SAN FRANCISCO - CALIFORNIA Governor Arnold Schwarzenegger declared a fiscal emergency on Friday, allowing him to call lawmakers into another special session to tackle the state's weakening finances, which include a US$40 billion (S$58.4 billion) budget shortfall over the current and next fiscal years.

California's Democrat-led legislature concluded its prior special session on Thursday by approving an US$18 billion budget package.

Mr Schwarzenegger, a Republican, said he would veto the package because he wants lawmakers to both address the state's budget gap and ease regulations to speed construction projects to help stimulate the state's economy.

Assembly Speaker Karen Bass said the Democrats' package would have provided for US$3 billion in revenues for transportation projects, accelerated US$3 billion in bonds for transportation projects and made it easier for hospital construction and expansion projects to move forward.

The dispute over which approach would better boost California's ailing economy, underscored by its 8.4 per cent unemployment rate last month, comes on the heels of a decision on Wednesday by the state's Pooled Money Investment Board to halt US$3.8 billion in loans for public works.

The state government, on track to run out of cash in February, needs funds from the Pooled Money Investment Board to pay for vital services. The board's action affects almost 2,000 projects, including highways, schools, levees, housing and parks.

The legislature now has 45 days to pass and send a bill or bills addressing the state budget to Mr Schwarzenegger. -- REUTERS