SAN FRANCISCO (MarketWatch) -- Facing a $19.1 billion state deficit and with no budget in place, California Gov. Arnold Schwarzenegger reinstated furloughs for state workers in an executive order declaring a fiscal emergency Wednesday.
The new furloughs call for state employees to take three unpaid days off a month, starting Aug. 1, until the state can enact a new budget or the state has enough cash on hand for the fiscal year.
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Schwarzenegger pointed to California's steep budget deficit as well as the steps the state has already taken to reduce costs, such as deferring payment to school and local governments, as reasons for declaring an emergency.
If no budget is in place, the latest projections show that California will run out of cash by October, he said.
"Our cash situation leaves me no choice but to once again furlough state workers until the legislature produces a budget I can sign," Schwarzenegger said in a statement. Read Schwarzenegger's executive order.
State firefighters and highway patrol officers are among the groups exempt from the furloughs. Revenue-generating agencies are also exempted, as are semi-public agencies that do not rely on general funds.
The governor also ordered the Department of Personnel Administration to adopt an equivalent furlough program for all non-represented state employees, including supervisors, managers and exempt state employees.
California's roughly 200,000 state workers already were forced to take three furlough days per month for more than a year, but that order expired July 1, when the new fiscal year began.
Wednesday's executive order will likely have little immediate effect on California's municipal bond market because the markets were already aware of the state's budget woes and the delay in passing a budget, said David Blair, a municipal bond analyst with Pimco.
"The market hasn't been responding and we're likely to continue seeing that trend," Blair said. California's benchmark bond -- 30-year Build America Bonds -- remained flat Wednesday, trading at 2.65 percentage points above 30-year Treasurys, Blair said.
State Controller John Chiang said Monday that he may start issuing IOUs in August or September to conserve cash if the state does not enact a budget before then.
"Every passing day of political paralysis leads us closer to a completely avoidable fiscal meltdown that will plunge the state's credit ratings into junk status, slow the state's economic recovery and force us to again issue IOUs to innocent Californians," Chiang said in a statement Monday.
While the municipal bond markets likely won't respond to news of the state reenacting furloughs, they could take a hit in about a month if and when the state begins issuing IOUs, Blair said.
Collectively, U.S. states faced deficits of $89 billion for fiscal 2011, and most of them had to balance budgets by this month, according to the National Conference of State Legislatures. Read more on state and local budget woes nationwide.