SAN FRANCISCO: California Governor Arnold Schwarzenegger formally declared a fiscal emergency in the largest US state Wednesday and called state legislators back into a special session to close a budget deficit expected to reach US$24 billion over the next two years.

The move came as California, which has a US$2.8-billion cash shortage, said it would not be able to pay some of its bills starting Thursday.

Schwarzenegger said in his proclamation that the cash shortage will grow to US$6.5 billion by September unless the state legislature makes huge cuts in services ranging from education to poverty programmes.

If the state is unable to pay its bills, the governor said: "Californians will be placed at serious risk because essential public assistance services are no longer being provided."

Schwarzenegger also issued an executive order mandating that many state offices close the first, second and third Friday each month through June 2010.

Employees at those offices, which issue everything from drivers' licenses to building permits, will have their pay reduced by those three days each month.

State hospitals, prisons and the California Highway Patrol will not be subjected to such cuts.

The state, whose economy would rank eighth in the world if California was a country, has been struggling with fiscal problems throughout 2009.

Schwarzenegger and legislators thought they had averted the worst of the crisis when they devised a package of potential solutions in mid-February, but voters rejected all of those proposals in mid-May.

The cash shortage has become more acute due to dwindling tax revenues. California has been hit harder than most states during the national economic crisis, with unemployment of 11.5 per cent and a high rate of house foreclosures. The national unemployment rate is 9.4 per cent.

The governor had given legislators until Tuesday night, the end of the state's fiscal year, to come up with a comprehensive plan for solving the budget crisis.

"Though the legislature failed to solve our budget problem yesterday, rest assured that solving the entire deficit remains my first and only priority, and I will not rest until we get it done. I will not be a part of pushing this crisis down the road - the road stops here," Schwarzenegger said.

- AFP/yb