SACRAMENTO, Calif. -- Jan. 8 -- The following is a transcript of Gov. Arnold Schwarzenegger's (R) 2008 state of the state address.

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LIEUTENANT GOVERNOR GARAMENDI:

Senator Perata, Speaker Núñez, thank you so very much for your leadership and personal resolve to seek solutions to the many, many issues that confront us here in California. I was looking at the newspapers today, and yeah, the media and the newspapers are full of the many challenges that confront us here in this state, and it's a very long list.

Fortunately though, our state, California, has a powerful and a very diverse economy. We have capable and motivated workers. California has extraordinary entrepreneurs and educators and research facilities. This is no average state, and this room is certainly not filled with average leaders. I believe that we can, here in California, take on all comers, solve any problem, and continue to be the place where people from all over the world want to come and stake their claim to the future.

Governor, I'd turn around and address you, but how do I -- yeah, we can do it. We can do it this way. Governor, your life story and your determination to move forward, to take action, and your willingness to work beyond the frame of partisanship really exemplifies the possibilities before us. It's been my honor, and frankly quite a pleasure, to work side-by-side with you this last year, working on many of the challenges that have confronted California. And I'm confident that Californians want all of us to continue to work together, to roll up our sleeves, to take action, and to solve the problems that confront us. I know that I'm joined by everyone in this room in the desire to keep California the Golden State.

So, Governor, we look to your leadership. And ladies and gentlemen, it's with a high honor and a distinct pleasure that I introduce you the Governor of the great State of California, the Honorable Arnold Schwarzenegger. (Applause)

GOVERNOR ARNOLD SCHWARZENEGGER:

Thank you very much, Lieutenant Governor, for the wonderful introduction. What a change. (Laughter) I want to thank you also for your extraordinary work this past year and for being such a great partner. Thank you very much. A big hand for Lieutenant Governor Garamendi. (Applause)

I also want to thank my wife Maria, who is sitting up there. I want to thank you for being such a great partner and being the love of my life. Without you I would not be able to do this job, so thank you very much. A big hand for Maria. (Applause)

And I also want to thank Secretary George Schultz and Charlotte Schultz for being such great friends, and for their continuous support throughout the years. Thank you very much, and thank you for being here. (Applause)

Now, there are many people that I should thank, but there is one other person that I don't want to forget, a very important person, and this is my Chief of Staff, Susan Kennedy. A big hand to her for her tireless work. (Applause)

Now, Lieutenant Governor Garamendi, Speaker Núñez, Senate President Pro-Tem Perata, Senate Republican Leader Ackerman, Assembly Republican Leader Villines, my fellow servants of the people, ladies and gentlemen; when I was last here, little did we know that California would be engulfed by the largest firestorm in its history. It turned the night sky into an eerie, disturbing orange, and the day sky black. It drove hundreds of thousands of our citizens from their homes. And in response, the army of the inferno, 140 aircraft, 1,600 fire engines, 15,000 firefighters, mobilized to battle the flames. Now, it sounds like a scene from a movie, but it was real, and people died. People lost their homes, and people's lives changed.

Now, that first Monday night during the height of the fires I went to Qualcomm Stadium in San Diego, which by now became an evacuation center. I went to see for myself if the people had enough food, water, and the necessities. I talked to the people there. They were worried, of course, but they were in good spirits. They felt that their government had responded.

Then I heard that there were people at Del Mar, the racetrack. So, I went unannounced to see the situation for myself, and I found 300 frail, elderly people who had been forced from their nursing home by the fire. And it was there I met a volunteer named Paul Russo, a nurse practitioner who appeared to be running the place. Paul, who is also a naval reserve, had a military command of the situation. His clarity and control were impressive, and I noticed that this gave people confidence. He knew that the nursing home residents sitting in wheelchairs and lying on mattresses on the floor had to be moved to facilities where they could get dialysis and medicine and other things that they needed. Paul and a couple of volunteers were calling hospitals and ambulances to find places and means of transportation.

Now, their commitment moved me, so I said to Daniel Zingale, one of my senior advisors, I said, "We're not leaving this place until we help them take care of these people." So I got on the phone too, and together we found beds for emergency situations at the nearby military base. We found a school district that agreed to send special education buses. Now, I left, but Paul stayed up all night and had everyone moved by the next afternoon.

