The union support could take significant political pressure off Schwarzenegger, who promised during his election campaign not to cut education in the course of resolving the state's $14-billion budget deficit.

Budget analysts were anticipating that the governor would do battle with the education community over his insistence on closing the deficit without any new taxes. But educators said privately Monday that with schools accounting for about 40% of the budget, $2 billion in temporary cuts seem manageable. They had been bracing for much worse, alarmed by recent comments from the governor that a suspension of Proposition 98 might be necessary to rein in what he characterizes as out-of-control spending.

Officials said they are still discussing where exactly the cuts will be made, but all the money would be restored next year — whether the state economy improves or not. For that reason, the cuts may help Schwarzenegger balance next year's budget, but would do nothing to help solve the state's long-term structural imbalance between spending and revenues.

Under review, among other things, is more than $900 million in cost-of-living increases that the state will owe schools next year. It is discretionary money that schools are free to use however they please. Also on the table are several hundred million dollars to pay for new state mandates — such as an updated school bus safety program. The administration could defer the mandates and, along with them, the money schools need to accommodate them.

For the governor, the agreement also demonstrates his continuing success in striking out on his own to broker sensitive political deals, as he did last month when he reached agreement with the Legislature's Democratic majority over a plan to borrow $15 billion to cover this year's deficit. That borrowing plan will go before voters in March.

"It's a smart move on the governor's part," said Senate Appropriations Committee Chairwoman Dede Alpert (D-San Diego). "It takes the issue that could have been most troublesome to him out of play."

Republican political consultant Dan Schnur agreed. "This is probably the best possible way for a new governor to start his term in office," Schnur said. "Any interest group that faces a potential cut can make enough noise to cause a governor some problems. But the teachers could have made his life absolutely miserable."

However, the agreement does threaten to fracture an uneasy coalition of major education groups that only a few weeks ago had resolved to stand together in budget negotiations. Representatives from some of those groups expressed frustration that they were left out of the talks, but would not comment publicly.

Community colleges were particularly anxious. They are preparing for the governor to propose hiking fees from $18 per credit to $26, which would raise more than $90 million in new revenue.

Administration officials have also signaled to the colleges that they are considering eliminating fee waivers for disadvantaged students, in the hope of saving an additional $150 million or so.

An administration spokesman declined Monday to discuss any details of the deal, saying only that schools will get at least as much money next year as they received this year.

"The governor made clear he was not going to cut K-12 spending, and the budget he will submit to the Legislature will reflect that commitment," said Department of Finance spokesman H.D. Palmer.

The administration prefers to not define the reduction in education spending as a "cut" because schools would get at least as much as they got this year. The cuts would instead come from payment increases guaranteed to accommodate enrollment growth, inflation and the cost of meeting new mandates required by the state.

Instead of getting a $3.5-billion increase owed them this year as a result of Proposition 98 and other laws, schools would get $1.5 billion or less.

Schwarzenegger's budget Friday will also be in a different form than in years past. Governors have traditionally been forced to have their entire budget put together by Christmas so it can get to the printer in time to be ready for the Jan. 10 deadline.

But the administration is not going to be printing hundreds of volumes of the budget. It will instead distribute the plan on computer CD-ROMs, a move that could prove controversial. Finance Director Donna Arduin made a similar move while budget director in Florida. Democrats there complained her "e-budget" was stylish and user friendly, but short on substance and difficult for them to analyze effectively.

Deal to cap budget trims is off; educators furious

By Jill Tucker Oakland Tribune, January 7th, 2005

California Gov. Arnold Schwarzenegger is reneging on a year-old deal to cap budget cuts to state schools, leaving education officials first stunned and then furious at what they said was a betrayal. The deal brokered a year ago called for the suspension of Proposition 98 but limited cuts to $2 billion. Proposition 98 uses a complicated set of formulas to ensure a minimum level of funding for education within the California budget.

When the Education Coalition and Schwarzenegger agreed on the deal, they underestimated how much money the state would collect this budget year. Now, there is more than $1.2 billion school officials claim is theirs, or about $200 per public school student.

On Wednesday, in private budget briefings with the California Teachers Association, the California School Boards Association, state Superintendent of Public Instruction Jack O'Connell and others, administration officials said the deal is off.

Given an $8 billion budget deficit, the state needs the money more than schools, the Education Coalition was told. Last month, the Legislative Analyst's Office recommended the governor rescind the deal to help close the deficit.

