Gov. Arnold Schwarzenegger ordered Friday that state employees take two unpaid furlough days each month starting in February and that the least-tenured workers may face layoffs to save cash during the ongoing budget crisis, delivering a blow to Sacramento's government-oriented economy.

The Republican governor also renewed his fiscal emergency declaration and called for a new special legislative session, demanding that state lawmakers resolve a $40 billion budget gap by Christmas.

Schwarzenegger's fiscal missives provoked frustration among state workers and criticism from Democratic leaders who assailed him for rejecting their $18 billion budget plan Thursday. The governor tried to soften the blow by sending a blanket e-mail letter to 238,000 state workers, explaining that his emergency steps "will require sacrifices from everyone."

Unlike the once-monthly furlough plan Schwarzenegger pursued in November, the two-day measure does not require legislative approval and will take effect barring legal intervention. The governor believes he can now impose furloughs unilaterally because the state is in a fiscal emergency, according to an administration official.

Furloughs will have a significant impact on the Sacramento-area economy, said Jeffrey Michael, director of the Business Forecasting Center at the University of the Pacific. The state employs 73,536 workers in Sacramento County alone, including 63,818 full time.

Union officials consider the furlough plan equal to a 10 percent pay cut for workers. Managers and non-union employees will receive an equivalent 10 percent pay decrease starting the same day, Feb. 1.

In addition, the governor has instructed his Department of Personnel Administration to "initiate layoffs, reductions and other efficiencies" to reduce costs by 10 percent starting in February. To do so, he will give one-fifth of state employees – those with the least seniority – notices that they are at risk of being laid off, though it does not necessarily mean they will lose their jobs.

Those workers can retain their jobs for 120 days upon receiving a "surplus" notice within the next month. But they will be subject to layoff, demotion or transfer thereafter, said DPA spokeswoman Lynelle Jolley.

Schwarzenegger also prohibited state agencies from hiring contract workers as of Jan. 1.

Some state employees are exempt from the order because their entities fall outside the governor's authority, including the Legislature, the University of California and California State University. The governor asked them to take similar steps.

Schwarzenegger told public employees of his executive order in an e-mail that began, "Dear State Worker."

"Californians can be proud of the services you provide day in and day out, and I appreciate your dedication and work," he wrote. "But it is imperative that state government look inside itself and be part of the solution."

Service Employees International Union Local 1000 President Yvonne Walker said Friday she plans to file a legal complaint with the state Public Employment Relations Board charging the administration with engaging in an unfair labor practice. Her union represents 95,000 state workers.

"The situation is out of control," Walker said. "With the state's economy heading toward a cliff, Gov. Schwarzenegger has pushed the state's fiscal crisis into a catastrophe."

State workers filing out of their downtown Sacramento offices Friday afternoon were frustrated with the governor's announcement, especially its timing before the holidays.

"It's really a sad state of affairs that we have to resort to that kind of a pay cut," said Dawna Jones of Sacramento, an executive assistant for Cal-EPA. "On the other hand, I'm just very thankful that I have a job."

Richard Castle of Antelope, a research program specialist at the California Integrated Waste Management Board, lamented that one allure of state employment – job security – seems to be gone.

"I understand the budget constraints that we're under," Castle said. "It's frustrating that (we) always seem to be the first whack. The public always seems to think we're all overpaid and underworked. … But the reality is most people are making wages like they would with any other company."

State leaders face a $40 billion budget gap over the next 18 months, and California could run out of cash as soon as February unless lawmakers and the governor take steps to reduce the shortfall.

Though it provides some savings, the two-day furlough plan will not avert the cash problem next year, said Department of Finance spokesman H.D. Palmer. The plan will save $1.3 billion over 17 months.

Jolley said payroll represents roughly 17 percent of the state's expenditures; a rough estimate based on the current budget suggests the state could save about $2 billion annually by cutting 10 percent of jobs.

Schwarzenegger rejected the Legislature's $18 billion package Thursday because he said its economic aid was insufficient and it did not contain reasonable cuts and taxes. The governor criticized the Legislature in particular for a provision that the state must consult with labor unions before implementing furloughs.

Lawmakers have adjourned until Jan. 5, but Schwarzenegger reiterated his call that they return to Sacramento.

"I believe that we can solve this before Christmas," he said. "I hope that the Legislature stays in the building."

Democratic leaders said Friday they will wait to send the governor their approved budget package in hopes they can reach a compromise soon. They pinned the state's fiscal woes back on Schwarzenegger for refusing to sign their $18 billion proposal.

Assembly Speaker Karen Bass, D-Los Angeles, noted with some acidity that despite his comments, the governor was not in Sacramento today.

"He seems to think we need to be here all the time," Bass said. "Maybe he needs to be here and join us."

Michael, the economist, said doubling the furlough hit – to a 10 percent pay cut – will cause state workers to pull back even more from spending. "It certainly impacts discretionary spending," he said. "They're going to be thinking this weekend about whether they can go out to dinner or buy Christmas presents. Maybe they won't go skiing this year."

Schwarzenegger angered unions in late July when he signed an executive order that sought to reduce pay for about 200,000 state workers to the federal minimum wage of $6.55 per hour.

He said the move was necessary for the state to preserve cash in the midst of a protracted budget dispute. But unions filed lawsuits and state Controller John Chiang refused to implement the order, precipitating a legal battle that remains unresolved. As a practical matter, the issue became moot once the governor signed the state budget in late September.

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Call Kevin Yamamura, Bee Capitol Bureau, (916) 326-5548. The Bee's Steve Wiegand, Aurelio Rojas, Dan Smith and Jon Ortiz contributed to this report.

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