Schwarzenegger submits "draconian" California budget

Arnold Schwarzenegger, governor of the state of California, gestures during a debate at the Climate Summit for Mayors at the Copenhagen City Hall December 16, 2009.

SACRAMENTO, California (Reuters) - California Governor Arnold Schwarzenegger proposed "draconian" spending cuts in his new budget on Friday to help close a crippling deficit and warned new cash shortages loomed in coming months.

In his final budget, the Republican governor declared a fiscal emergency to add urgency to the California budget process after a legislative impasse in 2009 that lasted over 100 days in the midst of recession.

The budget for the remainder of the current fiscal year and all of the next aims to close a $19.9 billion deficit, relying mostly on spending cuts of $8.5 billion, which the governor called "draconian," and $6.9 billion in federal funds. The state will spend $82.9 billion in fiscal 2010-2011, beginning in July.

"There is simply no conceivable way to avoid more cuts and more pain," said Schwarzenegger, in his last year in office as he is barred from seeking re-election due to term limits.

California, which has the largest economy of any state, is among those hardest hit by the housing crisis and double-digit unemployment, leading to sharp drops in personal tax revenue. The state famously issued IOUs for months last year as it scrambled for cash to pay bills and tax refunds.

But Schwarzenegger ruled out raising taxes and called for "real reforms" to the outdated budget and tax systems.

"If you compare it to an intersection it's like seeing people crashing into each other and never building a stop sign, never building a stoplight," he said.

He said the state will face cash challenges in March but can repay debt as scheduled in May and June. But by July, he sees "substantial cash challenges" if no corrective action is taken.

"BIG PILE OF DENIAL"

The budget must be approved by a two-thirds majority vote, a difficult requirement in a legislature with hardliners at both extremes of the political spectrum.

Democrats, who control the legislature, rebuked the governor for pushing for cuts in health and human services spending, saying they would be harsh and unnecessary and urged Schwarzenegger to consider increasing revenues.

"You've got to be kidding," said State Senate President Darrell Steinberg, describing the general reaction of Democrats to Schwarzenegger's plan. "We intend to take a different approach."

The proposed cuts would mean, for example, that over 200,000 children would lose low-cost, state-backed health insurance, said state Finance Director Ana Matosantos.

Schwarzenegger, a Republican and governor since 2003, also called again on the federal government to come to the rescue of the state by raising the amount Washington transfers back to California.

"Right now the federal government is forcing us to spend money we don't have," he said.

But the Democrats, now in charge in Washington, said that relying on those funds coming through was "wishful thinking."

"Typically he is threatening the legislature. Now he is threatening the president of the United States," said outgoing state Assembly Speaker Karen Bass, adding that the budget plan amounted to "a big pile of denial."

(Writing by Mary Milliken; Editing by Kenneth Barry)