UPDATE 1-California governor signs budget that includes rainy day fund

Fri Jun 20, 2014 1:59pm EDT

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(Recasts with governor signing budget)

By Sharon Bernstein

SACRAMENTO, Calif., June 20 (Reuters) - California Governor Jerry Brown signed a $156 billion budget plan on Friday that includes funding for a controversial high-speed rail project and a so-called rainy day fund in line with the governor's vision of fiscal restraint, his office said.

The compromise budget deal followed months of political wrangling among Democrats, who wanted to restore more spending on social programs cut during the recession than Brown wanted.

Democrats control both houses of the legislature and all elected offices in California, but divisions have emerged between Brown, who has steered the state on a moderate fiscal course, and progressive party members who say the state should do more to replenish its tattered social safety net.

Last week, he praised the legislature for "a solid and sustainable budget" barely bigger than the $156.2 billion he had proposed in May.

California faces the upcoming fiscal year, which begins July 1, in good financial shape, thanks to new taxes approved by voters and the resurgent economy. When Brown took over in 2011 from two-term Republican Arnold Schwarzenegger, the state faced an 18-month budget gap of $25 billion.

Under the budget plan approved by lawmakers June 15, Brown's high-speed rail project, a $68 billion effort opposed by Republicans, will receive $250 million in funding from the state's cap-and-trade program. The state collects a fee after polluters buy and sell their rights to emit carbon into the air.

The budget also encompasses Brown's initial plan for $76 billion in education spending, along with additional programs negotiated by lawmakers.

Brown did use his line-item veto to reduce some of the spending in the package approved by the legislature, his office said. Details of the final version will be released by Brown's office later on Friday. (Reporting by Sharon Bernstein; Editing by Cynthia Johnston and Eric Beech)

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