Two early events will set year's tone for Schwarzenegger.

As Gov. Arnold Schwarzenegger outlines this week how he intends to deal with an estimated $8 billion budget deficit, the big question is whether he will try to deal with Democrat lawmakers or go directly to the people--again.

Up first is the annual State of the State speech on Wednesday (5th), which will set the tone for the months of tough words and negotiations to follow. Then, next Monday (10th), the governor presents his 2005-06 budget to the Legislature. His new budget chief, Tom Campbell, has already hinted at a slew of cuts to health and welfare programs and no revenue increases.

Schwarzenegger may be able to skirt some of the most difficult budget choices for another year, since there will be some money left over from last year's $15 billion deficit bond offering and the state can still take $1.5 billion from local governments. But if he chooses a patchwork approach, the 2006-07 budget has the makings of a fiscal disaster, just at the time Schwarzenegger could be running for re-election.

"To get a handle on this budget deficit, Schwarzenegger must show he can listen to legislators," said Sherry Bebitch Jeffe, professor of political science at the University of Southern California. "But he doesn't think he has to listen to legislators. He thinks he can go around them and take things to the voters. If he tries this, things will turn very, very ugly."

There's been talk around Sacramento that the governor will support initiative measures for a stricter spending cap, redistricting reform and other state government reforms contained in the mammoth California Performance Review.

While Schwarzenegger has not tipped his hand, such an approach will have him on a collision course with the Democratic leadership--and could prompt them to propose their own initiatives on a special election ballot.

"It's already clear that bipartisanship is a mess and it's not likely to get any better," Jeffe said.

Overtime Battle?

A bitter battle from the 1990s may get a replay in Sacramento, as business groups, fresh off election victories that restricted lawsuits and overturned a health care mandate, try to repeal the state's daily overtime law.

"This is the number one concern for small businesses right now," said Martyn Hopper, state director for the National Federation of Independent Business.

The law, which requires employers to pay hourly workers overtime if they work more than eight hours a day, was overturned in 1997. That's when members of a five-member commission appointed by then Gov. Pete Wilson voted to require overtime only after an hourly worker puts in more than 40 hours in a week.

At the time, employers argued that a weekly overtime limit would better accommodate flextime schedules. They also argued that California was one of only three states to require daily overtime pay, putting it at a competitive disadvantage.

But the labor community labeled it a $1 billion "take-away" from working families, and it became a potent campaign issue for Gray Davis as he sought the governorship the following year. Within days of being sworn in, Davis had legislation introduced to restore daily overtime and he signed it into law in July 1999.

The business-friendly Schwarzenegger administration has changed the landscape, although workers' compensation reform and the defeat of an employer health care mandate were the top priorities of business last year.

Now, Hopper said, there's talk of forming a coalition of business groups to push for legislation that would repeal the overtime law.

Labor groups vehemently oppose any move.

"We found that when Pete Wilson took daily overtime away, we had one of the largest groundswells of activation of workers that we've seen in a long time," said Art Pulaski, executive secretary and treasurer of the California Labor Federation. "Let them introduce this again. It will be a battle royal and a grand mobilizer for lots of workers."

If Schwarzenegger were to support a repeal of daily overtime, he's likely to run into the same buzz-saw of opposition that hit after an obscure commission last month voted to change the rules regarding lunch breaks for hourly employees. The commission ultimately backed off and agreed to hold hearings this month.

A spokeswoman for Schwarzenegger said the governor does not comment on legislation that has not been introduced.

City Council Agenda

The Los Angeles City Council, back from its winter recess this week, is set to consider two major business-related issues: a mandate on developers to set aside units for affordable housing and a financing deal for a convention center hotel.

The affordable housing set-aside, known as "inclusionary zoning," has been postponed for months due to opposition from developers and business groups. Also, Mayor James Hahn has come out against a mandate, saying it would stifle developers' willingness to build in the city.

Later this month, a revised ordinance is due back in committees; backers, including Councilmembers Eric Garcetti and Ed Reyes, hope it can come to the council floor either this month or next.

Meanwhile, Councilwoman Jan Perry is pushing for a $150 million public financing package of loans, subsidies and tax breaks for the developers of a 1,200-room convention center hotel next to the Staples Center. The development group includes Wolff Urban Development Inc., Apollo Real Estate Advisors LP and Staples Center majority owner Anschutz Entertainment Group.

Backers say it's necessary to attract major conventions that are now bypassing the city. Perry has said she wants council approval for the financing package this month so that construction can begin on the hotel later this year. "I'd really like to see this hotel open by 2007," she said last week on Comcast Cable's "Local Edition."

Staff reporter Howard Fine can be reached by phone at [phone], ext. 227, or by e-mail at [e-mail].