By Sharon Bernstein and Rory Carroll
SACRAMENTO, Calif., Jan 9 (Reuters) - California's Democratic governor took a stern line on fiscal restraint as he released a $107 billion budget plan on Thursday, potentially inviting a fight with more progressive state lawmakers who want to restore spending on social programs cut during the long economic downturn.
Governor Jerry Brown challenged lawmakers who want more spending on schools, healthcare for the poor and other services to make their case while passionately defending his plan at a news briefing.
"Prudence is very difficult when the money is in," said Brown, who proposes more funding for education while paying down billions of dollars in debt and cutting spending on Medicaid, the program that provides healthcare for the poor. "When the money is in, everybody wants to spend it."
Brown's budget plan for the fiscal year beginning in July calls for $106.8 billion in general fund spending, along with a $1.6 billion rainy day fund. He also called for a constitutional amendment to enshrine the rainy day fund into law.
The plan drew immediate criticism from advocates for the poor. "People in our communities are frustrated," said Pete Woiwode, an advocate with the California Partnership. "This is clearly how the governor plays ball. He holds all the cards."
The governor's plan would increase general funding spending by 8.5 percent. It proposes spending increases of 1.6 percent for health and human services, 9.5 percent for K-12 education and 10.8 percent for higher education.
Democrats control large majorities in both houses of the legislature. But Brown, a Democrat, has charted a centrist path as governor, sometimes alienating more liberal members of his party with tightfisted fiscal policies credited with helping the state right its finances and persuading voters to adopt temporary tax increases in 2012.
Top Democrats in the state Senate and Assembly have tried in recent weeks to lay out a more progressive budget agenda, calling for public pre-kindergarten for all 4-year-olds and restoring some of the deepest recession-era cuts to social services. But on Thursday, Senate President Darrell Steinberg and Assembly Speaker John Perez declined to criticize Brown.
Steinberg, whose press aide referred to upcoming budget talks as a "five-month dance" with Brown, praised the governor's fiscal restraint but also hinted at his own agenda. Brown will present a revised budget plan in May that will kick negotiations into high gear.
"I appreciate the governor's aggressive approach to more than double the reserve and pay down debt even more quickly than we had hoped," Steinberg said in a statement. "At the same time, we must invest in the people of California, especially those living in the economic margins."
Republicans generally backed Brown's approach. His plan received a warm reception on the $3.7 trillion U.S. municipal debt market, where two of three major credit rating agencies whose opinions influence the state's borrowing costs have cited its strengthening finances in upgrades to its general obligation ratings over the past year.
In announcing the plan, Brown reaffirmed his support for more crude oil production in California and said he opposes a proposed tax on it.
His plan proposes using $250 million in funds raised through California's carbon trading program to support its planned high-speed rail project, which could eventually help lower greenhouse gas emissions although its construction would increase them.
The plan also assumes a panel of federal judges will grant a two-year extension to a long-fought order to reduce crowding in California's troubled prison system, which would save the state $90 million next year.
But the judges have not been receptive to granting long extensions and last June threatened to hold Brown in contempt of court if he did not comply with the order. Brown said he would take money from mental health and anti-recidivism programs for inmates if the judges do not grant the extension.
The upgrades by Standard & Poor's and Fitch Ratings reflect California's improving economy and revenue as well as how Brown, elected to his third term as governor in 2010, has forced deep spending cuts to help close deficits, rallied voters behind tax increases and won support from lawmakers for paying down debt.
California's finances were in a constant roil in the previous decade, and three years ago its leaders faced a $25.4 billion budget gap and comparisons to economically and financially beleaguered Greece.
"Think about how much that has changed," said Howard Cure, director of municipal research at Evercore Wealth Management in New York, which manages $4.9 billion in assets.
S&P analyst Gabriel Petek said Brown's budget plan "looks fairly positive from a credit standpoint," adding that it acknowledges many concerns investors have had about California.
Petek noted that the plan points to the financial challenge of unfunded pension and retiree health liabilities of nearly $218 billion and urged paying down internal loans and making good on deferred payments the state used to help balance its books in previous years.
"This is really in keeping with the philosophy he's taken to managing the state's finances since he's come into office," Petek said.