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Gov. Arnold Schwarzenegger plans to sign an executive order next week that will temporarily reduce pay for more than 200,000 state workers to the federal minimum wage of $6.55 per hour to preserve cash in the midst of a month-long budget standoff, according to a draft copy of the order obtained by The Bee.

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

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

Administration officials said the governor expects to take the action Monday.

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

The Republican governor, in the executive order, argues that the late state budget means there is "a real and substantial risk" that the state will not have enough cash to pay its bills.

He says that his action complies with a 2003 ruling by the California Supreme Court that made clear that without a state budget in place, federal labor laws require the state to pay most workers "either federal minimum wage or, for those employees that work overtime, their full salaries." The order would require state agencies to stop authorizing overtime for most employees.

The governor also plans to issue a hard hiring freeze except for state jobs "directly related to the preservation and protection of human life and safety." He also will suspend work for all retired annuitants, permanent intermittent employees, seasonal employees, temporary help workers, student assistants and some contractors.

The order, which would take effect for the August pay period, envisions that state workers would be paid their full back salaries once a budget is signed.

Jordan, Chiang's spokeswoman, said the state will have sufficient cash to pay its bills through September and then, if a budget is still not in place, will go to the private credit market.

The state Supreme Court, Chiang said in a prepared statement, "has never addressed the legality of withholding full salaries versus paying minimum wage (and) the governor's proposed executive order would only invite more extensive and expensive litigation. Worse, should the courts find that withholding full pay is illegal, the state will be liable for treble damages."

Chiang's statement called the proposed move "a cynical attempt by a governor who has spent the past few weeks going up and down the state criticizing others for political posturing."

Sen. Dean Florez, D-Shafter, issued a statement blasting the idea.

"I don't think it is wise for the governor to use working men and women as hostages for the state budget," Florez said. "I think it shows weakness on his part as a negotiator. The men and women who do the hard work that keeps our state running deserve their full pay."

Court decisions over the years have given the state authority to pay many bills, including employee salaries, despite the lack of a budget.

This move by the administration is an effort to preserve money in case the budget debate drags on through September, when internal cash reserves are expected to run dry and the state would be forced into the distressed and expensive private credit market.

It also is likely to have a serious political effect on lawmakers, who will feel the heat from public employee unions.

Lawmakers have yet to vote on the budget, now 23 days late, that has a $15.2 billion deficit in the $101 billion general fund. The entire budget, including bonds and special funds, is $144 billion. Both houses of the Legislature adjourned until Aug. 4, but today, the Senate summoned its members for a vote next Tuesday.

Terry Halleck, president and chief executive of The Golden 1, said that the company would likely float loans to its members if the governor cuts their pay. The Sacramento-based firm has a history of offering such deals to its direct deposit members during budget delays.

The Golden 1 was founded in Sacramento by California state workers 75 years ago. Today it's the nation's sixth-largest credit union with $6 billion in assets. About 100,000 of its 686,000 members, roughly 15 percent, are employed by the state.

"Certainly, as a credit union started by state workers, we would immediately give consideration to what we could do to help our members," Halleck said in a cell phone interview.

Any loan program would need board approval. Board members Pedro R. Reyes and P. Craig Cornett, who are both state executives, "would not be allowed to participate in discussion or voting" on a state worker loan program, Halleck said.

While The Golden 1 has branded itself as the dominant state worker credit union, others have similar loan programs.

Sacramento-based Schools Financial Credit Union, for example, started a "budget impasse" loan program on July 1, making zero-interest loans available to members crunched by the budget delay. It also offers loan payment extensions for state employee members who have lost income.

"We've had a policy like this in place for years," said Nathan Schmidt, Schools' vice president of marketing.

Under former Gov. Pete Wilson, the state in 1992 paid 93,000 workers with IOUs when it ran out of cash, a practice later deemed illegal by a federal judge.

That year, the budget impasse lasted a then-record 64 days, as California was deep in a recession and Democrats and Republicans fought over spending cuts and taxes.

The IOUs became an embarrassing milestone for California budget-making, as it marked the first time since the Great Depression that the state paid bills in scrip.

Banks initially cashed the IOUs for employees when the state began issuing them that summer. But as the budget stalemate grew longer, some banks refused to accept them, sparking legal action against the state from public employees.

In 1995, U.S. District Judge Garland E. Burrell Jr. found that the IOUs, or registered warrants, were not "cash or its equivalent" and did not constitute a prompt payment in violation of the federal Fair Labor Standards Act. The state reached a settlement in 1996 in which it granted state workers as many as seven additional days of paid leave.