Lawmakers have yet to agree on a spending plan a month after the state's fiscal year began, leaving California without the ability to pay contractors, the higher education system and legislative employees.
Democratic and Republican lawmakers remain divided over how to close a $15.2 billion deficit, with Democrats favoring $8.2 billion in new taxes on corporations and the state's wealthiest residents. Republicans want a spending cap and oppose tax increases.
Adding to the fiscal mess has been an unprecedented number of wildfires this year, costing the state far more for emergency response than it had budgeted.
"Today I am exercising my executive authority to avoid a full-blown crisis and keep our state moving forward," Schwarzenegger said. "This is not an action I take lightly."
Yet the governor said he is responsible for making sure California has enough money to pay its bills and that the executive order will lead to immediate savings.
The order exempts public safety agencies but will have an immediate effect everywhere else: Hiring, overtime and contracting will be halted, and tens of thousands of employees will feel the squeeze.
It covers 22,000 retired state employees who work under contract, temporary and part-time workers such as those who fill in at the Department of Motor Vehicles, seasonal employees and student assistants. But Schwarzenegger's finance team said of that total, just 10,300 would receive pink slips immediately. The others are workers who might be exempted from the order because they are deemed crucial to public safety.
Schwarzenegger also cited a 2003 California Supreme Court ruling allowing him to slash the pay of regular full-time employees when the state lacks a budget. By law, those workers must be paid at least the federal minimum wage of $6.55 an hour and would be reimbursed once a budget is approved.
Whether that provision of the order will ever be implemented is in doubt because the state controller, who cuts the checks, has said he will not comply with it.
The administration estimates that immediately terminating the contracts and suspending overtime would save the state as much as $80 million a month. The deferred wages for full-time employees would take several weeks to implement, saving the state anywhere from $300 million to $1 billion a month starting in late August, depending on how many employees are determined to be essential to public safety and would be exempt from the executive order.
Department heads were ordered to develop a list by Friday of exempt employees.
Before he signed the order, Schwarzenegger said he understood the effect it will have on thousands of people and apologized to state employees.
"It is a terrible situation to be in," he said. "I don't think any governor wants to be in this situation."
But the governor also said he was left with no other option, saying the state was running out of cash.
As Schwarzenegger left the news conference to return to his office, a man in the hallway of the Capitol began shouting at him "no, no" and saying the cuts were unfair. He was quickly surrounded by California Highway Patrol officers and taken away.
Officer Keith Troy said the man, who appeared to be college-age, was detained for protesting without a permit and escorted out of the Capitol when officers determined he posed no threat. Troy said he did not have the man's name.
Tiffany Woodruff is among those who will feel the sting immediately.
The 28-year-old is one of four part-time employees at the state Employment Training Panel, which provides training to those who are out of work.
Now, she said Thursday, "I could be unemployed. We're going to receive our pink slips this afternoon."
She said she works as many hours as she can - usually 35 to 40 hours a week - and takes home about $2,500 a month. It's already hard paying for food, a car and rent, she said, adding that her unemployment benefits would max out at about $1,800.
Woodruff said she and other employees feel like pawns in the budget fight.
"We're just completely upset with having your salary completely abolished because of the inaction of the Legislature and the political inaction here," she said.
Assembly Speaker Karen Bass said she was disappointed with Schwarzenegger's order but said it would not deter legislative leaders from working toward a budget compromise. The Los Angeles Democrat said she hoped they would submit a spending plan to Schwarzenegger "in the next few days."
The governor's executive order came under immediate challenge.
State Controller John Chiang, a Democrat, sent a letter to Schwarzenegger on Thursday saying he will defy the order and issue employees their regular paychecks.
He said the governor's executive order was based on "faulty legal and factual premises."
Chiang said the 2003 Supreme Court ruling did not specify the actual amount of the salary his office could pay state employees during a budget impasse.
The controller and the Republican administration also differ over the state's financial condition. Chiang maintains that California has enough money to meet all its expenses through September.
If it's later determined that California has insufficient money, Chiang said he is authorized to borrow until a budget is approved.
Chiang's refusal to comply sets up a potential legal skirmish between his office and Schwarzenegger's.
The governor was asked during a news conference whether his administration would sue the controller's office if it did not comply with the executive order.
"If that's what it takes," he said. "I'm here to make sure that our state functions, and whatever it takes, I will do it."
Schwarzenegger signed the order Thursday because it's the first day of the August pay period. The first paycheck to be affected by the minimum wage order would be the one state employees receive in early September.