What Paul and the volunteers did, and what the police and the firefighters did, and what the state and federal agencies did, was this; they responded to the needs of the people. They led. They acted. They did not wait. And from the bottom to the top, everyone knew this was their moment. They resolved, without a word being said, that this would not be another Katrina.

Now, President Bush and the entire federal government could not have been more supportive, and I want to thank the President and the Secretaries Chertoff and Kempthorne for their great help. The President said to me more than once, "If there's anything that you need, give me a call." And in fact, I did call him back right away, just to check it out, and sure enough he got on the phone. He was there for California.

Paul Russo was there for California. And so this evening I want to recognize Paul, who represents a devotion to the greater good in a time of crisis. So Paul, would you please stand up so we can thank you for the great work that you have done? (Applause)

Now, in addition to the volunteers, the firefighters, police, and the state, local, and federal employees, let me tell you another group that deserves recognition; the general public. People came together. It was unbelievable what I saw. They cooperated, they evacuated, they rescued, they contributed. They were exemplary citizens, and so I would like to express my profound appreciation to the people of California.

Ladies and gentlemen, working together people can accomplish remarkable things. In April, for instance, a fiery truck crash melted the Bay Area's 580 freeway exchange. Hundreds of thousands of Californians who depended on that interchange foresaw months of delays and stress. Yet it didn't take the normal 150 days to repair. Caltrans workers, with contractors, cleared the span in 10 days, and then built a new bridge and opened it up in a record of 16 days later. Government can work, it can be efficient, it can lead.

Even though we are not suffering a serious economic downturn, still the risk of foreclosure threatens many Californians with the loss of their homes and thus the American Dream. So we took action, and reached a voluntary agreement with major lenders to freeze interest rates for homeowners most at risk. This could help keep more than 100,000 Californians in their homes. Government can lead.

This last year we took on other tough issues, like the very contentious issue of prison reform and rehabilitation, the world's first low carbon fuel standard, and the most comprehensive health care reform in the nation.

Now, talking about health care reform, let me explain to you why health care reform is so important. Here in California the health care system is collapsing under its weight, its costs, its gaping holes, and its injustices. Millions of people can't afford, or can't get, health care. Our emergency rooms are crowded or closed. As a matter of fact, 60 of them closed in the last 10 years alone. Medi-Cal patients are being turned away at hospitals. Businesses and families are experiencing double digit increases in health care costs. And medical bills are the No. 1 reason that people file for personal bankruptcy. Now, all of this is weakening our economy and is contributing to our budget deficit.

But let me make this more personal and real, through a true story about a 51 year old self-employed San Diego man named Todd. Todd had been on his wife's insurance plan, but after divorce he found a policy with a well-known company. Five months later, he started feeling tired, and soon had lymphoma.

Now, the insurance company then went back through all of his records looking for a reason to cut him off. They pointed to a knee problem, unrelated to cancer, and they noted that now he weighed less than he did when he applied for the insurance. Well, duh, of course he did, because now he was sick with cancer. But they cut him off. One month after he got sick the company canceled his insurance. Todd died eight months later. We are taking action so what happened to Todd will not happen to any other Californian. (Applause)

Now, I understand the concern that we have now a deficit, and that our plan is maybe too daring, or too bold, or expensive. But sometimes you have to be daring, because the need is so great. I mean, you want to hear about daring? Think about FDR. FDR did not ignore the problems of the Depression, because times were tough. No, he addressed those problems in big visionary ways because times were tough. He saw the problems and he acted on behalf of the people and the nation. For example, to give America jobs he created the WPA, which built 650,000 miles of roads, 78,000 bridges, and 125,000 buildings. All of those things we are still enjoying today. So we too must act boldly on behalf of the people and the state.

So I want to thank the Assembly for its action on health care. You can give me applause. (Applause) Now, when the Senate finishes its deliberation, I'm confident that the people of California in November will approve the most comprehensive health care reform in the nation. In any number of cases we have tackled politically risky things that no one in the past wanted to touch. To me, this is progress.

