Arnold Schwarzenegger's style of governance is to publicly focus on one thing at a time and at this moment, his thing is forging a deal with legislators to overhaul the state's much-troubled workers' compensation system.

The governor moved to workers' comp last month - demanding changes to reduce rapidly escalating costs borne by employers - after persuading voters to approve a $15 billion bond issue to refinance some of the state's budget deficit and a companion measure calling for a balanced budget.

As Schwarzenegger campaigned energetically for the measures, he implied that passage would go a long way toward fixing the state's finances, but in fact they did almost nothing about the state's fundamental budget problem: It's spending billions more dollars each year than the taxation system is producing, despite an improving economy.

The state auditor's office reported recently that the state ran up $30 billion in deficits during the 2001-02 and 2002-03 fiscal years, and by all indications, the reservoir of red ink will expand by another $15 billion or so during the 2003-04 year that will end on June 30. The administration has acknowledged that it faces $18 billion in leftover and new deficits for 2004-05, and if anything, revenue and spending trends will widen the gap, not narrow it.

After Schwarzenegger returns from his Easter vacation in Hawaii and - he hopes - concludes his deal on workers' comp, the budget crisis will, by necessity, return to the front burner. His proposed 2004-05 budget would whittle the "structural deficit" a bit but still have the state borrow billions of additional dollars to keep the ship of state afloat. And according to the Legislature's budget office, even if all of Schwarzenegger's spending reductions were to be adopted by the Legislature, the state would face ongoing deficits for many years to come.

A Legislature controlled by liberal Democrats is clearly reluctant to adopt any of the spending reductions Schwarzenegger wants. It largely ignored his pleas for midyear spending cuts after he took office in November and is making it clear that few of his major cutbacks for 2004-05 are likely to win approval.

The Democrats want billions of dollars in new taxes and although they've changed their rhetorical tone in recent weeks - pretending to search for areas where spending can be trimmed - their fundamental goal remains unchanged. And now Schwarzenegger may be moving in their direction, much to the chagrin of his fellow Republicans. In a series of newspaper interviews last week, Schwarzenegger softened his previously firm stance that he would balance the budget without new taxes and implied that he would consider tax increases of some kind.

Schwarzenegger's statements stiffened Democrats' resolve to hold out for new taxes - most likely some kind of surtax on high-income taxpayers - and alarmed Republicans. Were he to opt for taxes, Schwarzenegger probably could cajole or strong-arm enough Republicans to reach the two-thirds vote level - much as his mentor, former Gov. Pete Wilson, did in 1991 when he faced a severe budget deficit. But that would drive a wedge between Schwarzenegger and conservatives.

It's questionable, too, whether a tax increase would make a substantial dent in the state's huge structural deficit. The taxes that Democrats mention most, such as a surcharge on the affluent and some new taxes on cigarettes and liquor, would add only a few billion dollars a year to the revenue side of the fiscal equation, and still leave a yawning gap. And it's possible that a tax increase would provide little net revenue because under Proposition 98, the school-finance measure enacted by voters 16 years ago, the first $4 billion would have to go to schools - unless the Legislature were to suspend its provisions.

The final factor is the state's economy. It has been recovering smartly but job growth remains fairly anemic, and that depresses personal income taxes, the state's single most important revenue source. Revenues are running under projections for the current fiscal year, largely due to flatness in income taxes.

Schwarzenegger, despite his rhetoric on the bond issue last month, still faces a monumental budget headache that's not going away.