Democrats and Republicans have so far been unable to compromise on a solution to the state's $15.2 billion budget deficit for the fiscal year that started July 1. As the stalemate continued, Schwarzenegger has ratcheted up his rhetoric.
Spokesman Aaron McLear said the Republican governor is contemplating signing an executive order next week that would pay about 200,000 state workers the federal minimum wage, which is $1.45 an hour less than California's minimum wage.
Employees would receive their full salary retroactively once a budget is signed.
"Because the Legislature has failed to produce a budget over a month past their deadline and because we don't have a rainy day fund, the governor is looking at a number of options to make sure the state does not run out of cash," McLear said.
A draft of the executive order also said state agencies would be prevented from hiring any nonessential employees and would be forced to terminate about 20,000 contracts with temporary workers, interns and contractors. There also would be a ban on most overtime.
The administration estimates that immediately terminating the contracts and suspending overtime would save the state about $100 million a month. The deferred wages would take several weeks to implement, saving the state as much as $400 million a month starting in late August.
State Controller John Chiang, whose office pays state employees, criticized Schwarzenegger's threat as a political ploy that could end up costing the state even more in litigation fees.
"Forcing public servants to involuntarily loan the state cash by foregoing their hard-earned paychecks puts an untenable burden on our teachers, health care workers and those who provide critical public services," Chiang said in a statement.
"Cutting workers' salaries will do nothing meaningful to improve our cash position or help us make our priority payments."
The Service Employees International Union, which represents nearly half the affected workers, was considering legal action to try to block the move, spokesman Jim Zamora said.
"We're victims of this budget crisis. It's not our fault that the state Legislature and Governor Schwarzenegger can't come together to pass a balanced budget," he said.
The union represents about 95,000 clerical, office and civilian workers throughout the state.
Emergency, disaster and other critical workers would be exempt from the order.
Legislative leaders in both houses have said they are working to meet an Aug. 1 deadline. Without a spending plan in place by then, the state will have to start negotiating on expensive loans to address a cash shortfall that will affect state coffers by the end of September.
Democrats are seeking to raise taxes by $8.2 billion, while Republicans want to balance the budget mostly through cuts. Schwarzenegger said Tuesday that he will not sign a budget if it does not include long-term budget reform, such as a rainy day fund to help ease the state through tough economic times.