The San Francisco Chronicle reports: 

Gov. Arnold Schwarzenegger and Democratic lawmakers reached an agreement Monday to raise California's minimum wage by $1.25 over the next year and a half to $8 an hour, making it the highest state minimum wage in the nation.

It was a classic horse trade.  Schwarzenegger agreed to a higher increase than he had offered, and Democratic leaders gave up their demand that the law index the minimum wage to inflation.  Speaking for many conservatives, Senate Republican leader Dick Ackerman said: “We think any time you raise the minimum wage, it's going to be a drag on business.”

If Democratic leaders had stonewalled on indexing, Phil Angelides would have been able to use the minimum wage issue against the governor in the fall campaign.  They probably think that Schwarzenegger will win, however, so they grabbed the best deal they could.