Schwarzenegger wage cuts show Calif. 'dysfunction'

SAN FRANCISCO, July 15 (Reuters) - California's tortuous budgetary politics may mark a new low this year when the pay of some 200,000 state workers is cut to minimum wage, underscoring the difficulty of balancing the so-called Golden State's books.

Republican Governor Arnold Schwarzenegger has ordered pay for state employees cut to $7.25 an hour, in many cases as of August 1, to force Democratic lawmakers to negotiate harder on a state budget and tackle a $19 billion shortfall.

"This is a case study in dysfunction. The whole reason this has arisen is because of the failure of the governor and legislature to agree to a budget," said Jack Pitney, professor of government at Claremont McKenna College.

"If you want to make the case that California is broken, this is Exhibit A," Pitney added.

California missed a July 1 deadline for a new budget and analysts expect several weeks will pass before there is a deal on a spending plan.

The California legislature is notorious for its partisan divisions, and any budget must be approved by two-thirds of lawmakers, whereas a simple majority can pass budgets in nearly all other states.

Members of powerful public unions employees are scared of lower wages.

"I've cut off every little extra service," said Angela Ramirez, 46, a state Department of Motor Vehicles employee and a member of the Service Employees International Union in Sacramento. Her salary will be reduced to $700 per month from $2,200, she said.

"I've cut off cable, summer trips, no cell phones ... I've been in food lines at least twice over the past year." She is also struggling to prevent her home from going into foreclosure, she said.

Schwarzenegger also wants to gut spending on Democratic programs and rules out tax increases they are seeking.

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Investors see the messy budget process threatening the state's debt rating, which is just a few notches above "junk" status, said Marilyn Cohen, president of Envision Capital Management in Los Angeles.

"Tell me, what's going right?" Cohen said. "As a bond portfolio manager, as an investor in California bonds and as a taxpayer, I'm disgusted .... I'm not buying Calif GOs (general obligations) ... I don't think it's prudent."

The minimum wage battle began in 2008 when State Controller John Chiang, a Democrat, refused to carry out an order from Schwarzenegger to cut wages amid a budget impasse that year.

Their feud went to court, and an appeals court ruled on July 1 the governor may cut employees' pay if the state lacks a budget. Chiang continues to balk, however, saying the state's payroll system cannot process the latest wage rollback.

Tony Quinn, co-editor of the California Target Book, which tracks state politics, said Schwarzenegger's hardball tactics are meant to impress upon Democratic-leaning public employee unions that he wants to overhaul costly public pensions in any budget agreement.

"He's taking a two-by-four both to the public unions and to the legislature," Quinn said.

The state is not alone in pressing to shore up budget gaps by shaving future pension costs. Bills making pensions less generous were signed into law earlier this year in Illinois and New Jersey, cash-poor states whose finances have, like California's, have been laid low by the poor economy.

In taking on Schwarzenegger, Chiang has raised his profile and, some analysts say, may be on the short list for future Democratic candidates for governor, Quinn said.

Schwarzenegger spokesman Aaron McLear said Chiang is fighting a loosing battle because the state constitution and a 2003 California Supreme Court decision require the governor to lower state employee pay absent a state budget.

McLear said the administration is again seeking a court order to force Chiang to execute Schwarzenegger's order, with a court hearing schedule for Friday.

Democratic lawmakers in the state Assembly and Senate are drafting a joint budget plan to rival one proposed by Schwarzenegger.

(Editing by Philip Barbara)