But O'Connell said he clearly remembers shaking the governor's hand a year ago to seal the deal. "It goes to the core of the integrity of the administration," he said Thursday, adding he was "flabbergasted" at the announcement.

Administration officials noted the state's education budget has increased by 7 percent even with the cuts which covers enrollment growth and cost-of-living increases.

Education officials said the money still isn't covering cost increases, noting that California spends less money on education than 42 other states when adjusted for regional costs, according to a RAND study released earlier in the week.

To make matters worse, said members of the Education Coalition, the governor is also proposing radical changes to Proposition 98, reductions in state contributions to teachers' pensions and a merit pay structure for teachers.

Schwarzenegger is calling for a state budget system that requires across-the-board cuts when the state is spending more than it is taking in. That means that without the Proposition 98 protections, schools could see significant cuts, and the state would never have to pay the money back.

Also on the governor's agenda is a plan to eliminate about $1 billion in state payments that now cover annual shortages in teacher pension payments. That shortfall would apparently fall to local school districts to cover, without any increase in Prop 98 funds to make up the difference.

"What are people smoking?" asked Scott Plotkin, executive director of the California School Boards Association. "It could be catastrophic."

Districts would have to come up with the money or take the issue to the bargaining table and ask teachers to pay a greater share toward their retirement. "We're going to have strikes all over the state," Plotkin added.

The governor's budget briefings along with a speech Wednesday night in which he blamed teachers for the state's failing schools was a one-two punch to the gut, said CTA president Barbara Kerr.

"I am professionally and personally extremely disappointed," Kerr said, adding the Education Coalition will fight the governor's proposals.

The governor's merit pay idea, paying teachers based on student performance, is also a hot-button issue although several education officials said they thought it was a smokescreen to divert attention away from the budget cuts.

State Secretary of Education Richard Riordan, a Schwarzenegger appointee, said details, including how to create a merit pay system, would be released either with the governor's budget on Monday or at some point soon.

Delaine Eastin, former state superintendent of public instruction, said Schwarzenegger's proposals were a "total betrayal" to public schools.

"It's an administration built on what looks like a Hollywood street, where you open the door and you discover there's nothing behind it," she added. "It's just a facade."

Governor: No school fund pledge

He says education leaders are lying about a budget deal to restore $2 billion this year

By Gary Delsohn, Sacramento Bee, May 18, 2005

Arnold Schwarzenegger's administration has acknowledged for months that it broke its promise to restore more than $2 billion in base education funding this year, but Schwarzenegger insisted Tuesday he never made the pledge and said education leaders are perpetuating a "right-out lie" by criticizing him over it.

During a visit to a Rocklin elementary school, Schwarzenegger also said he'd do nothing to stand in the way of efforts by Senate President Pro Tem Don Perata, D-Oakland, to ask voters in November to approve tax increases for education - even though he opposes them.

On a third topic, Schwarzenegger said for the first time that he likes a proposed ballot measure to hinder unions' political fundraising and acknowledged that he's using it as leverage to get Democrats to negotiate with him on the other initiatives and pension changes.

The school funding dispute, which has been steadily escalating since January, has its roots in Schwarzenegger's first budget proposal in 2004. The Republican governor, education leaders and the California Teachers Association announced with fanfare an agreement to suspend the automatic funding formula for education for a year. But the deal called for education base funding under Proposition 98 to be restored once state revenues increased. Legislative Analyst Elizabeth Hill now says that figure approaches $3 billion. But when Schwarzenegger unveiled his budget plan in January, the base funding was not restored despite the prospect of rising revenues. Despite outrage from school union officials, the governor has said he made a choice to protect funding for health and social service programs.

At a meeting with The Bee's editorial board on Jan. 18, Schwarzenegger was asked what he learned from the controversy over the school funding agreement.

"I think," he said, "that you learn to just always make it clear that things can change and then that changes ... the deal."

On Tuesday, Schwarzenegger accused the union of lying.

"I did not break a promise like they keep saying," Schwarzenegger said of the CTA, which has been running television ads for months that accuse him of breaking his word.

"I borrowed $2 billion, and now I'm supposed to give it back this year? This is wrong. It's a right-out lie," he went on.

"We did not make a promise that we would give it back this year because I couldn't guarantee we would give it back this year because we didn't know how much money we'd have."

