updated 7/15/2009 6:53:58 PM ET 2009-07-15T22:53:58

Gov. Arnold Schwarzenegger says he is hoping to have a deal with lawmakers by the end of the day to close California's $26.3 billion budget shortfall.

"The leaders have shown willingness to make this work," Schwarzenegger said. "There have been no blow-ups, chairs flying, none of that. We have a good shot at getting this done today."

The governor cautioned reporters during a Wednesday news conference that several difficult issues still must be resolved. Negotiations were to resume later in the afternoon.

California Assembly Speaker Karen Bass said lawmakers and the governor were just several hundred million dollars apart on finalizing a $90 billion-plus state spending plan.

Bass made the comments before the start of the afternoon negotiating session. She said a decision had not yet been made on the size of the reserve fund.

To save cash, California has been forced to issue IOUs to thousands of state vendors, and Schwarzenegger has imposed three furlough days a month. The state's credit rating has been sinking steadily as the negotiations over balancing the budget drag on.

Meanwhile, advocates for social services are protesting against cuts and proposed reforms outside the Capitol. They pleaded with the governor to spare programs they say are vital to seniors, low-income families and the disabled.

Layoffs, IOUs
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 were being debated.

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.

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.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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