Leaders reach budget deal

Gov. Arnold Schwarzenegger and legislative leaders have reached agreement on a budget compromise that would allow the governor to sign a new state spending plan that is more than 80 days overdue. The first signs of an accord emerged after the political leaders met today in the Capitol behind closed doors.

Sources say the draft agreement includes a smaller emergency reserve and increased penalties on corporations that under-report their income.

The Assembly has scheduled a vote on the proposal for Friday at 5 p.m.

The tentative accord does not include an earlier proposal that would have accelerated the collection of withholding from California taxpayers, which would bring in $1.5 billion in one-time revenue to the state.

To make up for that lost revenue, the proposal increases penalties on corporations that fail to disclose their earnings by $1 million or  more. The new penalty on corporate taxpayers could raise an estimated  $1.5 billion.

The easing of the historic impasse began after a stormy day in which angry lawmakers in both major parties threatened to unite against the governor.

Relations between legislative leaders and Gov. Schwarzenegger reached the boiling point this week, after the governor threatened to return the budget bill to the Legislature without his signature. Schwarzenegger cited bookkeeping gimmickry and "fake budget reform" as the reasons for rejecting the budget.  Democratic and Republican legislators angrily responded that the "gimmickry" cited by the governor originated with his own finance department.

According to Capitol sources, the Legislature has agreed to the governor's proposal to develop  a so-called Budget Stabilization Fund, and tighter restrictions on when that "rainy-day fun" could be tapped.

The Big 5 — the governor and the four legislative leaders — planned to meet later today.

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