Gov. Arnold Schwarzenegger's ability to forge a compromise on the contentious issue of workers' compensation marks a decisive political victory for him and bolsters his strength heading into state budget negotiations next month with the Legislature.

To close the complex deal five months into his job, the governor employed his acting skills, leveraged his popularity with voters, played on the hopes, fears and competing interests of leading Democratic lawmakers, and capitalized on his own Republican Party's desire to be taken seriously in California after so many years as the underdog.

Praised as a bipartisan power broker after Friday's vote, he credited lawmakers and insisted, "I'm not here to be powerful," but admitted, "I like the idea of using the stick."

Schwarzenegger, who was elected last November in a populist uprising against partisan gridlock, convinced voters earlier this year to support two budget initiatives at the ballot box. On Friday, he indicated to reporters that he decided early on that the best way to extract a workers' compensation deal in the Legislature was to threaten to go again directly to voters.

He began helping a business coalition gather voter signatures to place on the upcoming November ballot a workers' compensation package that insurers supported and Democrats strongly opposed because of limits it would have imposed on injured workers.

This carried some risk for him, his advisers acknowledged. He might have lost at the ballot, ending a winning streak that began just after his election with a rollback of vehicle license fees and a repeal of an undocumented immigrants' driver's license bill and continued into last month, when voters approved a $15 billion bond deal he wanted to manage state finances.

Even if a workers' compensation ballot initiative succeeded later this year, Schwarzenegger knew his reputation could be battered, as attorneys who represent injured workers launched a counter-campaign heavy on horror stories about grotesque injuries and destitute victims.

Still, Schwarzenegger was willing to play a game of chicken.

He appeared at Costco stores across the state, asking hordes of warehouse shoppers to sign petitions. The legislative compromise was approved on the very day the coalition was to turn in signatures to elections officials to secure a spot on the ballot.

Political consultants said the ballot fight might have cost $60 million between supporters and opponents.

That was money neither Democrats nor Republicans wanted to spend. Both sides had other priorities.

For unions and for Senate President Pro Tem John Burton, D-San Francisco, who will step down this year because of term limits, the priority was fighting another November initiative that seeks to repeal a law Burton championed that will require large employers to provide workers with health insurance.

Newly named Assembly Speaker Fabian Núñez, D-Los Angeles, had his own political concerns, including protecting a handful of vulnerable legislative seats that Republicans might target this fall, and that, if lost, might jeopardize his leadership position.

Both leaders rejected accusations from disgruntled interest groups that they were cutting a deal to protect their legacies. But they admitted they didn't want the distraction and cost of a ballot fight. They also said high workers' compensation costs were hurting the state's economy, and that the compromise should reduce costs while guaranteeing injured workers basic protections.

"It's not in any way, shape or form evil," Burton said of the compromise.

As part of the deal, Schwarzenegger convinced Democratic leaders to abandon what was once their line in the sand - that any compromise limiting injured workers' access to doctors, benefits and courtroom payouts must also require insurance companies to lower the rates they charge businesses.

Instead, Democrats agreed to pursue that through separate legislation, which Schwarzenegger may or may not sign.

Here, Schwarzenegger put to use a talent he has developed over decades as a movie actor - convincing his audience at any given time that he is on their side.

Núñez recalled a visit from the governor days before the deal was cut, in which he believed Schwarzenegger was telling him that he personally favored rate regulation but couldn't get Republican lawmakers to budge.

"We had a heart-to-heart about this issue," Núñez said. "Basically, the governor said, 'Look I can't sell it. I really want to do this, but I can't sell it.'

"I think I've figured out when this governor is acting and when he's being himself," Núñez said. "And I've got to tell you he was not acting."

Schwarzenegger reacted with amusement as reporters asked him to verify Núñez' account. "I'm not going to say that he stretched his imagination, but all I can tell you is that I would never say that I support rate regulation," he said. "I only said that I would look at it."

With rate regulation off the table, Republicans agreed to unanimously back Schwarzenegger's compromise, even though some wanted stricter limits on medical and legal recourse for workers who claim job-related injuries.

"He forced them to pass a bill, and it strengthens us," said Assembly Republican leader Kevin McCarthy of how Schwarzenegger handled the Democrat-controlled Legislature.

Said Senate Republican leader Jim Brulte: "We admire, respect and react to strong chief executives."

In the closing hours of the talks, the California Labor Federation, which represents 2.1 million workers, agreed to stop fighting the compromise.

The deal is expected to save money for employers who self-insure - including municipal employers. Unions hope that frees up money for salary and benefits increases at the bargaining table, said federation President Tom Rankin.

The business coalition pushing the workers' compensation ballot initiative also dropped its campaign, even though, thanks to Schwarzenegger's earlier support, it appeared to have collected more than enough signatures to qualify.

Democrats say Schwarzenegger still must consider rate regulation down the road if the marketplace doesn't force premiums down.

"The rates must come down, or the governor will be viewed as negotiating a bill that didn't work," said Sen. Richard Alarcón, one of a minority of Democrats who voted against the compromise.

Schwarzenegger's next test begins next month, in the face of an estimated $15 billion shortfall, as he tries to broker a budget deal that requires two-thirds approval by lawmakers.

Republican consultant Dan Schnur said the governor is well-positioned.

"Every success increases his store of political capital, which makes him that much stronger going on to his next battle," Schnur said. "If you're a legislator who's thinking about taking on the governor over the budget, you're much less likely to win."

Burton said he likes working with Schwarzenegger but is not cowed by a governor whose greatest weapon is his ability to get voters to the polls. "You cannot put the budget on by initiative," Burton said.