Exclusive: Gov. Arnold Schwarzenegger 'On the Record'

This is a rush transcript from "On the Record," July 29, 2009. This copy may not be in its final form and may be updated.

GRETA VAN SUSTEREN, FOX NEWS HOST: We're live in Los Angeles, and why? Well, to sit down with California Governor Arnold Schwarzenegger. We visited his private Santa Monica office, which you're going to tour later. But in the meantime, California on the brink of calamity. The governor has been battling over his state's finances but has just signed the state's budget. And now some state Democrats are enraged at him for taking out the veto pen, slicing $500 million more.


VAN SUSTEREN: Governor, nice to see you, sir.


VAN SUSTEREN: Lot of news in the state, and I supposed we should start with The LA Times wake-up (ph) this morning. You got the Democrats mad at you. It says, "Deeper cuts enrage state Democrats." Why are they mad at you?

SCHWARZENEGGER: Well, actually, when we did the budget, they were happy with me. But what happened was they gave me a budget that had a -- it was, first of all, not balanced and it didn't have a reserve. And I promised the people of California that I would never sign a budget that doesn't have a reserve and is not balanced.

So what they did was, they just were not willing to make the tough decisions and the last cuts that we needed to do in order to create a reserve, so I had to make the tough decisions and -- which I was, you know, more than happy to do, even though it's very tough. But we've got to have a reserve because, you know, we have fires, we have earthquakes in this state. We have all kinds of things. So if we don't have a reserve, it would be totally irresponsible. So I think it's important the people to know we had no reserve, and that's why I had to make the necessary cuts.

VAN SUSTEREN: I take it that's sort of the lousy part of the job, making cuts. I mean, I heard you say, The good, bad and the ugly. I take it you don't have any enjoyment in making cuts.

SCHWARZENEGGER: Well, you know, I have to say that this is the greatest job that I've ever had, the most rewarding job and the most challenging job. And there are moments that it's a lot of fun, but there are moments, of course, when the economy goes down and when the revenues go down where it gets to be very tough, and you have many times sleepless nights awake (ph) because, you know, you're concerned about the cuts that you have to make.

You don't want to make them. You don't want to cut in education or in health care or take health care for kids away and stuff like that. But if you don't have the money, that's what you need to do, is you have to make tough decisions. And that's what we had to do for these last two years, just, you know, cuts, cuts, cuts, and really go and bring the spending in line with the revenues.

VAN SUSTEREN: What happened -- I mean, I know every state is having a tough time. I mean, I read about one state this morning that's even contemplating selling some of its house or senate office buildings because of the financial problems. But why does California seem to have a particularly big problem, compared to other states, or is it just because California is a big state?

SCHWARZENEGGER: Well, I think, in general, California always is kind of more exaggerated about everything, you know, if it is about the good things, but also about the bad things. And so for instance, in this case, we don't only have a lack of revenues because the economy went down, but we also have an outdated tax system that relies on 1 percent of the rich people paying 50 percent of the taxes. It's always very popular to pile on the rich and to say, you know, the rich should pay more taxes. But in fact, it backfires then when you have downturn economically because when the rich people invest in Wall Street, and then all of a sudden, you take a major hit when Wall Street takes a major hit. So this is why we have had the loss of revenues of 20 percent last year and 22 percent now, so it's 42 percent altogether. So that's huge.

Other states don't have that. We, for instance, had to deal with $60 billion in losses. And so the $60 billion -- just to give you an example, there is no state in the union that has that even as a budget, as a whole budget. So those are the kind of cuts we had to make and those are the kind of, you know, problems that we had to deal with in just these last five months.

And so the budget -- the system is outdated. The tax system is outdated. We have an initiative process that needs to be overhauled, and you know, kind of brought up to date because anyone can go on a ballot with a proposition and bring up a bill and ask the state to pay $5 billion a year, and we have to pay for it. So there's a lot of things like that that you have to really modernize and really -- you also have budget -- you know, you need to have two thirds of the vote, which other states don't have. So there's a lot of difficult things here in our state.

