State Controller John Chiang said the state will have enough cash to pay its bills through September and called the pay-cut plan a “cynical” ploy.

If Schwarzenegger issues a pay-cut order as expected Monday, the Democratic controller said he will continue to pay state workers in full, presumably forcing the Republican governor to file a lawsuit to enforce his order.

Chiang got some support yesterday from the Legislative Counsel, which said in an opinion requested by state Sen. Dean Florez, D-Shafter, that the governor cannot compel the controller to reduce workers' pay.

Schwarzenegger's plan would cut the pay of most state workers to the federal minimum wage, $6.55 an hour. He says a state Supreme Court decision in 2003 gives him the authority.

Full pay with back wages would resume after a new budget is signed. But there seems little prospect for that happening soon.

“I don't think the governor should put public servants in the crossfire of this budget battle,” said Assembly Speaker Karen Bass, D-Los Angeles.

Senate President Pro Tempore Don Perata, D-Oakland, said the pay-cut plan is an “act of war,” not helpful to budget negotiations.

A deadlock over closing a $15.2 billion deficit in a general fund of more than $100 billion has left the state without a budget since July 1. Democrats are pushing a $9.7 billion tax package. Republicans oppose a tax increase and want more spending cuts.

Schwarzenegger and Republican legislators also want a spending cap to help prevent future deficits. Democrats are opposed, saying schools and other programs are underfunded and legislators should retain spending authority.

The notion of the state running out of money, or having to borrow money at high rates, has been discussed for weeks. Then budget talks among legislative leaders broke down in recent days.

The governor took the unusual step Wednesday of meeting separately with Democratic and Republican leaders, then individually with each leader. That was also the day that the media obtained a draft of Schwarzenegger's executive order to cut pay, which his aides said could be issued next week.

A crucial clause in the draft order: “As a result of the late budget, there is a real and substantial risk that the state will have insufficient cash to pay for state expenditures.”

It is an echo of warnings about “running out of cash” if there is no budget by August repeatedly made by legislative leaders in both parties, who seem to want a deadline for action.

“Knowing that the state is going to run out of cash soon, the governor is looking at various options to make sure we don't run out of cash,” Schwarzenegger's press secretary, Aaron McLear, said yesterday.

But what has become the conventional wisdom at the Capitol – running out of cash if there is no budget by August – may be off the mark. For openers, a cash crunch is not expected in August.

Schwarzenegger's finance department agrees with the controller that the state could have enough money to pay its bills through September. But the administration wants a larger cash buffer just to be sure.

H.D. Palmer, the finance department spokesman, said the administration wants to maintain a “cash cushion” of $2.5 billion. But in September, the cushion is expected to drop to $1.8 billion, he said.

“Cash can swing on any given day from $1 billion to $2 billion,” Palmer said. “We cannot say with certainty that on any day in September we are going to have substantial cash on hand to meet our obligations.”

So, maintaining a larger buffer in September – and rather than the certainty of running out of money – is the reason the governor wants the pay cut, which could save $1 billion a month.

Palmer said that to maintain a cash cushion in July and August, legislation in February delayed $8.6 billion in payments owed schools, Medi-Cal, local governments and other programs in the first quarter of this new fiscal year.

Until Schwarzenegger began planning for a pay cut to build a larger reserve in September, the push to get a budget by August was aimed at avoiding a more expensive form of short-term borrowing.

The state routinely gets short-term loans – it did so in 19 of the past 20 years – to maintain cash as tax revenue arrives in spurts, with most coming in toward the end of the fiscal year.

The borrowing process must begin in August to make sure the money is in hand by the end of September. If there is a budget by August, the state can borrow with conventional loans paid off by the end of this fiscal year.

But if there is no budget, the state must engage in more expensive borrowing that will not be paid off until next year. With no budget in place, that borrowing requires an expensive “credit enhancement.”

For example, when the state borrowed $10.9 billion in short-term loans in 2003, it paid $142.5 million for a credit enhancement, an added cost not needed for normal borrowing, said Hallye Jordan, Chiang's spokeswoman.

If there is no budget in place by about the second week of August, the controller will have to sign papers that commit the state to the more expensive loans, Jordan said.

There has been speculation at the Capitol that turmoil on Wall Street, driven by the mortgage crisis, could make it difficult for California to borrow, regardless of whether there is a budget. Jordan said there are willing lenders.

“The money is there,” she said. “The concern is, how much is it going to cost?”