One afternoon a few months ago, California legislators were sitting in a room in the capitol at Sacramento, arguing about workers' compensation. Their governor, Arnold Schwarzenegger, was hundreds of miles away, in Burbank, at a Costco warehouse store. He was gathering signatures for a petition to put a workers' comp initiative on the general election ballot. Schwarzenegger was happily signing just about any object offered to him: pieces of paper, books, even a $20 bill. He made sure the cameras had a good angle as he held up the clipboard with his signed petitions.

Some of the reporters on the scene wanted to know why Governor Schwarzenegger wasn't back at the capitol, engaged in the workers' comp negotiations. He batted the question right back to them. "This is what the people want to see," he declared. "They want to see an action governor--not someone who sits around the office in Sacramento, not doing anything."

The appearance at Costco had all the trappings of a publicity stunt. But anybody who saw it purely in those terms misunderstood the governor's strategy--and his cleverness. Schwarzenegger's real audience that day was the legislators at the capitol, the people he seemed to be ignoring. Schwarzenegger was, in fact, intimately involved in the backstage legislative bargaining. He handled much of the final negotiation himself, even getting down into minutiae about medical association guidelines for treating specific injuries. But he knew he needed to use the looming pressure of an initiative on the November ballot to force legislators to make a deal in April. And he succeeded.

Within days of the Costco event, Schwarzenegger had not only cut a deal but signed a new workers' comp bill into law. "They had gathered over a million signatures, were prepared to turn them in," says Steve Merksamer, a former Republican gubernatorial aide, "and miraculously, that's when the deal with the legislature happened."

It's the way the new governor of California likes to work. To no one's surprise, he frequently acts as if he were still in show business. He calls for "action, action, action" so often he sometimes reminds people of a manic movie director. But even those who were skeptical of the movie star-governor are forced to admit that Schwarzenegger isn't just demanding action: He's finding ways to get it. "The only people who are still laughing at Governor Schwarzenegger," says Claremont McKenna political scientist Jack Pitney, "are the people who don't know California."

A serious chess player, Schwarzenegger is demonstrating an ability both to read people and to get up to speed on complex issues in a hurry. Jim Brulte, until recently the state Senate Republican leader and the de facto leader of the California GOP, recalls that it was his job to show Schwarzenegger the ropes and tutor him in the ways of the capitol. "I realized after about five weeks," Brulte says, "that I was no longer the teacher."

In just his first few months in office, Schwarzenegger has won significant policy victories on tax, budget and policy issues: a car tax cut, a $15 billion bond to prop up the state's finances and a series of spending cuts worked out with interest groups, leading up to a budget package that was turned over to the legislature as a fait accompli. He campaigned for those victories with exquisite timing. On the budget, as he did with workers' comp, Schwarzenegger made deals in private and then announced them very publicly, one at a time, for maximum attention.

In virtually every case, the goal hasn't been publicity for its own sake; it's been publicity aimed at creating some movement in the state's legendarily gridlocked political system. Meanwhile, Schwarzenegger has focused attention on the governmental process in a way that hasn't been true in years. San Francisco and Los Angeles TV stations have set up Sacramento bureaus for the first time since the early 1990s. "When it comes to use of his personal time in a very, very public way," says Brulte, "he understands that he can help focus public attention on a particular problem--and in so doing focus legislative attention on a particular issue."

In truth, though, the biggest trials lie ahead. Schwarzenegger's early deals have not resulted in any structural reform of the dysfunctional California budget process. Putting the state's fiscal house in order will require demands for real sacrifice, whether in the form of deep and permanent budget cuts that no constituent group would willingly agree to, or through the tax increases Schwarzenegger and California voters abhor. "I think history has yet to be written," says Democrat Darrell Steinberg, the Assembly budget chairman, "as to whether or not his obvious leadership skills, his force of personality, his smarts and his desire for change actually result in the long-term changes that are needed."


It won't surprise anybody that Schwarzenegger brings show-business flair to his routine activities. Any working day during the spring saw lines of school kids waiting patiently outside the governor's office for a turn posing in front of the portrait of Schwarzenegger and his wife, Maria Shriver. One group argued among themselves whether he was famous "because he's an actor" or "because he's a senator." Those who were standing around when Schwarzenegger happened to pass by started screaming the way Beatles fans used to.

