Talks Intensify Over Closing Calif.'s $26B Deficit

Despite the differences, both Democratic leaders appeared upbeat as they left Schwarzenegger's office after a second round of talks that began Friday night.

Gov. Arnold Schwarzenegger talks with reporters during a break in budget meeting with Legislative leaders at the Capitol in Sacramento, Calif., Friday, July 10, 2009.(AP Photo/Rich Pedroncelli)

(AP)

Assembly Speaker Karen Bass, who walked out of negotiations earlier in the week, said there did not appear to be any insurmountable obstacles to reaching a deal. She described the talks as complicated.

"I think what has happened over the last 48 hours has been the most productive in the last several weeks," the Los Angeles Democrat said. "We are just not finished." Senate leader Darrell Steinberg, a Democrat from Sacramento, also attended the talks.

Besides the welfare and social service reforms, education funding is one of the key negotiating points. Lawmakers are trying to decide whether it can be cut and, if so, by how much. Funding for K-12 schools and community colleges accounts for roughly half of annual state spending.

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The possibility of a breakthrough in resolving California's mammoth budget shortfall comes a week after the state began issuing IOUs to thousands of vendors. State workers also have begun taking three days off a month without pay, cutting the salaries of more than 200,000 government employees by 14 percent.

The state's fiscal picture has become progressively worse since Schwarzenegger and lawmakers passed the budget for the current fiscal year last February during an unusual midyear session.

Personal income taxes declined 34 percent during the first five months of the year, a slide that has accelerated as the recession continues to strangle California's economy.

On Friday, the state controller's office reported the state had spent $10.4 billion more than it collected in the fiscal year that ended June 30. It is now without sufficient cash to cover all of its payment obligations.

If the budget isn't balanced by late August, the state will have to defer payments to its pension funds and may issue IOUs instead of paychecks to state employees.