Democrats and Republicans on Thursday said they have backed down from their ideological high ground in order to reach a possible budget compromise.
Gov. Arnold Schwarzenegger met for several hours with top party leaders from both sides.
They seemed to be moving closer to a deal, observers said. However, there is much tough talk expected to take place in the coming days about a potential limit on spending in exchange for a temporary increase in taxes.
On Thursday, one observer described the budget talks as going better than in previous weeks.
"Finally for the first time since I've been here for four years, Republicans are actually putting all the options on the table, including tax increases," said Assembly Majority Leader Alberto Torrico, D-Fremont.
The fact that some Republicans are actually mentioning the "T," as in taxes, is somewhat surprising, given that nearly half of all state Republican leaders have signed no-tax pledges.
"Let's be honest. We have a very big crisis on our hands," said Assemblyman Anthony Adams, R-Hesperia. "There is not a budget solution that's going to be able to be achieved without real talk about taxes being on the table. The bottom line though (is that) this is about taxes versus reforms."
Republicans want Democrats to agree to a hard cap on spending, something now under negotiation, according to Karen Bass, D-Assembly Speaker.
"I do believe that we'll see a breakthrough in the next few days," Bass said.
Lawmakers are also facing additional pressure on another front, as the state's first financial credit rating has gone from bad to worse.
"If you look at it like a soccer match, referees carry two cards in their pocket," said H.D. Palmer of the California Department of Finance. "A yellow card is a warning and a red card is an ejection. What Moody's did yesterday was pull a yellow card on the state of California."
California's credit rating is now tied for last place among all 50 states, and not likely to improve unless a budget solution comes quickly.
Another potential stumbling block emerged Thursday afternoon. Schwarzenegger said he wants to send state workers home two days a month without pay in order to pay $1.3 billion.
State Controller John Chiang said he will defy the governor's executive order. Since Chiang is the elected official who issues the checks, that could change everything.
Therefore, if the Democrats don't agree to support the governor on furloughs the budget talks could quickly unravel.