Deeply tanned and much shorter than he appeared on the screen as the Terminator or Conan the Barbarian, the 56-year-old governor can, in fact, regularly be seen walking around the capitol. Previous governors sat at their desks most of the time, waiting for people to come to them. Schwarzenegger gets out and about, appearing before groups that haven't seen a governor in the flesh in a long time and meeting with legislators in their own offices--even attending their birthday parties.

Voters and politicians alike felt that Schwarzenegger's ousted predecessor, Gray Davis, cared only for himself. Davis forever angered fellow Democrats in the legislature by saying publicly that their role was "to implement my vision." Schwarzenegger is not about to make any similar mistake. "Here's a guy who gets up from his desk to see legislators," says Fred Silva, of the Public Policy Institute of California. "It's a protocol change, which for public policy purposes is probably a good one"--and symbolic of Schwarzenegger's more active engagement in crafting legislation.

Democrats don't agree with Schwarzenegger on everything--and some of them say more critical things in private than they feel comfortable saying in public, since he is riding so high--but the new governor does seem approachable and willing to listen, and that alone is a change. (Both houses of the legislature are currently controlled by Democrats, as is every other statewide elected office.)

Schwarzenegger manages simultaneously to play both good cop and bad cop, calling for a part-time legislature that would send him fewer "strange bills" while opening up to Democratic Assembly members in a way they're not used to. He uses Bob Hertzberg, a former Democratic Assembly speaker, as an adviser and liaison to Democrats. But the governor may be his own best liaison. John Burton, the veteran Senate president pro tem, says that Schwarzenegger is "a lot looser than Gray" and recalls that during the workers' comp negotiations the two teased each other about personal image. "You're a great man," Schwarzenegger told Burton. "No," the senator assured him, "you're a great man."


The circumstances of California's 2003 recall election were, arguably, the most unusual surrounding any state campaign in recent times. Davis had been reelected in 2002 against a weak GOP opponent. As 2003 progressed, however, buyer's remorse set in among California voters, who disapproved of Davis' handling of the budget and remembered his tepid response to the energy-supply meltdown in 2001, when the lights literally went out in the state. A recall effort was launched by Republican activists and underwritten by a wealthy GOP congressman. Although the recall looked initially like an extended personal vendetta, it quickly gathered popular strength. In retrospect, Davis was probably doomed by the time Schwarzenegger announced his candidacy on "The Tonight Show." Davis was recalled by a 54 percent majority, and Schwarzenegger easily led the field of 130 candidates who filed to succeed him.

Given Schwarzenegger's background, the obvious comparison at first was to Jesse Ventura, the ex-wrestler who was elected governor of Minnesota as a third-party candidate in 1998. Although Schwarzenegger ran as a Republican, he was, like Ventura, an outsider drawing mostly on show-business notoriety. Like Ventura, Schwarzenegger surprised skeptics in the early weeks by putting together a highly competent staff and cabinet.

But Ventura had the misleading luck of coming to office at a time of budgetary plenty, and he never really adjusted to the hard times that ensued. By 2001, Minnesota's fiscal surplus had evaporated, and Ventura's popularity had evaporated with it. In the closing months of his four-year term, Ventura was nearly irrelevant politically; the legislature passed a budget without his signature, overriding his veto within three hours of its issuance. "He had a tougher time dealing with the legislature when we were in a world of hurt," says Tim Penny, a former congressman and one-time Ventura adviser. Schwarzenegger, by contrast, came to office precisely because his state was "in a world of hurt." Voters were ready for a change, and anything he could do to improve the situation would look like a big win.

When he first took office, it looked as if Schwarzenegger might be content simply to remain a creature of the media, an outsider governor who appeared on TV to bash legislators. He often talked about taking his agenda directly to voters through the initiative process if the legislature wouldn't play ball, and kept political consultants on staff as if he were going to operate in permanent campaign mode.

It's now clear that Schwarzenegger had a more subtle strategy in mind, one that envisioned the initiative process less as a blunt instrument to get his way and more as a negotiating tool. "I like the idea of using deadlines," Schwarzenegger said at a news conference celebrating the workers' comp package. "Because why would we hang here for the next two years and negotiate and debate over this issue?"

