July 15 (Bloomberg) -- California Governor Arnold Schwarzenegger said he and lawmakers may complete a deal today to close a $26 billion budget deficit that left the state paying creditors with IOUs and its credit rating near non-investment grade.

Schwarzenegger, a 61-year-old Republican, is scheduled to meet behind closed doors in his Sacramento office with Legislative leaders this afternoon after conferring for more then six hours last night.

“I think that we have a good shot at getting the budget done today,” Schwarzenegger told reporters today, though he cautioned that some issues remain unresolved.

California this month began issuing IOUs to pay some creditors, a step taken only once before since the Great Depression, because of the stalemate over the gap in the $100 billion annual budget. Moody’s Investors Service yesterday lowered California’s credit rating two steps to Baa1 from A2 and said its evaluation may be reduced further unless legislators quickly solve the cash crisis.

Schwarzenegger and Republicans oppose tax increases, while Democrats, who control both chambers of the Legislature, reject deep spending reductions that would eliminate entire welfare programs. Democrats lack the votes to reach the two-thirds majority needed to enact any solution immediately.

Moody’s reduction to Baa1 from A2 affected about $72 billion of general obligation and lease-supported bonds. The new grade is three levels above non-investment grade. Moody’s at the same time also lowered its rating on the state’s taxable bonds and debt sold for stem cell research, to A2 from Aa3.

California’s Reputation

“The political showdown continues to wreck California’s reputation and push taxpayers deeper and deeper into the hole,” Tom Dresslar, a spokesman for Treasurer Bill Lockyer, said in a telephone interview.

Fitch Investors on July 6 lowered its evaluation of California’s general obligation bonds by two steps to BBB from A-, placing the debt two ranks above so-called high-yield, high- risk junk ratings.

The cuts by Fitch and Moody’s put California’s creditworthiness where it was in December 2003, when Schwarzenegger tightened the state’s fiscal bind by honoring a campaign pledge to slash a car tax. By comparison, before the end of the Cold War, which battered military contractors in California, the state had the top credit grade from all three bond rating companies.

‘Cash Crisis’

“Moody’s believes that as the days and weeks go by without enacted solutions to the current cash crisis and the $26 billion budget gap, the risk to priority payments, and eventually debt service payments, is increasing,” the firm said in a statement. “The downgrade incorporates the risk we believe exists at the current time, as well as the state’s inability to solve the current difficulties in a timely fashion.”

Standard & Poor’s gives the state it’s A grade, the sixth- highest of 10 investment levels. The firm reaffirmed that assessment on July 1.

A California bond maturing in 2038 traded for as much as $1.04 per $1 face value to yield 5.5 percent yesterday. On July 1, that same bond sold for as little as 98.5 cents to yield 6.11 percent. The difference between a 10-year California bond and top-rated municipal bonds jumped as high as 1.71 percentage points on July 1 and has since slipped to 1.56, according to Bloomberg data.

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; William Selway in San Francisco at wselway@bloomberg.net.

Last Updated: July 15, 2009 16:53 EDT