The furloughs left entire agencies closed while more than 200,000 state employees were told to stay home without pay.
Many protested as the furloughs went from two days to three days per month, amounting to a 14 percent loss in pay.
The California Supreme Court weighed in Monday, backing Schwarzenegger on how he handled the state budget deficit.
"The Supreme Court today said that the governor had the authority to do the line item vetoes and also the furlough program from last year, which allowed us to cut spending and live within our means," Schwarzenegger's spokesperson Aaron McLear said.
The court's decision angered state workers, whose unions filed lawsuits to argue that the furloughs were a violation of their contracts.
"We're all very sad; definitely we're upset because we've been struggling now since February 2009, and a lot of people are having a hard time paying their bills and stuff like that," state employee Shirley Kennedy said.
Employees at some state agencies were exempt from the furloughs, notably the California Highway Patrol, the franchise tax board and the secretary of state's office.
"We were even envisioning maybe a payback of the days and everything, but no, that's not going to happen," Kennedy said.
The California Supreme Court also determined that the governor shares authority with the Legislature to cut the pay of state workers.
"In this case, the Supreme Court determined that it was appropriate for the governor to impose mandatory furloughs and more importantly, when the legislature came back in session at his request, they ratified that decision, and the court said that's good enough," labor law attorney Christopher Platten said.
Labor groups and the Democratic leader of the state Senate both expressed disappointment in the court's ruling.
The governor issued a statement, indicating the court made the right decision, protecting taxpayers and keeping state spending in line with revenue.