Smaller paychecks beat reams of pink slips, California public employee unions are concluding in contract talks with local governments facing budget gaps requiring deep spending cuts.

Even in liberal San Francisco, labor's public-sector wing has been thrown on the defensive in contract negotiations amid weak revenue collected by the city as California's economy struggles to recover from its deep slump.

Last week, San Francisco Mayor Gavin Newsom unveiled a $6.48 billion budget plan for the city's next fiscal year that closed a shortfall of $482.7 million -- a feat he said was made possible in no small part by major financial concessions by city workers.

"It may be counterintuitive with some people's perceptions of labor in San Francisco," Newsom told Reuters Friday.

Savings from union concessions, including for many city employees the equivalent of nearly 5 percent wage cuts for the next two fiscal years, will be considerable, Newsom said:

"North of a quarter of a billion dollars."

Along with other compromises, including furloughs and some outsourcing, massive layoffs will be averted, Newsom added.

Greg Wagner, Newsom's budget director, noted the scale of layoffs that had been in the works for San Francisco's employees had they walked away from the bargaining table.

"We were looking at layoffs in the thousands. Now we're looking at layoffs in the hundreds," Wagner said.

Rod Gould, city manager of Santa Monica, California, expects three to four more lean years for local governments across the state, leaving public-sector unions little leverage in contract talks.

"Big city, small city, rich city, poor city, negotiations are occurring in ways they haven't in 20, 30 years," Gould said. "Cities are coming to the table with nothing to give or with little to give and asking for something back."

NEARING THE EDGE

In addition to forcing massive layoffs, obstinate unions could force local governments over the financial brink and into bankruptcy like Vallejo, California, which made headlines two years ago by taking that dramatic step, a stigma with municipal bond investors and credit rating agencies.

Bankruptcy, however, has helped Vallejo rein in compensation and benefits for its unionized employees, especially those in its public safety units, where paychecks were well above the state average.

Since Vallejo's bankruptcy proceedings began, three of four city public employee unions have agreed to reduced compensation and benefits.

The unions would have been better off negotiating out of court than leaving important city financial decisions to a bankruptcy judge, said Marc Levinson, a partner in Orrick, Herrington & Sutcliffe LLP, who represents the city.

"You can always cut a better deal for yourself than letting a court do it," Levinson said. "The judge never cares about you as much as you do."

FEELING THE SQUEEZE

Teachers in Elk Grove, California, learned that lesson well. Eighty-nine percent of their 3,000-member-strong union last week backed a difficult contract to keep their school district afloat -- and to preserve their numbers.

The two-year agreement included pay cuts, nine furlough days for each year of the agreement, suspension of an annual bonus and higher medical co-payments.

"It wasn't in our interest to bankrupt the district," said Tom Gardner, president of the teachers union for northern California's largest public school district. "We felt it was really necessary to make some concessions."

In exchange, Elk Grove Unified School District shelved plans to lay off more than 210 teachers, librarians and counselors, and it expects to save $10 million in each year of the contract to help close a budget gap of $60.5 million, spokeswoman Elizabeth Graswich said.

At the state level, Governor Arnold Schwarzenegger is seizing on California's fiscal woes -- centered on a $19.1 billion budget shortfall -- to press for contract concessions from state employee bargaining units.

Among the concessions he is seeking are changes to pension packages to reduce their costs at the same time that he is demanding lawmakers roll back pension benefits for new state workers, a 5 percent increase in employee pension contributions, and the recalculation of pension payments.

In a letter to the state Senate's president last week, Schwarzenegger said, as he did in presenting his revised state budget plan in May, that he would not sign a state budget unless the Legislature overhauls the state's pension system.