- The Washington Times - Tuesday, July 21, 2009

SACRAMENTO, Calif. | Gov. Arnold Schwarzenegger and California’s legislative leaders agreed Monday on a plan to erase the state’s $26 billion budget shortfall, potentially getting the state back on firm financial ground so it can stop issuing IOUs.

The governor and leaders from both parties announced the compromise after more than five hours of closed-door talks. If the agreement survives its run through both houses of the Legislature, it would provide temporary relief to an epic fiscal crisis that has captured national attention, sunk the state’s credit rating and forced deep cuts in education and social services.

Most analysts and top lawmakers expect that California will face multibillion-dollar deficits into the foreseeable future as the economy struggles to recover and tax revenue lags far behind the level of the boom years.

The negotiations came as the state pays its bills with IOUs for the first time in nearly 20 years and as major credit agencies threaten the state’s already basement-level bond rating. The dismal economy has forced a new round of cuts just 4 1/2 months after California closed a $42 billion deficit.

The state’s four top legislative leaders were scheduled to meet with the Republican governor Sunday to work out what all sides expected to be the final budget deal. But that meeting was abruptly postponed by scheduling conflicts.

On Monday, the focus was on balancing a state budget that had been thrown way out of whack by declining tax revenue since Mr. Schwarzenegger signed it in February during a rare emergency session of the Legislature.

“We are very happy to have a basic agreement,” Mr. Schwarzenegger told reporters after emerging from his office shortly before 7 p.m.

The Democratic and Republican leaders of the Assembly and Senate were at his side.

The plan will include $15 billion in cuts. The rest of the deficit will be made up by a combination of borrowing, shifting money from other government accounts and accelerating the collection of certain taxes.

Mr. Schwarzenegger and Republican lawmakers refused to raise taxes any further, limiting lawmakers’ options. Democrats had fought to preserve basic social services, including welfare, in-home support and health care for low-income children.

“We have closed the deficit. … We have protected the safety net,” said Assembly Speaker Karen Bass, Los Angeles Democrat.

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