Barbara Kerr, the CTA's president, disagreed.

"His story keeps changing," she said. "That happens a lot when you're not telling the truth or you forget. I don't know which it is. All I know is we were promised the money would be put back when revenues went up. Revenues are up, and that hasn't happened."

The disagreement is important for a number of reasons. For one thing, Democrats have vowed not to approve Schwarzenegger's budget for the fiscal year that starts July 1 unless the education money is restored.

The CTA, which applauded him when the original deal was hatched, has since promised to spend millions campaigning against Schwarzenegger's proposed spending control measure if it appears on a special election ballot in November.

Schwarzenegger went to Rock Creek Elementary in Rocklin, a school noted for its high test scores and celebrated reading program, to draw attention to money that he has put in his budget for education spending.

In response to questions from reporters, Schwarzenegger said he encouraged Perata to try placing a tax hike on the November ballot for education. Perata said a tax on high earners or sales tax increases on some services could restore education funding. Such measures would require a two-thirds vote in the Legislature.

"Perfectly fine with me," Schwarzenegger said of Perata's idea. "As I've said many times, 'Let the voters make those decisions.' I think this is good. The legislators can't make the decision, so let the voters make the decision. I wish him good luck with that."

The two-thirds vote requirement means Republican support is needed, and GOP leaders said that is unlikely.

"The whole mind-set of taxing the rich is just very poor policy," said Senate Republican leader Dick Ackerman.

Promises, promises

By Dan Weintraub, Sacramento Bee, May 18, 2005

Governor Is Digging Himself Deeper With Denial of School Funding Deal

By Goerge Skelton, Los Angeles Times, May 19, 2005

Gov. Arnold Schwarzenegger may be confused. Perhaps he's in denial. Or maybe he's being disingenuous. Or just parsing words. Or even lying.

"Right-out lying," as he said of the school lobby Tuesday.

Two things are certain: Schwarzenegger is not being completely candid. And he's way too vitriolic for a governor.

"I did not break a promise, like they keep saying, that I borrowed $2 billion and now I'm supposed to give it back this year," Schwarzenegger told reporters at an elementary school photo-op near Sacramento. "This is wrong; it's a right-out lie….

"We did not make a promise that we will give it back this year because I couldn't guarantee to give it back this year, because we didn't know how much money we'd have."

A third thing also is certain: There was a deal. The governor promised schools more money — not $2 billion, but more like $3 billion, based on the latest calculations. He pledged to give it to them this year.

Too many people were in the room and heard him.

And nobody in the Schwarzenegger administration, until Tuesday, had ever tried to deny it.

It's a complex issue involving the Byzantine school funding guarantee contained in Proposition 98.

Here's what happened:

Shortly after getting elected, Schwarzenegger was desperate for money to balance the budget without raising taxes. So he cut a deal with the "education coalition," including the biggest teachers union, school boards, administrators and the PTA. If they'd surrender $2 billion that schools were owed under Prop. 98, he'd later return it to their guaranteed funding base.

But this is the most important part of the deal: The governor promised that if tax revenue rose, he'd give schools their normal Prop. 98 share of the increase. Put another way, they all agreed that schools would receive their normal cut of total revenue, minus the surrendered $2 billion.

"Trust me," Schwarzenegger said when the deal was announced.

But when revenue rose, the governor reneged.

One obstacle to comprehension here is that there are too many "$2 billions" floating around.

Disregard the $2 billion initially seized for budget-balancing. That could be returned to the schools' funding base any time in the next one to three years, depending on economic conditions. (That is, unless the governor's spending cap is approved by voters. Then schools will get shortchanged, but that's another complicated story.)

Focus on the $2.3 billion that the increased tax revenue should have earned schools during the current and next fiscal years. In proposing his 2005-06 budget in January, Schwarzenegger decided to hold on to that $2.3 billion to avoid a tax increase. By last week, this amount had grown to $3.1 billion because of even higher tax receipts, according to nonpartisan Legislative Analyst Elizabeth G. Hill.

Bottom line: Schwarzenegger is proposing a roughly $3-billion annual increase in Prop. 98 funding for kindergartens through community colleges. But that's $3.1 billion less than what they're owed under the deal he cut.

