California governor seeks permanent state pay cuts

OAKLAND, California (Reuters) - California Governor Arnold Schwarzenegger will propose replacing furloughs of state workers with permanent pay cuts and increased retirement contributions from workers when he unveils his fiscal 2011 budget later Friday, his spokesman said.

The Sacramento Bee reported the two proposals would mean a 10 percent cut in gross pay for roughly 200,000 public-sector employees, who have seen their pay cut by 14 percent through this year’s furloughs, citing administration officials.

Schwarzenegger spokesman Aaron McLear said permanent cuts in pay and state retirement contributions would replace furloughs in the budget year starting in July but declined to discuss other details.

Combined with other personnel cost cuts, the plan would save $1.6 billion in the next fiscal year, the Bee said.

Schwarzenegger will propose an $82.9 billion budget for fiscal 2011 aimed at closing an expected $19.9 billion deficit in the next 18 months, the paper said, citing state government data.

Separately the Los Angeles Times reported Schwarzenegger would seek $8 billion from the federal government and call for the elimination of the state’s main welfare program, Calworks, if the federal funds failed to arrive.

The budget plan in any case would seek deep cuts in public transit, healthcare and social services, and would seek to expand oil drilling off the Santa Barbara coast, the Times said.

The Republican governor will seek legislative approval for the proposals, which are expected to face opposition from Democrats, who have been critical of state worker cuts.

Democrats approved a budget for fiscal 2010 that included three furlough days. Labor unions have maintained the furloughs are illegal and have filed two dozen lawsuits since they began in February.

California, the most populous U.S. state, was among the states hit hardest by the housing slump and mortgage crisis and by consumers sharply reining in spending as the U.S. economy softened and payrolls thinned dramatically.

California’s unemployment rate currently is more than 12 percent, well above the national average, and will remain in double-digits until 2012, according to the most recent UCLA Anderson Forecast unit projection.

Financial market turmoil made matters worse for California’s government as it counts on wealthy taxpayers for about half of its revenues from personal income taxes, its main source of revenue.

Schwarzenegger and lawmakers agreed to two lean budget plans last year to keep the state’s books in balance.

The governor signed the first in February after declaring a fiscal emergency the previous December and following an impasse in the legislature over the budget of more than 100 days.

The plan slashed spending and raised taxes to close a $42 billion deficit through this July but was undone by the worst drop in personal income tax collection since the Great Depression.

That spurred a cash crisis for California’s government, forcing it to issue IOUs to preserve funds for priority bills, including debt payments to investors holding state bonds.

Schwarzenegger in late July signed a package of bills aimed at balancing the state’s books again by closing a budget gap of more than $24 billion, largely with spending cuts and some one-time moves while excluding tax increases.

But California’s revenue slump reopened budget shortfalls of roughly $6.6 billion for the remainder of this fiscal year and $13.3 billion in the fiscal year beginning in July.

Reporting by Ciara Linnane in New York and Jim Christie and Peter Henderson in California; Editing by James Dalgleish