California budget: Deal reached to close $26B deficit |

California budget: Deal reached to close $26B deficit

SACRAMENTO, Calif. and#8212; Gov. Arnold Schwarzenegger and California’s legislative leaders have agreed on a plan to close the state’s $26 billion budget shortfall, potentially getting the state back on firm financial ground so it can stop issuing promissory notes.

The governor and leaders from both parties announced the compromise Monday evening 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.

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

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

In the end, both sides said they had accomplished their goals under extraordinarily difficult circumstances.

“It was like a suspense movie,” Schwarzenegger told reporters after emerging from his office. “Like I said, we have accomplished a lot.”

The Republican governor described the compromise as a “basic agreement” to close the state’s massive shortfall. The Democratic and Republican leaders of the Assembly and Senate were at his side.

Their plan will be distributed to rank-and-file lawmakers over the next day or two, with votes in the Legislature projected for Thursday. The budget requires a two-thirds vote in each house to pass, meaning all Democrats and a handful of Republicans must support it.

Monday’s announcement ended a little more than two weeks of intense negotiations that began shortly after the start of the fiscal year July 1, after the Legislature failed to pass interim steps that could have delayed the reliance on promissory notes.

The state controller’s office has been sending the pay-you-later warrants to thousands of state contractors and vendors that provide an array of state services. State finance officials hope a balanced budget will allow the state to obtain short-term loans to cover its daily expenses until most of the tax revenue arrives in the spring.

If it does get the loans, it would be able to stop sending the promissory notes, which have served as the most visible symbol of California’s cash crisis and opened the state to ridicule. California last issued them in 1992 and has done so only twice since the Great Depression of the 1930s.

Hallye Jordan, spokeswoman for state Controller John Chiang, said it was not immediately clear how quickly the state would stop issuing the notes. She said the office needed to see the details of the budget agreement to determine how it would benefit the state’s cash flow in the weeks ahead.

Associated Press Writers Don Thompson, Juliet Williams and Samantha Young contributed to this report.

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