The most frequent goal of the Schwarzenegger administration, it seems, is not to force movement in any foreordained policy direction but to close a deal that will have representatives from all sides standing together at the press conference to announce it. Schwarzenegger is a Republican committed to a no-tax-increase agenda, but beyond that he has been extremely flexible, working not only with a Democratic legislature but with lobbyists across the political spectrum to reach agreements that everybody can live with. Dianne Feinstein, California's senior U.S. senator and leading Democratic politician, calls the governor "a Republican with the body language of a Democrat."

Not all the Democrats in the legislature feel that way; some of the budget deals have left them feeling shunted aside. But for the most part the administration has been open to them, and they have found Schwarzenegger to be someone they can make deals with, despite their partisan differences. "He understands the art of negotiation," says Steinberg, showing off a silver hamesh (a hand symbolizing protection), a religious gift Schwarzenegger brought him from a trip to Israel. "He's a pleasure to deal with," Steinberg insists. "He listens as much as he speaks."


While maintaining his Republican credentials on taxes and most fiscal issues, Schwarzenegger has otherwise won points for pragmatism and kept his overall image moderate. When San Francisco began issuing marriage licenses to same-sex couples, Schwarzenegger complained that the move was against state law, but suggested he wouldn't be upset if that law were changed. He appointed an environmental activist to head the state EPA, has promoted the idea of building a "hydrogen highway," as well as a bill to allow hybrid vehicles to use HOV lanes, and has pledged to defend in court, if necessary, the state's pioneer law regulating the greenhouse gas emissions of cars and other vehicles. "On the environment, so far so good," says Assemblywoman Fran Pavley, author of the greenhouse gas bill.

Now politicians on both the right and the left are seeking out the center because, suddenly, that's were the action is. The governor's fondness for establishing consensus became apparent early in the game, in the way he handled the issue of driver's licenses for illegal immigrants. The legislature had passed a law last year establishing such licenses, and this quickly became a prime topic in the recall of Davis. Schwarzenegger's Republican allies argued that they should take the issue directly to voters.

Unlike a measure dealing with workers' compensation, an initiative to ban the driver's licenses was a sure winner. It would have passed overwhelmingly and been certain to fire up GOP partisans. Instead, Schwarzenegger worked with the original measure's sponsor, Democratic state Senator Gil Cedillo, to repeal the law through the legislative process. The governor promised that he would sign a compromise bill later on if it included tighter security provisions, although he and Cedillo have not yet been able to come to an agreement.

"A lot of Republicans were furious at him," says Tim Hodson, executive director of the Center for California Studies, at Sacramento State. "Arnold Schwarzenegger sacrificed the partisan interests of the Republican Party, in my view, to avoid a very racially divisive wedge issue election. It's a good example of what a governor does, as opposed to a campaign manager."

In the case of workers' comp, Schwarzenegger wanted agreement on a benefits package less costly to business than the one Davis had approved the previous year. The new governor warned legislators that a multimillion-dollar initiative campaign would go forward if they didn't cooperate on the workers' comp issue. He won near-unanimous approval on his final deal, even though he refused to give Democrats the rate regulation provisions they were hoping for.

Schwarzenegger has won over other potential antagonists by trying new approaches to their problems. Almost from the day of his inauguration, Schwarzenegger began wooing the lobbyists who represent California local governments. When he repealed Davis' car tax increase, he put at risk $4 billion in funds earmarked for cities and counties. Schwarzenegger made it up to them through use of an obscure budgetary mechanism called deficiency appropriations that had never been used nearly as expansively before.

When Schwarzenegger addressed the California State Association of Counties, he was the first governor to do so in 20 years. After the event, he sat down with CSAC leaders for nearly an hour to talk about their concerns that his initial budget proposal would, like previous state financial decisions, drain local treasuries. By the time they had finished talking, the governor had worked out the outlines of a deal. In the end, he persuaded cities, counties and special districts to take a $1.3 billion hit in each of the next two budget years, in exchange for his pledge to campaign for a constitutional amendment that the locals had long dreamed of, one that would make it much harder for the state to plunder local revenue sources in the future.

The localities won't get back any of the billions the state has claimed for itself over the years, but if the amendment passes--it would come in the form of another ballot initiative--any further legislative attempts to fiddle with local sales- or property-tax dollars would have to be approved by voters. "What he said to us," explains Chris McKenzie, of the League of California Cities, "was, 'I'll embrace your Number One priority if you embrace my Number One priority, which is to eliminate the budget deficit and get the state back in balance.'"


