With California's budget gap growing by millions each day, Thursday marked a roller coaster of Capitol emotion that veered from optimism about prospects for a deal to eruption of a new fight over school funding.

Bottom line: No agreement – and state finance officials estimate that the red ink grows by about $25 million per day for every day that goes by this month without a balanced budget in place.

"It's time that we get this done," Senate President Pro Tem Darrell Steinberg said of the impasse.

But battle lines were forming Thursday over a key element of Gov. Arnold Schwarzenegger's latest budget-balancing proposal – suspension of Proposition 98 to achieve $3 billion in savings this year.

Steinberg, Assembly Speaker Karen Bass and school officials said that the governor's proposal would lower by $1.4 billion the base used to calculate future funding for public education.

"My understanding is that a temporary suspension has long-term impact," Bass said.

The matter is complicated by complex formulas for determining school funding, which depend partly on state economic conditions, so there is disagreement over whether schools would be hurt long-term by the governor's proposal.

H.D. Palmer, Schwarzenegger's finance spokesman, said schools have been treated fairly.

"In a budget environment like this, I don't think that should be cause for criticism," Palmer said of the governor's proposal. "I think it should be cause for gratitude."

Proposition 98, approved by voters more than two decades ago, is meant to ensure a minimal level of funding for public schools and community colleges.

Suspending the measure would require a two-thirds vote of the Legislature and represents a political land mine for lawmakers.

"I expect a very serious fight over this. It's a big deal," said Kevin Gordon, a veteran education lobbyist.

Steinberg called it a "terrible idea" to suspend Proposition 98.

"As hopeful as I remain about coming to an agreement, the governor's actions create a serious complication," Steinberg said.

Democrats contend the governor is to blame for the Proposition 98 mess because suspension could have been avoided if he had been willing to sign a stopgap package of three bills by midnight last Tuesday, the end of the fiscal year.

The package would have cut about $3 billion from the state budget, including $1.6 billion to K-14 public education, for the fiscal year that was expiring. By law, state officials can't cut the budget of a fiscal year that has ended.

Failure to act before the deadline hiked the state's budget gap from $24.3 billion to $26.3 billion and prompted the governor to propose suspending Proposition 98 and cutting school funding by $3 billion this year.

Failure to act also had a positive impact on schools, however, by resolving a dispute over whether the state owed them more than $8 billion from past budget cuts. Schools are assured of receiving that money over a period of years.

Under California's complex education funding formula, the quickness and extent of the state's recovery from recession could help determine what effect suspending Proposition 98 would have on schools.

Palmer contends that school funding would not suffer in the long run – and that federal stimulus funds would help ease any short-term pain.

The school-funding issue erased early morning hopes Thursday that a budget deal was near.

Before noon, Schwarzenegger and Steinberg had expressed optimism in separate news conferences.

"I'm going to be here, and I know that some of my colleagues are going to be here around the clock today, tomorrow and over the weekend with the hope and expectation that over the next several days we will complete this and complete it successfully," Steinberg said.

Steinberg said the Democrats were no longer pushing tax hikes on cigarettes or oil extraction.

Schwarzenegger blasted Democrats for catering to special interests, but he also expressed optimism about striking a deal.

"Well, I always say I'm an optimistic man, right?" Schwarzenegger said at a Los Angeles news conference. "So I say that we actually have a chance to do it within the next two or three days."

Call Jim Sanders, Bee Capitol Bureau, (916) 326-5538.