Published: Monday, 20 Jul 2009 | 10:22 PM ET

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California Governor Arnold Schwarzenegger and top lawmakers said on Monday evening they had reached an agreement to close a $26.3 billion deficit to balance the state's budget, ending weeks of lengthy and often tense negotiations.

The government of the most populous U.S. state, also the world's eighth-largest economy, began its fiscal year on July 1 facing the massive shortfall due to a plunge in revenues caused by the recession and rising unemployment.

Schwarzenegger, a Republican, said during a news conference in front of his office that the budget would introduce no tax increases and would include $15 billion in spending cuts.

"All around I think it is a really great, great accomplishment," the Hollywood icon turned politician said, noting the closing rounds of drawn-out budget talks had been like a suspense movie.

The legislature's top Democrats and Republicans said they would brief rank-and-file lawmakers on the agreement in the hope of holding votes in the state Assembly and Senate on Thursday.
   
Democratic leaders acknowledged the budget agreement contained painful spending cuts in popular programs, the result of mounting financial woes for California's government since 2007.

"There isn't a whole lot of good news in this budget," said Senate President Darrell Steinberg.

The state's revenues have been sliding amid the lengthy housing slump, the mortgage crisis and credit crunch, turmoil on Wall Street, the recession and rising unemployment.

State officials reported on Friday that California's jobless rate in June was unchanged from May at 11.6 percent, its highest level in modern state records, and up from 7.1 percent a year earlier.

Double-digit unemployment is striking hard at the state's revenues from personal income taxes, its biggest revenue source. They are suffering their worst decline since the Great Depression.

At the same time, consumers have been sharply reining in their spending, resulting in a drop in revenues from retail sales taxes.

Wall Street has grown increasingly nervous about the state's finances.

Fitch Ratings on July 6 cut its rating on California's long-term general obligation bonds to BBB, or two notches above "junk" status, and kept the debt on watch for additional downgrades.

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Similarly, Moody's Investors Service last week cut its rating on about $72 billion of the state's general obligation debt by two notches to Baa1, or three notches above speculative status, and said the rating may suffer further downgrades.

Both rating agencies were concerned by the lengthy budget stalemate's effect on the state government's dwindling cash.

Without a balanced budget, California entered July at risk of burning through its cash so State Controller John Chiang on July 1 began issuing "IOUs" instead of payments to vendors and to taxpayers owed tax refunds.

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The IOUs have allowed California to hold on to cash for its priority bills, including payments to investors holding its bonds.

Without IOUs, the state would have run out of cash and begun missing its priority payments at the end of of this month, a recent statement by Chiang's office said.

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