This is a partial transcript from Hannity & Colmes, December 9, 2003, that has been edited for clarity.

SEAN HANNITY, CO-HOST: Governor, good to see you again.

GOV. ARNOLD SCHWARZENEGGER, CALIFORNIA: Good to see you again.

HANNITY: Getting used to that name yet, governor?

SCHWARZENEGGER: No. It still sounds funny, especially when people like you that I've known for a long time all of a sudden call me governor. So that's kind of strange.

HANNITY: It is strange saying "Governor."

SCHWARZENEGGER: Yes. I believe it, yes.

HANNITY: I'm not surprised. When we were together for the town hall, you just had this confidence. You didn't have any doubts you were going to win this race, really. You were confident all throughout.

SCHWARZENEGGER: Well, I knew that the people really wanted change, and I knew that if you, you know, get the message out there of what you want to do with the state, that the people will pick up on that.

And it was very clear that the people had different choices, there were different candidates with different ideas and philosophies, raising taxes, not raising taxes, cutting the budget by $20 billion and all those kinds of things. And what I presented to the people was what they voted for. So it made me very happy. But I knew that this was the way the people would go and I, of course, felt very appreciative, you know, that they had the confidence in me and the trust in me.

HANNITY: A little different than bodybuilding and acting, your two prior professions.

Now that you've had a chance to get in and really take a look at these problems, are they bigger than what you expected? Is it more challenging than what you expected? What were some of your preconceived notions and what is some of the reality in what you're facing?

SCHWARZENEGGER: Well, I think that it was very clear to me from the beginning for me that the challenges were huge. I mean, it was very clear that we actually have the largest budget deficit in the history, and that we have a terrible credit rating. We cannot borrow. We've got a big problem borrowing and all of those kind of things.

You know, the business environment in California is terrible. The -- you know, the businesses are moving out of the state and others.

So, I knew that there were serious problems to deal with, but there's a whole other thing, of course, of going there and actually dealing with it, because a lot of decisions that you make are always -- it's a collaborative effort. You need the legislators to make the decisions right along with you. They have to see...

HANNITY: Easier if you could just write...

SCHWARZENEGGER: Exactly. That's right. And also, what is interesting about this job is that, unlike anything else that I've done, that I've made decisions that affected me or my family, this has an effect on almost 36 million people. It's tremendous -- It's a whole different responsibility. That's right.

HANNITY: State lawmakers rejected your economic recovery plan. You have been very outspoken in pushing for this plan. You have called the legislators in Sacramento, where we are today, spending addicts. And now you have a plan to take it directly to the people of California.

SCHWARZENEGGER: Well, Sean, as you know, the fight and the struggle and the negotiations are not over yet. Even though we have passed the deadline, and Secretary Kevin Shelley (search) has said the deadline was last Friday. But the legislators can actually postpone the deadline.

And so we are right now, as we speak, we are in the middle of negotiations and both sides, Democrats and Republicans, want to make this work, because they know that we have to put bipartisan -- we have to be bipartisan in order to make this work. Partisanship has to be pushed aside in order for California to win.

So, I think that we have a good shot at it, and we have worked to late night yesterday. We will work again until late night tonight, and I think we could come to an agreement.

I'm always very optimistic, as you know. Until it's over for me, it's never over. So that's what I'm waiting for.

HANNITY: You've been -- in some senses, you've been openly embracing all of these Democratic candidates. You've gone to certain cities in the state of California, and you've brought Democrats with you.

On the one hand, you've been out in the courtyard out here, offering them cigars, having meetings with many of these guys. And then on the other hand, you say there will be serious consequences in the next election if they don't fix this problem.

Some people are critical that you, on the one hand you're embracing them, but you're also warning them of consequences.

SCHWARZENEGGER: Well, only because the people are very smart. The people want to have the problems fixed. And it's very clear that it was the people that flexed their muscles and that let their voices be heard on October 7. That's how I became elected.

