Gov. Arnold Schwarzenegger will propose ending furloughs for state workers at the end of June but seek permanent pay cuts and higher employee retirement contributions in their place, administration officials said Thursday.

Those two measures, which require legislative approval, would equal a 10 percent cut in gross pay, compared with a 14 percent reduction that state workers now face with three monthly furlough days. State employees would resume a full workweek in July.

Schwarzenegger will ask the Legislature to approve those changes as part of his budget proposal today, which is a "Furlough Friday" for state workers. His plan seeks to close a $19.9 billion deficit over the next 18 months. The Republican governor plans to propose an $82.9 billion general fund spending plan for 2010-11, according to a Department of Finance chart.

Schwarzenegger's office has decided to move away from furloughs when the fiscal year ends June 30 because it believes the state cannot justify their use as an emergency measure beyond that point.

Labor unions believe the furloughs already are illegal and have filed two dozen lawsuits since they began last February. Service Employees International Union Local 1000, which represents 95,000 state workers, and two other unions won a decision in Alameda Superior Court last week. Schwarzenegger has won other cases, however, and plans to appeal the Alameda decisions.

The governor's latest plan seeks a 5 percent pay cut and an added employee pension contribution - equal to 5 percent of salary - starting July 1.

Schwarzenegger also plans to issue an executive order asking state departments to slash personnel costs by an additional 5 percent in July, installing a payroll cap. Department chiefs will have flexibility to determine how best to do that, including layoffs, attrition or hiring cheaper employees.

State workers who have not reached the top of their pay scale would remain eligible for annual merit raises after the pay cut takes effect.

The changes would affect about 200,000 state workers, including positions paid solely by "special" revenue streams outside the general fund. The administration has said the state needs special-fund savings to help preserve its overall cash flow. It also believes most state workers are paid from a blend of special funds and general funds.

In addition, the governor will propose renegotiating contracts for state employee health care to save $152 million, a move that could increase premium costs or reduce benefits for workers.

All told, the governor's employee compensation proposal would save $1.6 billion in the next fiscal year.

"It's hard to say what's better or worse," said Bruce Blanning, executive director of the Professional Engineers in California Government, when asked to compare the new plan with the current furloughs. "If the governor wants the Legislature to unilaterally impose a pay cut and increase employee pension costs without going to the bargaining table, it'd be a problem for us."

The administration believes the Legislature could enact the pay cut and higher retirement contribution on its own and without union negotiations. Blanning said he believes imposing the changes without union bargaining would violate state law.

Democrats approved a budget plan last year that relied upon three furlough days a month, but they have increasingly voiced opposition to state worker cuts and are likely to fight the governor's latest plan. It is unclear what Schwarzenegger will do if the Legislature rejects his new state worker proposal, but his office has threatened in the past to seek unilateral layoffs to save money if need be.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, called the furlough elimination a "positive step." But he said Schwarzenegger must negotiate any wage cuts or increased retirement costs with the unions. If Schwarzenegger ignores them, Steinberg said the Legislature will block his state worker cuts.

"No unilateral action," Steinberg said. "It not only violates the intent and the spirit of the law governing employment relations in California for public workers, but it also is shortsighted because the very people who aren't being brought to the table are the people with the most knowledge of where to save money."

Jeffrey Michael, director of the University of the Pacific's Business Forecasting Center, said furloughs have dampened the entire regional economy. "We've seen greater job losses in retail and restaurants and all sorts of discretionary spending, worse than we've seen in other areas of California."

Regardless of the legal issues, Michael said the governor had to question the effectiveness of maintaining furloughs for another year. Average Department of Motor Vehicles wait times stretched from 27 minutes to 45 minutes, according to a state Senate Office of Oversight and Outcomes report last year.