ARNOLD GOES FOR BROKE ON BONDS.

Byline: David M. Drucker Sacramento Bureau

SACRAMENTO - Gov. Arnold Schwarzenegger vows to sell the world on California and predicts it will be an easier sell than some of his movies, but first he must convince a skeptical electorate to support an economic recovery agenda that would fail if voted on today, according to polls.

The full-throttle campaign to pass Propositions 57 and 58 - the Republican governor's $15 billion deficit-financing bond and constitutional spending limit - has not begun, and analysts suggest recent surveys showing little support for the bond measure were taken too early to accurately gauge its prospects.

Among political handicappers, conventional wisdom says a proposition must start with support from at least 50 percent of the voters to pass. And six weeks before the March 2 election, Schwarzenegger faces a true test of the mandate he claimed upon disposing of former Gov. Gray Davis in unprecedented fashion last October.

``We have a campaign on our ends, there's no question,'' Todd Harris, a spokesman for Californians for a Balanced Budget, said. ``It's going to be an aggressive, well-funded sprint to the finish that looks very much like a gubernatorial campaign.''

With $13 billion in short-term loans due in June, California faces a cash crunch of historic proportions. Even if voters believe tax hikes or spending cuts - or both - are preferable to borrowing to cover the debt, officials say the state must continue to rely on borrowing because any savings from spending reductions and any revenues from tax increases could not be realized by June.

With borrowing inevitable, Schwarzenegger believes propositions 57 and 58 are the state's best options.

Under Proposition 57, the state would sell a $15 billion general obligation bond, the largest ever sold by California, to finance $12.3 billion of debt accumulated through the 2003-04 fiscal year, which will end June 30.

Proposition 58, which would only go into effect if Proposition 57 passes - and visa-versa - would ostensibly require balanced budgets and outlaw the use of borrowing to fill future deficits. It would not preclude internal government loans to balance the budget, but would create a ``rainy day'' fund to be used in case of an economic downturn.

``The important thing for people to know is that by voting no on the bond, it will not stop the state from borrowing to cover deficits,'' Donna Arduin, Schwarzenegger's finance director, said last week. ``One way or another, we're going to have to borrow.''

A Field Poll and a second poll by the Public Policy Institute of California both indicated that about one-third of voters supported the governor's fiscal recovery plan - less than the simple majority needed for the plan to pass on Election Day.

Voters can expect a campaign complete with television commercials and public appearances by Schwarzenegger and a coalition of grass-roots supporters corralled by him and Democratic Controller Steve Westly, said Harris.

Arduin spoke on Friday in support of Propositions 57 and 58 to the business community at a California Chamber of Commerce luncheon. To further the administration's case, she held an informal news conference afterward with members of the Capitol press corps - an unusual event for the governor's new chief fiscal adviser.

Her participation in the campaign continues this week with three public appearances.

Meanwhile, outgoing Assembly Speaker Herb Wesson, D-Los Angeles, said Saturday he expects to hit the campaign trail in favor of the plan - which he negotiated with Schwarzenegger - and sources say public appearances featuring Westly and the governor's wife, Maria Shriver, are likely.

``We need to pass this initiative to avoid an all-out fiscal meltdown,'' said Westly, who along with Schwarzenegger is co-chairman of Californians for a Balanced Budget.

Despite strong endorsements by Westly and Wesson - who was key to securing the legislative approval needed to place the governor's plan on the March 2 presidential primary ballot - sources say the proponents of Propositions 57 and 58 are most worried that Democratic voters will reject the measures.

Although Republican voters traditionally oppose borrowing and might favor more spending cuts, it is believed that Schwarzenegger's influence within his own party will be enough to secure the Republican support needed to push his plan over the hump. The real concern is that Democrats might vote it down because they believe it would force Schwarzenegger to raise taxes.

The California Democratic Party declined to endorse the bond measure this past weekend at its annual convention, and party leaders like Treasurer Phil Angelides oppose it. Angelides does not plan to campaign against it, but he called the argument for it - that it will avoid a fiscal meltdown - ``hooey'' and said he will speak against it whenever asked.

``I also think the governor ought to quit threatening the people of California with economic chaos if this bond doesn't pass,'' Angelides said. ``He ought to take the two-by-four out of his hand ... and develop a `plan B' in case the voters disagree with his judgment.''

The governor argues that the bond's failure will cause him to propose $12.3 billion in spending cuts beyond what he recommended in his 2004-05 budget plan. Westly, in an interview Saturday at the state Democratic convention in San Jose, said draconian spending reductions and tax hikes would be necessary if voters reject Proposition 57.

One purpose of the administration's bond measure is to retire a $10.7 billion deficit-financing bond passed by the Legislature and Davis last year, which is being tested in court.

According to the administration and Westly, if the March 2 bond measure is voted down and the $10.7 billion bond issue is overturned in court, then the state would be forced to borrow to cover the $13 billion due in June. The costs would be astronomical, as Sacramento would be forced to pay a huge premium - the extreme equivalent of mortgage insurance - to meet its obligations, and Wall Street would likely dictate the next state budget as a precondition for loaning the money.

Harris said internal poll numbers paint a better picture than the two public opinion surveys released last week, but remains aware of the battle ahead. ``We still know we are going to have to sell this thing,'' he said.

David M. Drucker, [phone]

david.drucker(at)dailybulletin.com