Schwarzenegger, lawmakers restart budget talks

SACRAMENTO, Calif. -- Negotiations over closing California's $26.3 billion budget deficit resumed Friday, as government offices closed for the second time this month and a health program for low-income children stopped accepting new applicants.

Gov. Arnold Schwarzenegger and the legislature's four top lawmakers went into a closed-door meeting Friday afternoon to work out a disagreement over repaying billions of dollars to schools that halted talks earlier in the week.

It was not immediately clear whether the sides were any closer to an agreement than they had been when talks broke off Wednesday.

Senate Minority Leader Dennis Hollingsworth, R-Temecula, was reserved when asked how soon a deal might be struck.

"I think predictions have been wrong over the last week, so I'll say we're close but we'll see what happens," he said before entering Schwarzenegger's Capitol office.

He said any compromise to close the state's shortfall should include a reserve of $1 billion to $2 billion.

As talks restarted, the effects of California's fiscal crisis were being felt throughout the state.

Most state agencies, including the Department of Motor Vehicles, were closed Friday as part of the three-day-a-month furloughs ordered by Schwarzenegger. Prisons, state hospitals, highway patrol and firefighting agencies remained staffed.

Protesting cuts

About 100 protesters gathered outside the governor's Los Angeles estate to denounce pay reductions for state workers and proposed cuts to health and social programs.

Healthy Families, which offers reduced-cost medical coverage to low-income children, began putting new applicants on a waiting list because of a projected shortfall of at least $90 million. It was the first time the program had done so since it was started 12 years ago.

Advocates fear as many as 570,000 children would be denied access to health coverage, but program officials pegged the figure around 400,000 if the freeze were imposed for an entire year.

The move was made to prevent the state from having to remove children from coverage if lawmakers approve deep funding cuts, said Ginny Puddefoot, deputy director for health policy at the Managed Risk Medical Insurance Board, which oversees the Healthy Families program.

Even with the enrollment freeze, families continued applying.

"I understand there's no money, but the kids, they deserve to have some health insurance, some coverage. We don't have enough income to pay for their medical bills," 26-year-old Pa Lor said as she signed up for the waiting list at a Sacramento County Healthy Families contract provider.

Puddefoot said the recession was driving up need as parents lose jobs and struggle to find new ones, especially ones that provide health insurance.

The U.S. Department of Labor reported Friday that California's unemployment rate remained steady at 11.6 percent from May to June, the highest in modern record-keeping.

Not all developments Friday were grim. Citibank announced it was extending the period it will accept IOUs, which the state began issuing this month to preserve cash. That will provide temporary relief for vendors who have been issued IOUs instead of payments for providing staffing, cleaning office supplies and other services to the state.

Citibank said it would extend the deadline to July 24 after previously saying it planned to stop accepting the state's registered warrants.

"We are deeply disappointed that the California budget situation remains unresolved," Rebecca Macieira-Kaufmann, president of Citibank California, said in a statement.

Bank of the West and some credit unions have said they will continue to accept IOUs but JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and several other major banks have already stopped honoring California's warrants.

Meanwhile, about 500 local government officials from around the state met in Sacramento to discuss Schwarzenegger's proposals to take billions of dollars from local treasuries. They also debated whether a constitutional convention is needed to change the state's governance structure.

"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 as he opened the conference.

The crowd responded with hisses, boos and shouts of "no way!"

As California's bond rating sinks, threatening the state's ability to fund infrastructure projects, budget negotiations hit a snag over education funding.

Schwarzenegger disagrees with the Legislature's two Democratic leaders over whether 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.

In Los Angeles, protesters anticipated deeper cuts to health and social service programs in any final budget deal.

Dozens of union members, home-care workers and their supporters gathered Friday near Schwarzenegger's estate to ridicule his proposed spending cuts, chanting "shame on you" and "no budget, no peace."

Dozens of armed police watched over the crowd and guarded the private road leading to the home.

At one point, two disabled women in motorized wheelchairs began moving up the road, while leading the crowd in the civil rights anthem "We Shall Overcome." Police blocked them; they were ticketed for trespassing but not taken into custody.

"The criminal is in Sacramento. His name is Arnold," Lillibeth Navarro, one of the women, shouted as police surrounded her.

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Associated Press writers Don Thompson and Juliet Williams in Sacramento and Michael R. Blood in Los Angeles contributed to this report.