Unfortunately, many people — myself included last week — have inaccurately short-handed a description of this deal by stating that Schwarzenegger "borrowed" $2 billion and hadn't repaid it, as promised. (I've also previously written the above long-winded but accurate version.)

On Tuesday, Schwarzenegger was denying the oversimplified rendition. And he was technically correct, but in a Clintonesque way.

The governor's tone was that he hadn't broken any promise and that people who contended he had were liars.

"I am personally offended that the governor has resorted to calling me and other education leaders 'liars,' rather than honestly discussing how we are going to fund schools," state Supt. of Public Instruction Jack O'Connell, a Democrat, said in a written statement Wednesday. "His current attempt at revisionist history is outrageous….

"I agreed to his plan because I trusted him to be good to his word…. His inability to be honest and keep his promises should concern anyone who is asked to put their trust in him."

Asserted Barbara Kerr, president of the California Teachers Assn., who was at the negotiating table: "He changes his reality every day. That's what happens when you don't tell the truth — the story keeps changing and changing."

As for the governor calling her and others liars: "That's the way he behaves. When all else fails, he calls somebody a name. It's the bully type of tactic."

But don't take their words for the broken promise.

In passing the current budget last summer, the Legislature sent the governor a separate bill that put this deal in writing. He signed it.

The Sacramento Bee reported Wednesday that Schwarzenegger was asked in January by its editorial board what he had learned from negotiating the deal. He replied: "You learn to just always make it clear that things can change and then that changes … the deal."

Until Tuesday, administration officials had been telling reporters that the governor's highest priorities for the $2.3 billion — now $3.1 billion — were avoiding higher taxes and deeper cuts in programs for the poor.

But he isn't arguing that. He's calling his critics liars.

He's digging himself in deeper. He's in denial and being disingenuous.

It's bad policy and worse politics.

Governor was snared in Prop. 98 trap

By Dan Weintraub, Sacramento Bee, May 22, 2005

As anyone who watches television in California must know by now, the public education lobby believes Gov. Arnold Schwarzenegger shorted the schools by $2 billion when he proposed his budget for the coming year in January. The California Teachers Association, one of the state's most powerful public employee unions, has been drumming that message home for weeks in political advertisements bashing the governor and his integrity. The attack has driven Schwarzernegger's approval ratings down and threatened his entire agenda for change in 2005.

Frustrated, the governor last week lashed out, accusing the union and its allies of lying about his record. "I did not make a promise like they keep saying," Schwarenegger declared.

His outburst was ill-timed and impolitic. But in a way, it was understandable.

Because while the union ads now airing might be technically accurate, they are misleading.

Schwarzenegger is not cutting the schools at all. He is proposing a $3 billion increase. The $50 billion for education in his budget would be more than the schools have ever received in California.

That $50 billion is also slightly more than everyone assumed the schools would be getting when Schwarzenegger made his now infamous deal - the "promise" - with the education lobbyists in his first weeks in office. Go back and look at the projections made at the time and you can see that the governor's numbers are actually outpacing them.

Why, then, the outcry? Because the deal's fine print included not only the precise number Schwarzenegger committed to and has delivered. It also included an escalator clause that would force that number higher if state revenues grew faster than expected. And that's exactly what happened.

Earlier this month, the governor revised his budget, as the law requires, and gave the schools $126 million more than he proposed in January. Yet now we are told that he is shorting them not by $2.3 billion but by $3.1 billion. By the strict terms of the deal made last year, this is true. But it is also true that Schwarzenegger is proposing $500 million more than the law requires.

No wonder he's frustrated. The faster he runs, it seems, the farther he falls behind.

Puzzled? You have a right to be. Schwarzenegger is giving the schools more than the law requires, more than they got last year, more than they have ever received before, and enough to keep pace with higher enrollments and higher prices next year.

But he's $3.1 billion short of what they say they are entitled to - at a time when the state still faces a huge gap between its projected revenues and expenditures.

If nothing else, this conflict shows how foolish it is to base state budget decisions on formulas written into the Constitution. Proposition 98, approved by voters in 1988, works like a ratchet that pushes school spending higher in good times and then requires lawmakers to use that higher level as a base in bad times. In a state plagued by volatile tax revenues that shoot up one year and then flatten out the next, this is a formula for disaster.