And it is -- it was a very clear message to all the lawmakers, to all the legislators and all the politicians, not only in this state but in the entire country, if you don't do your job and do it well and represent the people, we vote you out. And that's actually what will happen in the next election.

If the lawmakers here in Sacramento fail to serve the people and not do a good job and get us out of this problem, the crisis that we're in, the people will vote them out of office, and those are the casualties. And so, they should know that the people now want to have their voices heard.

HANNITY: Will you go and actively campaign for Democratic legislators who help you on this, the most important crisis you think the state is facing? In other words, if they say, "I'm going to support you" and then come to you and ask for help for their re-election campaign, would you help Democrats?

SCHWARZENEGGER: I would travel around the state of California to all different corners, all different villages and cities, because I want to cover the whole state. I don't want to just sit around in Sacramento and negotiate. A governor has to really serve the people and travel around.

And as I travel around to the different communities and the different cities, I will always bring in the local representatives. If they're Democrats or Republicans, I want them to be there so we can talk about the local issues, the problems that they're facing in the state, and talk together, let everyone shine.

It doesn't matter if they're Democrats or Republicans, because we have to work together. That's how we're going to make this state great.

HANNITY: There is an alternative plan, though. If these negotiations were to fail, and we thought Friday was the deadline, it's not the deadline. But you've also vowed to bypass the legislature and go directly to the people of California, not just on these budgetary issues but on the workers' compensation system, open government records, campaign finance, and some of the other issues facing the state.

That is a strong plan B.

SCHWARZENEGGER: Well, first of all, it has to go on the ballot, because the people want to vote and have the choice on those issues. So it is very important it gets on the March ballot. But if our legislators fail to vote on that and to put it in a March ballot, then they have to take it to the November ballot, which is the next one, the next election. So, that's what we would do.

I will go all the way. No matter what happens here, I will take it to the ballot. It just would then take longer and I think California as a state would have to go through some more -- a longer period of time of misery, which is unnecessary. That's why I want to put it on the March ballot to solve those problems immediately.

But I would take it on the ballot no matter what.

HANNITY: If you have to do it. But that would also mean that the economic recovery plan -- it's almost 11 months away -- you'd even have a chance to begin to implement it.

So, that makes getting an agreement that much more of an imperative for you. Correct?

SCHWARZENEGGER: It is extremely important to come to an agreement, and you know, the pressure is on all of us. There is no two ways about it. I think that we need this in California; we need to have this recovery bond, because I've inherited such an enormous debt, as you know, from the previous administration and from the spending over the last five years that has occurred. I mean, you know, they spent money that they don't have.

HANNITY: Yes.

SCHWARZENEGGER: And so now what we have to do is roll all this inherited debt into one bond, and then offer it out there so that we can come back and have a recovery, a quick recovery, and be at the same time -- have to put a spending limit on lawmakers. Because the people of California don't want to get into this crisis again.

HANNITY: Can you still do it without raising taxes?

SCHWARZENEGGER: Absolutely.

HANNITY: Do you still -- that pledge stands from what you said during the campaign, that only during some type of state emergency would you consider raising taxes?

SCHWARZENEGGER: We're getting -- This week we're getting into the budget situation. As a matter of fact, tomorrow. As soon as this negotiation's over, we will get into the details of the budget so I can really see what will happen next year, what we need to do in order to fix the problem and all those things.

But I'm not a believer in taxes.

HANNITY: Tom McClintock, your opponent in the last race, had an interesting piece in The Wall Street Journal, suggesting that if you cut spending by 13.4 percent, that would solve all the budgetary problems and you would still be at a rate of 15 percent higher than when Gray Davis took over office, which would be a significant increase in spending anyway, even though it's a reduction.

Is that a plan you'd adopt or is that too severe?

SCHWARZENEGGER: I think that he presented his plan to the people when he campaigned, and the people did not like his plan. Otherwise he would be governor.

The bottom line is that you have to find some happy medium. When you sit there and you go through the programs and you see the kind of cuts that you have to make, it's tough to make those cuts. There's no two ways about that. But we have to roll back, and we have to really, you know, decrease the spending. Because we just cannot afford it.

