SACRAMENTO, California (Reuters) - California Governor Arnold Schwarzenegger proposed “draconian” spending cuts in his new state budget on Friday to help close a crippling shortfall of nearly $20 billion and warned new cash shortages loomed.

Arnold Schwarzenegger, governor of the state of California, gestures during a debate at the Climate Summit for Mayors at the Copenhagen City Hall December 16, 2009. REUTERS/Scanpix/Anders Debel Hansen

In his final budget, the Republican governor declared a fiscal emergency to add urgency to the state budget process after a legislative impasse in 2009 that lasted over 100 days in the midst of recession.

The budget aims to close a $19.9 billion deficit over the next year and a half, relying mostly on spending cuts of $8.5 billion, which the governor called “draconian,” and $6.9 billion in federal funds. The state will spend $82.9 billion in fiscal 2010-2011, beginning in July.

Under the cuts, more than 200,000 children will lose eligibility for health insurance. Prisoner health care, services for immigrants and in-home care, schools, and state aid to local public transportation would see funding slashed.

“There is simply no conceivable way to avoid more cuts and more pain,” said Schwarzenegger, in his last year in office as he is barred from seeking re-election due to term limits.

California, the largest economy of any U.S. state, is among those hardest hit by the housing crisis with one of the highest jobless rates of any U.S. state at 12.3 percent in December.

High unemployment has led to sharp drops in California’s personal income tax revenue. Other states are also clamoring for a new round of federal stimulus. Few fell to California’s level of desperation last year, when it issued IOUs.

Schwarzenegger also proposed state parks be funded through new oil drilling off the Santa Barbara coast, a controversial measure he previously put forward without success.

Failure to get federal funds would trigger $4.6 billion in additional cuts, including the outright elimination of the state’s main welfare program, its in-home health services and inmate rehabilitation services not mandated by courts, according the budget plan.

“You’ve got to be kidding,” said State Senate President Darrell Steinberg, describing the general reaction of Democrats to Schwarzenegger’s proposals.

NO NEW TAXES, CASH FLOW LOW

The governor ruled out raising taxes and called for “real reforms” to the state’s budget and tax systems.

“If you compare it to an intersection it’s like seeing people crashing into each other and never building a stop sign, never building a stoplight,” said Schwarzenegger, who has been frustrated in many previous efforts at institutional change.

He said the state will face cash challenges in March but can repay debt as scheduled in May and June. But by July, he sees “substantial cash challenges” without corrective action.

Investors found little comfort in the governor’s plan.

Tom Tarabicos of Wells Fargo Financial Advisors said the plan was another reason to steer clear of California’s debt. “You look at it and wonder how the heck they can remain investment grade,” he said.

“I just have a real strong feeling that there will be something bad happening,” he added. California has the lowest rated general obligation debt of any state, and debt markets did not react to the plan, the opening salvo in a long debate.

The budget must be approved by a two-thirds majority vote, a difficult requirement in a legislature with hardliners at both extremes of the political spectrum.

Democrats, who control the legislature, rebuked the governor for pushing for cuts in health and human services spending, saying they would be harsh and unnecessary and urged Schwarzenegger to consider increasing revenues.

“We intend to take a different approach,” Steinberg said.

“BIG PILE OF DENIAL”

Schwarzenegger, governor since 2003, also called again on the federal government to come to the rescue of the state by raising the amount Washington transfers back to California.

“Right now the federal government is forcing us to spend money we don’t have,” he said.

But Democrats, now in charge in Washington, said that relying on those funds coming through was “wishful thinking.”

“Typically he is threatening the legislature. Now he is threatening the president of the United States,” said outgoing state Assembly Speaker Karen Bass, adding that the budget plan amounted to “a big pile of denial.”

The American Federation of State and County Municipal Employees charged Schwarzenegger with seeking to impose “Third World austerity measures.”

Wheelchair-bound Christina Mills, 32, of Sacramento, California said disabled workers could not afford to have subsidies for assistants cut as the governor proposed.

“If they didn’t have home-care workers to help them get dressed in the morning, they wouldn’t be able to go to work.”

State Treasurer Bill Lockyer, a Democrat, urged the governor and lawmakers to balance the state’s budget quickly because the state needs to sell bonds to support public works.

“Thousands of infrastructure projects will be threatened with delay or closure if the state cannot reenter the bond market soon,” Lockyer said.