Governor Schwarzenegger: California has been living beyond its means
The governor of California, Arnold Schwarzenegger, has declared a fiscal emergency, amid fears the state could run out of cash by early next year.
He has ordered lawmakers to hold a special session to tackle the $11.2bn (£7.5bn) deficit in California, one of the world's biggest economies.
Across the US, state tax revenues are down because of the economic slump.
State governors have been meeting President-elect Barack Obama to press the case for federal help.
Governor Schwarzenegger on Monday invoked powers allowing him to declare a fiscal emergency as the new state legislature was sworn in.
"Without immediate action, our state is headed for a fiscal disaster," Mr Schwarzenegger said, saying that the current $11.2bn shortfall could swell to "a staggering $28bn" over the next 18 months.
"I compare the situation that we are in right now to finding an accident victim on the side of the road that is bleeding to death," the Republican governor told a news conference in Los Angeles.
"We wouldn't spend hours debating over which ambulance we should use, or which hospital we should use...No, we would first stop the bleeding, and that's exactly the same we have to do here."
He said the state was already drawing up plans to lay off public employees.
Under the fiscal emergency, lawmakers have 45 days to pass legislation addressing the budget crisis. If they miss the deadline, 15 January, they have to stay in session without considering any other business until agreement is reached.
The previous state legislature failed to reach agreement on a series of spending cuts and tax increases.
However, the elections in November produced little change in the legislature's political make-up, with the Democrats three seats short of the two-thirds majority needed to pass fiscal measures.
"It's our job as legislators working with the governor to try to make a major dent in the problem, and we can only do so by cutting expenses and by raising addition revenue," the Senate president, Democrat Darrell Steinberg, told the BBC.
But Republicans indicated their continued opposition to both Mr Schwarzenegger's and the Democrats' proposals.
"This is not blind ideology on the part of Republicans, but our sincere belief that higher taxes will hurt the economy and lead to more uncontrolled spending," Republican minority leader Mike Villines said.
Governors from across the US held talks with Mr Obama on Tuesday in Philadelphia to discuss ways of tackling the budget shortfalls many states are experiencing.
Mr Obama promised to work quickly on an economic recovery plan to include tax cuts and increased federal spending.
"We intend to put tax cuts into the pockets of hard-pressed middle-class families in your states. And we intend ... to start making a down payment on the critical investments that are going to be necessary to sustain long-term economic growth as well as pull us out of the current slump," AP quoted Mr Obama as saying as he met the governors.