Governor put self in bind in school funding dispute

By Amy Chance , Sacramento Bee, May 25, 2005

Mike Murphy, lead political consultant to Gov. Arnold Schwarzenegger, likens negotiating with the California Teachers Association to a memorable scene in the alien-attack movie "Independence Day." When the president of the United States asks a captured alien what it wants him to do, the alien responds: "Die. Die."

"That's the kind of vibe I get from the CTA," Murphy said in a recent interview with political reporters. "I don't think they're interested in talking. Too bad. It's a disservice to the people of California, so we might just have to go settle this at the ballot box."

As Schwarzenegger threatens a special election fight over spending on state programs, however, even his own advisers can't refute teachers' argument that the governor is the one who decided to destroy a deal they reached in early 2004.

The governor confused nearly everyone at the Capitol last week when he insisted to reporters that teachers were lying when they said he broke his promise on school funding.

That dispute, however, appears to be over the way the teachers characterize his broken promise in their advertising - as a refusal to pay back money he borrowed - not whether he failed to keep his word to boost school spending in better times.

Schwarzenegger himself acknowledged he wouldn't be sticking to that part of the deal in December, when his administration called education leaders in to discuss the budget he would release in January.

While state income was higher than expected, he said, giving schools more money would have resulted in painful decisions about health and human service programs.

"He talked about (programs for) the elderly and he talked about (programs for) children," recalled CTA President Barbara Kerr.

"I said, 'You know, you made this deal; a promise is a promise. You've got to keep your word.' We didn't get anywhere, either side. I made the assumption that we would come back and talk."

The next thing she heard from him, she said, was the State of the State address in which he suggested that teachers were "special interests" he would battle on behalf of schoolchildren.

"I wouldn't say that we're the ones that didn't negotiate," she said.

Schwarzenegger relished CTA deal, but it blew up in his face

By Dan Walters, December 13, 2005

Third in a series of 10 columns examining Gov. Schwarzenegger's missteps since winning the recall election

As he began to govern California two years ago, Arnold Schwarzenegger faced a projection that the state budget, which had been wallowing in red ink, could have another $15 billion deficit, in part because he had unilaterally reinstated a $4 billion-a-year cut in car taxes.

Deal Breaker

How Arnold Schwarzenegger changed his mind on Prop. 98 and lost the support of the all-powerful teachers union

By Joe Mathews, Los Angeles Times, July 29, 2006

Joe Mathews covers labor and politics for The Times. This article is adapted from Joe Mathews' upcoming book "The People's Machine: Arnold Schwarzenegger and the Rise of Blockbuster Democracy" (Public July 30, 2006

Arnold Schwarzenegger entered the Sheraton conference room with an unlit stogie in his mouth. On this day in November 2004, his concession to the Sacramento hotel's smoking rules was the only one he would make to limits set by others. After a string of victories in his first year in office, the governor believed that he had a once-in-a-generation opportunity to overturn California's political order in 2005.

Although Schwarzenegger often oversold even his modest achievements as historic reforms, in private he talked about his frustration with the slow pace of change in the state, and about how the political reality stymied major progress. He wanted to invest billions in repairing California's infrastructure, but the budget, though far healthier than when he took office, was still unbalanced. As the governor tried to make political history, his own political history boxed him in. He knew it would be a struggle to reconcile his campaign promises to reduce the state budget deficit, avoid a tax increase and protect popular public spending, particularly the school funding guarantee known as Proposition 98.

Much has been said and written about the supposed reasons for the governor's slide in the polls during his second year in office, including his fight with a nurses union and the rhetorical misstep of calling legislators "girlie men." But the real story of his political rise—and the subsequent decline from which he has only partially recovered—centers on his relationship with the 335,000-member California Teachers Assn. and a deal that he and his closest advisor, Bonnie Reiss, negotiated with the union shortly after his election in the waning days of 2003. That agreement reflected his stated desire to protect Prop. 98 and education funding. During an interview at Riverside's historic Mission Inn in the midst of the campaign to recall his predecessor, Gray Davis, I had asked Schwarzenegger if he would suspend the Prop. 98 guarantee to balance the budget. "Not over my dead body," he replied.

