Reporting from Sacramento -- Efforts by Gov. Arnold Schwarzenegger and legislative leaders to reach agreement on a package to wipe out the state's $26.3-billion deficit stalled Wednesday night.

Despite earlier consensus on how to close most of the gap, some nagging final issues stopped them from completing their work. They ended talks just after 10 p.m.

"I hate to describe it as a setback," said Assembly Speaker Karen Bass (D-Los Angeles), referring to the talks, "but it is definitely a stall."

Among the issues still unresolved are how to tweak voter-approved school funding formulas so the state can cut from education the billions of dollars it needs to balance the budget."When times are better and we can afford it," said state Senate leader Darrell Steinberg (D-Sacramento), "we want education to be paid back."

Other sticking points are changes to the structure of state government that the governor is demanding as part of any final deal.

Schwarzenegger says the changes would produce long-term savings by making various programs more efficient.

One contentious proposal would change the state welfare program to increase penalties for participants who do not meet minimum federal work requirements. Currently, emergency cash is available for children of parents in that category; those grants could be eliminated under Schwarzenegger's plan. .

Participants in the discussions had expressed optimism before Wednesday's talks began.

"There is no nastiness in the discussions -- no blowups, chairs flying and what usually are the routines -- there's none of that," Schwarzenegger said at a morning news conference. "So I think that we have a good shot of getting the budget done today. But there are still, I have to just caution, there are still some very important things that are not resolved."

Against the backdrop of goodwill, however, political bickering persisted. The powerful California Teachers Assn. continues running advertisements attacking the governor for his plan to cut money from schools. And the governor is running advertisements that Democrats say wrongly accuse them of trying to sneak tax hikes into the budget.

The California Democratic Party filed a complaint Wednesday with the state's ethics agency, seeking to force the governor's spots off the air. The ads, the party says, are paid for with funds that may be spent only to promote initiatives and referendums. The governor's campaign team called the complaint a baseless "political attack."