And now the key thing is, is to use this downturn in the economy and the kind of losses in revenues as an opportunity and to reform all of those systems as quickly as possible so we don't have that again. I tried to do this for the last five years, may I remind you, but I was not successful. I tried it through the people, the initiative route, and they voted it down because the special interests spent hundreds of millions of dollars against it. And I tried it through the legislature, and it didn't work.

But I think because of the crisis, it gives us a good opportunity to make those changes now.

VAN SUSTEREN: I know if you had a magic wand, you'd make it so that nobody had to pay taxes, everybody had opportunity and had lots of money to take care of all their needs. But let me give you a different magic wand. I'll give you a magic wand to structurally change California instantly. What would be the structural changes you'd make in the tax code or the way you do business if you had no resistance?

SCHWARZENEGGER: I would, number one, change the tax structure, the way it works now, the tax system, to make it...


SCHWARZENEGGER: Well, to make it less volatile and to make it more even so we rely on a bunch of different taxes and not to go and just rely on rich people paying the taxes. We've got to go and create more -- you know, kind of sprinkle (ph) the responsibility of tax revenues of all around so you don't rely on one thing because that makes it volatile and makes it vulnerable. That's number one.

Number two, what I would do is I would change the budget system itself, where we have a rainy day fund. We need at least a $10 billion to $15 billion rainy day fund so when we have a drop in revenues, we immediately can draw down from that rainy day fund.

Three, I think we need a spending cap so we don't ever spend more in any given year than 5 percent. (INAUDIBLE) between 4 and 5 percent is the average of increase in revenues that we see in the last 10 years. So that would be a good thing to keep it around that. Some people think it should be lower, but I think even if you had 5 percent, you would take out the times when you spent 13, 14 percent increase in spending when you have the venues. We got to get the extra revenues and put it aside in the rainy day fund.

So I think -- and the initiative process I would also change so that we don't ring up such a huge debt also and also deficits by just people piling on and going the initiative route and make you spend money, make the state and the taxpayers spend money that we don't have.

VAN SUSTEREN: If the rich didn't complain, is -- would that -- does it solve the problem to tax the rich? I mean, is that -- from a revenue standpoint, you know, is the money there to tax the rich? And is -- you know, is that a problem, taxing the rich, besides the fairness issue?

SCHWARZENEGGER: It doesn't have as much to do with the rich complaining because you see a lot of rich people moving out of the state and taking their money out of the state.

VAN SUSTEREN: Isn't that a form of complaint? That's a little bit -- that's a protest, a little bit.

SCHWARZENEGGER: Well, it's a protest, but you know, rich people are not running around complaining that much. It's just, A, that they leave the state. And B, it is volatile. When you rely on income tax and the capital gains tax, it's a volatile thing because the revenues are not based by rich people just on the economic activities of California, it's based on what's going on on Wall Street. So as soon as Wall Street takes a dive, we take a major dive with our revenues, and we cannot afford to do that.

We cannot continue making very important programs like education and health care and prison, law enforcement, and so on, go on that roller- coaster (INAUDIBLE) one year, we have an increase of 5 or 10 percent, and the next year, we have a drop of 10 percent. You can't continue running -- you couldn't run a business this way. You couldn't run a family this way. And you can't run a state this way. So that's what makes us very vulnerable, and this is why we have had a much more decrease in revenues than other states had because we have a flawed tax system and also no rainy day fund.

VAN SUSTEREN: When the Democrats left last week after handing you the budget, leaving you to make the cuts -- when they left town, did they realize sort of what -- they were trying to sort of give you this problem or -- they know this -- they knew this was coming.

SCHWARZENEGGER: They realized it. And what happens a lot of times is legislators come to me all the time and they said, Look, you know, we are a bunch of kids. You have to be the grown-up here. And so that's the way this is. I mean, they were not willing to make the necessary cuts or to take any additional money from local government, or whatever we had as part of the budget solution. They were not willing to make that extra step of the $1.1 billion.

