Schwarzenegger State Address Watched Closely

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Arnold Schwarzenegger's (search) first state of the state address on Tuesday night marked a critical step in the California governor's metamorphosis from an action film star to the political leader of the nation's most populated state.

But it also marked Schwarzenegger's enunciation as a fiscal centrist who will not kowtow to Republicans who got him elected or to Democrats who lead the state Legislature and with whom he must negotiate in order to get any of his proposals met.

"I don't think he cares whether he toes the Republican line or not. He's saying basically they should toe his line," said Sacramento Bee columnist Dan Walters.

Schwarzenegger used his first statewide address to call for reforming the workers' compensation insurance system and preparing Californians for major spending cuts in virtually all government services, including education. The proposals could be pivotal in drumming up the support he will need to get through the difficult economic period.

"We have no choice but to cut spending, which is what caused the crisis in the first place," Schwarzenegger said. "These are cuts that will challenge us all. But we cannot give what we do not have. If we continue spending and don't make cuts, California will be bankrupt."

During the election to replace Democratic Gov. Gray Davis (search), Schwarzenegger zeroed in on California's catastrophic financial problems. But he also promised to work with both parties toward achieving goals like slashing spending and reducing business regulations, buzz words that conservative lawmakers liked to hear.

Since the Nov. 17 inauguration, however, Schwarzenegger has managed to please and perturb lawmakers on both sides of the aisle.

He immediately cut the car taxes that tripled this year under Davis' watch and he has repeated his promise not to raise taxes despite a budget deficit that could reach $14 billion next year.

But Schwarzenegger has also invoked emergency powers to make payments to cities and counties, and last month, backed off his pledge to impose a spending cap and cut a compromise deal with Democrats for a softer limit, a much smaller reserve and a $15 billion bond to refinance state debt.

"I'm very concerned about the level of borrowing the administration is doing, and that is something that is going to cost taxpayers billions of dollars of unnecessary interest," said state Republican Sen. Tom McClintock, who ran against Schwarzenegger in the recall election

Tuesday's address was a prelude to the budget proposal that the Republican governor will introduce Friday. In it, Schwarzenegger is likely to promote the improving state economy and projected increases in tax revenue, said H.D. Palmer, spokesman for the governor's Finance Department.

But the governor is also expected to propose steep cuts in spending in several areas, including public health and welfare programs. The governor has already released a list of about $4 billion in spending reductions he wants, including changes to the state health insurance program that costs taxpayers about $10 billion annually.

He also is likely to cut several billion dollars in school funding — a move that would conflict with a campaign promise not to cut funding for public education. School spending currently comprises almost half of the general fund budget.

Kevin Gordon, executive director of the California Association of School Business Officials (search), said most education interest groups understand how dire the state's fiscal condition is and would support the plan to cut spending if schools get enough funding to cover the cost of rising enrollments and inflation.

Given the state budget formula for calculating the education dollars, public schools should be getting an additional $4 billion this year. Gordon, who met with Schwarzenegger and other administration officials during the past week, said he believes schools will get only a portion of that sum.

On Monday, several officials close to the budget talks said no agreement has been reached on the issue.

Some analysts who paid close attention to the election say no one should be surprised by Schwarzenegger's budget approach. He is not the fiscal conservative or partisan warrior that some mistakenly had believed he would be, said Joe Cerrell, a Democratic strategist.

"He's a moderate and he's a centrist and he ran that way and he's acting that way," Cerrell said.

But Tuesday's address was closely watched by partisans. Since Schwarzenegger took office less than two months ago, Republicans have had to adjust their tactics to fit Sacramento's new political landscape. Some are unhappy the new governor has not pushed his policy ideas more aggressively. Schwarzenegger has responded that he needs cooperation across the political spectrum to solve the state's pressing financial problems.

And while some in the GOP are unhappy that Schwarzenegger is not more aggressively championing their proposals, Democrats like Senate leader John Burton are welcoming the spirit of cooperation. After five years with the more aloof Davis, many are enjoying Schwarzenegger's efforts to socialize with them and bond personally.

Still, state lawmakers say they are not ready to give up their role in the budget process.

"We will want to see how all of this works as a package," said Sen. Dede Alpert, D-San Diego, who added that Democrats still control both chambers of the state Legislature.

Fox News' Alicia Acuna and The Associated Press contributed to this story.