Gov. Arnold Schwarzenegger plans to save $1.6 billion in state employee costs by extending monthly furloughs past June, laying off staff or shifting general fund workers into state jobs financed by other revenues, according to sources familiar with the governor’s forthcoming budget proposal.

Schwarzenegger and lawmakers must eliminate an estimated $20.7 billion general fund budget deficit over the next 18 months. The governor already has dismissed higher taxes as an option after temporarily raising them in February. Instead, he hopes to rely on spending cuts, a massive infusion of federal aid and creative ways of reassigning revenues to cover the gap.

The Republican governor is hoping for about $8 billion in cash from the federal government beyond stimulus funds that the state already will receive, sources said. He sent a letter to Congress on Tuesday warning that without additional cash, the state might be forced to eliminate in-home care for low-income disabled and elderly Californians, and to slash Medi-Cal coverage for hundreds of thousands of poor residents.

The governor is considering whether to seek a federal waiver to cut school funding below what stimulus guidelines allow, according to an education advocate familiar with his budget preparations. K-14 education makes up roughly 40 percent of the general fund budget. Such a move likely would touch off a fierce response from teachers’ unions and other education groups, which contend that the governor can’t cut schools any further.

Schwarzenegger ordered 200,000 state workers to take two furlough days each month starting last February and three per month starting in July to save $2.4 billion, including $1.4 billion in general fund dollars for the fiscal year that ends June 30. Under the governor’s new budget proposal, furloughs could continue beyond the scheduled end date of June 2010.

Schwarzenegger communications director Matt David had no comment on the governor’s plan. Labor unions already have filed two dozen lawsuits challenging the furloughs, and they vowed to fight any extension.

“It’s no shock that he would want to continue what he did, but we continue to believe as we argue in court that the furloughs are illegal,” said Bruce Blanning, executive director of the Professional Engineers in California Government, which represents 13,000 state engineers and construction professionals.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, said he hopes to curtail furlough days after a year in which state workers lost roughly 14 percent of their income. He suggested the state could find new revenues by requiring independent contractors to withhold taxes, a change presumed to capture more money because the state believes some contractors avoid paying their fair share.

Rather than use furloughs, Steinberg said the state should ask departments to save money by reducing contract work and administrative costs.

“I believe strongly that these furloughs at a minimum need to be cut back,” Steinberg said. “Three days is way too much.”

Although Schwarzenegger threatened layoffs this past year, few state workers have actually lost jobs. The governor issued 28,000 layoff warnings in February to workers with the least service time. The notices expired after 120 days, and the administration did not follow through with mass layoffs.

In May and June, the governor sent layoff warnings to a total of 7,000 employees in general fund departments. Several thousand workers moved to more secure state jobs paid with special funds, and the state avoided sweeping layoffs.

But 2010 could be different. Last fall, the Department of Corrections and Rehabilitation gave termination notices to about 800 of its 1,400 prison teachers, and those layoffs kick in next month.

Schwarzenegger plans to release his budget proposal on Jan. 8. The governor’s plan will rely on as much as $8 billion from the federal government. If California does not receive that money, the state would consider eliminating at least three safety net programs – CalWORKs, Healthy Families and In-Home Supportive Services, according to a Capitol source.

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