And now we must make progress on another problem that has been put off for many, many years, and that's the budget. Professor Schwarzenegger is going to explain now the economics of our budget problem. Our budget problem is not because California's economy is in trouble. In spite of weakness in housing, other areas of our economy continue to thrive. We remain a powerhouse of technology, of agriculture, advanced research, venture capital, international trade and innovation, and we continue to have job growth. So our revenues this coming year are not going to be lower than last year, they're not going down. No, the situation is that we are simply going to hold steady with our revenues.

The problem is that while revenues are flat, automatic formulas are increasing spending by 7.3 percent. Now, even a booming economy can't meet that kind of increase. So the system itself is the problem.

Also, for example, the rich in California by far pay most of the income taxes. But we only have so many rich people. The top 10 percent of our population, those making more than 119,000 dollars a year, pay nearly 80 percent of the taxes. So our whole revenue system, its ups and its downs, is based on whether the rich have a good year. That is no basis on which to run a government. We need more stability.

And another thing. Some people say, "Arnold, you are part of the reason why we have this deficit, because you stopped the car tax increase." Well, yes, I did that. And you know something? I would do it again, because it is -- (Applause)

Because it is not fair to punish people who can barely afford the gas to get to work, and on top of that then to ask them to pay for a tax increase to cover Sacramento's overspending. I said it back during the recall and I'll say it again; we do not have a revenue problem, we have a spending problem. (Applause)

We have to fix the system. The first year I was here, I tried to fix the system. I tried to get the Legislators to pass a Constitutional amendment to limit spending, but it didn't pass. Then in 2005 I tried to convince the voters to pass a Constitutional amendment to control the budget, but that failed too.

So, for several years we took actions to balance the budget as long as the economy was booming. For several years we kept that budget wolf from the door; but the wolf is back. It used to be that Sacramento plugged its deficits by just grabbing money anywhere it could; pension funds, local government, bonds, gas taxes that were meant for transportation. But we tightened that noose by taking away those options. We passed Proposition 1A, Proposition 58, and Proposition 42. We now have no way out except to face our budget demons.

To address next year's 14 billion dollar deficit, I will be submitting a budget that is difficult. It does not raise taxes; it cuts the increase in spending, and it cuts that spending across the board.

Now, as Governor, I of course see firsthand that the consequences of cuts are not just dollars.

As Governor, I of course see firsthand that the consequences of cuts are not just dollars, but people. I recently brought leaders and advocates of various different communities into my office to tell them about what we face financially. I had to look in their eyes and tell them.

I mean, talking about fiscal responsibility sounds so cold when you have a representative for AIDS patients or poor children or the elderly sitting across from you.

It's one of the worst things about being Governor. Yet, fiscal responsibility, like compassion, is a virtue because it allows the necessary programs in the first place.

Now, what I find most troubling is the variety of ways that we treat those who need our help the most ?? one year up and the next year down. We cannot continue to put people through the binge and purge of our budget process. It is not fair. It is not reasonable. It's not in the best interest of anyone.

So I, again, am proposing a constitutional amendment so that our spending has some relationship with our revenues. It is modeled after the process used in Arkansas. When revenues spike upwards, the amendment that I propose will not let us spend all of that money that rushes in when the economy is good. Instead, we would set some of that good?year money aside for bad years.

Remember, when revenues jumped 23% in 1999?2000, or when they jumped 14% in 2005?2006, those were sugar highs. I remember how everyone here was so enthusiastic and so hopeful and so creative about how to spend that money. Everyone was saying, now is the time to do this, now is the time to do that. All good causes. If not now, when?

Then the sugar is gone and we come down off our high. We spend it all in one year and can't sustain it the next. We need to budget more evenly.

Also, the way things are now, when we see a budget problem developing during the year, we don't have any way to stop it. We just keep that spending accelerator down to the floor. Now, what kind of sense does that make? We need some brakes. We need an alternative to crashing. I mean, this is like a slow?motion crash; you can see it happening, but you can't do anything about it.

Like right now we are spending 400 to 600 million dollars a month more than we are taking in, and we can do nothing to stop it.

This amendment that I am proposing would do something. It would trigger lower funding levels if deficit opens up during the year.

So ladies and gentlemen, I have faith that by us working together like we have in the past, we can give California a budget system worthy of the people who rely on it. I am absolutely convinced we can.

