Voters on Tuesday resoundingly rejected his latest effort, a package of budget-balancing measures that he promised would provide a short-term patch for the current financial crisis and prevent further catastrophe in the future.
Instead, he now faces a $21.3 billion budget deficit and a budget system that has not changed a bit since he took office nearly six years ago.
"I think he's discovered that this job is a lot harder than he anticipated in a state of economic downturn," Treasurer Bill Lockyer said Tuesday of the governor who came into office in 2003 promising to "end the crazy deficit spending."
The Republican governor faces another tough round of budget negotiations after months spent haggling with lawmakers to close the state's first budget shortfall, which was initially $42 billion through June 2010.
Schwarzenegger will be forced to spend much of his final year-and-a-half in office struggling with the same financial woes that led to the recall of his predecessor instead of enacting the sweeping policy changes he once envisioned.
"The biggest loser would be Arnold," said Dave McCuan, a political science professor at Sonoma State University. "It's time to start looking for a cabinet post in the Obama administration or an ambassadorship someplace warm."
Lockyer said Schwarzenegger and lawmakers will have to reach a new budget agreement quickly, with tax revenue coming in far below projections. Unless a compromise is struck by the end of June, the state could have trouble paying its bills by the end of July.
Political observers say Schwarzenegger and lawmakers will have little choice but to go after even politically sacred programs such as schools. An unusually high two-thirds vote threshold in the Legislature for passing budgets and partisan polarization could combine for a painful summer.
"The choices facing the governor and Legislature are daunting," said Jack Pitney, a political science professor at Claremont McKenna College in Southern California. "Democrats have taken heat for accepting spending cuts. Certain Republicans have taken heat for accepting tax increases, and the heat's only going to get more intense this summer."
Many Californians have been hearing about the state's budget problems but have yet to feel the severity of the crisis. That will soon change, Pitney said.
"For a lot of people, the budget's been an abstraction. But with the next round, there will probably be serious consequences, particularly in the schools," Pitney said.
Last week, the governor said he will consider shortening the school year by seven days, laying off up to 5,000 state employees and taking money from local governments, which likely would translate into cuts to police and firefighting services.
Tens of thousands of teachers also face the prospect of layoffs.
Schwarzenegger's warning did not sway voters, many of whom said they did not trust that the ballot propositions would do much to solve California's budget trouble.
The majority of registered voters didn't bother to vote at all. Partial results from nearly 70 percent of precincts reporting late Tuesday showed only 19 percent of voters had cast a ballot, according to the secretary of state's office.
Chris Almanza, 55, of Sacramento was among those who chose not to vote, in part because she was angry and frustrated at state lawmakers.
"I'm not going to vote because I don't think it's going to matter," Almanza said.
The governor had particularly championed Proposition 1A, which would have created a stronger rainy day fund for troubled times and capped state spending, while extending a series of tax increases lawmakers approved in February. Those taxes would have brought in about $16 billion to state coffers in future years.
Proposition 1A also was crucial to solving many of the budget problems Schwarzenegger has had to confront in office and help him carve out a legacy for himself.
He reiterated Tuesday that he wanted to be remembered as a fighter for budget reform and said he wouldn't be dissuaded by the overwhelming repudiation from voters.
"I have been working to accomplish this kind of reform since I was elected in 2003 and I will keep working toward it because we cannot allow this harmful and out-of-control budget process to continue," Schwarzenegger said in a concession statement late Tuesday.
The governor planned to return Wednesday from Washington, D.C., where he spent Election Day, to start discussing the grim options with legislative leaders.
Associated Press writers Judy Lin, Solvej Schou and Samantha Young contributed to this report.
Copyright 2009 The Associated Press.