Jerry Brown promised Californians a "painful" but honest budget proposal
He said the year ahead would "demand courage and sacrifice" if California was to overcome its fiscal problems.
Among his first tasks will be to present a new budget plan.
The state faces a $28bn (£18bn) budget shortfall over the next 18 months.
Voters may be asked to agree to the extension of temporary taxes that were brought in in 2009 and are due to expire in July.
Mr Brown, 72, will need the backing of some Republicans in the state legislature if he is to put any tax measures to voters.
While vowing to tackle waste in government, Mr Brown pointed out that government spending on services would also have to be scrutinised.
He promised to be truthful about the state's finances, saying there would be "no more smoke and mirrors", to put any proposed tax rises before voters and to return more powers to local bodies.
"The budget I present next week will be painful but it will be an honest budget," he said.
Mr Brown defeated billionaire Republican candidate Meg Whitman in the November US mid-term elections to win office.
When he last held the governorship, Mr Brown became known as "Governor Moonbeam" for what were then viewed by some as outlandish ideas.
In the intervening years he twice pursued the Democratic nomination for president, campaigned for the US Senate and most recently served as state attorney general.
Mr Schwarzenegger, a Republican, leaves after seven years at the helm of the country's most populous state.
The 63-year-old former action movie star, best known for his role in the Terminator films, has not yet confirmed what he plans to do next.
He was not eligible to run for governor again because of term limits.
Jerry Brown has been sworn in as the new governor of the US state of California, taking over from the departing Arnold Schwarzenegger.
Mr Brown, a Democrat who also served as California's governor from 1975 to 1983, will be only the second person to lead the state for three terms.He said the year ahead would "demand courage and sacrifice" if California was to overcome its fiscal problems.
Among his first tasks will be to present a new budget plan.
The state faces a $28bn (£18bn) budget shortfall over the next 18 months.
Voters may be asked to agree to the extension of temporary taxes that were brought in in 2009 and are due to expire in July.
Mr Brown, 72, will need the backing of some Republicans in the state legislature if he is to put any tax measures to voters.
Speaking at his inauguration ceremony in the state capital, Sacramento, Mr Brown urged the state's politicians to "rise above ideology" to take the action needed for the good of the state.
"There's no other way forward in this crisis. We simply have to learn to work together as Californians first and members of a political party second," he said.While vowing to tackle waste in government, Mr Brown pointed out that government spending on services would also have to be scrutinised.
He promised to be truthful about the state's finances, saying there would be "no more smoke and mirrors", to put any proposed tax rises before voters and to return more powers to local bodies.
"The budget I present next week will be painful but it will be an honest budget," he said.
Mr Brown defeated billionaire Republican candidate Meg Whitman in the November US mid-term elections to win office.
When he last held the governorship, Mr Brown became known as "Governor Moonbeam" for what were then viewed by some as outlandish ideas.
In the intervening years he twice pursued the Democratic nomination for president, campaigned for the US Senate and most recently served as state attorney general.
Mr Schwarzenegger, a Republican, leaves after seven years at the helm of the country's most populous state.
The 63-year-old former action movie star, best known for his role in the Terminator films, has not yet confirmed what he plans to do next.
He was not eligible to run for governor again because of term limits.
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