California lawmakers will vote on Thursday on a budget deal between Governor Arnold Schwarzenegger and their leaders that balances the state's books by closing an historic $26.3 billion shortfall, largely with deep spending cuts.

The Republican governor and top lawmakers in the Democrat-led legislature reached agreement on Monday, ending weeks of negotiations over how the government of the most populous U.S. state would balance its budget.

They agreed to slash spending by more than $15 billion, shift funds, borrow and take money from local governments to balance the budget for the state's fiscal year that began on July 1 in the face of cash crisis. Tax increases were excluded from the agreement.

Without a budget agreement in place, the state controller on July 2 began issuing IOUs instead of payments to taxpayers owed refunds and to vendors to hold on to the state's dwindling cash for priority payments, including debt servicing payments to investors holding the state's bonds.

Legislative leaders said lawmakers would vote on the budget agreement on Thursday. If lawmakers in the state Senate and Assembly approve Monday's budget agreement it will go to Schwarzenegger for his signature.

Once he signs it, his finance department will press ahead with its analysis of the state government's cash flow, which the state treasurer and state controller need to decide which kind of short-term debt, and how much of it, the state will need to sell in coming weeks.

Plans are under way in the state capital of Sacramento to sell either revenue anticipation notes or revenue anticipation warrants to raise money that the state government will use to bolster its cash account, which is under pressure from a sharp drop in state revenue.

The tumble reflects the recession's tight grip on California's economy, which would rank as the world's eighth largest economy were the state a country.

State officials reported on Friday that California's jobless rate in June was unchanged from May at 11.6 percent, its highest level in modern state records, and up from 7.1 percent a year earlier.

Double-digit unemployment is slashing revenues from personal income taxes, the state's biggest revenue source. They are suffering their worst decline since the Great Depression and many analysts expect weak collections until payrolls expand with an economic recovery.

California's economic woes, the state government's revenue downturn and lengthy talks in Sacramento over a budget agreement combined to raise concerns at Wall Street credit rating agencies, and they have signaled the state should expect higher borrowing costs.

Fitch Ratings on July 6 cut its rating on California's long-term general obligation bonds to BBB, or two notches above junk status, and kept the debt on watch for additional downgrades.

Moody's Investors Service last week cut its rating on about $72 billion of the state's general obligation debt by two notches to Baa1, or three notches above speculative status, and said the rating could suffer further downgrades.

Standard & Poor's analyst Gabriel Petek told Reuters on Tuesday the budget deal between Schwarzenegger and lawmakers came just in time. Without it, S&P was poised to next month cut its A rating on the state's general obligation debt. That was the trajectory it was on, Petek said.