But a year later, as he contemplated using ballot measures and a special election to fix the state's stubbornly out-of-balance budget, the governor began to see Prop. 98 as a target. The meeting at the Sheraton in November 2004, a year and a day after his inauguration as governor, was Schwarzenegger's belated attempt to force his team to plan for such an election. More than two dozen advisors showed up, including pollster John McLaughlin, who flew out from New York to give a presentation. There were a few warning signs, particularly the governor's relatively low approval rating on education (43%). But the good news outweighed the bad. Seventy-one percent of the voters surveyed had a favorable opinion of Schwarzenegger. "Enjoy it," McLaughlin said as his client chomped on his cigar. "We have no place to go but down."

Bonnie Reiss got a look at her future boss in action in 1979 when she and her friend Maria Shriver were trying to whip up interest in a Teddy Kennedy for President event at a roller-disco club in Hollywood. The two women coaxed Shriver's bodybuilder boyfriend into taking a stroll along Venice Beach. "He let us walk 20 feet behind him and try to sell fundraiser tickets to the people following him down the beach," Reiss recalled.

In 1994, Schwarzenegger asked Reiss, by then an entertainment lawyer and environmental activist, to lead the national expansion of his foundation, the Inner City Games. The two were a good match in part because they were so different; the Republican Schwarzenegger projected Austro-Californian cool, while the Democrat Reiss talked and moved like a New York express train. Under their guidance, the Inner City Games evolved from a sporting event in L.A. into a collection of after-school programs in 15 cities. It also became Schwarzenegger's springboard into politics when he decided to sponsor a 2002 ballot initiative to fund programs like his.

The star's political consultants advised him then that CTA was the most politically powerful organization in the state, and that the union could sink the initiative by opposing it. To avoid that prospect, he reached out to the CTA's political director, John Hein, and invited a lawyer who did work for the union to help write the after-school initiative, Proposition 49, so that its funding stream would not interfere with Prop. 98.

The CTA knew how to use direct democracy. In 1988, the union had sponsored Prop. 98, which established a three-part formula involving tax revenues, school enrollment and per-capita income growth to determine how much money the schools should receive. As each factor changed, the funding guarantee could go up or down, depending on the day it was calculated.

If the amount spent on education in a given year fell short of Prop. 98's guarantee, the difference would be paid off in the future. Because the state almost always owed money under Prop. 98, the education lobby, and the CTA in particular, held a political sword over the governor and the Legislature.

Accepting this reality, Schwarzenegger in his first weeks in office approached Hein again and, with Reiss handling much of the negotiating, cut an extraordinary deal that gave him a one-year cushion as he tried to reduce a $16-billion deficit. Under the agreement, the schools would receive whatever the Prop. 98 guarantee was eventually calculated to be in his first budget year—minus $2 billion in savings that Schwarzenegger sought.

The CTA provided political cover. The union sold the deal to other education associations and backed the Republican governor's budget with the Democratic Legislature. And throughout much of 2004, relations remained warm. Schwarzenegger taped a message praising the CTA for the National Education Assn. convention. He settled a class-action lawsuit brought by the American Civil Liberties Union against the state for failing to provide equal opportunity for low-performing school districts. The CTA was included in discussions about reform spearheaded by Schwarzenegger's education secretary, Richard Riordan.

By the fall, the teachers union began making plans to endorse Schwarzenegger for reelection. But the governor knew nothing of the possible endorsement. And he had begun to feel trapped not only by his deal with the union, but also by the Prop. 98 formula. With the economy recovering and unexpected revenues flowing into the state, the guarantee was projected in late 2004 to be $1.8 billion higher than it had been estimated when Schwarzenegger made the deal. Under Prop. 98 and the legislation that formalized the accord, he was obligated to give the schools the extra money. And if the guarantee continued to grow as expected, the state would be on the hook for an additional $1.3 billion in Prop. 98 funds in the following budget year.

The governor was in a jam. State revenues were up $5 billion, but state spending formulas required Schwarzenegger to boost the budget by $10 billion. If he tried to stop the increases, he would be accused of cutting programs even as the budget expanded.

"You have to understand, it's nothing personal with me," Schwarzenegger recalled in an interview this year. "Gray Davis could not make it manage. No one could have made it manage under the political and budget system that we have. The system itself is dysfunctional."

Meanwhile, the Legislative Analyst's Office—the nonpartisan California equivalent of the Congressional Budget Office—produced a report that all but invited the governor to back away from his deal with CTA. Instead of funding the full growth in Prop. 98, the LAO suggested, Schwarzenegger could cut the deficit by boosting the education budget only enough to reflect increases in the cost of living and enrollment.

