"This thing is coming to an end sooner than later," Senate President Pro Tem Darrell Steinberg, D-Sacramento, said Friday. He said an agreement could come as soon as Sunday night, when talks are scheduled to resume.
Democratic Assembly Speaker Karen Bass said late Friday that she was optimistic they would reach a deal soon, adding that both sides "made huge progress today."
Hours before lawmakers and Schwarzenegger began their latest round of talks, the U.S. Department of Labor reported that California's unemployment rate remained at a record high of 11.6 percent, underscoring the challenges facing the state's economy.
Income tax revenue to the state has plunged 34 percent during the first five months of the year, leading to a massive imbalance between the state's income and its spending obligations.
It's that imbalance the governor and lawmakers are trying to fix in a budget that was passed in February.
Despite the renewed sense of optimism, negotiators still have not resolved the main points of disagreement that have prevented a deal so far, including whether to repay billions of dollars to public schools for money that was cut from earlier budgets and whether the state should maintain a reserve fund for emergencies.
"We are closer than we have been, but we still have a ways to go," said Aaron McLear, Schwarzenegger's spokesman.
Schwarzenegger, a Republican, disagrees with the Legislature's two Democratic leaders over how the state should guarantee that schools will always get back what is cut during lean budget years. Both parties agree schools should be repaid about $11 billion from recent budget cuts, but Democrats want a written guarantee enshrined in the state's complex education funding formula that schools will always get such repayments.
The administration believes such a change would require voter approval.
Education advocates prefer to make repayment permanent because they feel the governor hasn't always made good on his past promises. In 2005, the administration agreed to repay $2.9 billion to public education after the state's largest teachers union accused Schwarzenegger in a lawsuit of taking school funding and refusing to pay it back.
Another negotiating point was over whether to take money from city and county governments, many of which have experienced steep declines in tax revenue and are being forced to lay off workers, including law enforcement officers and firefighters.
"Folks are gathered across the street right now to talk about how to take money from our schools, from our cities and our counties," San Mateo County Supervisor Rich Gordon said Friday during a conference of about 500 local government officials to discuss Schwarzenegger's proposals to take billions of dollars from local treasuries.
The crowd across from the state Capitol responded with hisses, boos and shouts of "No way!"