So they gave me a budget that was not balanced and was in the hole for $156 million. So therefore, I always said that we need a reserve of at least a half a billion dollars, so I had to make $656 million in cuts and other maneuvers so we have that reserve.


VAN SUSTEREN: Coming up: Does Governor Schwarzenegger want to run for president? And what are his plans for after he leaves office? Much more with the governor. That's next.

And later, Republican National Committee chairman Michael Steele is here. By giving in a bit, Democrats managed to get some Blue Dog fiscally conservative Democrats on board for the health care bill. Will that compromise proposal win over any Republicans?


VAN SUSTEREN: More with Governor Arnold Schwarzenegger.


VAN SUSTEREN: All right, you said it was a great job and everything, but then I think to myself, is that they leave town. You've got to now cut things. The LA Times, you know, front page, they talk about you're cutting it from children, AIDS victims, people who really need help. I mean, that's what you wake up to. So what's the attraction to the job?

SCHWARZENEGGER: Well, as I said, this is a job that I enjoy tremendously, especially in the good times. Even though now, I have, as I said earlier, sleepless nights many times when you have this kind of a budget disaster and when you have this kind of a lack in revenues and when you have to make this kind of severe cuts because you know that it is not just the ledger sheets and the books that reflect that, but there is people beyond that. There are kids that need this kind of health care. There's children that need the education. There's kids that are struggling getting into universities now. All of those things have a tremendous effect, and we all know that.

But if you have no money, then you have to make those cuts. And so the legislators have given me that responsibility by just leaving town. They left town. They are on vacation. And they handed me that kind of a budget, so I have to make those kind of decisions.

And you know, I always knew when I take this job that there will be times that will be joyful and where the economy will go well and things will go well, but there will also be times that will be very tough.

And I remember that when I was at my swearing-in ceremony in Sacramento, you know, the governors -- the past governors came up to me and says, Enjoy this day, Arnold. And I said, Why are you saying it that way? And they said, Well, it's the most enjoyable day because after that, it goes downhill, they says, because you will be going to funerals of fallen police officers (INAUDIBLE) get shot in the street. You will be going to fire -- funerals of firefighters that have lost their lives because of fighting fires. You will be dealing with budget deficits and you will deal with protesters and you will deal with all kinds of things.

And that's exactly what happened. But you know, I always like to take on challenges. It doesn't make me appreciate the job any less. I enjoy the job, and I am very much aware that you have to ride out the bad times and you also have to enjoy the good times. It's a mixture of things.

VAN SUSTEREN: How about the video with the knife? What do you -- you got a lot of backslash from that.

SCHWARZENEGGER: Well, I think that, you know, when you do interviews like this, I obviously don't sit there with my sword, with my Conan sword...

VAN SUSTEREN: You didn't bring a prop?

SCHWARZENEGGER: ... or with a knife or with grenades or anything like that. But when you do the twittering, it's a different ballgame because you want to give the people a feeling that that is a different thing than what they see on television, that they see a little bit behind the scene. So they see me sitting in the smoking tent. They see me without a jacket and without a tie on. They see me casual. They see me on the desk, playing around. One of them was, of course, with the knife. I just got that as a birthday gift from somebody.

So it's also my personality and my sense of humor because I come from a background where I always was a little bit over the top, and I think that's why they sent me to Sacramento to continue (ph) that because the way it has been in the past, this job was always considered as a boring job and the personalities that have been involved were also very stiff. So now I am bringing a little bit of life to the whole job.

VAN SUSTEREN: When you look at the president's job -- by the way, you're not constitutionally, at least at this point, eligible to be president. Do you have any interest in being president, by the way?

