Governor Arnold Schwarzenegger and leading California legislators say they have agreed a plan to close a state deficit of more than $26bn (£17bn), BBC reported.
Mr Schwarzenegger said the plan would include $15bn of spending cuts and no significant tax increases.
Legislators said they are hoping to vote on the plan on Thursday.
Mr Schwarzenegger declared a fiscal emergency earlier this month after legislators missed a deadline to agree a budget for the coming financial year.
Amid a protracted fiscal crisis, the office of the state controller has been sending promissory notes, or IOUs, to thousands of contractors and vendors providing state services.
Monday's deal came after more than two weeks of intense negotiations.
"We are very happy to have a basic agreement," Mr Schwarzenegger said as he announced the plan.
California's lawmakers approved a budget package in February that was aimed at plugging the state's deficit until the summer of 2010.
But the recession has sharply reduced state revenues, making further measures necessary.
Along with the spending cuts, the plan proposes to raise money by borrowing from local government, moving funds from other government accounts, and accelerating the collection of some taxes.
California's assembly speaker, Democrat Karen Bass, said the plan protected basic social services that her party had sought to preserve.