Arduin to Walk Economic Tightrope

She is the marvel of Republican strategists nationwide as a fiscal fix-it expert able to swoop into states awash in red ink and restore stability.

Now, Donna Arduin, confirmed by the state Senate on Monday as state finance director, is on the spot in California to the tune of $14 billion.

“I have seen firsthand -- in other states -- governors and legislatures going through difficult fiscal times,” she said in an interview at her Capitol office. “I know what has worked and what hasn’t.”

At the urging of her boss, Gov. Arnold Schwarzenegger, voters earlier this month approved billions of dollars in refinancing bonds through Propositions 57 and 58. But the state still faces a $14-billion shortfall in the fiscal year beginning July 1, and it’s Arduin’s job to find solutions. Soon.

The state must OK a balanced budget by June 30. The Legislature is divided on how to make it happen, and the governor remains a wild card in reaching agreement.

Arduin will play constantly shifting roles as she deals with the Legislature, maneuvers within the Schwarzenegger administration and works to rebuild Wall Street confidence in California. By summer, she could emerge as a crafty budgeteer or a GOP hatchet woman clueless about California.

As early as last November -- after a five-week review of the state budget -- she inflamed Democrats with her bluntness. “We knew this was going to be bad,” she said of the state’s finances. “The fact is, this is staggering.”

Her proposed cuts in spending for the developmentally disabled became a public relations disaster. And she walked out of a public hearing during hostile questioning.

But on Monday, the contrast couldn’t have been sharper. The Senate, by a 34-0 vote, confirmed the new budget chief.

“We think the governor should have his own person,” said Senate President Pro Tem John Burton (D-San Francisco).

Arduin -- the number-crunching favorite of the GOP and an outspoken advocate of privatization and cuts -- has emerged as a player in Sacramento’s bruising game of “Let’s Make a Deal.”

“She came with what we perceived to be a rather large ego and not much of a desire to work collectively to solve the problem,” said state Sen. Joe Dunn (D-Santa Ana).

“Lately she has shown a willingness to set her ego aside, roll up her sleeves and work toward solutions -- although I suspect that may be driven less by her desires than those of the administration as a whole.”

The Democratic-run Legislature is by far her biggest challenge.

Legislators are still not sure what to make of Schwarzenegger’s finance wizard. Many of the Democrats working on the budget said they had not met her as of early this month.

Some that have say her curt manner makes her difficult to read -- a sharp contrast to her predecessor, Democrat Steve Peace, a former chairman of the Senate Budget Committee brought in to engage the Legislature by a governor having trouble getting their respect.

The emotional Peace enjoyed chewing over weighty policy issues in public. Lawmakers say they typically knew where he was going. And when he felt the Legislature went too far astray, he would let its members know it.

Arduin’s role is different. Schwarzenegger doesn’t need her to build bridges with legislators, or to try to bring them under control. He has proved gifted at doing that himself. He needs her to generate ideas. And by most accounts, he is listening to what she has to say.

“She is not the backslapping type of person,” said Assembly Republican Leader Kevin McCarthy (R-Bakersfield). “We [didn’t] hire her to be a backslapper.”

In January, Schwarzenegger and Arduin presented a blueprint for closing the budget gap through deep spending cuts in almost every area of government. It was roundly criticized by legislative leaders.

Now, the finance director must help the governor find middle ground. It is not an easy task for someone who is arguably the most conservative voice in a diverse Cabinet.

Ashcroft Comparison

Republican political consultant Dan Schnur says she is well-received by the party’s conservative activists the same way the U.S. attorney general helps President Bush. “She’s the John Ashcroft of the Schwarzenegger administration,” he said

Arduin cemented her reputation as a champion to anti-tax and libertarian activists in her last job as Florida Gov. Jeb Bush’s budget chief. There, she used skills honed as top deputy budget director in Michigan and then New York -- two states where Republican governors pushed through plans to dramatically cut back state services.

She says she still has regular phone chats with Bush, where they bounce ideas off one another. “Donna has gained a national reputation as the single foremost expert on cleaning up state budgets,” said Stephen Moore, president of the Washington, D.C.-based Club for Growth. The political committee targets for removal from office Republican legislators whom they deem too liberal on fiscal issues.

“There was celebration among fiscal conservatives around the country when Arnold chose her,” he said.

To many of those involved in budget discussions, Arduin is the administration’s “bad cop.” Lawmakers say she takes the hard line, remaining resolute. The governor comes in later with charm and cigars and a compromise that makes Democrats feel the administration has caved.

Asked whether there was any truth to this, she smiled and said, “I’m certainly not going to give away our negotiating strategy.”

In the coming weeks, Arduin and other aides will present the governor with scores of options for eliminating the projected budget shortfall. Not all her ideas will even get out of the governor’s office, but it will be her job to defend any that reach the Legislature. “Arduin may become the public face of the less pleasant budget decision to allow Schwarzenegger to stay above the fray,” Schnur said. “It’s no fun, but she’ll be the governor’s javelin catcher.”

Arduin says her job is to help steer the evolution of a budget. “Everything in this process is a negotiation,” she said. “You never end up where you started.”

She negotiates not only with the Legislature but also fellow Cabinet members. She says she has been able to forge good working relationships with department heads who are working on plans to overhaul the way the state provides services to Californians. She starts most workdays at a meeting with the governor’s senior staff.

In discussions she and those agency heads will hold with advocates from groups across the political spectrum, Arduin says, the administration will seek to build consensus on the least painful ways to save money.

“The people who have come in and talked to us understand the state is in a fiscal crisis and they want to contribute,” she said.

Some of those involved say that while they appreciate her openness, they also are deeply frustrated by the finance director’s plans to cut social services.

Advocates have planned dozens of rallies to fight the administration’s budget proposals, and Democrats will be holding hearings into the spring to build the case against eliminating the shortfall with cuts alone.

Arduin also must keep investment firms and bond rating agencies in touch with what is happening.

“The situation is volatile and complex both financially and politically,” said Reid Smith, a senior portfolio manager with the Vanguard Group. “Arduin and the administration must provide a leadership role in where the state is going. They have to get control of the process.”

Her job also involves consultation with big names such as former Secretary of State George P. Shultz and John Cogan, a fellow at Stanford University’s Hoover Institution. She also talks to executives at major New York financial houses who were closely involved in structuring the governor’s $15-billion borrowing plan.

“We got very good practical advice in putting those propositions together,” Arduin said, “both in structuring the bond itself, and in what we need to put in the measures to give investors confidence and open the markets to us.”

Now comes the advice on crafting a plan for selling the actual bonds. Arduin is leading a committee that is weighing how much of the $15 billion is to be used to cover accumulated deficits and how much will be used to pay for state programs for the upcoming fiscal year.

Programs on Autopilot

The finance director, who earns $131,412 a year, says negotiating a budget in California is a unique challenge because state spending is structured in such a way that many of the programs are on autopilot to continue to grow unless they are cut.

“Regardless of the tinkering some states try to do with their revenue systems, there is generally an amount of government a state economy can support,” she said.

Figuring out what amount of government spending can be supported here involves walking an economic tightrope. For every economist who warns that raising taxes will be a drag on job growth, another warns that cutting the university system and delaying transportation projects -- as Arduin has proposed -- is just as harmful.

And as she pushes for those cuts, Schwarzenegger’s “bad cop” may be in for a much more visible role in the weeks ahead.

“So far, the budget debate has been largely an insiders’ game,” said Schnur, the political consultant. “When the public starts paying attention later this spring, Arduin’s role as the ‘bad cop’ gets a lot tougher and a lot more challenging.”