SACRAMENTO (AP) – Gov. Arnold Schwarzenegger began 2005 convinced California was in need of major changes and believing he had the clout to sell his “year of reform” to voters.

He starts the new year in a far different position. Much of his political capital is gone, spent in the ill-fated special election; he will face a well-funded Democratic opponent in his re-election bid this year; and he even caused upheaval within his own party when he appointed a Democratic activist as his chief of staff.

Meanwhile, he has to show voters that he remains capable of significant accomplishments. But to do so he must work with a legislature controlled by Democrats who may not be eager to cooperate in an election year.

How the action film star-turned-politician will walk the tightrope between the Democratic majority and Republicans who question his leadership will play out as one of the more intriguing political story lines of 2006 in California.

“It will take a lot to overcome the misstatements and bad judgment and the obvious defeat in the special election,” said Joel Aberbach, a political scientist at the University of California, Los Angeles. “But when you are governor, you do have certain political opportunities. A lot will depend on how he uses those opportunities.”

Most expect Schwarzenegger to move back to the political center and away from the partisan tone that characterized his campaign for his referendum proposals in the November special election. But any moves intended to regain the confidence of Democrats and independent voters also risk alienating Schwarzenegger’s Republican base.

“A move back to the center is essential,” said Gary Jacobson, a professor of political science at the University of California, San Diego. “The election reminded him that California is not a Republican state. You don’t win here by emphasizing your GOP agenda.”

Schwarzenegger’s referendum initiatives focused on gutting the political power of Democrats and their supporters in the labor movement. He sought to cap state spending, change the way legislative districts are drawn, reduce the amount of money public employee unions could raise for political purposes and make teachers work longer to gain tenure.

Most voters never saw the urgency for the Nov. 8 election or its cost, estimated at more than $50 million. They rejected all four of the measures Schwarzenegger promoted, as well as four others that also were on the ballot.

Schwarzenegger’s spokesperson, Rob Stutzman, disputed the perception that the governor needs to re-establish his centrist position.

“He doesn’t have to move. He’s been consistently in the center,” Stutzman said. “It’s just that the view was obstructed by the election and a $120-million campaign spent against him to change the image.”

Stutzman said Schwarzenegger is interested in ideas that Democrats also should champion, such as fixing the state’s aging infrastructure and providing health care to low-income children. He also remains steadfast against tax increases.

Nevertheless, Schwarzenegger has taken steps since the special election to rebuild the bipartisan image that made him so popular during his first year in office.

Only days after the election, he settled a bitter court fight he had been waging with the California Nurses Association over hospital staffing ratios. The nurses union had been among his most vocal and persistent critics.

He then shocked many of his Republican colleagues by naming a prominent Democratic activist, Susan Kennedy, as his chief of staff.

That decision angered some Republican loyalists who said they now are watching Schwarzenegger closely for signs of major policy shifts.

Top aides said Schwarzenegger wants to move forward on a major bond measure that would provide billions of dollars for building roads and bridges, schools, low-cost housing and flood-control projects.

His success at projecting a more moderate image could be crucial for his re-election, since about two-thirds of California voters are registered as Democrats or independents.

Schwarzenegger’s budget proposal also will provide an opportunity for him to improve his standing with Democrats, especially when it comes to education spending.

Education lobbyists insist the state owes public schools $5.5 billion based on a promise Schwarzenegger made – and they claim, broke – two years ago. They want education fully funded.

Schwarzenegger has said he did not break a promise but is expected to propose more money for schools this year, helped by higher than expected tax revenues. Democrats say they are willing to cooperate.

The calculus of cooperation for both sides will be viewed through the arithmetic of an election year in which Democrats and Republicans have much at stake.

In addition to the governor’s own re-election campaign, 100 of the 120 legislative seats are up for election, and some lawmakers are running for statewide office.

Democrats who sense weakness in Schwarzenegger and want to play tough should be careful, said Republican strategist Allan Hoffenblum. Polls consistently show that the Democrat-controlled Legislature remains even less popular than the governor.

“If the governor can show that Democrats are the ones being the obstructionists – that all they care about is raising taxes, the gay marriage bill and getting driver’s licenses for illegal immigrants – then that anger can shift to them,” he said.