SCHWARZENEGGER: Yes, I would have done -- you know, gone in that direction eventually because I always shoot for the top. That's just me, you know? I mean, I enjoyed this job, even though we had difficult moments, but it's because it's so rewarding to do something that is more about something bigger than you, you know, to solve problems out there, to take care of the state, or for instance, as president, to take care of the country and of the world. So it's a challenging job. It's a wonderful job. I think it's great for someone that has this kind of personality and enjoys being with people and do this -- you know, give something back to the community and to the country.

But I can't do that, and that's OK because, I mean, I...

VAN SUSTEREN: But you'd like it?

SCHWARZENEGGER: ... I look at it as -- everything that I have accomplished in my life is because of America. I mean, there is nowhere in the world where I would have even had 10 percent the success that I've had in America. If I would have gone to France or stayed in Germany or Austria or go to China or go to the Middle East or Africa, wherever, nowhere in the world could I have had the success.

So I think that my body-building career, my acting career, my business, the millions of dollars that I've made, becoming governor, my family -- everything is because of America. So I am not going to dwell on this one single thing that I can't do, which is to run for president. I'm not going to (INAUDIBLE) and say, Oh, isn't this terrible? Let me (ph) feel sorry for me. I can't run for president. No because I love this country, and I take it exactly as a whole package.

VAN SUSTEREN: If by some wild chance the rules changed, would you think about it?

SCHWARZENEGGER: Yes. I said that several times, that because I always like to shoot for the top, I would think about it and I would go after it. But that's not something that I have to think about right now because I don't think it will happen in my lifetime that they will change the Constitution. As long as there's someone around that possibly would go in into the race, they would never go for it.

I remember that when I was sitting there listening to my Republican colleagues at the first debate at the Ronald Reagan library, and they were asked, the candidates -- they were asked. And outside of McCain, every one of the other candidates said, No, I'm not for the change of the Constitution. And McCain had a funny line, where he said, he says, Well, the governor is sitting right down there, and I'm not about to say no in front of him, otherwise he will crush me. So he -- he did something -- a positive spin on it, which was very funny.

But you know, I think that people just are not ready yet. Maybe the people are, but the politicians that make those decisions maybe are not ready yet.


VAN SUSTEREN: Coming up: Governor Schwarzenegger is a superstar, a famous actor and was a body builder years before entering politics. Up next, you get a rare inside look at his office -- movie memorabilia, trophies. You have to see this! Plus, is the governor's next job cable news? Guess who he suggested as his co-anchor? He's going to tell you himself.


VAN SUSTEREN: More with California Governor Arnold Schwarzenegger.


VAN SUSTEREN: What Republican politician has inspired you most or you just sort of like to read about or talk about the most?

SCHWARZENEGGER: Well, you know, we have had great, great leaders in the past, from Lincoln to Teddy Roosevelt and Ronald Reagan, and so on. But I tell you, the guy that is today very innovative is Newt Gingrich. You know, he maybe is not kind of the most attractive guy for, you know, running for office or something like that because we always look for the young new guy on the block, and so on. But he is the one with the most substance and he always has terrific ideas on how to make government run more efficiently, how to get in there and root out the fraud and abuse and the waste in government.

As you mentioned earlier, health care. When we do health care reform, we got to think always about how to we make health care reform more cost- effective? How do we not go and do the usual things where we pay such extraordinary amounts of money for health care?

How do we insure everybody and make prevention more important so that people can create their own health care reform by eating better, by lowering their cholesterol level, by lowering their body fat, but therefore not having as much vulnerability when it comes to heart diseases, by stopping to smoke and to drink and all of those kind of things. I mean, people themselves have the power of lowering their health care costs by one third by just changing their lifestyle. So people can participate in that. And then also, how do you go and reform the system to make it more efficient and to really deliver a system that is for everybody?

VAN SUSTEREN: Is the new health care that they're talking about on Capitol Hill -- is that something you worry about for your state in terms of the cost?

SCHWARZENEGGER: Well, yes, of course. I think it's very important that we have health care reform, and I think it's very important for the Republican Party to be a very important player in the discussion because they are the ones that have a lot of times the ideas of how to make things more cost-effective and more efficient.

