California budget: Jerry Brown's $12 billion in painful cuts

NEW YORK (CNNMoney) -- California Gov. Jerry Brown unveiled Monday a draconian budget plan that would slash $12.5 billion in spending and extend $12 billion in tax hikes.

The cuts would fall heavily on the state's neediest residents and on state workers. Some public employees would lose up to 10% of their take-home pay and the state's Medicaid and welfare programs would see a $3.2 billion drop in funding.

Brown, who assumed office a week ago, has to contend with a $25.4 billion shortfall over the next 18 months. California's fiscal year starts July 1.

"These cuts will be painful, requiring sacrifice from every sector of the state, but we have no choice," said Brown. "For 10 years, we've had budget gimmicks and tricks that pushed us deep into debt. We must now return California to fiscal responsibility and get our state on the road to economic recovery and job growth."

The governor's plan also calls for extending 2009 tax hikes for another five years. The levies include a quarter-point increase in personal income taxes, which expired at the end of last year, as well as a 1 percentage point jump in sales taxes and an increase in the vehicle licensing fee, which expire June 30.

Brown wants to hold a special election in June to give voters their say on the tax increases. If they don't approve the hikes, the cuts would have to be even deeper, he warned.

But the package must also get past state lawmakers, who will likely make changes. Brown's predecessor, Arnold Schwarzenegger, and the legislature battled for months before adopting last year's budget in the fall.

Brown said his plan won't touch funding for K-12 education, which he said has suffered repeated cuts in recent years, and would put $1 billion into a rainy day fund. It would also protect public safety.

But the University of California and the California State University systems would each lose $500 million, and funding for the Department of Developmental Services, which assists those with disabilities, would be slashed by $750 million. Brown also plans to trim government operations by $200 million.

And the state would save $308 million by reducing the pay of unionized state workers not currently covered by contracts by up to 10%. Other unionized employees had their pay cut by that amount in 2010.

The budget contains something not to like for nearly all California residents.

Among the cuts:

• State parks with the lowest attendance would be shut, while the hours would be cut back at other facilities.
• Local libraries would lose $30.4 million in funding.
• Medicaid patients would have to pay $5 for services under the Medi-Cal program.
• Needy families would receive cash grants under the CalWorks program for 48 months, down from 60 months.
• The elderly would lose some services provided by the state's in-home care program.
• Cal State students would pay an additional $654 in fees, while University of California students will see fees rise by $822.

On Friday, Brown outlined $7 million in savings from the consolidation or elimination of various state offices. Among other cuts, Brown is slashing his own office's spending by 25% or $4.5 million. This includes getting rid of the Office of the First Lady, though he named his wife, Anne Gust Brown, as an unpaid adviser. He is also eliminating an education advisory office that cost $1.9 million a year.

California has endured a decade of spending cuts, said Jean Ross, executive director of the California Budget Project, a fiscal and policy analysis group.

The state's fiscal troubles largely stem from its heavy reliance on personal income taxes. This revenue stream dries up when recessions hit and unemployment soars.

During the recession, then-Gov. Schwarzenegger made severe reductions to state-supported programs, including education and services for low-income residents, even though demand for these services were rising. The state issued IOUs for several months in 2009 after it ran short of money to issue tax refunds and pay vendors.

As a result of repeated budget cuts, school districts laid off teachers and consolidated classrooms. Universities hiked fees, setting off student protests across the state. Low-income adults lost dental care under the state's Medicaid program. And state workers lost three days of pay a month under a furlough program.

The new round of spending reductions could prove even tougher on the needy. At a time when jobs remain scarce, they would lose cash assistance and have to pay more for child care and health services.

"The families and children that depend on these programs would be hit yet again by deep reductions in service," Ross said.

But California simply doesn't have the money to pay for all the services it once did, said Jerry Nickelsburg, senior economist with the UCLA Anderson Forecast, which monitors California's and the national economies.

"The balancing of the budget needed to be done," said Nickelsburg. "But on the other hand, it will be painful all across the public services the state provides. It's up to the voters to determine how much pain to endure."