Gov. Terry Branstad last week laid off 850 employees and said more reductions will be forthcoming in order to keep the state budget balanced.

Dick Vohs, a spokesman for the governor, said the initial reduction from the 42,000-worker state payroll should save about $20 million this fiscal year, and the upcoming layoffs would save $27 million.

The American Federation of State, County and Municipal Employees has filed a lawsuit challenging the governor's veto of a state employee pay raise. The raise, included in the fiscal year 1992 budget that was passed in May by the Legislature but was vetoed by the governor, amounts to about $47 million, Mr. Vohs said.

The union sued the governor in June, citing an arbitrator's ruling. Mr. Vohs said the administration's position is that an arbitrator cannot force the governor to include such raises in the state budget.

Donald McKee, state AFSCME president, said that in addition to the lawsuit, the union would work with laid-off employees to file grievances with the state employee relations board, seeking reinstatement on the ground that their layoffs were politically motivated.

The layoffs came in the wake of $104 million in across-the-board cuts that Gov. Branstad made from the budget July 1, the day the new fiscal year began.

The governor said state revenue estimates had declined by $104 million between the time the Legislature passed the budget and when it took effect.

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