Gov. Arnold Schwarzenegger (search) failed to reach a budget deal (search) with legislative leaders before Thursday's start of the new fiscal year in his first budget negotiations since taking office.

Schwarzenegger had made on-time passage of the budget a priority, and promised during the recall campaign last year that he would slash spending and balance the budget. But the $103 billion spending plan emerging from the last weeks of negotiations relies on billions of dollars of additional borrowing and one-time savings — and the hope for more money from Washington.

It is the ninth time in 11 years that California ended the fiscal year without a budget approved by the Legislature.

Schwarzenegger had been optimistic of a breakthrough on the few issues that still separated the parties Wednesday — including local government financing, health and welfare spending and money for state universities.

"He said a lot of obstacles were cleared away today," spokeswoman Margita Thompson said Wednesday. "He said they are solving, solving, solving."

But even as the negotiators continued to express optimism that a deal is imminent, evidence of a potential rift between the GOP governor and members of his own party began to show as the governor backed away from spending cuts he appeared committed to only a few weeks ago.

Republicans are also making an issue of $200 million in fee increases the governor wants to impose on farmers, logging operations and water users. GOP legislators say the fees are no different from a tax increase — and their unhappiness could hamper the governor's attempts to build the necessary two-thirds majority to pass a budget.

"We've been saying for months that the fees are a top priority," said Assembly Minority Leader Kevin McCarthy (search). "We laid that out very early."

In his latest agreement with Democrats, Schwarzenegger gave up efforts to trim the pension benefits of state workers and instead backed a plan that relies on new workers failing to obtain full retirement benefits to derive hoped-for savings of $2.7 billion over 20 years.

In another victory for Democrats, union officials say Schwarzenegger has also backed away form his demand that state workers give back a 5 percent raise that was scheduled to begin Thursday.

At the same time, several of Schwarzenegger's budget projections have not materialized. For example, he expected to save about $300 million this year by renegotiating the state contract with prison guards but said Tuesday the state would be saving about $108 million over two years. Schwarzenegger also expected to save about $450 million by renegotiating other employee contracts, which apparently now will not happen. There's also a settlement in a school funding lawsuit that may cost the state as much as $130 million this year.

On top of that, Democrats still want about $400 million in additional spending to help state universities, home health care workers and welfare recipients.

Since his election in October, the actor turned politician has claimed several victories. Upon taking office, he repealed an unpopular increase in the car tax, and he forced lawmakers to repeal a law allowing illegal immigrants to obtain driver's licenses.

In March, he persuaded voters to approve the nation's largest state bond issue — $15 billion in borrowing. He also brokered a deal to reform the state's costly workers' compensation system.