Los Angeles News

SACRAMENTO, Calif. (AP) ― Closed-door negotiations failed to yield a compromise on California's $26.3 billion shortfall late Tuesday, but Democratic and Republican lawmakers remained hopeful that a deal could be struck with one more round of talks.

"We're very close," said Senate Republican Leader Dennis Hollingsworth after talks broke Tuesday before midnight.

Lawmakers were scheduled to resume meeting with Gov. Arnold Schwarzenegger on Wednesday afternoon.

The Schwarzenegger administration was more reluctant to predict when a deal could be reached.

The governor appeared to be pressing for more cuts before closing out a revised version of the state's spending plan.

"We're not done; we still have work to do," said Schwarzenegger spokesman Aaron McLear.

California has been battered by a cash crisis that has forced the state to lay off thousands of government workers and issue millions of dollars worth of IOUs since the new fiscal year began July 1.

The governor and lawmakers are scrambling to bridge a deficit that's more than a quarter of the state's general fund.

On Tuesday, Schwarzenegger told state employee unions that his administration would cut 2,000 jobs on top of 4,600 layoff notices previously issued.

The same day, Moody's Investor Services downgraded California bonds to near-junk status, from A2 to Baa1, and placed the state's credit rating on watch for possible further reductions.

Schwarzenegger and Republican lawmakers have been seeking deep cuts to social service programs for low-income families, seniors and the disabled.

After weeks of resisting, Democrats now appear to be willing to make changes to benefits and eligibility to save the state money without eliminating those programs.

Other issues such as education funding also remain.

It's unclear whether the state would have to suspend a complex education funding formula to fund public schools with less money.

Education is the largest program funded by the state general fund, taking up roughly half of the budget.

"We believe that among the options we have to choose from, there is a solution that should work for all the parties," said Assembly Minority Leader Sam Blakeslee.

Earlier in the night, Assembly Speaker Karen Bass and other Democratic lawmakers indicated they were prepared to work all night to close the deal.

They reported making good progress during an evening break.

Lawmakers are feeling pressure as the state's credit rating falls and more layoff notices are being prepared.

Moody's said the budget deadlock had put constitutionally required payments to bond holders at risk.

"If the state gets to a position where it is unable to make priority payments, a multi-notch downgrade may result," Moody's said in a statement.

The state's cash crisis has forced state Controller John Chiang to issue nearly 130,000 IOUs worth a total of $436 million to state vendors.

The Legislature has until the end of August to balance the budget for the current fiscal year before jeopardizing paychecks for government employees and others.

Besides layoffs, Schwarzenegger has imposed three furlough days a month for many workers and proposed a 5 percent pay cut for state workers that would have to be agreed on as part of budget negotiations.

The furloughs bring the total pay cut to about 14 percent.

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