Up until Thursday, Gov. Arnold Schwarzenegger had sought to occupy the high ground in California's budget morass.

Last month, this Republican governor proposed a plan of tax increases and spending cuts that, while imperfect, would have helped the state stop its fiscal bleeding.

He kept his options open, saying that everything should be on the table. He slammed Democrats for taking their directives from unions, slammed Republicans for imposing conditions on any budget and placed an electronic ticker outside his office that showed the escalating costs of inaction.

His strategy worked.

After Republicans refused to budge from their no-tax pledges, Democrats came up with an inventive $18 billion mix of budget cuts, fees and tax cuts and increases that they could pass on a majority vote.

They met the governor partway on using public-private partnerships and "design-build" contracts to speed up state construction projects. Although they didn't give the governor everything he wanted, they offered a viable plan to close this year's budget gap, and take a big bite out of a shortfall that could grow to $42 billion by 2009-10.

What did the governor do? He immediately said he'd veto the package. Moreover, he did so for reasons that weren't immediately clear and didn't fully justify the continuation of an impasse he recently likened to "Armageddon."

Did Schwarzenegger decide to veto the package because it included levies on gasoline he didn't like? His statements Thursday night suggested as much, but he didn't make that clear.

Did he reject it because of fears the Democrats' approach is illegal? If so, we could accept that. But he didn't say that.

Although he has trouble with articulation, the governor – speaking through his surrogates – does seem to have some legitimate problems with elements of Thursday's package.

Kowtowing to their friends in labor, Democrats refused to advance the governor's proposal for once-a-month furloughs of state employees, and an end to potential abuses of overtime and sick pay. At a time when the state is slashing programs for the aged and disabled and considering further cuts, a trimming of the state payroll is reasonable and prudent, potentially saving $800 million over 18 months.

We also think the Democrats failed to make other tough choices to help the state close the remainder of a $42 billion deficit by 2010. In particular, lawmakers need to give school districts flexibility to redirect spending that is now earmarked for state-mandated "categorical" programs.

That said, much of the dispute between the Legislature and the governor had little to do with budget particulars. It revolved around loosening restrictions on "public-private partnerships" and allowing more construction of highway projects that are designed and built by the same firm.

While those goals have some policy merits, they pale in the face of California's cash-flow crisis. That calamity is threatening and shutting down bond funding for all sorts of infrastructure projects, from the building of classrooms to flood control levees.

Schwarzenegger once occupied the high ground in finding a resolution. If he can give a bit, and if Democrats and other legislators can be less intransigent, they might yet be able to claim it together. If they don't, they will have sunk the state into some very deep water.