Madam Chief Justice, Governor and Mrs. Davis, Governor and Mrs. Schwarzenegger, esteemed members of the Senate and the Assembly, constitutional officers, distinguished guests, fellow Californians. Thank you for joining me today.

Governor Schwarzenegger, thank you also for your courtesies and help in the transition, and for your tireless efforts to keep California the Great Exception that it is.

This is a special moment as executive power passes from one governor to another, determined solely by majority vote. It is a sacred and special ritual that affirms that the people are in charge and that elected officials are given only a limited time in which to perform their appointed tasks.

For me this day is also special because I get to follow in my father’s footsteps once again—and 36 years after my first inauguration as Governor, even follow in my own.

Then—1975—it was the ending of the Vietnam War and a recession caused by the Middle East oil embargo. Now, as we gather in this restored Memorial Auditorium, dedicated to those who died in World War I, it is our soldiers fighting in Iraq and Afghanistan, and our economy caught in the undertow of a deep and prolonged recession.

With so many people out of work and so many families losing their homes in foreclosure it is not surprising that voters tell us they are worried and believe that California is on the wrong track.

Yet, in the face of huge budget deficits year after year and the worst credit rating among the 50 states, our two political parties can’t come close to agreeing on the right path forward. They remain in their respective comfort zones, rehearsing and rehashing old political positions.

Perhaps this is the reason why the public holds the state government in such low esteem. And that’s a profound problem, not just for those of us who are elected, but for our whole system of self-government. Without the trust of the people, politics degenerates into mere spectacle; and democracy declines, leaving demagoguery and cynicism to fill the void.

The year ahead will demand courage and sacrifice. The budget I propose will assume that each of us who are elected to do the people’s business will rise above ideology and partisan interest and find what is required for the good of California. There is no other way forward. In this crisis, we simply have to learn to work together as Californians first, members of a political party second.

In seeking the Office of Governor, I said I would be guided by three principles.

First, speak the truth. No more smoke and mirrors on the budget. No empty promises.

Second, no new taxes unless the people vote for them.

Third, return—as much as possible—decisions and authority to cities, counties and schools, closer to the people.

With your help, that is exactly what I intend to do. The budget I present next week will be painful, but it will be an honest budget. The items of spending will be matched with available tax revenues and specific proposals will be offered to realign key functions that are currently spread between state and local government in ways that are complex, confusing and inefficient. My goal is to achieve greater accountability and reduce the historic shifting of responsibility back and forth from one level of government to another. The plan represents my best understanding of our real dilemmas and possibilities. It is a tough budget for tough times.

When dealing with a budget gap in the tens of billions, I must point out that it is far more than waste and inefficiency that we have to take out. Yes, government wastes money—and I will be doing a lot about that, starting this week—but government also pays for things that most people want and that are approved only after elected representatives debate their merits and finally vote them into law. They cover the spectrum from universities, parks, health care, prisons, income assistance, tax incentives, environmental protection, firefighting, and much else.

Choices have to be made and difficult decisions taken. At this stage of my life, I have not come here to embrace delay or denial.

In reflecting on our difficulties, my thoughts turned to those who preceded me and what they faced and what they were able to accomplish. My father who took the oath of office as governor 52 years ago. His mother, Ida, born on a ranch in Colusa County in 1878, and her father, August Schuckman, leaving Missouri in 1852, and traveling across the plains to Sacramento.

I tried to imagine the difficulties my great-grandfather confronted as he left Germany and came to America and then across the plains and over the Sierras into California. Let me read from the diary that he kept during his long trek westward:

“On the 26th of June, we came to the first sand desert—it was 41 miles. We went there at night and rode 19 hours in it…

“On the 26th of July, we came to the second large plain—also 40 miles long. Here we lost seven oxen which died of thirst…Thousands of cows, horses and mules were lying about dead…

“The discarded wagons by the hundreds were driven together and burned. We saw wagons standing that would never be taken out again and more than 1,000 guns that had been broken up. Here on this 40 miles are treasures that can never be taken out again.”

