Gov. Arnold Schwarzenegger and California's legislative leaders agreed Monday 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 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.
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.
"We are very happy to have a basic agreement," 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 from local government, shifting money from other government accounts and accelerating the collection of certain taxes.
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, D-Los Angeles.
Monday's announcement ends 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 IOUs.
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 IOUs, which have served as the most visible symbol of California's cash crisis and opened the state to ridicule. California last issued IOUs in 1992 and has done so only twice since the Great Depression.
Hallye Jordan, spokeswoman for state Controller John Chiang, said it was not immediately clear how quickly the state would stop issuing IOUs.
"We'll have to see what their assumptions are, stress-test those and assure that there is sufficient cash to pay off of the state's bills before we can stop issuing the IOUs," Jordan said. "It's going to depend on how much and how quickly cash comes into the state treasury."
The state's ability to function by issuing IOUs to contractors was projected to last until early September without a balanced budget in place. Payments to the state pension funds and paychecks to state workers would have been in jeopardy beyond that point.
While California has been criticized for spending beyond its means, much of the current deficit can be traced to a steep economic downturn that has robbed the state of tax revenue.
Personal income fell this year in California for the first time in 70 years, leading to a 34 percent plunge in income tax revenue during the first half of the year.
The $26.3 billion shortfall amounts to roughly a quarter of the state's general fund, the account that pays for day-to-day state services. The sheer size of the deficit meant that any effort to balance the state's books would be felt throughout the state, from college students seeing a sharp increase in fees to local police and fire departments that face cuts as the state takes money from city and county governments.
"This is a sober time because there isn't a lot of good news in this budget," said state Senate leader Darrell Steinberg, D-Sacramento. "We have cut in many areas that matter to real people, but I think we have done so responsibly."
Details of the agreement were scarce beyond the total amount of spending cuts, but the governor and lawmakers said education would be fully funded.
Evaporating tax revenue combined with Republicans' firm stand against new tax increases had complicated negotiations to balance the budget. Democrats, who hold majorities in the Assembly and Senate, wanted to preserve as much as possible of the state's welfare-to-work program and health care program for low-income children after Schwarzenegger had proposed eliminating them.
Education funding in a state with 6.3 million public school students was among the most contentious issues in recent days.
Specifically, lawmakers and the governor negotiated over how to repay schools $9.5 billion that had been cut from education budgets last year. It was not immediately clear how that debate had been resolved.
Legislative leaders also struggled over whether to take some $3.7 billion from local governments. About $2 billion of that would come from property taxes and would have to be repaid within three years, but city and county representatives said they wanted a guarantee.
Paul McIntosh, executive director of the California State Association of Counties, called it the largest raid on local governments' coffers in state history.
Cities and counties already are laying off firefighters, police officers, sheriff's deputies and park workers because of their own budget problems. Some are threatening to sue if the state takes their tax revenue for its own needs.
"This is, of course, one of the most difficult economic times to face our state since the Great Depression, so none of these were easy choices," said Assembly Minority Leader Sam Blakeslee, R-San Luis Obispo. "I think we selected a path which will lead the state back to the point where we will be strong."