SAN FRANCISCO - California Gov. Arnold Schwarzenegger and legislative leaders reached a budget deal yesterday to close the state's massive two-year, $41.6 billion budget deficit through spending cuts, borrowing, and temporary tax increases.

The details were not yet available at press time yesterday, but legislative aides said lawmakers would soon introduce a measure that would garner the needed two-thirds support in the state Legislature.

Lawmakers - pressed by ratings downgrades, impending layoffs of thousands of state workers, stalled construction projects, and a cash crisis that has delayed income tax refunds - have apparently agreed to a package that will cross many of the red lines drawn by both Republicans and Democrats.

Senate President Darrell Steinberg, D-Sacramento, said legislative leaders had agreed to a "framework" that would close the entire budget gap, but he refused to call it a "deal."

The agreement, negotiated by Schwarzenegger and legislative leaders from both political parties, reportedly includes higher income taxes, sales taxes, and vehicle license fees opposed by Republicans. It also includes ballot measures that would force increased savings in the state's rainy-day fund and cap the growth in state spending, the second of which was opposed by Democrats. It also includes some borrowing, though staff members would not say exactly what kind of borrowing or how much.

Without full details, it was impossible to determine if the budget plan will credibly close the budget deficit or simply rely on budget gimmickry and one-time fixes that simply delay the day of reckoning.

In September, lawmakers and the governor passed a spending plan that Treasurer Bill Lockyer described as a "Banana Republic" budget. Within two months, it was shown to be tens of billions of dollars out of balance.

Since 2003, the state has repeatedly brought deficit spending bonds to market, usually with Schwarzenegger pledging it would be the last time. He has previously proposed budget fixes with deep spending cuts, tax increases, and the sale of lottery bonds and revenue anticipation warrants. Steinberg confirmed yesterday that the new plan will include lottery bonds, but didn't comment on the Raws.

While the details of the new plan remain unclear, it is clear that state lawmakers have been under intense pressure to act.

Controller John Chiang started delaying non-priority payments Feb. 1 because he expected the nation's largest state to have more in bills than cash this month. He delayed payments such as income tax refunds, disability benefits, and county payments for health and welfare programs in order to preserve cash for constitutionally required payments on debt service and education aid.

Schwarzenegger has forced state workers to take unpaid furloughs two days a month and threatened to lay off 20,000 workers to pare spending amid the budget impasse. Despite opposition from Chiang and state workers' unions, a California Superior Court judge in Sacramento ruled that the governor had the power to order the furloughs.

The state's Pooled Money Investment Board - on which Lockyer, Chiang, and Schwarzenegger have seats - has halted most bond anticipation lending to state agencies and local governments to preserve cash. That's halted thousands of infrastructure projects.

Lockyer, who says the state has no real access to the public municipal bond market because of the budget crisis, has been negotiating with the Bay Area Toll Authority to borrow $200 million through a private placement to keep some projects going.

All three credit rating agencies have downgraded some of the state's bonds because lawmakers have failed to come up with viable budget solutions. California now has the lowest state credit rating in the nation. Before the current budget crisis, it was tied with Louisiana.

California's general obligation bonds are rated A by Standard and Poor's, A-plus by Fitch Ratings, and A1 by Moody's Investors Service. Standard & Poor's downgraded the GOs Feb. 2. Both Fitch and Moody's have negative outlooks on the GO debt.

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