We can only imagine what it took for August Schuckman to leave his family and home and travel across the ocean to America and then across the country—often through dangerous and hostile territory—in a wagon train. But come he did, overcoming every obstacle. Yet, he wasn’t finished. After a few years, he went back to his homeland and found a wife, Augusta, and brought her with him, sailing around the Horn and up the coast of South America back to California. Their granddaughter, my aunt Connie Carlson, is here with us this morning—this March, she will be 99.

Aunt Connie, could you please stand up?

It is not just my family but every Californian is heir to some form of powerful tradition, some history of overcoming challenges much more daunting than those we face today. From the native peoples who survived the total transformation of their way of life, to the most recent arrival, stories of courage abound. And it is not over.

The people of California have not lost their pioneering spirit or their capacity to meet life’s challenges. Even in the midst of this recession, Californians this year will produce almost two trillion dollars of new wealth as measured by our state’s domestic product. The innovations of Silicon Valley, the original thinking coming out of our colleges and universities, the skill of our farmers, the creative imagination of Hollywood, the Internet and the grit and determination of small businesses everywhere—all give hope for an even more abundant future. And so do our teachers, our nurses, our firefighters, our police and correctional officers, our engineers, and all manner of public servants who faithfully carry out our common undertakings.

This is a time to honestly assess our financial condition and make the tough choices. And as we do, we will put our public accounts in order, investments in the private sector will accelerate and our economy will produce new jobs just as it has done after each of the other ten recessions since World War II.

As Californians we can be proud that our state leads the rest of the country in our commitment to new forms of energy and energy efficiency. I have set a goal of 20,000 megawatts of renewable energy by 2020 and I intend to meet it by the appointments I make and the actions they take. There are hundreds of thousands of new jobs to be created if California regulatory authorities make sensible and bold decisions. It will also be necessary to make sure that our laws and rules focus on our most important objectives, minimizing delays and unnecessary costs.

I will meet not only with the leaders of energy companies but with executives from a broad range of California business and industry to work on common problems and break down barriers that hold us back. We live, after all, in the eighth largest economy in the world. Over the last decade, California has outpaced the nation in the growth of our gross domestic product and in our productivity per capita.

Aside from economic advance, I want to make sure that we do everything we can to ensure that our schools are places of real learning. Our budget problem is dire but after years of cutbacks, I am determined to enhance our public schools so that our citizens of the future have the skills, the zest and the character to keep California up among the best.

One of our native sons, Josiah Royce, became for a time one of the most famous of American philosophers. He was born in 1855, in a mining camp that later became the town of Grass Valley. I mention him because his “Philosophy of Loyalty” is exactly what is called for. Loyalty to the community, to what is larger than our individual needs.

We can overcome the sharp divisions that leave our politics in perpetual gridlock, but only if we reach into our hearts and find that loyalty, that devotion to California above and beyond our narrow perspectives.

I also mention Josiah Royce because long ago my father spoke to me about his philosophy of loyalty. I didn’t really grasp its importance, but as I look back now, I understand how this loyalty to California was my father’s philosophy as well. It drove him to build our freeways, our universities, our public schools and our state water plan.

In the coming year, we will grapple with the problems of our schools, with our prisons, our water supply, its reliability, and our environment. We will also have to look at our system of pensions and how to ensure that they are transparent and actuarially sound and fair—fair to the workers and fair to the taxpayers.

Many of these issues have confronted California one way or another for decades, certainly since the time of Governor Earl Warren. It is sobering and enlightening to read through the inaugural addresses of past governors. They each start on a high note of grandeur and then focus on virtually the same recurring issues—education, crime, budgets, water.

I have thought a lot about this and it strikes me that what we face together as Californians are not so much problems but rather conditions, life’s inherent difficulties. A problem can be solved or forgotten but a condition always remains. It remains to elicit the best from each of us and show us how we depend on one another and how we have to work together.

With realism, with confidence, with loyalty—in that deepest sense—to California, to my forebearers and to posterity—as our song says:

“California here I come right back where I started from.”

Thank you and God bless you.