This state doesn't have any money right now, and therefore we are forced into making cuts in the programs. And I'm asking everyone in California that we have to tighten our belts and everyone has to give here, because it is very tough, and like I said, there's no money.

HANNITY: You were able to follow through on a campaign promise and cut the car tax. Do you worry that that will contribute to further debt in the short term? In terms of lost revenues.

SCHWARZENEGGER: Of course. Whenever you cut anything, then you have less money available. But I felt very strongly that it was unfair for the legislators to let the car tax increase.

HANNITY: Right.

SCHWARZENEGGER: Because they knew way in advance that they're spending too much money. And, therefore, the way it was written, the way the law was written was only when you get into an emergency situation you can do that. The trigger happens, the triggers automatically and then you can increase the car tax where it wasn't an emergency.

They knew a year ahead of time with the budget that it would get to that point that they have to do that, to increase the car tax. So, it's not really fair to the people, because they cannot control the spending, that they go out and increase the car tax and then the people have to suffer because of it.

And I tell you, the amount of letters that I've gotten and the huge reaction of thank you notes and thank you calls and people come up to me on the streets and say, "Thank you, Arnold, for cutting the car tax increase." It is amazing what effect it had, because there are so many people that make so little money, and for them, $200, $300 savings is a huge amount of money.

HANNITY: Let's move on to the issue of illegal drivers, illegal immigrants getting legal driver's licenses. Another issue, another campaign promise. You've already moved on it.

And you left the window open a little bit inasmuch as, under certain circumstances, people that are undocumented could get driver's licenses?

SCHWARZENEGGER: Absolutely. I made it very clear during my campaign that I am totally against driver's licenses for undocumented immigrants, because there is no background check and it doesn't really solve the problem with the insurance situation.

I've said, always said that we have to do it this the right way. We have to sit down and give it time so that we can look into it and do it the right way.

A pre-election, especially the way this was done, was the wrong thing to do, everybody in California hated it, and therefore I was very much for it and repealed it and get rid of this problem.

HANNITY: But under what circumstances could somebody who's not here legally would you support getting a driver's license? Is there any circumstances? If they're not here legally, could you foresee any circumstances where you would allow them to get a license?

SCHWARZENEGGER: Yes. If they have -- if we find a way of doing the background check so it doesn't go into criminal elements. We have to have the background check because we have to secure and protect the state, because of terrorism and all those other things. The other driver's license bill was terrible, because it did not protect the state at all.

HANNITY: Even if they're here illegally? Even if they're not here legally?

SCHWARZENEGGER: And also the important thing is to find a way of attaching the insurance, because the whole idea for people to have driver's licenses is so they can drive and have insurance with their car.

And this has been the big complaint that if you have no driver's license, how can they ever get an insurance, and how can they then protect all the citizens of California? We need to look for what protects the citizens, what protects everybody. And so this, I think, is the best way of doing it.

HANNITY: Somebody could get a license even though they're not here legally, but if you checked out their background and that they had insurance, they could prove it...

SCHWARZENEGGER: That's correct.

HANNITY: In those circumstances, some would say why not send them back? Considering we have a few highly coveted spots or openings for people to come here, why reward illegal activity? With a legal status?

SCHWARZENEGGER: I don't think -- I don't see it as rewarding at all. I see it as everyone is driving in the state. They all are driving. So what it does is that if there's an accident or something like that, that they have insurance and that they have a driver's license and we know who they are. That's really the bottom line.

It -- it does not legitimize their staying here. It does not make it official now. It does not make it all of a sudden now that they are here legally. It doesn't mean any of that. It just means that now they have a driver's license when they drive.

So I mean, it has to be done the right way rather than the wrong way. And the way it has been done and why I repealed it and got rid of it was because it was done the wrong way.

HANNITY: During the campaign, you had allegations with women. As you know, this is now on the front pages of the paper today in the Sacramento Bee that a woman -- and you had apologized for anything, a joking manner that you might have done while you were involved in your acting career.

