After resolving their major education dispute Friday, Gov. Arnold Schwarzenegger and legislative leaders hope to finalize a budget deal today that closes California's $26 billion deficit with spending cuts, accounting shifts and revenues from local governments.

State leaders have agreed on a general budget framework and gave attorneys and budget aides time Saturday to draft a bill, sources close to negotiations said.

Lawmakers and a spokesman for Gov. Arnold Schwarzenegger warned, however, that leaders must still resolve minor disputes over spending cuts and the state's reserve, as well as negotiate any issues that arose in staff talks Saturday.

Under the working budget plan, Schwarzenegger and Republican legislators can claim victory by imposing stricter welfare requirements and avoiding tax increases.

Democrats can say they blocked Schwarzenegger's harshest reductions – the governor initially wanted to eliminate welfare-to-work, Cal Grants and Healthy Families – while obtaining a $9.5 billion future payment for schools and avoiding the suspension of the state's constitutional guarantee for education.

Leaders cleared a major hurdle Friday when they agreed on a conceptual deal to provide schools future repayment without changing the state constitution, sources told The Bee.

Schwarzenegger had been in a brief standoff with Democrats and the California Teachers Association over whether to permanently expand the types of situations in which schools would receive compensation for budget cuts.

"The cuts to education have been devastating to my city and to other cities," said Assembly Speaker Karen Bass, D-Los Angeles. "Teachers have been laid off, class sizes have grown. What's happened to education has been terrible. The reason it's happened is because we've been in the worst recession since the Depression. We haven't exactly sealed the deal yet, but it seems as though we are reaching conclusion on how to make sure the schools are repaid."

Democrats will avert a 5 percent pay decrease for state workers that Schwarzenegger proposed, sources said. Schwarzenegger, using his executive authority, likely will keep three monthly furlough days in place through next June, however.

Besides spending cuts, the budget proposal includes capturing more than $4 billion from cities, counties and special districts.

It also relies on accounting tricks, such as increasing income tax withholding schedules by 10 percent to shift money from 2010-11 to 2009-10, as well as delaying state worker paychecks next June 30 to July 1.

In the final days, leaders have discussed other controversial items that remain unresolved.

Schwarzenegger is pushing lawmakers to approve an oil drilling lease off the Santa Barbara coast for Plains Exploration and Production Co., which would generate nearly $2 billion for the state over the project's lifetime.

Environmental groups, including Sierra Club California, rallied opposition to the proposal Friday.

Schwarzenegger spokesman Aaron McLear said the oil company would drill only from its existing ocean rig in nearby federal waters.

Senate President Pro Tem Darrell Steinberg, D-Sacramento, said Friday that the proposal remains on the table. Democrats are considering approval of the lease if it contains guaranteed protections sought by environmentalists, sources said.

Assemblyman Pedro Nava, D-Santa Barbara, said the lease contains loopholes that could allow more drilling than lawmakers intend.

The governor also wants executive authority to sell office buildings, including several in Sacramento, that the state would lease back in an attempt to build revenues.

Democratic lawmakers are seeking oversight in those transactions before they sign off, sources said.

Without enough cash to pay all of its bills, the state has relied on IOUs since early July for only the second time since the Great Depression. The rare IOU move resulted in two recent credit downgrades to near junk-bond status.

Bass and Steinberg said late Friday in an e-mail to Democratic lawmakers that they anticipated a budget floor session Wednesday or Thursday.

State Controller John Chiang won't stop issuing IOUs until he is confident the budget plan provides California with sufficient cash, said his spokeswoman, Hallye Jordan.

Call Kevin Yamamura, Bee Capitol Bureau, (916) 326-5548.