The most serious question is whether Schwarzenegger has made much progress in addressing the long-term problem that he places first on his own priority list. For all the governor's efforts to distinguish his approach from that of Davis, the fact is that this year's budget, like last year's, will punt about $10 billion worth of debt into the following fiscal year. The $15 billion bond measure used to help balance the 2004 books was coupled with another that toughens balanced-budget requirements--but, conveniently, those new requirements don't apply this year.

Schwarzenegger has consistently maintained that it took years to create the budget mess in California and it will take years to solve it. The majority of state spending is mandated by law, and the governor has done nothing to address that underlying reality. And although the deals with constituencies such as teachers unions, university systems and local governments will help in the near term, the promises Schwarzenegger made to obtain those agreements involve future funding that will push eventual solvency that much farther away. In the words of Pete Schaafsma, the Assembly's senior Republican budget adviser, the much-publicized agreements represent the exchange of "a little bit of pain now for eternal bliss later."

Will Schwarzenegger ultimately have the stomach to make the hardest choices--to raise taxes or impose spending cuts that will create real pain and discourage legislators and interest groups from sharing the stage with him? "Neither the legislature, the governor or the people of California are interested in facing the long-term fiscal problems of the state," warns Phil Isenberg, a lobbyist and former Democratic legislative leader.

Indeed, for all the goodwill Schwarzenegger has engendered, some in Sacramento are starting to wonder whether the governor isn't selling the same snake oil that has bedeviled the state in the past--short- term fixes that create longer-term problems--disguised by bright new packaging. "I've heard the talk about action, action, action, but I have not seen the courage," says state Treasurer Phil Angelides, a potential Schwarzenegger rival in 2006. "I don't sense from this governor any idea of where he wants to take the state other than making deals that calm the political waters. He's popular now, but he hasn't made people make the hard choices."

What's undeniable, however, is that Schwarzenegger has raised the stakes in California. A year ago legislators were debating bills on cross-dressing and baby-bird feeding while the state's budget shortfall was approaching $35 billion. Now, at the very least, there is a sense among voters that the state's toughest problems can be addressed and that they have elected someone willing to take them on. The governor may have punted, so far, on solving the long-term structural deficit, but he has tackled other issues that had long stalemated the capitol, such as workers' compensation. And he promises more to come. He is pushing the legislature and Public Utilities Commission, for example, to make changes in energy regulation--an issue both bodies had been afraid to touch--in order to allow the largest users of energy to negotiate their own purchases.

More dramatically, Schwarzenegger's California Performance Review threatens to "blow up the boxes of state government," as the governor says, with a mixture of agency consolidations--the state has nearly 20 agencies with tax responsibilities alone--and privatization of such services as real estate management. A prime target of the review panel, which is taking advice from a group of more than 250 state employees sworn to secrecy, will be the 300-odd state boards and independent commissions, whose appointed and well-compensated members are often former legislators or gubernatorial cronies.

The governor's Performance Review advisers have been given the broadest authorization to proceed, and the proposals that ultimately emerge from Schwarzenegger's office stand a fair chance of actually being adopted, because California has a government restructuring law that works like the federal procedure for closing military bases. Once a plan is submitted to the legislature, there must be an up-or-down vote on the entire package within 45 days. No amendments are permitted.

If he can update the state bureaucracy, which he has called "a mastodon frozen in time," Schwarzenegger will have accomplished a tremendous feat. Given his personal popularity and unforeseen talents as a negotiator, he continues to have enormous potential to change the way the state does business. But because the structural deficit is so enormous, even the most ambitious administrative shuffling can do little to solve it. "On the one hand, it's easy because you've got this guy who is so dynamic and unafraid to take on challenges," says Billy Hamilton, co-director of the performance review, "but on the other hand, you've got a budget problem that is in some respects more complex than the federal budget."

California could withdraw entirely from the business of funding roads, universities and parks--indeed, the governor could lay off every state employee--and the state might still have a deficit problem for years into the future. "To me, the jury's still out on whether he wants real, true structural reform," says Joe Canciamilla, an Assembly Democrat. "If he's not willing to take that step, with the popularity he's had, the independence he's had, the public statements he's made-- if this governor isn't willing to go there, it ain't gonna happen for several generations."