VAN SUSTEREN: I can't resist over my left shoulder. Who's this?

SCHWARZENEGGER: This was in the middle of my heart surgery.


SCHWARZENEGGER: No! But this is from...

VAN SUSTEREN: He needs health care reform then!

SCHWARZENEGGER: Exactly. Yes. This is from "The Terminator." You know, so I have those -- they were created by Stan Winston (ph), who is one of the great visual effects, special effects make-up designers and artists. They've won four Academy Awards. He passed away in the meantime, sadly to say. But I mean, he also created from the first "Terminator," this one here. This is from the second "Terminator." Then when you turn around, this is from -- he also created that from "Predator." This is the predator, and then, of course, there's over there Mr. Freeze from "Batman and Robin." So we have it all here, so it's kind of a combination of entertainment and politics.

VAN SUSTEREN: It's a contact sport, isn't it, politics.

SCHWARZENEGGER: Yes, but I mean, you know, that's all part of it, you know, so you can't complain about it. Like, when I pick up the paper, I don't complain about it and say, Can you believe The L.A. Times writing this, or Can you believe The San Francisco Chronicle, you know, misquoting me or something. No. That's just all...


SCHWARZENEGGER: No, it's all part of the job. You know, the job is a very tough job, and you got to have thick skin and you got to always think about one thing -- if there's one thing that I have always been good at in my life and why I've been successful in a lot of different things it's I never get concerned about those kind of things. What concerns me is just, What is my vision? Where do I want to go?

And to get there -- it doesn't matter what it takes to get there. I will do anything and everything to get there because it's all about -- it's all about the hard work and -- and -- and the struggle. That's how you accomplish things. There's no easy way out. It's just -- there just isn't. And every job comes with those kind of sides (ph), and this job has the side that, you know, you get attacked by the media. You get attacked by protesters. You get attacked by the opposition and all of those things.

But in the end, the joy comes when you can move the state forward, reform the systems that have been broken and hand over the state as a better state to the next governor. That's where the real joy comes in.

VAN SUSTEREN: And I see that there are a lot of things here that didn't come easy, all these trophies.

SCHWARZENEGGER: (INAUDIBLE) trophies from weight lifting, from power lifting, from body building, from, you know, film awards, from television awards, and all of those kinds of things. So you see a combination of things here, and also awards for public service, and you know, for the work in after-school programs that I have down there, awards for Special Olympics of being the torch bearer and an international coach for Special Olympics. So there's all kinds of different awards here.

VAN SUSTEREN: This is the one for your competition in Ohio?

SCHWARZENEGGER: Yes, exactly, and this -- they all -- like I said, you know, I won five times the Mr. Universe contest, and Mr. World, Mr. Olympia seven times. So this is (INAUDIBLE) trophies all about that.

VAN SUSTEREN: So what's the next act? Because you're going to get term-limited out soon, November 10th, 2010.

SCHWARZENEGGER: Well, I will continue public service. I will continue, you know, doing things that will help the environment and help the state and the country in one way or the other. And you know, then the rest, I really haven't focused on what I'm going to do next because if I do a good job with what I'm doing now, there will be all kinds of opportunities available. I mean, the amount of offers that I've been getting, from doing more movies to getting involved in business -- businesses or writing books, and so on.

So there's just so many different -- or running foundations and getting involved in international things that have to do with the environmental issues, and so on. So there will be many, many things -- kind of challenges available. So I'm looking forward to that, but I'm not thinking about it because there's so much work that still needs to be done here in the state.

VAN SUSTEREN: Well, I hope you're not thinking about TV news, talk shows, slash, because we don't want you out (INAUDIBLE)

SCHWARZENEGGER: Only if we partner.

VAN SUSTEREN: If we partner? We co-host!



SCHWARZENEGGER: That's what I'm saying. There you have it.

VAN SUSTEREN: I'm game for that!

SCHWARZENEGGER: Now you're talking.

VAN SUSTEREN: I'm game for that.


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