Schwarzenegger believed he had three options, all loaded with political peril. He could take the legislative analyst's advice, thus risking a fight with the CTA and hurting his public standing on the very issue—education—on which his own polling showed him to be weak. Or he could keep the deal and slice into the rest of the budget, which would mean cutting the health and human services programs that his wife's family had long championed. Or he could raise taxes and violate another promise, jeopardizing the political support of Republicans.

Schwarzenegger's economic advisors urged him to honor the education deal. So did Schwarzenegger's new finance director, Tom Campbell, and Reiss, who argued that he would then be in a stronger position to reform Prop. 98. The governor could say: I hate this budget and its cuts to human services, but it's what Prop. 98 requires. Yet Reiss and Campbell were in the minority. The conservatives on Schwarzenegger's staff warned that paying back the Prop. 98 growth would encourage a tax increase. The liberals worried about the program cuts.

Kim Belshe, the health secretary, argued that if Schwarzenegger provided the additional billions in Prop. 98 growth, the state would have to deny government-sponsored health insurance to tens of thousands of poor children. The health secretary played yet another card. As a decision on the budget approached, Belshe called Shriver to warn her of the possibility of cuts in health programs. The first lady was soon on the phone to her friend Reiss. Why aren't you protecting these programs? Shriver demanded.

"I said, 'Maria, in a zillion years, I couldn't advocate, nor could your husband, the governor, sign a budget that had those kinds of health and human service cuts,'" Reiss later recalled. But she explained to Shriver that by putting the cuts in the January budget proposal and fully funding the Prop. 98 growth, the governor would make the case for budget reform. He would still have time to restore the money to health programs when he revised his budget in May.

Shriver's views did not sink the education deal, but they indicated the direction the governor was heading. Schwarzenegger was not inclined to take Reiss' and Campbell's advice, concerned how it would look if he took $1.8 billion out of health and put it into Prop. 98 in January, only to reverse himself in May. "There would have been a huge thing about 'the governor flip-flops again,'" he said in the interview. "'Once again, he's changing his mind, and he's under pressure and all that.'"

"I had a choice," Schwarzenegger said. "If we want to give education the $2 billion more they say they are owed, we have to take the $2 billion out of health care, and that means we would have to take it out of vulnerable citizens. I was not willing to do that." And there was no justification for raising taxes, the governor believed, when revenues were up $5 billion.

In different circumstances, Schwarzenegger might have approached the CTA earlier in the fall and tried to fashion a compromise. But if the governor chose to amend Prop. 98 as part of his budget reform for the special election, he would be in a fight with the teachers union anyway. In addition, he was looking at possible education reforms, including lengthening the probation period for new teachers and a "paycheck protection" initiative to restrict the ability of unions that represent public workers to use their members' dues on politics. As his media strategist said in a Dec. 9 memo to the governor and a top staffer, "We are going after CTA with a vengeance."

On Dec. 15, three top Schwarzenegger aides, including Tom Campbell, told John Campbell (no relation to Tom), a Republican legislator who was drafting a budget reform initiative, that the governor wanted to amend Prop. 98 as part of the measure.

The next day, Schwarzenegger invited CTA President Barbara Kerr, a Riverside schoolteacher, to a meeting inside the governor's Capitol offices. Schwarzenegger and his team had decided to make no mention of the budget reform proposal. Instead, he used the meeting to try to figure out if there was any way he could renegotiate his original budget deal with CTA.

I'm having some trouble, Schwarzenegger confessed to Kerr. I can't keep the deal this year without hurting health care and other programs. Is there anything you could do to help us?

We have a deal, Kerr bluntly replied. We expect you to honor it. The CTA had agreed only to the one-time, one-year savings of $2 billion from the Prop. 98 guarantee, she said. If Schwarzenegger didn't give the schools the full Prop. 98 guarantee, including the growth, he would be taking more money from education. "I think he was startled that I didn't just say, 'Oh, OK.' I don't think he likes to be told no," Kerr said. There was discussion but no resolution. Kerr and the CTA officials left after 90 minutes.

The following week, CTA leaders held a conference call. No one, least of all Kerr, could believe the governor would break such a high-profile deal.

