The Brazilian government has frozen the bank accounts of Rio de Janeiro state, ordering it to pay millions of dollars in overdue debt.
Many public workers have not been paid in months. Rio de Janeiro has been struggling with a long-standing financial crisis because of a drop in global oil and commodity prices.
It declared a financial emergency ahead of the Rio Olympics earlier this year.
State governor Luiz Fernando Pezao announced austerity measures last week.
He said that unless they were approved, the state could not guarantee that workers would receive their full salaries next year.
The Rio financial secretariat said the state was "blocked from making any kind of payment until the amount it owes the state has been paid".
The state has been hard hit by Brazil's worse recession in a century, and officials say it owes the federal government about $53m (£43m).
With tax revenues dropping, Rio has already made sharp budget cuts.
On Friday, Governor Pezao announced more austerity measures, including cuts to social programmes, a tax increase for retired people, a sales tax increase and a transport fare rise.
Mr Pezao said he would travel to the capital Brasilia to negotiate with the federal government.
Officials told Reuters news agency that they hoped to have the accounts unfrozen in the coming days.