Sacramento, Calif. ? 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.

Schwarzenegger and Republican lawmakers refused to raise taxes, limiting lawmakers’ options. Democrats, meanwhile, had fought to preserve basic social services.

The four legislative leaders said they did not want to release extensive details of the compromise before they had briefed their party caucuses, but the governor’s office said it includes $15 billion in cuts. Those reductions will come on top of an equal amount of spending cuts enacted in February.

The rest of the deficit will be made up by a combination of borrowing from local governments, shifting money from other government accounts and accelerating the collection of certain taxes.

A legislative source familiar with the negotiations, who was not identified because no one was authorized to release details of the agreement, told The Associated Press the cuts included $6 billion to K-12 schools and community colleges.