Controller says he won't cut workers' wages CALIFORNIA'S FISCAL STALEMATE Controller says he'll refuse to comply with plan to slash state workers' pay - legal fight looms

Marcos Arbello, 34, of Kentfield, Calif., works on cutting trees in Miwok Meadows inside China Camp on July 24, 2008 in San Rafael, Calif. Arbello is a seasonal parks employee and might be laid off under the governor's plan to cut state expenses in the midst of the summer budget impasse. Photo by Kurt Rogers / The Chronicle less Marcos Arbello, 34, of Kentfield, Calif., works on cutting trees in Miwok Meadows inside China Camp on July 24, 2008 in San Rafael, Calif. Arbello is a seasonal parks employee and might be laid off under the ... more Photo: Kurt Rogers, The Chronicle Photo: Kurt Rogers, The Chronicle Image 1 of / 4 Caption Close Controller says he won't cut workers' wages 1 / 4 Back to Gallery

Gov. Arnold Schwarzenegger's bombshell plan to slash the pay of state workers and lay off thousands of other employees to ease a looming cash shortage brought on by the state's budget impasse faces the same obstacle that arose five years ago during a state fiscal crisis: a state controller unwilling to cooperate.

While the governor is poised to order the cuts on Monday, state Controller John Chiang, who is responsible for disbursing state workers' paychecks, said Thursday that he will refuse to go along with the governor, setting up a political standoff and a possible legal fight.

"The authority to issue people's paychecks is mine. I have both constitutional and statutory authority," said Chiang, a Democrat. "Frankly, (the governor) is just trying to make me do something that's improper and illegal."

But the Republican administration maintained that Schwarzenegger has the legal right to invoke such a controversial plan, under which the pay of about 200,000 state workers would be reduced to the federal minimum wage of $6.55 an hour. Once a new budget is passed, the workers' pay would be restored along with back wages.

"We are on firm legal standing," said Aaron McLear, a spokesman for the governor. "But if (the controller) wants to challenge the state Constitution and a state Supreme Court decision, he has the right to do that."

The dispute over state employee wages is a replay of 2003, when the state Supreme Court issued a precedent-setting ruling during a budget impasse on the watch of Gov. Gray Davis that left some questions unanswered.

In a unanimous decision stemming from a 1998 lawsuit by the Howard Jarvis Taxpayers Association, the court said state workers who are paid by the hour and don't work overtime in a particular pay period are legally entitled only to the federal minimum wage if the state enters a new fiscal year without a budget.

But the 2003 court decision didn't resolve the argument raised by the state controller at the time, Steve Westly - reiterated Thursday by Chiang - that the controller's office has the authority to continue paying all state employees in full even without a budget because of a series of obstacles to temporarily reducing their wages.

Westly continued paying the employees in full until Davis signed the new budget on Aug. 2 of that year.

Besides cutting workers' pay, Schwarzenegger's proposal would lay off nearly 22,000 temporary, seasonal and student workers. He also wants to stop all overtime pay and impose a hiring freeze.

Lisa Paige, a spokeswoman for Schwarzenegger, said agency secretaries are reviewing how their workers would be affected, adding that the governor's plan won't jeopardize critical areas of state government.

At the heart of the governor's proposal is the ongoing budget impasse, which has resulted in California beginning a new fiscal year on July 1 without a spending plan in place. Schwarzenegger and lawmakers in the Democratic-controlled Legislature have not agreed on how to close a $17.2 billion budget gap, which would include $2 billion in cash reserves.

To make matters worse, the state may face a cash shortage by September if a budget is not in place, which is one of the reasons Schwarzenegger wants to push legislative leaders into quickly finding a budget compromise.

But the governor's order also underscores his desire to push the Legislature to approve his budget reform ideas - and his plan to borrow against future lottery revenue to help solve California's budget woes - for the November ballot.

In a letter to Schwarzenegger on Wednesday, Secretary of State Debra Bowen said the deadline for new measures to be placed on the supplemental ballot for the November general election is Aug. 16.

Schwarzenegger's budget proposal includes borrowing against future state lottery sales and reforms such as a large rainy-day fund, a spending cap based on previous decades' revenues and automatic mid-year spending cuts that the governor could invoke by declaring a fiscal crisis.

All four plans would require voter approval.

Republicans have demanded budget reforms of their own that include a rainy-day fund and limits on spending. Democrats, meanwhile, have been less enthused about such ideas and have proposed a nearly $10 billion tax package to help solve the budget deficit.

"I understand what the governor wants and why he wants it in terms of the rainy-day fund, and I'm not opposed to that," said state Senate President Pro Tem Don Perata, D-Oakland, who has scheduled a Senate floor session on Tuesday to vote on the budget. "But we're not going to give away the responsibilities of the Legislature to make appropriations."

While there is no deal in sight, Perata said Thursday that the budget he will put up for a vote will include a rainy-day fund, taxes and cuts in spending.

But Perata also criticized the governor for his plans for state worker pay cuts and layoffs, adding that such proposals don't help during tough budget negotiations.

"I find it perplexing. It's gratuitous," he said. "If you're trying to bring people together, this is not the way to do it."

Assembly Speaker Karen Bass, D-Baldwin Vista (Los Angeles County), called Schwarzenegger's plans draconian and vowed to work with Chiang in his decision not to reduce state workers' pay.

But Republicans argued that the governor's proposals are unfortunate realities for a state whose spending has been out of control.

"The state is running out of money. That is no bluff. That is mathematical fact," said state Sen. Tom McClintock, R-Thousand Oaks (Ventura County). "I wish (the governor) sounded this alarm a year or two years ago. If we had addressed this earlier, we wouldn't be in this mess."

Assemblyman Chuck DeVore, R-Irvine, agreed.

"We've run out of options. This is clearly inevitable. It's the unfortunate consequence of all these years of overspending and the system is finally grinding to a halt because it's unsustainable."