SACRAMENTO, California (Reuters) - California Governor Jerry Brown unveiled a budget on Monday that included "painful" cuts to state worker pay and social services and a plan to extend tax increases as the most populous U.S. state struggles to close a $25.4 billion deficit.
Brown, a 72-year-old Democrat who last week began his third term as governor 28 years after wrapping up his second term, faces a tough campaign to win approval of his budget plan from the Golden State's fractious legislature.
Brown's proposed cuts, like those of his predecessor, Republican Governor Arnold Schwarzenegger, come in response to a steep drop in the state's coffers in the wake of a crippling housing market crash and recession that roiled financial markets and sent unemployment into the double digits.
"It's going to be difficult," said Ken Naehu, managing director at Bel Air Investment Advisors. "But he's been there before so he knows what to expect, and he's got a fighting chance to be successful."
Brown said he would ask lawmakers to support a ballot measure to extend temporary tax increases that expire this year. He plans to campaign vigorously for the measure and is hopeful voters will endorse it in light of even deeper spending cuts if they reject it.
He ruled out borrowing to help balance the state's books. "It's better to take our medicine now," he told reporters while unveiling his budget plan.
California's budget is closely watched by the $2.8 trillion U.S. municipal bond market. California has the world's eighth largest economy and is the market's biggest debt issuer. But it carries Moody's Investors Service's lowest state credit rating, a distinction shared only with Illinois.
Brown's overall budget plan depends on a successful June special election to extend temporary tax increases for five years. For that plan to proceed, lawmakers must support the budget plan by March.
Brown is likely to face difficulties convincing the Democratic-controlled legislature to sign on to such deep cuts to the state's social safety net. At the same time, he will have to convince some in the legislature's anti-tax Republican minority to support a special election to extend taxes.
Republican Assemblyman Jim Nielsen told reporters that would be a challenge and that convincing voters would be a hard sell since they rejected a tax measure last year.
Assembly Speaker John Perez issued a short statement describing Brown's proposal as the "starting point of a responsible fiscal plan for California."
Brown proposed cutting the take-home pay of unionized state employees in six bargaining units by between 8 percent and 10 percent. The units account for more than a third of the state's general fund payroll. Salaries are projected to cost the fund $7 billion in the next fiscal year, and cutting the pay of the six units would bring them in line with the agreements reached by Schwarzenegger's administration and the state work force's 15 other bargaining units last year.
Brown also wants the six units to remain on three-day-per-month furloughs through June. Schwarzenegger made aggressive use of furloughs to hold down payroll expenses.
In addition, the budget proposal includes $1.7 billion in cuts to the state's health program and $1.5 billion in spending reductions for its welfare-to-work program.
Big cuts are also slated for programs for the disabled, including the mentally retarded and autistic.
Sitting in a wheelchair outside Brown's office, Bonnie Vigil of Redding, California, said she fears the proposed budget would slash the paycheck of the person who helps her out at home. "He's not going to be able to survive," she said.
The renowned University of California system and other state universities also face $1 billion in cuts, though elementary and secondary public schools would not see any spending cuts.
Brown's budget envisages spending of $127.4 billion for the 2011-12 fiscal year, including $84.6 billion for the general fund. He would also put $1 billion into a "rainy day" fund.
If voters approve the tax extensions, which would continue current personal income and sales taxes as well as a vehicle license fee, the revenue would be transferred directly to local governments.
Brown said his plan to give more authority to local governments was "vast and historic," and as part of that plan his budget proposes phasing out the funding mechanism for redevelopment agencies.
A Janney Capital Markets report on Monday showed Illinois bonds with the widest spread over the Municipal Market Data triple-A scale of any state. The spread for 10-year Illinois bonds is 210 basis points over the scale, up from 95 basis points a year ago and well over California's spread, which has fallen to 125 basis points from 146 basis points a year ago.
(Reporting by Jim Christie, writing by Nichola Groom; Editing by Andrew Hay and Leslie Adler)