State layoffs worsen California's economic slump

SAN FRANCISCO Wed Aug 13, 2008 9:09pm EDT

California's Governor Arnold Schwarzenegger (C), Director of Department of Finance Mike Genest (L) and Director of Department of Personnel Administration Dave Gib take part in a news conference at the State Capitol in Sacramento, California July 31, 2008. REUTERS/William Foster/Office of Governor Schwarzenegger/Handout

California's Governor Arnold Schwarzenegger (C), Director of Department of Finance Mike Genest (L) and Director of Department of Personnel Administration Dave Gib take part in a news conference at the State Capitol in Sacramento, California July 31, 2008.

Credit: Reuters/William Foster/Office of Governor Schwarzenegger/Handout

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SAN FRANCISCO (Reuters) - Like thousands of Californians, Celeste Knox has lost her job, and like so many others in the Golden State she is having trouble making payments on her mortgage.

But Knox, who worked as an office assistant at a state agency overseeing veterans' education, is not a typical victim of the weak economy.

She's been terminated by the "governator."

Like 20,000 other state workers, Knox was laid off by Gov. Arnold Schwarzenegger, who is struggling to pass a state budget nearly two months overdue in the middle of an economic crisis.

With lawmakers unable to compromise on a spending plan, the former "Terminator" movie star late last month also ordered deep pay cuts for 200,000 state workers.

It is the latest dark sign for sunny California, the most populous U.S. state and a trend-setter in U.S. politics. California's economy, the eighth largest in the world by its own count, has been shaken by housing price collapse and mortgage meltdown.

Schwarzenegger himself, whose final term as governor ends in 2010, may see his reputation tarnished by a political stalemate -- along with chances for seeking another office.

"It's been building up," Allan Hoffenblum, publisher of the California Target Book, which tracks state politics, said of the confrontation with state lawmakers. "He has to do these public things because private persuasion isn't working."

LAYOFFS AMID WEAK ECONOMY

State employees had not expected Schwarzenegger to draw them into the budget battle given the weakening state economy.

Knox said her pink slip came an especially bad time -- on the heels of a home purchase, putting her at risk of joining so many others who have fueled California's foreclosure surge.

"The lenders are trying to work with me because they know a budget will be passed," Knox told Reuters by telephone from her home in Antelope, California. "But I'm in limbo."

She is not alone. California's unemployment rate rose to 6.9 percent in June from a 5.3 percent a year earlier, fueling an increasingly gloomy outlook. A recent Field Poll found a record 63 percent of Californians saying they are financially worse off than a year earlier and 70 percent seeing no improvement over the next 12 months.

Sacked state workers said they doubt they will be rehired for their old jobs even if a budget is agreed upon soon.

California has been hammered by the housing slump, highlighted by high rates of foreclosures, anemic home sales and falling home values, and the state began its current fiscal year on July 1 without a spending plan in place to close a budget shortfall estimated at more than $17 billion.

While Schwarzenegger's job and pay cut orders were meant to put heat on Democrats backed by state employees, the Republican governor has also pressed anti-tax lawmakers of his party by signaling he would consider raising the state sales tax to help fill the state's coffers.

"It's a pox on both houses," said Hoffenblum.

Bob Bancroft, a Vallejo, California mental health counselor who had been a contractor for the state, expects the government to rein in spending. "I'd love to have my old job back," Bancroft said. "The downturn makes that pretty unlikely."

(Editing by Peter Henderson and Cynthia Osterman)

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