Which brings me to the next subject, which is public education.

It makes me proud as Governor that a recent survey found that 23 out of the top 100 public schools in the nation were in California. And I would like to congratulate the teachers, the principals, the administrators and all who are responsible for those remarkable schools.

Now, there's other great news too. Like, for instance, the number of high school students taking advanced math and science courses has increased by 53 percent since 2003. And that, by the way, is terrific for our high?tech future. And we have other great education news, but it's not all good news, as we know. Like, for instance, our drop?out rate is now between 15 or 30%. We don't even know exactly the number. Now, this is not just a statistic, may I remind you. These are children lost in the black hole of ignorance, poverty and crime. And on top of that, our schools have 30% fewer teachers and half the number of counselors as other schools in the U.S. We've got to fix that. We've got to create 100,000 more teachers in the next ten years.

Now, everyone knows that to dramatically change our education system we have to undertake reforms, and we have to fund those reforms. In light of the current budget situation, of course, this is not the year to talk about money. I do believe, however, that we still must undertake reforms right now in the schools that need our help most.

Like, for instance, to varying degrees 98 school districts in California are out of compliance with the No Child Left Behind Act. According to the Act, after five straight years of noncompliance by a district, the State is required to take action or lose federal funding.

Now, we have identified several of the districts that on a whole have persistently failed to education children. So I'm announcing today that California will be the first state to use its powers given to us under this No Child Left Behind Act to turn these districts around. And we will be working with Superintendent of Public Instruction, Jack O'Connell, and the teachers, the administrators, the parents and the elected officials to make these districts models of reform. No more waiting. We must act on behalf of the children.

Likewise, on infrastructure I will continue to push for action, because we have a water system that was built decades ago for 18 million people. Today we have 37 million people, and in 20 years from now we will have 50 million people. We've got to get going. I mean, already homes and businesses are facing mandatory cut?backs, farms are unable to irrigate crops, building permits are being denied, and yet raging flood waters run wasted into the sea because they can't be captured.

We must expand water storage. We must build the water delivery systems. We must fix the delta and restore its ecosystem.

And I will not give up. I will continue to push on this, because California needs water now. We need water 20, 30 and 50 years from now.

Now, also over the next 20 years we have $500 billion worth of infrastructure that needs to be met. Now, as we head into this new century, we also need digital infrastructure to keep our economy growing. So the question is: How do we meet all those needs?

There isn't enough money in the public sector, we all know that. Can't do all of it. We need to expand partnerships where government and the private sector work together to meet the needs of the people. These partnerships can often deliver infrastructure faster, better and cheaper.

For instance, in British Columbia, public/private partnerships are common for building highways, bridges, rapid transit, water treatment and so on, and everyone is happy. The political leaders are happy, business is happy, the public is happy, the economy is happy, the future is happy.

So in the weeks ahead, I will be sending you legislation to make these partnerships more available to our state and to our local governments.

We will also continue to make California the world's environmental leader. We are leading on climate change and low carbon fuels, energy efficiency and on clean, green technology. So when it comes to cleaning our air, preserving our ocean and protecting our environment, California will continue to be the foremost advocate for change. And if we have to sue the Federal Government to get out of our way, we will do so.

Now, I will be submitting to you many legislative proposals on energy, on environment, on infrastructure and on education.

And I will also be submitting a proposal of behalf of our returning veterans. They deserve not only our gratitude and respect, but a more open, welcoming door to civil service and to education benefits.

Now, let me close by saying that last year I talked about post?partisanship, and a few cynics made fun of me that year. But that is how I've tried to conduct my administration over this past year, and this is how I intend to conduct business over this coming year.

So Speaker Núñez, Senate Leader Perata, Senator Ackerman, Assemblyman Villines: I cannot fix the budget alone; I cannot build the roads and the bridges alone; I can't improve education alone. You are my partners. All of you sitting here in this chamber are my partners.

This coming year will test us in very hard ways. I like something that Paul Russo said when he was asked why he didn't go home and get some sleep at night at Del Mar. He replied: When you have a job to do, you get it done.

Well, ladies and gentlemen, we have a job to do for the people of California, so let's get it done.

Thank you very much. Thank you.