Schwarzenegger declares California fiscal emergency

The deficit is 22 percent of the $85 billion general fund budget the governor signed last July for the fiscal year that ended in June, highlighting how the steep drop in California's revenue due to recession, the housing slump, financial market turmoil and high unemployment have slashed its all-important personal income tax collection.

In the declaration, Schwarzenegger ordered three days off without pay per month beginning in August for tens of thousands of state employees to preserve the state's cash to pay its debt, and for essential services.

California's budget is five weeks overdue, joining New York among big states with spending plans yet to be approved, and Schwarzenegger and top lawmakers are at an impasse over how to balance the state's books.

Analysts say it could be several more weeks before the Republican governor and leaders of the Democrat-led legislature reach an agreement, a delay that threatens to lower the state's already weak credit rating, now hovering just a few notches above "junk" status.

"Without a budget in place that addresses our $19 billion budget deficit, every day of delay brings California closer to a fiscal meltdown," Schwarzenegger said in a statement.

"Our cash situation leaves me no choice but to once again furlough state workers until the legislature produces a budget I can sign," he wrote.

Schwarzenegger's declaration noted the state's government is projected to run out of cash no later than October should its budget stalemate persist, as expected.

California has a long history of nasty and lengthy budget battles.

Last year, the fight over a spending plan dragged on so long the state controller had to issue IOUs instead of payments to vendors to conserve money for priority payments, including payments for education programs and for investors holding the state's bonds.

IOUs AS EARLY AS NEXT MONTH

Schwarzenegger's declaration noted State Controller John Chiang has said he could be forced to issue IOUs as early as next month because of the budget impasse.

Schwarzenegger has proposed slashing spending to balance the state's books, an approach rejected by Democratic lawmakers. Their leaders in the state Senate and Assembly are trying to draft a joint plan likely to include proposals for tax increases to rival the governor's budget plan.

By ordering furloughs, which he also did last year, Schwarzenegger is bringing pressure on state employee unions allied with Democratic lawmakers on the heels of losing a courtroom battle to cut state employees' pay to the federal minimum wage to bolster the state's finances.

Schwarzenegger's new furlough order was instantly condemned by labor officials as a political ploy.

"To once again force state employees to take unpaid furloughs is just another punitive measure by Governor Schwarzenegger because he couldn't impose minimum wage," said Patty Velez, president of the California Association of Professional Scientists.

The declaration exempted state employee bargaining units that recently agreed with Schwarzenegger's administration to new contracts that include reduced pension benefits.

Schwarzenegger has said he will only sign a budget agreement if it includes an overhaul of the state's public pension system, which includes the California Public Employees' Retirement System, the biggest U.S. public pension fund, which he says poses one of California's greatest financial challenges going forward.

Schwarzenegger clearly has no qualms in the final months of his final term about pressuring lawmakers through the wallets of one their top constituencies, said Pete Peterson, executive director at the Davenport Institute at Pepperdine University's School of Public Policy.

"It's an indirect play," he said. " ... these past few months there has been a much more confrontational relationship between the governor and the unions."

(Editing by Todd Eastham)