Schwarzenegger had asked the court to order state employees' paychecks be reduced to the federal minimum wage as California enters the third week of the fiscal year without a spending plan in place.
But State Controller John Chiang, who prints the paychecks, said he couldn't implement the order, blaming an outdated computer system.
Sacramento County Superior Court Judge Patrick Marlette said Chiang was breaking state law by failing to issue the smaller paychecks but he could not discount the antiquated computer argument and denied the Schwarzenegger administration's request for an injunction, the Los Angeles Times reported.
Marlette set a date in late August for a full hearing on whether Chiang's computers can compute a pay cut to $7.25 an hour for the state's workforce.
Lynelle Jolley, a spokeswoman for the Department of Personnel Administration, said the state administration accepts the decision and will prepare for the late August court showdown, the Times reported.