Controller joins unions in lawsuit challenging Schwarzenegger

State Controller John Chiang has refused to execute an order by Gov. Arnold Schwarzenegger to force state workers to take two days off without pay each month, siding with two unions that filed a lawsuit challenging the move.

Schwarzenegger, a Republican, issued the order in December to save money, and Chiang’s office has said he was ready to implement it. The state is expected to run out of cash early next month.

But in a brief filed Tuesday in Sacramento County Superior Court and in conversations with the governor’s office Wednesday, aides to the controller, who is an independently elected Democrat, said he believes the state Constitution permits only lawmakers to adjust salaries.

The governor’s office estimates that the furloughs would amount to a 9% pay cut.

Chiang is a defendant with Schwarzenegger in the suit by the Professional Engineers in California Government and the California Assn. of Professional Scientists. But he nonetheless agreed with the unions, both of whom have supported him politically.

In a statement, Chiang said Schwarzenegger should emulate past governors who have obtained concessions from state employee unions during tough times rather than impose them.

“Rather than using an unlawful executive fiat, they did so in accordance with the law by negotiating at the bargaining table and through the legislative process,” Chiang said. “I urge the governor and organized labor to follow that path to help the state through this fiscal crisis. I am confident that state employees, like all Californians, will find ways to tighten their belts.”

One state union, Service Employees International Union Local 1000, is negotiating voluntary furloughs and other concessions as part of contract talks with the Schwarzenegger administration, a union spokesman said.

The governor’s office says its forced furloughs would affect 238,000 employees and save $1.3 billion through June 30, 2010. Schwarzenegger, who has declared a state of emergency, has also ordered agencies to get ready for layoffs, and officials are preparing to delay tax refunds and issue IOUs to deal with the crisis.

Schwarzenegger and legislative leaders are expected to meet for budget negotiations today for the first time since Friday. The Democratic leaders of the state Senate and Assembly remained in Washington on Wednesday, a day after attending the inauguration of President Obama. Schwarzenegger, who returned from the inauguration Tuesday, was in Los Angeles.

Matt David, a spokesman for the governor, said that unless Chiang has concluded that the state doesn’t face a cash shortfall, “he made a politically calculated decision to follow his special interest donors” in refusing to implement the furloughs. “And I think there would be consensus by everyone in the state that we face a cash shortage,” David said.

The two unions have contributed $28,200 to Chiang’s campaign accounts since 2006, state records show.

Political contributions from the unions “would have no bearing on his decision to not implement an order that he believes is illegal,” said Chiang spokeswoman Hallye Jordan.

She said the controller does not want to implement the governor’s plan because if a judge overturns it, the state could later have to repay employees for time they did not work.

A hearing on the case is scheduled for Jan. 29.

Meanwhile, the state’s fiscal quandary prompted Moody’s Investors Service to issue a notice of a potential downgrade of the state’s credit rating. California is tied with Louisiana for the worst credit rating of any state, and a downgrade would put it alone at the bottom and reduce the value of state bonds for investors who hold them.

The rating agency cited the state’s dwindling supply of cash, the possibility that lawmakers and the governor may not figure out a legitimate way to plug the budget gap by the beginning of next month, and the limited options the state will have to handle future difficulties because it has already borrowed heavily.

“This is more evidence of how urgently our state needs its legislators to act to resolve our fiscal emergency,” said Mike Genest, Schwarzenegger’s finance director.

In a conference call with reporters Wednesday, Senate President Pro Tem Darrell Steinberg (D-Sacramento) and Assembly Speaker Karen Bass (D-Los Angeles) were asked why they had not yet returned to the Capitol to resume talks.

They defended their decision to stay in Washington, saying they had been able to meet with California’s two U.S. senators and most Democratic members of the state’s congressional delegation to discuss the federal economic stimulus plan proposed by Obama.

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michael.rothfeld@latimes.com

patrick.mcgreevy@latimes.com

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Times staff writers Marc Lifsher and Tom Petruno contributed to this report.