Schwarzenegger Declares Fiscal Crisis

Arnold Schwarzenegger, the new governor of California, last night declared a fiscal crisis and invoked emergency powers for unilateral spending cuts.

"I was elected by the people of this state to lead. Since the legislative leadership refuses to act, I will act without them," the actor-turned-politician said at a news conference.

The $150m (£84.7m) in cuts, largely in social services, will free up money for city and county governments that have lost more than $300m since the Republican governor reversed an unpopular increase of the state's car tax.

The cuts include a 0.5% decrease in funding for the University of California and California State University systems, closing a migrant farmworker housing centre, less money for the department of motor vehicles and a $91m reduction in programmes to help people on benefits to return to work.

Although some Democrats questioned the legality of Mr Schwarzenegger's move, the Democratic state controller, Steve Westly, supported the idea.

"Our police officers and firefighters must not be held hostage," Mr Westly said. "This is an appropriate but temporary solution. The governor and the legislature now have six months to cut waste and solve California's fiscal crisis."

Many mayors, dependent on the state money, also back the move. Jerry Brown, the mayor of Oakland and a former Democratic presidential candidate, was one of them.

"The legislature gave the governor the power to make the cuts and he made the move," Mr Brown said. "The risk to police and fire is not a joke, it is deadly serious."

The crisis was self-inflicted as one of Mr Schwarzenegger's first moves since becoming governor was to fulfil a campaign pledge to repeal a tripling of vehicle license fees. The increase in car tax was introduced by Mr Schwarzenegger's unpopular Democratic predecessor, Gray Davis, who was thrown out in a recall election largely on charges of economic incompetence.

But in repealing the car tax increase, Mr Schwarzenegger has to make up for some $4bn in revenues the tax would have generated to pay for services such as fire and police departments and parks.

Mr Schwarzenegger has proposed that the money be made up by combining some of the $1.9bn in midyear cuts he has already requested with a windfall of $1.8bn in revenue that the state expects to receive by June as a result of the improving economy.

California's economic woes deepened yesterday when another credit agency lowered the state's bond rating - already the lowest of the 50 states - to just above junk bond status. The latest downgrading will immediately add $55m to the price of short-term loans the state secured to remain solvent through June.

California, which has the equivalent of the world's eighth largest economy, faces a deficit of between $12bn and $24bn by the middle of 2005 unless the state reins in spending. The state's total budget for this fiscal year is $99bn.