TOUGH CUTS, NEW HOPES ARNOLD PROMISES TO END WASTE, CREATE JOBS.

Byline: Harrison Sheppard Sacramento Bureau

SACRAMENTO - Delivering his first State of the State address, Gov. Arnold Schwarzenegger laid out a broad agenda for California's revival Tuesday and challenged Democrats to join him in boosting the business climate or face a battle for the hearts and minds of voters in November.

Among Schwarzenegger's new proposals were a wholesale review of state government operations with the goal of making it cost-efficient, providing incentives to increase energy efficiency of buildings and granting local schools new powers to contract out for services.

In a speech broadcast internationally and with hundreds of reporters on hand, the governor urged Democrats to work with him on California's economic recovery and job growth and welcomed their most ``radical'' proposals for the state's fiscal crisis that could lead to bankruptcy if solutions aren't found by June.

He delivered the speech on the 51st day of his administration, using it as an opportunity to tout his accomplishments so far in repealing the tripled car tax and drivers' licenses for illegal immigrants and solving the immediate fiscal crisis if voters support the measures on March 2. But he also laid the groundwork for difficult fights ahead on the state budget.

``The state of our state will soon be strong because our people and our purpose are strong,'' Schwarzenegger said. ``We have a new spirit, a new confidence. We have a new common cause in restoring California to greatness.''

The speech in Assembly chambers was broadcast to an international audience and interrupted by applause - mostly from Republican legislators - 36 times.

Democrats, who dominate both houses of the Legislature, had largely negative reactions although some moderates praised him for including some Democratic ideas.

Senate President Pro Tem John Burton of San Francisco said the governor's talking about health and welfare cuts - to be outlined in detail Friday - would hurt the poorest of the poor. ``That makes absolutely no sense morally, no sense politically.''

Assembly Speaker Herb Wesson of Los Angeles said Democratic lawmakers would cooperate with Schwarzenegger, ``but we will not capitulate to this governor on issues of core Democratic values.''

Assemblywoman Jackie Goldberg, D-Los Angeles, said the true test will come Friday, when the governor releases his first budget proposal.

``Don't pay any attention to anything he said tonight,'' Goldberg said. ``See what he does on Friday. All of this is just rhetoric. ... He should enjoy it, because it's probably the last applause he's going to hear after Friday.''

Democrats, she said, will work with him but will fight efforts to cut education funding or social services.

Illustrating her point, several hundred union members gathered outside the Capitol prior to the talk, toting signs that warned about budget cuts that could hurt the poor and children.

But Democratic Assembly Speaker-elect Fabian Nunez of Los Angeles praised the speech, saying he was glad to hear the governor touch on Democratic ideas such as improving the environment.

``I think the governor did a great job striking a conciliatory note in his speech, when he talked about bipartisan cooperation particularly,'' Nunez said. ``It gave all of us something to feel good about. He talked about the importance of preserving the environment, creating jobs, protecting per-pupil spending in education. Those are all Democratic core values.''

Schwarzenegger showed flashes of his humor during the talk, twice straying from his prepared script to joke about his movie career.

Opening the speech, he said ``OK, I changed my mind. I want to go back to acting.''

Later, he described himself as a salesman, saying his task now is to sell California to the world.

``If I can sell tickets to my movies like (box-office flops) 'Red Sonia' or 'Last Action Hero,' you know I can sell just about anything.''

The speech also represented a kickoff to the campaign he will lead over the next 10 weeks to pass his fiscal recovery package, a $15 billion bond and balanced-budget constitutional amendment on the March 2 ballot.

On Friday, he is slated to release his budget proposal for 2004-05, but provided few clues during the speech as to what it might contain.

Among Schwarzenegger's proposals:

--The California Performance Review. This effort will look for ways to make state government more efficient, including rooting out fraud, waste and abuse. The governor will establish a commission that will include legislators, state bureaucrats and people from business to oversee the effort. Among its tasks will be reducing overlapping functions between state agencies, eliminating commissions seen as unnecessary and updating the state purchasing system.

``Every governor proposes moving boxes around to reorganize government,'' he said. ``I don't want to move the boxes around; I want to blow them up.''

--A $170 million environmental ``green bank'' for energy efficiency. The state will provide financing to retrofit private buildings and infrastructure to become more energy-efficient. The funds will be provided through existing bonding authority from the state power authority, which already has the authority to issue revenue bonds.

--Education reform. Schwarzenegger wants to repeal a state law, SB 1419, authored by Sen. Richard Alarcon, D-Van Nuys, that he says prevents school districts from contracting out to the private sector for some services.

Alarcon, however, said the law does not prevent the districts from contracting completely, but only in cases where the cost savings are achieved by a private contractor paying lower wages and benefits to employees. The law, Alarcon argued, benefits California's economy by keeping wages higher, and prevents the state from having to pick up health costs for uninsured workers.

``If that's the only savings, then I don't think that helps California, because those workers will not be able to participate in our economy with much strength,'' Alarcon said.

--Workers' compensation reform. In November, Schwarzenegger proposed additional reforms to the workers' compensation system. In his speech, he gave the Legislature a deadline of March 1 to enact more reforms or, he said, he would seek to place a measure on the November ballot. Some Democratic legislators said more reforms can be passed but that the March 1 deadline is unrealistic.

--Community college fees. Schwarzenegger said college fees have increased by 40 percent over the past two years. He said he wants to limit future fee increases to no more than 10 percent a year. He also plans to fund a 10th campus for the University of California system, at Merced.

Schwarzenegger was introduced by Lt. Gov. Cruz Bustamante, who took the unusual step of delivering his own, brief remarks first. Bustamante, who finished second to Schwarzenegger in the recall election, cautioned Schwarzenegger to ``not allow the sterile language of the budget to numb us to human suffering that will follow each and every action.''

``Yes, we have to cut waste and fraud in government and there are no easy fixes,'' Bustamante said. ``But in addition to program cuts, closing just one tax loophole or increasing tobacco tax would minimize the harm caused by eliminating important health or education programs.''

Harrison Sheppard, [phone]

harrison.sheppard(at)dailynews.com

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(color) Governor Schwarzenegger laid out a broad agenda on Tuesday in his first State of the State address, saying, ``A tax increase would be the final nail in California's financial coffin.''