Arnold's new role: Schwarzenegger has his hands full in Sacramento.(California)

This is a new political environment. This is the first time California has had an Austrian-born Mr. Universe as governor.--Arnold Schwarzenegger, November 17, 2003

When Arnold Schwarzenegger came calling on Halloween night--appropriately, my kids were out trick-or-treating in Terminator costumes--to ask if I would serve on his budget-audit committee, I already knew that California's budget situation was a horrible mess. But I had no idea just how gloomy the fiscal outlook really was.

After countless hours combing through the budget with star budget director Donna Arduin, we realized that the state faces roughly $15 billion annual deficits, twice as high as expected, from here to eternity. California's budget deficit is now larger than those of the other 49 states combined--and this state is already the most indebted in the nation.

So how is Arnold doing so far in filling this enormous fiscal black hole? He has already scored some impressive victories: He has--much to the indignation of the liberal intelligentsia--unilaterally slashed $150 million from the budget, including money for left-wing groups such as a taxpayer-funded pro-union think tank run out of the University of California.

But the state's immediate problem is not the long-term deficit but a cash-flow crisis: The state could easily run out of money to pay the bills around June. Gray Davis's parting gift to taxpayers was a set of accounting books that disguised Sacramento's money woes in a scandalous manner: Correcting for all the accounting gimmicks, the real deficit balloons to at least $62 billion through 2007.

In meetings I have had with Arnold, it has become reassuringly clear to me that this governor, like his predecessor of three decades ago, Ronald Reagan, thinks and talks like a supply-sider. He fundamentally understands that restoring growth is the key to restoring budget balance. It will take 6 percent growth of the economy in California to cut the state deficit in half; the rest will have to come from budget cuts--and that is where the governor may be a bit wobbly.

But Arnold is right to focus on igniting growth as the first step toward ending California's miseries. Between June 2000, the height of the boom, and the end of 2003, the state has had a negative growth rate in overall revenues after inflation. Why? Because, for the first time in the state's history, more taxpayers have left California than have entered it over a given three-year period. According to data from the State Board of Equalization, about 80 percent of the state's revenue losses were a result of disappearing millionaires. Some of this was a result of the dot bomb in Silicon Valley. But a lot of it was policy-driven. The leftists in the state legislature have made it clear through high taxes and anti-business regulations that they despise rich people, so the rich people have retaliated by leaving. The number of reported millionaires in California plunged from 44,000 in 2000 to 29,000 in 2002.