One woman has filed a lawsuit, saying your campaign smeared her, and said that she had had an arrest record. On a similar note, you also had had a plan that you were going to conduct an investigation on your own into the allegations that some people have made, and you have dropped that and said it would be ridiculed by political opponents.

What is the status of that woman's claim and how do you respond? And tell us why you decided to drop your own investigation.

SCHWARZENEGGER: Well, first of all, I don't know anything about the woman's claim. That's something that has to do with the campaign, and so I'm not familiar with that.

But I think that the people were, you know, very clear. They sent me to Sacramento. They've read all those things, and they sent me here to do the job. And that's what I'm here to do.

I'm extremely busy trying to turn this vision that I have into reality and to keep my campaign promises and trying to go through the checklist, one after the next, and take care of the job. And that's what I'm here to do.

HANNITY: Does that hurt you, does that bother you that people are doing this? Do you think it's politically motivated?

SCHWARZENEGGER: Well, you know, it was very clear that, you know, when you're -- when no one ever has complained for 35 years that I'm in this country. And then all of a sudden a few days before the campaign -- before the election, all of a sudden, there's all these allegations. It was rather coincidental, I have to say.

So, I don't blame anyone for it. I just think that's the way it is in politics. And one has to, you know, look at it in a realistic way.

But at the same time, I always said that if there is anyone out there that I've offended, I'm always ready to apologize.

HANNITY: How is your family doing? How is your family, your wife and kids, reacting to this change in job? Obviously, you're going to have to work a lot of hours now.

SCHWARZENEGGER: You know, they have adjusted really well. And I think that the challenge is to set priorities.

And for my wife and I, the priorities are that on weekends, we want to keep that to the family. We want to just have the time put aside for family. And just to play with the kids and to go to the sports events that they have.

And like for instance, this -- last Saturday, we spent four hours doing what we do every year, which is decorating the Christmas tree, you know. We got the Christmas tree and we hung the lights, and then hung for four hours the ornaments. I was up there on the ladder ... reaching up and giving me the things, the ornaments and putting the hooks through it and decorating it. And we had the Christmas music on and hot apple cider.

So those are the kind of things that we've always done, and we want to continue doing those kind of traditional things or going away as a family or spending as much time together. And then my wife comes up here to Sacramento many times or I go during the week sometimes down.

So, we work it out in one way or if other. Where there's a will there's a way. The key thing is that family is first. My children are first. They're the most important thing, and then to do as much work up here as possible.

And as I told you before we started the interview, I really have a great time with this job. I mean, there's such joy that I find in this. Every morning when I get up, I'm looking forward coming to my office and looking forward to taking on the challenges, to dealing with the legislators, sitting down and negotiating and working out problems.

It is fun, because for so many years I've made decisions that were, like I said, had only an effect on me or my family, but now you make decisions that have an effect on all the people of California.

HANNITY: You met with the president and spent a lot of time with him.

SCHWARZENEGGER: Yes.

HANNITY: What do you want from Washington in terms of helping you with this problem? And No. 2, you're a big supporter of the president. Campaign is coming up. Will you try and help the president get re-elected?

SCHWARZENEGGER: I've talked to the president about that, and he is very sympathetic to our problem. And he has said that he'll look into it right away to help California, because he knows that California has a problem. We have this financial crisis, and he knows that we need help.

It's also clear that we cannot rely just on the federal government, because there's -- there are a lot of self-inflicted wounds that California has.

I mean, you know, there's nothing to do with the federal government that we have the highest workers' compensation cost. It has nothing to do with the federal government that we have the worst credit rating. It has nothing to do with the federal government that we will have next year the highest unemployment insurance and all of those kinds of things. So that is the things that we do to ourselves, and we have to solve those problems first.

But simultaneously, we should ask for more federal money. There's no two ways about that.

HANNITY: And will you campaign for him?

SCHWARZENEGGER: Yes. Absolutely. I mean, I will be there for him. I told him that. And I will do anything possible. The key thing is that we work together.

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