SACRAMENTO, Calif. — California soon might be able to stop printing IOUs now that Gov. Arnold Schwarzenegger and legislative leaders agreed on a compromise plan to close the state's $26 billion shortfall without tax increases.

The governor and lawmakers announced the compromise late Monday, nearly three weeks after the state began issuing pay-you-later warrants to thousands of state contractors and vendors. Many recipients had trouble finding someone to take them after several major banks stopped accepting IOUs.

The four legislative leaders will begin selling the plan to other lawmakers Tuesday as the best way to get the state back on firm financial ground and prevent further sinking of the state's credit rating, already the lowest in the nation. A contentious vote is expected Thursday.

The agreement composed of cuts, borrowing and fund shifts was not expected to resolve California's financial problems as the economy continues to struggle and tax revenue lags far behind the level of the boom years.

Personal income fell this year in California for the first time in 70 years, leading to a 34 percent plunge in income tax revenue during the first half of the year.