Schwarzenegger would wait until immediately before the State of the State speech to break the bad news, and he wouldn't do the job himself. Instead, Reiss invited education groups to a conference room inside the governor's office at 3:30 p.m. on Jan. 5, 2005, less than two hours before the address. Tom Campbell greeted the guests before taking his seat alongside Reiss and Riordan. Riordan made remarks. Then Campbell spoke: The governor, he said, would not provide the education money in the budget that was dictated by Prop. 98. There were a few moments of stunned silence.

Let me get this straight, asked Glen Thomas, who represented county school superintendents. You're breaking the deal?

"I'm not going to argue with you over that characterization," Campbell replied.

Kevin Gordon, executive director of the California Assn. of School Business Officials, followed up. Campbell had said in his talk that Schwarzenegger would be "modifying Prop. 98." It wasn't clear whether he meant the terms of the funding deal or Proposition 98 itself, which was part of the California Constitution.

Are you amending the Constitution? Gordon asked.

Yes, Campbell replied.

One education advocate asked Campbell, Reiss and Riordan if they understood the size of the fight they had just picked. The entire education lobby would attack Schwarzenegger.

You have to do what you have to do, replied Reiss, looking grim.

Barbara Kerr watched the speech in her office at CTA headquarters near San Francisco. After the governor declared that, on the budget, "we must have a new approach that overrides the formulas, that overrides the special interests," she was sure that he was coming after Prop. 98. Kerr sent out an e-mail: "I guess I'm a wartime president."

Reiss says none of Schwarzenegger's advisors were ready for the coming attack on school funding and the governor's agenda. "I think—and I put myself as part of that group—his political team and his senior staff didn't do what we should have done. You have a governor who has told you he's declaring war on three continents, and you don't have a plan on where your forces are."

Schwarzenegger believed he was merely making the opening offer in what he expected would be months of talks on a grand compromise deal with the Legislature. But the governor had kicked off a bid to reform education, the budget and California politics by breaking a deal on education funding with the most politically powerful union in the state. Why would the Legislature, why would the CTA, why would anyone make a deal with Schwarzenegger after watching him break the biggest deal of his political career?

When he looked back at this momentous set of decisions, Schwarzenegger believed he was a victim of his own impatience. He should have taken more time, perhaps a year or two, to lay the groundwork before pushing for reforms and a special election. That was true, but there was more to his troubles than that.

Rather than facing the fact that he had made a bad deal with the CTA, Schwarzenegger embraced a budget reform measure to change the very basis of the deal. The budget reform, which became Proposition 76, was less a proposal to improve the governance of the state than a method to rescue the governor from an agreement that was no longer useful. Direct democracy was a fantastic tool for many things: for telling a story to the public, for leveraging public opinion to force the Legislature to act, for building coalitions. But the ballot initiative system was not a magic elixir for politicians to drink when they got into jams.

By biography and profession, Schwarzenegger was a manufacturer of magic. The governor thought that he could conjure a compromise with legislators and the teachers union. And he said that he always intended to provide the schools with the Prop. 98 growth, but he simply couldn't do it in this particular year and under this budget. "I always recognized that we owed them money," he would say. "The question is how do you pay it back." He believed that, too, with all his heart. "He never wanted to break that deal," said Reiss. "He never intended to break that deal."

But the fact was that the delay he wanted in funding Prop. 98 growth was not part of his original agreement with the CTA. Schwarzenegger was slow to recognize how a broken deal based on Prop. 98 could combine with a budget reform amending 98 to produce a climate so toxic that it could poison all of his plans.

Two weeks after the State of the State speech, the CTA began its campaign against Schwarzenegger and his special election. In the CTA, the governor, for the first time, faced an opponent that knew him well. The union's chief tactic was to attack him for his "broken promise" on education funding, and Prop. 98 TV ads even quoted Schwarzenegger's "dead body" pledge from the Mission Inn. These attacks destroyed the governor's popularity, dropping his job approval rating by 30 points over the first six months of 2005. His other ballot measures were collateral damage. All four of the initiatives he backed would go down to defeat in the November 2005 special election.

Afterward, Reiss and Schwarzenegger reached out to representatives of the teachers union. By this May, those conversations had produced a new agreement between the governor and the CTA that, over several years, promises to give the schools the growth in Prop. 98 funds—now estimated at just less than $3 billion—that were due under the terms of the original deal. Education is also slated to get an additional $2 billion upfront. But the political damage has been done. And the California Teachers Assn. is supporting Phil Angelides for governor.