* Officials say budget won't impede firefighting
* Fire costs could cause other budget strains
* Prison release program could be firefighting problem
SAN FRANCISCO, Sept 1 (Reuters) - California's wildfires are burning through state cash at an alarming rate, with the government spending more than half its annual firefighting budget just two months into the fiscal year -- even before the traditional fire season began on Tuesday.
The state's ballooning budget deficit and sharp drop in revenues resulting from the recession have forced delays in replacing aging firefighting equipment, including 40-year-old bulldozers.
The firefighting effort could face new strains if the prison system, also trying to cut costs, releases 27,000 or more low-risk inmates -- the type the firefighting agency depends on for cheap, abundant labor.
Last year's emergency fire costs were close to $500 million. Wildfires this year have already cost the state $106 million of its $182 million emergency firefighting budget. The agency therefore expects to have to tap a $500 million state reserve, funded primarily through cuts in social services.
Crews battled on Tuesday to contain a 190-square-mile (492-square-km) blaze barely a dozen miles (19 km) north of downtown Los Angeles that has cost $14 million to fight in its first week. It is forecast to burn for two more weeks.
With the tinder-dry state's third year of drought and reservoirs far below average levels, California faces another potentially catastrophic wildfire season.
Governor Arnold Schwarzenegger has made fighting fires a priority despite crippling budget problems in America's most populous state linked to the housing industry meltdown and national recession.
"The bottom line is we will take whatever actions are necessary to ensure the budget will never be an obstacle to put crews on these wildfires," said Schwarzenegger finance spokesman H.D. Palmer.
That could also hasten plans to revise the state's fragile budget, now scheduled for January. State lawmakers agreed this year on closing a $60 billion, 18-month budget deficit. Their plan involved a wide array of spending cuts.
"If there is action that needs to be taken prior to January, we'll take it," Palmer said.
PRISONER RELEASE A PROBLEM
The state cut the firefighting equipment budget by $17 million in July. Fire engines, bulldozers and transport vehicle purchases will be pushed back a year, but the replacement cycles already have been stretched -- some bulldozers have been operating for 40 years.
The state tried to save money by canceling a $7 million annual contract for a DC-10 firefighting aircraft, but the recent fires led it to sign an emergency $4.6 million contract for the plane that only lasts until November.
The successful effort to close the budget deficit through statewide cuts may also boomerang in terms of fire costs if the prisoner release plan goes ahead.
"Any release of inmates will have a direct impact on our ability to suppress fires," said fire agency spokeswoman Alisha Herring, who added that state officials were working on ways to fill any gap.
Agencies are scrambling to decide what to do about prison releases. Inmates collectively did 3.1 million hours of emergency firefighting last year at $1 an hour.
"I guess they'll have to lower their standards," joked Chris Bowling, 38, an inmate from a Northern California camp, who is fighting the Los Angeles-area fire.
He is eligible for early release due to the budget cuts and is cutting his sentence with his firefighting work. (Additional reporting by Steve Gorman in Los Angeles; Editing by Mary Milliken and Peter Cooney)
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