Michael Genest, Schwarzenegger's finance director, said the executive order was needed because cash in the state's accounts threatens to dip so low by the end of September that reserves could run out and the state's checks could bounce.
The state also hopes to avoid an expensive type of short-term borrowing that it would be forced to use because it has no budget, were it to need a quick infusion of cash.
Genest said the layoffs could save the state up to $100 million a month. The pay cuts could temporarily save $1.2 billion a month if they were applied to all 200,000 workers subject to federal labor laws.
But many are expected to be declared exempt because they must work overtime for the state police, in prisons, in healthcare or in similar jobs. The governor gave agency secretaries until Friday to produce a list of exempt employees.
Elected officials and their appointees have had their salaries withheld since July 1, because Chiang cannot pay them without a budget in place; many are receiving loans with little or no interest from local banks in the interim.
The dispute between the governor and the controller is over the interpretation of the state Supreme Court's decision five years ago in White vs. Davis. The governor says that under the decision, when a budget has not been approved the controller has the authority to pay only the federal minimum wage to employees covered by federal labor laws. Only those who earn overtime can be paid their full salaries, the governor argues.
Chiang contends that although he is permitted to pay the minimum wage during a budget impasse, he is also allowed to pay an employee's full salary. Even if he wanted to comply, Chiang said, it would take 10 months to configure his agency's outdated computer systems to do what the governor is asking.
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michael.rothfeld@latimes.com
Times staff writers Nancy Vogel, Patrick McGreevy and Joanna Lin contributed to this report.
