OAKLAND, California (Reuters) - California Gov. Arnold Schwarzenegger will notify up to 20,000 state employees on Friday their jobs will be eliminated if lawmakers fail by then to balance the budget by closing a shortfall of more than $40 billion, a spokesman said on Tuesday.

The cuts would fall mostly on employees with low seniority in departments funded by the state’s general fund, whose revenues have plunged in recent months because of the housing downturn, rising unemployment and the sharp pullback in consumer spending.

“In the absence of a budget, the governor has to do everything in his authority to try to save the state money,” said Aaron McLear, a spokesman for Schwarzenegger.

California’s financial situation has become so dire that the state’s government is on the brink of running out of cash unless its budget deficit is plugged this month.

Negotiations between Schwarzenegger and top lawmakers to close the gap have been moving slowly over several weeks while the state’s cash account has steadily emptied.

Schwarzenegger’s layoff threat stunned Democrats who control the legislature.

Their top two leaders along with the legislature’s top two Republicans have been holding so-called “Big Five” negotiations with the Republican governor to hammer out a budget agreement that would close the shortfall in the current fiscal year along with the next year’s projected deficit, which combined totals more than $40 billion.

“We want to avert the layoffs and our plan is to take something (a budget vote) up on the floor by the end of this week,” said Alicia Trost, a spokeswoman for state Senate President pro Tem Darrell Steinberg.

“We’re confident that by the end of the week we’ll have a budget,” Trost said. “The ‘Big Five’ process is coming to a close.”

To conserve cash, public works projects in California have been halted and tax refunds have been postponed.

Additionally, vendors to the state have been told to expect notes promising payments instead of actual payments, state employees are being furloughed for two days a month and payments to counties for state-mandated services may be withheld.

The financial chaos in Sacramento, the capital of the most populous U.S. state, has become so worrisome on Wall Street that Standard & Poor’s Ratings Services earlier this month downgraded $46 billion of the state’s general obligation bonds, a move setting the stage for similar actions by Moody’s Investors Service and Fitch Ratings, according to analysts.

S&P cut its rating on California’s general obligation debt, which is backed by the state’s general fund, to “A” from “A+,” putting the state, the biggest U.S. issuer of public debt, at risk of increased borrowing costs.