By Judy Lin

Associated Press

SACRAMENTO, Calif. _ Gov. Arnold Schwarzenegger and legislative leaders averted a historic budget veto Thursday, agreeing to a compromise spending plan that includes the governor's demands for budget reform and scraps some of the borrowing gimmicks he opposed.

Facing a veto threat from Schwarzenegger and uncertain whether they could muster the two-thirds vote of the state Legislature required to override it, the four legislative leaders met with the governor again and agreed to many of his demands.

They emerged from a mid-afternoon meeting saying they would change the $143 billion spending plan the Legislature approved two days earlier.

"It appears we have a deal," Schwarzenegger spokesman Aaron McLear said.

Lawmakers scheduled meetings of the state Assembly and Senate to vote on the compromise plan Friday.

"We will be voting on the compromise budget that the five of us agreed to this morning," said Assembly Speaker Karen Bass, a Democrat. "Hopefully this will bring to an end 80-plus painful days that the state of California has gone without a budget."

The deal came 80 days into California's fiscal year, making it the longest budget stalemate in California history. Without a spending plan, the state has been forced to suspend billions of dollars in payments to schools, medical clinics, daycare centers and state vendors since July 1.

In a move that would have been the first in modern state history, Schwarzenegger threatened to veto the entire budget lawmakers approved shortly after 2 a.m. Tuesday, calling it fiscally irresponsible.

He criticized the plan for failing to meet his demands for a more robust rainy day fund. He said the budget relied on accounting gimmicks to close a $15.2 billion deficit — such as collecting an extra 10 percent of workers' income tax in advance and repaying it later — that could lead to an even larger deficit next year.

The four legislative leaders said they had agreed to remove that provision in their latest deal.

They planned to take up two bills. One would levy larger fines against businesses that underreport their tax liabilities, and another would ensure the state's rainy day fund could only be tapped when revenues fall below projected spending — the last remaining piece of the budget reforms Schwarzenegger sought.

The remainder of the budget approved Tuesday will stand, including $7.1 billion in spending cuts that advocates say will trigger deep cuts to health care in the future.

It was unclear how soon Schwarzenegger could sign the new spending plan if lawmakers in both houses approve it Friday. However, the rainy day fund and a proposal to borrow $10 billion against anticipated lottery revenues to help stabilize future budgets would require voter approval, likely in a special election early next year.

Legislative leaders agreed with the governor that their previous plan to address the deficit did nothing to solve the state's ongoing fiscal imbalance, but said it was time to move on.

"It's time to end this stalemate and stop the suffering for the thousands of innocent Californians," Senate President Pro Tem Don Perata, a Democrat.

While the deal struck Thursday removes some accounting gimmicks, it leaves others intact.

It would require those who pay estimated taxes, including corporations and wealthier Californians, to pay a greater percentage of their annual taxes in the first two quarters of the year, a move that would generate $2.3 billion for this fiscal year. But the state would lower their tax payments in the last two quarters, artificially inflating state revenues.

New millionaires would have to pony up their taxes earlier and the state would borrow nearly $1 billion from special funds intended for other uses, such as transportation projects and reducing smog.

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