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Most of the $26 billion deficit had reportedly been resolved, with only $400 million remaining.
"I think we have a good shot of getting the budget done today," said Gov. Arnold Schwarzenegger early Wednesday.
Optimism was in the air at the state Capitol that a deal to end the budget stalemate was imminent. Each party briefed their caucuses Wednesday morning on a general outline of a compromise, but the details had not been made public. However, the tone quickly changed when talks centered on how to pay back public education.
Lawmakers hinted cuts would be very deep to classrooms, and Democrats wanted assurances those kids would get the money back.
"What we're arguing over is the obligation to repay public education billions of dollars ... over time when the state can, again, afford the repayment," said state Senator Darrell Steinberg (D-Sacramento).
"I hate to describe it as a step back, but was definitely a stall," said Assembly Speaker Karen Bass (D-Los Angeles).
Education is always a target during budget negotiations because almost half of the state budget goes to public classrooms.
Governor Schwarzenegger says he supports paying back public education, but not the way Democrats prefer; which is a constitutional amendment without the vote of the people.
Budget talks will continue on Thursday.