By  on November 1, 2006

LOS ANGELES — Exuding celebrity charm, Gov. Arnold Schwarzenegger smiled at a Mexican restaurant here as admirers snapped photos and he accepted the endorsement of the Latino Coalition, a business advocacy group that is backing Sens. Dianne Feinstein, Hillary Clinton and other Democrats.

Swept into office three years ago as an outsider who vowed to shake up California politics, the movie star-turned-Republican politician is cruising toward Election Day just a year removed from seeing his approval ratings plummet amid a failed campaign for unpopular ballot initiatives. Schwarzenegger has an 18-point lead over his Democratic challenger, state treasurer Phil Angelides, according to the most recent poll of likely voters by the nonpartisan Public Policy Institute of California.

"He reached across the aisle, he worked with people in good faith and he started solving problems," said Hector Barreto, chairman of the Latino Coalition.

That vote of confidence is an indicator of Schwarzenegger's wide support in the business community of the state with the nation's largest apparel workforce. He won over many apparel manufacturers and retailers by reducing workers' compensation insurance premiums, vetoing a bill that would have imposed a $30 fee on every 20-foot cargo container moving through the Los Angeles and Long Beach ports and espousing an antitax platform.

Those decisions have outweighed his support for bills increasing the minimum wage almost 20 percent and requiring cosmetics companies to disclose ingredients that could cause cancer or birth defects.

"He is positioning himself where the typical Californian is and none of the major parties are," said John Matsusaka, a professor of business and law at the University of Southern California. "He is fiscally conservative, pro-business, but liberal socially and liberal on the environment. From the point [of view] of business, you are not going to get everything. The question is, who are you going to get more from?"

Schwarzenegger, 59, has been endorsed by the state's biggest newspaper, The Los Angeles Times, as well as the Sacramento Bee, San Jose Mercury News, San Francisco Chronicle and San Diego Union-Tribune, and by business and industry groups such as the Los Angeles Area Chamber of Commerce.

"Supporting Arnold is a no-brainer for retailers," said Bill Dombrowski, president of the Sacramento-based California Retailers Association, which has donated $415,000 to the governor's campaign. "You have a legislature that is very liberal. Having Gov. Schwarzenegger in place puts a stop to some of the more radical ideas and legislation they may want to pass."Angelides, a 53-year-old Harvard-educated grandson of Greek immigrants, has taken a tough stance on corporate tax loopholes and proposed raising taxes on the wealthiest Californians. He wants to cut taxes by an estimated $660 annually for middle-class families of four and slash as much as $5,000 a year in taxes for businesses with fewer than 50 employees.

Angelides hopes to benefit from indications of disenchantment with the national Republican Party. He emphasizes the importance of balancing the state budget, which he said faces a $5 billion deficit next year. As home prices flatten, concerns are rising that the state may collect less revenue.

Schwarzenegger claims credit for creating about 600,000 jobs in his first term, and the unemployment rate fell to 4.8 percent in September from 6.8 percent in November 2003.

Still, the comeback in Silicon Valley after the dot-com downturn and an increase in state revenue from higher property taxes and other fees were attributable to economic forces rather than the governor, said Jim Diffley, managing director at Global Insight Inc., an economic and financial analyst and forecasting company based in Waltham, Mass.

Diffley said Californians' personal income growth in 2006 will reach 7.3 percent, compared with the national rate of 7.1 percent. He projected that growth in the next year would dip to 4.9 percent versus the national rate of 5.3 percent, partly because the cooling real estate and construction market will affect spending on home furnishings, cars, vacations and apparel since a lot of personal wealth has been based on home values. "We're going to see a cutback," said Diffley, adding that the state government must maintain "fiscal discipline.''

To help fund an ambitious program to build more highways, schools and prisons and repair levees and other infrastructure, Schwarzenegger is seeking voter approval for five bond measures on the ballot totaling $37.25 billion. Angelides also supports the bond measures, which include a request to raise $19.93 billion to repair highways that is key for businesses that ship internationally.

