Arnold Schwarzenegger, the governor of California, delivered on his threat to lay off thousands of state employees on Thursday when he signed an executive order in an attempt to solve the state's budget crisis.

The move, dismissed by critics as a gesture to force legislators to reach a compromise on how to resolve the state's $15bn budget deficit, left more than 10,000 part-time and temporary employees without work yesterday. The order also reduced the pay of up to 200,000 state employees to the federal minimum wage of $6.55 an hour, below California's minimum.

"I have a responsibility to make sure that our state has enough money to pay its bills," the Republican governor said as he signed the order at a press conference in the state capital, Sacramento. "It is a terrible situation to be in. I don't think any governor wants to be in this situation ... But this is really the only way out at this point."

Critics, including the state controller John Chiang, a Democrat, disagree. Chiang, the state official who issues pay cheques, has said he will pay employees normally, arguing that Schwarzenegger does not have the legal authority to summarily reduce employees' pay.

Referring to the employees as "the innocent victims of a political struggle", Chiang declared: "The state of California, the elected leadership, cannot put the important public servants of California in harm's way. We put people first, we make sure we protect their interests, and that's why I have to tell the governor, with all due respect, I am not going to comply with this order."

Unions also declared their intention to challenge the order in court.

California, one of the world's largest economies, regularly fails to agree a budget by the annual July 1 deadline. Officials from the governor's office claimed the lay-offs could save the state up to $100m a month, while the pay cuts would save up to $1.2bn a month if applied to all 200,000 eligible workers.

· This article was amended on Tuesday August 5 2008. We originally said that California was the biggest state in the US. This is incorrect; Alaska and Texas are bigger. This has been corrected.