Schwarzenegger signs long-awaited California budget

California Governor Arnold Schwarzenegger signs a package of bills to balance the state's budget during a photo opportunity in the Governors Cabinet Room in the state capitol in Sacramento, California in this handout photo released by the governors office to Reuters July 28, 2009.

SAN FRANCISCO (Reuters) - California Governor Arnold Schwarzenegger signed a package of bills on Tuesday to balance the state's budget, which should allow the state to stop issuing IOUs instead of paying bills and to prepare for a crucial sale of short-term debt.

After weeks of negotiations, the Republican governor and top lawmakers in the Democratic-led legislature early last week agreed to several measures to close the state's massive budget deficit of more than $24 billion.

On Friday, the legislature passed many of the measures to close most of the gap but left it to Schwarzenegger to use line-item cuts to fill in the rest of the shortfall.

Schwarzenegger said in a statement his signed budget would plug the deficit largely with spending cuts of $16.1 billion and some one-time moves while excluding tax increases. It also maintains a $500 million reserve, which analysts have said the state government likely will need should its revenue slump persist.

California also wants to have reserve to impress investors as the state plans to issue either short-term revenue anticipation notes or revenue anticipation warrants in the near future to raise money to bolster its cash account.

It had been thinning during the stalemate over a budget agreement, forcing the state controller to issue IOUs to vendors and taxpayers owed refunds.

That emergency measure allowed the state to preserve cash for priority payments, including debt servicing payments to investors holding its cash. Two credit ratings agencies this month cut their ratings on California's general obligation debt to near "junk" status amid growing concerns over the state's finances and cash holdings.

Schwarzenegger acknowledged many who rely on state aid both directly and indirectly would suffer under the spending plan he signed. He also warned further pain may be in store because California's economy is in such bad shape, slashing the state's revenues.

"I see the real Californians that will be affected by the decisions made within this budget and nothing guarantees revenues won't drop further. But this budget puts us on a path toward fiscal responsibility so we can focus on bringing jobs back to get California moving forward again," he said.

Schwarzenegger detailed a long list of spending cuts and other efforts bringing the state's budget into balance, at least temporarily, including:

* Education spending will lose $9.3 billion.

* Spending by health and human services will drop by $3 billion.

* General government spending will fall by $1.7 billion.

* State employees will see pay cuts through three furlough days a month for savings $820 million.

* Prison spending will drop by $785 million.

* Vetoes will cut a miscellaneous $489 million.

* $1 billion will be shifted to the state's general fund from other state accounts.

* Delayed payments of payroll and health premiums will preserve $1.4 billion.

* Tax withholding and other changes will raise $3.5 billion.

* $2.2 billion would be borrowed from local governments and the State Highway Account.

Local governments, also under financial strain, have vowed to challenge in court the state's plan to seize their funds.