say that your budget will result in $120 million less in revenue this coming year. What do you say to them about that?

Schwarzenegger: Maybe their math is a little fuzzy, because we are not taking anything away from the L.A. school district. We are giving more money to education. We are giving $2.4 billion in state money, and then with all these local property taxes, it goes up to $2.9 billion. ...

It's the same thing as if someone says, hey, I expected to gain 10 pounds over Christmas holiday, and then he goes and steps on the scale and he only gained 5 pounds, and now he runs around and says, hey, I lost 5 pounds! It's the same thing. It's bogus, right? I would say that I gained 5 pounds - no matter how you put it, I gained 5 pounds.

That's what they do, they continuously, say, ``I lost 5 pounds,'' or ``Someone is taking money from us!'' They just have to live within their means. And they just have to be much more efficient, spend less time on administrative costs and just streamline and get that money to the classroom.

Daily News: In La Conchita, you promised to help rebuild the community there. Recent and long-term history tells us that's not a place where homes should be built at all. Is that a good use of taxpayers' money at this time?

Schwarzenegger: We have to let the whole thing play out because ... we really don't know yet 100 percent of what the whole thing is going to look like. I think we have to wait a little bit of time because I think the people really love that area. ...

I have looked through the whole area and drove around. Not just where the mud came down, but in other areas of the village, the little community, and there are safe areas in this community. (The danger is) just, I think, when you get that close to the hill.

So we have to just wait until the whole thing is settled, and then we have to help to make sure those people get as quickly back to normal life and help them as much as we can.

Daily News: As a resident of the Westside, and a driver on the 405 occasionally, what did you make of L.A. Mayor James Hahn's proposal to expand Los Angeles International Airport in a broader sense, spending up to $11 billion to do that. Does that makes sense to you as the governor?

Schwarzenegger: I would say that I am not an expert on Los Angeles International Airport. I remember that when I came to this country in 1968, a year later I had my first $5,000 saved from big posing exhibitions and strong-man acts and seminars and all these kinds of things. And then I picked up this newspaper that said, ``futuristic airport, Lancaster, supersonic airport!''

Of course I drove out there immediately, and hunted down all the real- estate agents and finally bought some property out there for $5,000. And not long after that I bought additional property and paid that off slowly, another five acres. I thought to myself, I always wanted to come here to be rich, this is it, I am gonna be so rich! And so, I always liked the idea that we have the next international airport there in Lancaster!

But there has always been this idea for years that actually they would do the national airports, like they have done in Europe a lot of times - in Munich, all these places, Berlin - take it outside of town, 30 miles or so, and then have a fast train or something like this. That, I think, was the idea for Lancaster, that there would be a bullet train or something like that that would bring the passengers in, because then you can generously expand any direction you want.

It is so difficult because LAX is so cramped. It's so difficult to build new buildings. I don't know yet what the mayor's plan is. I don't want to criticize because I don't know.

IN CONCLUSION

Schwarzenegger: Let me just say that we have a great opportunity to make this again the place. ... I just hope all of you are part of the reforms, because I've said this many times: Alone there is no way you can do it. I mean, alone you can do nothing, anyway.

In show business you see this right away when you see 150 people on the set just working to make you shine - the makeup guys, the cameramen, the directors, the producers, the stunt coordinators, they all make you shine. Here it's the same thing. It means everyone working together is the only way we can do it. ...

I'm having fun every day. I have never done anything where I didn't have fun. There were people in the gym in the old days who said, oh, my God, another 200 reps of sit-ups. And I said, I'm looking forward to the next 200 reps of sit-ups, because 200 reps will get me one step closer to turning my vision into reality. So I was always looking forward to the next rep, the next step, the next pound I lifted, with great enthusiasm, whereas other people dreaded it ...

It's the same thing with (politics). I have a great time going out and selling my ideas. I have a great time negotiating with the people in Sacramento, to wake up every morning to the challenges. This is the most satisfying thing I have ever done in my entire life.

CAPTION(S):

2 photos

Photo:

(1 -- color) no caption (Gov. Arnold Schwarzenegger)

(2 -- color) Before the interview on Thursday, Gov. Arnold Schwarzenegger arrives at the Los Angeles Daily News building.

Gus Ruelas/Staff Photographer