SACRAMENTO, Calif. — Against a backdrop of IOUs and expanding government furloughs, Gov. Arnold Schwarzenegger and legislative leaders expressed optimism Saturday that they were moving toward a compromise that could end California's fiscal calamity.

Negotiations to close the state's $26.3 billion deficit restarted after two weeks of inaction and partisan bickering. Top lawmakers from both parties said a budget-balancing deal was possible in the coming week.

"I would say we're getting very close to a general framework, but there are still outlying questions," said Assembly Minority Leader Sam Blakeslee, a San Luis Obispo Republican, after emerging from a closed-door meeting between lawmakers and Schwarzenegger.

They negotiated about 2<0x00BD> hours Saturday before ending talks for the day. They were expected to return to the Capitol on Sunday.

Negotiations centered on the extent of budget cuts — which are expected to range from $14 billion to $15 billion — and what other steps might be taken to close the deficit.

The shortfall, which is the difference between the amount of tax money coming into the state and its previously approved spending obligations, amounts to more than a quarter of California's general fund, its main account for paying operating expenses.

Schwarzenegger and Republican lawmakers also want reforms to welfare, pension, health care and in-home supportive service programs. They say preventing waste and abuse will save the state money, which in turn can be used to prevent cuts elsewhere in the budget. The governor's office has estimated its reform proposals will save $1.7 billion this fiscal year alone.

Democrats have criticized the reform proposals as peripheral issues that do not have a direct effect on the immediate budget deficit. They also say Schwarzenegger has overstated the savings.

"There's a general appreciation that many of these reforms will produce savings, but we want to make sure we approach them in a thoughtful manner," Blakeslee said.

Despite the differences, both Democratic leaders appeared upbeat as they left Schwarzenegger's office after a second round of talks that began Friday night.

Assembly Speaker Karen Bass, who walked out of negotiations earlier in the week, said there did not appear to be any insurmountable obstacles to reaching a deal. She described the talks as complicated.

"I think what has happened over the last 48 hours has been the most productive in the last several weeks," the Los Angeles Democrat said. "We are just not finished."