IT'S ARNOLD'S BIG DAY NEW GOVERNOR WILL NEED HERCULEAN EFFORT TO HANDLE STATE BUDGET CRISIS.

Byline: Harrison Sheppard Staff Writer

He became a world champion bodybuilder and a superstar in Hollywood. But when he becomes 38th governor of the nation's most populous state today, Arnold Schwarzenegger faces a challenge more daunting than conquering a movie villain or bodybuilding rival.

He has to deal with a budget deficit that could top $20 billion - without raising taxes, cutting education or reducing local funding.

He promised his first act will to be rescind the hated tripled car tax.

He has pledged to reform the troubled workers' compensation system.

He plans to block giving driver's licenses to illegal immigrants.

And then there's Week Two.

``There are a number of challenges that face Gov.-elect Schwarzenegger and his Cabinet members, but this is a challenge that they willingly and gladly accept because of the positive effect that it will have on the state of California and the lives of voters,'' said Karen Hanretty, spokeswoman for the Schwarzenegger transition team.

Schwarzenegger and his quickly assembled staff have set out to tackle several massive areas in the first week immediately after he takes office.

Hours after he is sworn in, he plans to cut the car tax. On Tuesday he plans to call a special session of the Legislature to start tackling worker's compensation reform, the driver's license bill and the budget deficit - which, incidentally, was estimated Friday at least $2 billion higher than was expected despite increased revenues.

In one sense, the strong persona that Schwarzenegger projected in his films - and during the campaign - has heightened the expectations for his real-world performance. During the campaign he made promises that to some longtime political observers seemed impossible to fulfill, such as cutting taxes while preserving services and being a governor for ``all the people'' in a state of 35 million residents and an array of wealthy and influential special interests.

``This is historic in the sense that you have a governor who - no one has saved the planet more than he has, albeit he saved it on the silver screen,'' said Assembly Speaker Herb Wesson, D-Los Angeles.

``I think you'll have a higher level of press coverage and scrutiny. Unfortunately for him, he might even be judged at a higher standard.''

Among the topics the new governor is expected to tackle in his first week:

--Car tax: Schwarzenegger has pledged his first action in office will be repealing the tripling of the vehicle license fee that was implemented earlier this year. The repeal will be retroactive for those who paid their higher bills since Oct. 1, meaning the state will likely begin mailing out millions of refund checks in a few months. The move will cost the state $4 billion in lost revenue, plus possibly millions in processing and mailing costs.

--Workers' compensation: During the recall campaign, Gov. Gray Davis signed a law reforming the system, but Schwarzenegger called it inadequate and said he would work to pass ``real'' reform.

The bill signed by Davis sought to roll back skyrocketing costs for businesses by capping payments for medical services at fixed amounts, limiting the number of visits to chiropractors and setting fixed reimbursement rates for drugs. The bill was expected to save businesses at least $5 billion a year.

Sen. Richard Alarcon, D-Van Nuys, one of the architects of the plan Davis signed, said he is concerned that further reform of the system would entail repealing the earlier bill before new reforms are passed.

``I absolutely believe that it is a gross miscalculation for anybody to contemplate repealing the incredible reform legislation that we created last year,'' Alarcon said. ``How do you move further by taking 10 steps backward?''

But Schwarzenegger's deputies say they have not yet decided whether repeal of the new legislation would be necessary and Tuesday's special session will only mark a beginning point.

--Driver's licenses: Senate Bill 60 made it legal for illegal immigrants to obtain driver's licenses. Davis had vetoed it before but signed a new version of it during the campaign, a move that political observers saw as pandering to the Latino vote. The measure has been opposed by a majority of Californians in polls, and Schwarzenegger said during the campaign he would work to repeal it.

--Budget: When lawmakers, after a lengthy stalemate, finally agreed on a deal to resolve the $38 billion deficit for the current year's budget, the deal led to an $8 billion deficit for the 2004-05 budget. That figure was raised on Friday by state legislative analyst Elizabeth Hill to $10 billion. But the figure could more than double if Schwarzenegger repeals the $4 billion car tax and if the courts rule in pending lawsuits to strike down the state's plans to borrow billions this year to close the gap.

Schwarzenegger is considering asking voters in March to approve up to $20 billion in borrowing to balance next year's budget, an unprecedented move that has some critics saying it will saddle future generations with debt for years to come.

``It's the height of fiscal irresponsibility to borrow money and pay interest on it in order to finance a tax cut,'' said Jean Ross, head of the California Budget Project, a nonpartisan group that focuses on budget policies to help low- and middle-income Californians.

``You're basically taking out a loan to give Mom and Dad and Grandma and Granddad a tax cut that will be paid back by their children and grandchildren.''

Harrison Sheppard, [phone]

harrison.sheppard(at)dailynews.com