Feb. 10 (Bloomberg) -- California Governor Arnold Schwarzenegger is preparing to fire thousands of government workers as an impasse over the state’s $42 billion budget shortfall threatens to drain the state of cash.

Schwarzenegger, a Republican, plans to send notices on Feb. 13 to 20,000 workers informing them they may be terminated, Aaron McLear, a spokesman for the governor, told reporters in Sacramento today. The notices will go to about 8 percent of the state’s employees, laying the groundwork for the governor’s goal of temporarily cutting as many as 10,000 jobs, he said.

“This is not a threat,” said McLear. “This is being done out of a sense of reality. The state is running out of cash.”

Schwarzenegger previously ordered 200,000 state workers to take two unpaid days off every month. Lawmakers have been unable to resolve the budget crisis over the past four months. Tax collections have fallen because of rising unemployment and consumer spending cutbacks, leaving the state with a $42 billion deficit through June 2010.

Last month, California’s general fund revenue dropped by $2.18 billion, or 22 percent, from a year before, according to figures released by state Controller John Chiang today. By the end of the month, the state had $2.7 billion in special funds left to pay bills.

“The state’s major revenue sources are simply unable to support the programs and services provided in California’s budget,” Chiang said in a statement. “While reconciling these funding issues will be painful, only a sound budget with cash solutions will guide us out of this fiscal sinkhole.”

Looking to Washington

California, where pricey real estate once fueled demand for interest-only loans and other mortgages at the root of the U.S. financial crisis, is among states that are being battered by the more than year-long recession. With less money being paid in taxes, states have been forced to cut spending on everything from schools to public health programs.

The National Governors Association said states are in the grip of the worst fiscal crisis since the Great Depression and has pressed for help from Washington. The plan to stoke the economy that was passed by the Senate today includes $39 billion to states to soften the impact of the crisis, $40 billion less than the version passed by the House of Representatives.

Not Immediate

The notices in California won’t result in any immediate job cuts, and not all the employees that receive them will be let go. Schwarzenegger is also willing to negotiate with unions to minimize the number of fired employees, his spokesman said.

Lynelle Jolley, a spokeswoman for the state’s Department of Personnel Administration, said it may take about six months for firings to take effect. During the state’s last budget crisis in 2003 and 2004, some 16,000 employees received notices like those Schwarzenegger may send, she said. Of those, only about 1,200 were eventually terminated.

“We have to be prepared for any possibility,” she said.

The shortfalls forced California to cut funding for thousands of construction projects in December, a step that officials said would cost thousands of jobs in a state already reeling from the real-estate market’s collapse.

Chiang also delayed making $3.3 billion of payments due this month, including income-tax refunds and welfare payments for cash-strapped counties. Without that step, he said, the state would have needed to borrow all but $346 million of the special funds.

Lowest Rank

Standard & Poor’s last week cut its rating on $46 billion of California bonds to A, the lowest grade it has assigned to any U.S. state.

Schwarzenegger is meeting with lawmakers in Sacramento in an effort to reach a budget agreement. The governor is willing to negotiate with labor unions on other steps, such as reducing paid holidays, which might hold down the number of people losing their jobs, McLear said.

“Absent a budget, we need to realize savings any way we can,” McLear said.

Jim Zamora, a spokesman for Service Employees International Union Local 1000, which represents government workers in Sacramento, declined to comment on Schwarzenegger’s plan.

An agreement has so far proven elusive as Republicans have blocked tax-increase proposals advanced by Schwarzenegger and the Democrats who hold a majority in the Legislature. Democrats can’t raise taxes or pass a budget without Republican support because they lack the two-thirds majority needed to do so.

To contact the reporter on this story: William Selway in San Francisco at wselway@bloomberg.net To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

Last Updated: February 10, 2009 19:20 EST