Calif. budget talks stall over education funding

SACRAMENTO, Calif. - The prospects for a quick budget-balancing deal between Gov. Arnold Schwarzenegger and California's top lawmakers dimmed late Wednesday as negotiations broke down over education funding.

Schwarzenegger and one of the Democratic leaders had expressed optimism earlier in the day that they could agree quickly on a plan to close the state's

$26.3 billion shortfall.

But Democratic leaders from both legislative chambers left the meeting with the governor and Republican leaders late Wednesday saying talks were stalled over whether to repay schools $11 billion once the economy bounces back.

"I hate to describe it as a step back, but it was definitely a stall," said Assembly Speaker Karen Bass, D-Los Angeles.

Democrats want a written guarantee that the funds will be repaid, but they said Schwarzenegger wanted to offer his word instead.

California already has a budget for the fiscal year that began July 1, thanks to an unusual midyear session in February. But the recession has clobbered the state's economy, putting its budget out of balance within weeks.

The shortfall has grown to more than a quarter of the state's general fund, which pays for daily expenses.

As tax revenue has plunged, the state has begun issuing IOUs to state contractors, a practice it may have to expand to government workers if a balanced budget isn't in place by late August. Contributions to the state pension funds also may be in jeopardy.

"We understand the question and the concern. And you know we're going to get this done, but it is worth fighting for those people," said Senate leader Darrell Steinberg, D-Sacramento.

Schwarzenegger and the Republican leaders of the Assembly and Senate say they will not increase taxes, a point the governor has been making in a commercial that began airing this week.

That means he and lawmakers must close the gap with spending cuts and other measures, which could include accelerating income tax collections, borrowing tax money from city and county governments, and shifting money between existing government accounts.

The outstanding issues include funding for education and health and human services, the size of any reserve fund and whether California should raid local government accounts.

As Steinberg took a break from Wednesday night's talks, a reporter asked if the negotiations were like buying a car.

"It's a lot more fun to be in a car lot, actually," Steinberg responded.

As lawmakers try to find enough common ground to forge a compromise, the state's credit rating continues to sink.

On Tuesday, 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. The credit rating agency said the budget deadlock had put constitutionally required payments to bond holders at risk.

The administration also notified state employee unions that the state would cut 2,000 jobs on top of 4,600 layoff notices issued previously.

Schwarzenegger said he wants to avoid a budget-balancing plan that addresses only the state's current fiscal problems. Rather, he wants to begin streamlining government and weeding out waste and abuse.

Democrats have agreed to allow the governor to study whether California should privatize its welfare eligibility system, as other states have done. Currently, counties determine who is eligible for welfare.

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Associated Press Writer Samantha Young contributed to this report.