Arnold the Strong

Schwarzenegger campaigned for workers’ comp reform during last fall’s recall campaign. He raised the topic again in his January State of the State Address, throwing down the gauntlet in the form of a March 1 deadline for the legislature to act. “Modest reform is not enough,” Schwarzenegger declared. “If modest reform is all that lands on my desk, I am prepared to take my workers’ comp solution directly to the people and I will put it on the ballot in November.”

But March came and went in Sacramento without the legislature heeding his warning. Still, workers’ comp didn’t end up on the November ballot. Why? Because, in post-recall California, it’s Arnold’s game and Arnold’s rules.

And here’s how the Governator played this particular game.

SCHWARZENEGGER IMPOSED different March deadlines for the legislature to complete its work. However, they were flexible deadlines. The only one that wasn’t subject to change was last Friday’s–the final day for turning in signatures to qualify an initiative for the November ballot. Not coincidentally, that’s the same day the legislature finalized the reform measure.

Behind closed doors, his staff worked with the legislative leadership. When the progress slowed, Schwarzenegger would leave the Capitol–to visit Costco stores in Sacramento and Los Angeles–to mug for the cameras and collect signatures for his potential initiative. Message to the legislature: I won big at the ballot in March; I’ll do it again if need be.

Even when he left California for some quiet time with his family, Schwarzenegger played mind games with the folks in the Capitol. While on a Maui vacation in early April, the Governator casually suggested that it might be best for all concerned if California’s full-time legislature, seemingly unable to do its job, was relegated to part-time status. Message to the legislature: you don’t want to see me angry.

By working with Schwarzenegger, lawmakers got a workers’ comp bill that placated the two parties. The Governator persuaded Democrats to give up their demand that insurers lower the rates they charge businesses. Instead, Democrats will pursue that through separate legislation, which Schwarzenegger may or may not support. By taking rate regulation off the table, Schwarzenegger won over Republicans who otherwise wanted tougher limits on job-related medical and legal claims.

California, in turn, got the promise of billions in savings to the state’s 90-year-old workers’ comp system–music to the ears of many California businesses, which currently suffer under rates double the national average. One preliminary estimate, by UC-Berkeley’s Survey Research Center, predicts an overall reduction of $13.5 billion, thanks to medical-cost containment measures and other reforms, from a system that otherwise would have skyrocketed to $30 billion in 2006 without the change.

SO WHAT TO MAKE of this latest Schwarzenegger success? It may be his most impressive accomplishment to date, given that he used leverage rather than brute force, as he did in winning recall and passing Proposition 57 and 58 in last month’s primary.

Let’s assume the Governator didn’t really want to take workers’ comp to the ballot–it would have cost both sides up to $60 million; and there was an outside chance that Schwarzenegger, for the first time, might have lost a political battle. Still, he kept alive the prospect of the initiative as a means of goading the legislature into action. Why? Because he was shrewd enough to recognize that Democrats also wanted to avoid a fight. The left-leaning unions already fear him–as witnessed by the California Teachers Association’s decision to drop a November initiative that would have raised business property taxes to pay for preschool programs and higher teachers’ salaries. Schwarzenegger opposed the measure; CTA didn’t want to wager $20 million that they could defeat him in a popularity contest. With workers’ comp settled, unions will put their muscle behind a November initiative that mandates healthcare coverage for California small businesses.

WHERE WILL Schwarzenegger next turn his attention? First, there’s unresolved business. Earlier this year, the Schwarzenegger administration asked seven California tribes for $500 million, in exchange for a higher number of slot machines per reservation. Facing a massive budget deficit, the Governator needs the money. Facing a titanic ballot fight this fall, the tribes can use the good PR (the tribes currently face an initiative, which is already running TV ads, that would allow some racetracks and card rooms to operate slot machines).

Second, he may take on a headache of the same magnitude as workers’ compensation: California’s dysfunctional state power system. The state already has suffered a state-one electricity alert earlier this spring. Others could be on the way as the mercury rises. Just how Schwarzenegger goes about fixing the grid is a topic that he hasn’t shed much light upon. “My plan is that we will resolve this this year,” he recently told reporters. “Ideologically, I like to have deregulation. But as you know that sometimes ideology falls apart when you deal with reality. So we also have to think about that.”

Third, there’s coming to closure on a matter that riles California’s right–and has local talk radio in a lather–driver’s licenses for illegal aliens. After campaigning against the issue during recall, Schwarzenegger has since indicated that he’s willing to consider a new version of the bill signed last fall by Gray Davis then repealed by the legislature. More recently, the Governator gave himself a little wriggle room, telling the press: “It is possible, but it is a very, very complicated issue.”

AND SPEAKING OF COMPLICATED, there’s this summer’s budget negotiations.

Next month, the Schwarzenegger administration will release the “May revise” of this January’s budget proposal–the state’s deficit adjusted for incoming tax revenue and changing economic conditions. Regardless of the tweaking, the deficit will be enormous–as much as $18 billion in leftover and new deficits for 2004-05.

Schwarzenegger will face two harsh realities about the Democrats in Sacramento: (1) they want to fix the deficit and expand government services by raising taxes; (2) they keep forgetting that California voters are fed up with tax-and-spend politicians.

Already, Democratic lawmakers are talking about raising income taxes on Californians earning $136,000 and above. Some Democrats want to raise the top bracket rate by as much as 20 percent. Meanwhile, a proposed November initiative by Assemblyman Darrell Steinberg (D-Sacramento) would place another 10 percent tax increase on California millionaires, with the proceeds going to expanded mental health services. It’s a great fairness debate: of the 13 million tax returns filed in California every year, only about 25,000 show income in excess of $1 million. However, those few returns account for roughly one-sixth of the revenue collected from all of California’s personal income tax.

And there’s another set of numbers for Schwarzenegger to consider. During recall, he and state senator Tom McClintock ran as the anti-tax candidates. Together, they received 62 percent of the vote. Lieutenant governor Cruz Bustamante, on the other hand, called for an $8 billion tax hike. He’s now political road kill. The anti-tax mood continued in California’s March primary. Proposition 56 didn’t expressly call for higher taxes, but did call for an end to the legislature’s two-thirds requirement for raising taxes. The opposition campaign said voting for the initiative was tantamount to supporting higher taxes. Proposition 56 lost, 66 percent to 34 percent.

As a politician, even one with only five months on the job, Schwarzenegger is smart enough to recognize that anti-tax sentiment. And it sets the stage for his next feat of strength: getting a budget passed without caving to the Democrats’ pressure to tax their way out of California’s fiscal mess.

Bill Whalen is a research fellow at the Hoover Institution, where he follows California and national politics.