ALAMEDA, Calif. — The California Supreme Court upheld Gov. Arnold Schwarzenegger’s employee furlough policy Monday.

The high court ruling saves the state from another hit to its already-unbalanced budget by throwing out claims by state workers to billions of dollars in back wages.

The governor and legislative leaders have announced an agreement on a three-month-late budget for fiscal 2010 that lawmakers are supposed to vote on Thursday in Sacramento.

The leaders have been tight-lipped on the details of how their budget will close the $18 billion structural gap.

Even if the budget is enacted Thursday, the state’s cash-flow problems will not immediately be solved.

With the passage of a budget, more than $8 billion of payments the state has not been able to make without budgetary authority will come due. And California’s cash position is projected to hit a low of just over $1 billion in late October, according to Hallye Jordan, spokeswoman for Controller John Chiang.

“There is not enough cash in the treasury to allow us to pay all the payments that have been withheld from vendors, clinics, and others because of the governor and Legislature’s failure to enact a budget,” she said.

In a normal year, California would have sold revenue anticipation notes by the end of October to help it smooth its uneven flow of revenue through the year, Jordan said.

That was not possible without a budget, and it will take time for the State Treasurer’s Office to put that deal together after one is enacted, she added.

“Everything’s under discussion,” Jordan said. “What we all want to do is avoid IOUs.”

Cash-flow problems led Chiang to issue $2 billion in IOUs in 2009 to some creditors to preserve cash for creditors with higher legal standing, such as bondholders.

Monday’s ruling stems from lawsuits challenging Schwarzenegger’s implementation of unpaid furloughs, which required most state workers to take three unpaid days off a month between February 2009 and June 2010.

The Supreme Court did not agree with the governor’s contention that it was within his authority to unilaterally implement furloughs.

However, Chief Justice Ronald George said lawmakers authorized the furloughs by adopting budget legislation in early 2009 that assumed savings from the unpaid furloughs.

“The Legislature, through the exercise of its own legislative prerogative, authorized the substantial reduction in the appropriations for employee compensation,” George wrote.

Five justices joined George’s opinion, and the remaining justice wrote a concurring opinion.

In a separate case, the Supreme Court handed Schwarzenegger another victory Monday, upholding the governor’s interpretation of his line-item veto power in a case challenging $500 million worth of line-item vetoes from 2009.

Schwarzenegger and the top Democratic and Republican lawmakers who negotiated the budget deal last week have not released details, saying they are saving them for hearings scheduled Wednesday — one day in front of the planned budget vote.

Published reports indicate that at least $3 billion of the shortfall was bridged simply by adjusting revenue forecasts upward.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.