The next governor will face a sizable deficit. Schwarzenegger said he reduced the structural budget gap to $3.5 billion from $16.5 billion and lowered the long-term debt to $16.5 billion from $22 billion. However, he acknowledged in a televised debate that "there is much more to be…done."Angelides countered that he will submit a balanced budget by proposing measures such as trimming $1 billion in inefficiencies in the government and raising taxes on Californians who earn more than $250,000 a year. Although the candidates share similar positions regarding immigration, Angelides advocates a bill that Schwarzenegger vetoed to provide financial aid to illegal immigrants at state universities.

"Gov. Schwarzenegger and I have a different vision of what will make people and the state stronger," Angelides said during the debate. "I don't believe protecting tax breaks for the rich and powerful and giving more and more special-interest giveaways to corporations is what is going to build California."

California politicians' proclivity to "take from the rich and give to the poor" worries Lonnie Kane, president of women's apparel maker Karen Kane Inc. in Vernon, Calif. Kane commended Schwarzenegger's efforts to keep business in California by reducing workers' compensation insurance premiums and easing regulatory controls. "Their mentality in Sacramento is, ‘We have a big population….Businesses have to be here,'" Kane said. "With that mentality, more and more [companies] decide to go to Las Vegas to operate."

The workers' compensation decision was particularly popular among business people. "We found about a 30 percent decrease, which is very nice, and we appreciate that, and we hope that trend will continue where we can become competitive with other states," said Robert Krieger, president of Norman Krieger Inc., an international freight forwarder and customs broker based in Rancho Dominguez, Calif.

Krieger, who employs fewer than 100 employees in California, said he wants the governor to reduce other corporate fees, such as the inventory tax, which doesn't exist in neighboring states such as Nevada. "This will help keep the garment companies from moving or outsourcing their distribution outside of California," he said.

To be sure, businesses haven't been satisfied with all of Schwarzenegger's policies, including the minimum-wage increase to $8 from $6.75 by Jan. 1, 2008, and a bill to reduce greenhouse gas emissions 25 percent by 2020 and impose mandatory caps on emissions starting in 2012 for significant sources.

"A minimum-wage [increase] is so incredibly popular among the general public,'' Matsusaka said. "Something was going to have to happen. What he did was a reasonably good defensive strategy."Still, Leon Zekaria, president of Los Angeles' Windsor Fashions, which operates about half of its 35 junior clothing stores in California, said the wage boost won't do much to improve the standard of living. "Businesses will need to raise prices to make up for the lost profit or will go out of business because of the increased expenses, thus creating a loss of jobs," he said.

There are also worries about exactly where Schwarzenegger will land on business issues in a possible second term. A survey by Small Business California, a nonpartisan business advocacy group in San Francisco, said the state government's highest priority should be tackling mounting health care costs. Schwarzenegger said he will act on health care reform, but companies fear the resurrection of a rejected ballot measure that mandated employers with 200 workers or more to pay at least 80 percent of the cost of employees' health care coverage or contribute to a state fund.

"I don't think anybody would have foreseen the dramatic turnaround the governor made,'' said Scott Hauge, president of Small Business California. "He became much more moderate. The big question out there is, which Arnold are we going to see'' if he is reelected?

Arnold Schwarzenegger
Claim to Political Fame: Defeated Democrat Gray Davis in 2003 recall vote.
Key business issues:

  • Advocates no tax boosts, temporary worker program for immigrants, increasing work visas for industries and agriculture, requiring illegal immigrants to pay fines, back taxes, and health care and education costs.

  • Supports $37.25 billion in bond measures to fund highways, schools and repairs to state infrastructure.

  • Vetoed bills to boost medical reimbursements and raise workers' compensation insurance paid by businesses.

  • Signed bill to increase minimum wage 20 percent to $8 per hour by January 2008.
Little-known fact:Former Mr. Universe likes raspberry bran muffins for breakfast.

Phil Angelides
Claim to Political Fame: Headed California Democratic Party and elected state treasurer in 1998.
Key business issues:
  • Wants to increase taxes on corporations and raise income taxes on Californians earning more than $250,000 per person, and in excess of $500,000 per couple.

  • Promises to lower taxes on small businesses and cut income taxes for people earning less than $100,000 a year.

  • Proposes regulating HMOs and ensuring health care for all children.

  • Wants to appoint a new administrative director of the state Division of Workers' Compensation to protect interests of injured workers.
Little-known fact: Paternal grandmother was a Greek-immigrant seamstress.

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