Gov. Arnold Schwarzenegger plans to sign an executive order next week intended to temporarily reduce pay for 200,000 state workers to the federal minimum wage of $6.55 per hour to preserve cash until lawmakers reach a budget deal, according to a draft copy of the order obtained by The Bee.

The governor's order also would terminate about 22,000 retired annuitants, temporary workers and seasonal employees, as well as impose a hard freeze that blocks the hiring of roughly 1,700 new employees per month.

Administration officials said the Republican governor expects to take the action Monday, when the budget will be four weeks late as Democrats and Republicans continue to spar over how to resolve a $15.2 billion shortfall.

"The administration is looking into many different options to preserve cash to ensure we have enough to cover our costs," said Matt David, Schwarzenegger's communications director.

But a spokeswoman for Democratic state Controller John Chiang, who pays the state's bills, said he would ignore the governor's order and continue paying full salary, likely forcing a court battle.

"He will pay state workers the salaries that they have earned, and that's full salary," Deputy Controller Hallye Jordan said of Chiang.

The order would take effect for the August pay period and envisions that state workers would receive their back pay in full when a budget is signed. State workers who get paid once at the end of the month still will receive their July paychecks next week.

The move would save roughly $1 billion in cash per month, depending on how many employees are exempt under federal law because they work in health and safety fields, according to Schwarzenegger officials. Each state department head will be responsible for determining which employees are exempt under federal law.

Available cash in dispute

Word of Schwarzenegger's pending order had circulated through the vast state Corrections and Rehabilitation offices on S Street by the time workers headed home Wednesday afternoon. Several gathered at the nearby 16th Street light-rail station, shaking their heads.

Corrections employee Vicki Rhodes said the governor is "crazy" to think about cutting workers' wages and predicted that the strategy could backfire.

"I guess people will start working on Monday like they're making $6.55 an hour," she said.

Janis Rose, another corrections worker, said Schwarzenegger is posturing and ultimately won't be able to legally cut her pay. "It's utterly ridiculous," she said. "He's acting – and not very well."

The governor believes that without a budget the state could run out of money by mid-September because of a soft economy and low reserves, officials said. Given the state's low credit rating, borrowing from Wall Street without a budget could cost the state hundreds of millions of dollars in interest.

But Chiang, in a statement, questioned Schwarzenegger's calculation. He said he believes the state still has enough cash to make it through September without cutting salaries.

Democrats and state employee groups immediately denounced the governor's plan as a political ploy designed to pressure lawmakers into passing a budget.

"The governor is turning the budget crisis into a budget catastrophe," said Yvonne Walker, president of Service Employees International Union Local 1000, which represents 94,000 state workers. "If it's political pressure by the governor, shame on him, because he is causing harm to the workers who run the state of California. We're not game pieces. We're real people with real lives."

Parties jockey for position

Democrats and Republicans remain sharply divided over how to bridge a $15.2 billion gap in the $101 billion general fund. Democrats have proposed a series of tax increases, largely on the wealthy, while Republicans want program cuts and a promise of long-term budget reform that would make spending reductions easier in bad years.

Both houses of the Legislature adjourned until Aug. 4, but on Wednesday the Senate summoned its members for a vote next Tuesday.

Call Kevin Yamamura, Bee Capitol Bureau, (916) 326-5548. Dan Smith and Jim Sanders of The Bee's Capitol Bureau contributed to this report.