SACRAMENTO, California: Gov. Arnold Schwarzenegger and California's legislative leaders 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 IOU promissory notes.

The governor and leaders from both parties announced the compromise late 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 attention across the US, 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.