SACRAMENTO, Calif._Negotiations over closing California's $26.3 billion budget deficit appeared stuck Friday, as government offices closed for the second time this month and a health program for low-income children stopped accepting new applicants.

Gov. Arnold Schwarzenegger and the Legislature's four top lawmakers had no meetings scheduled after a disagreement over repaying billions of dollars to schools halted talks earlier in the week.

With little apparent action in the Capitol, the effects of California's fiscal crisis were being felt throughout the state.

Most state agencies, including the Department of Motor Vehicles, were closed Friday as part of the three-day-a-month furloughs ordered by Gov. Arnold Schwarzenegger. Prisons, state hospitals, highway patrol and firefighting agencies remained staffed.

Healthy Families, which offers reduced-cost medical coverage to low-income children, began putting new applicants on a waiting list because of a projected shortfall of at least $90 million. It was the first time the program had done so since it was started 12 years ago.

Advocates fear as many as 570,000 children would be denied access to health coverage, but program officials pegged the figure around 400,000 if the freeze were imposed for an entire year.

The freeze was imposed to prevent the state from having to remove children from coverage if lawmakers approve deep funding cuts, said Ginny Puddefoot, deputy director for health policy at the Managed Risk Medical Insurance Board, which oversees the Healthy Families program.

Even with the enrollment freeze, families continued applying.

"I understand there's no money, but the kids, they deserve to have some health insurance, some coverage. We don't have enough income to pay for their medical bills," 26-year-old Pa Lor said as she signed up for the waiting list at a Sacramento County Healthy Families contract provider.

Puddefoot said the recession was driving up need as parents lose jobs and struggle to find new ones, especially ones that provide health insurance.

The U.S. Department of Labor reported Friday that California's unemployment rate remained steady at 11.6 percent from May to June, the highest in modern record-keeping.


Not all developments Friday were grim. Citibank announced it was extending the period it will accept IOUs, which the state began issuing this month to preserve cash. That will provide temporary relief for vendors who have been issued IOUs instead of payments for providing staffing, cleaning office supplies and other services to the state.

Citibank said it would extend the deadline to July 24 after previously saying it planned to stop accepting the state's registered warrants.

"We are deeply disappointed that the California budget situation remains unresolved," Rebecca Macieira-Kaufmann, president of Citibank California, said in a statement.

Bank of the West and some credit unions have said they will continue to accept IOUs but JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and several other major banks have already stopped honoring California's warrants.

Meanwhile, local government officials from around the state were meeting in Sacramento to discuss Schwarzenegger's proposals to take billions of dollars from local treasuries. They also were debating whether a constitutional convention is needed to change the state's governance structure.

As California's bond rating sinks, threatening the state's ability to fund infrastructure projects, budget negotiations hit a snag over education funding.

Schwarzenegger disagrees with the Legislature's two Democratic leaders over whether the state should guarantee that schools will always get back what is cut during lean budget years.

Both parties agree schools should be repaid about $11 billion from recent budget cuts, but Democrats want a written guarantee enshrined in the state's complex education funding formula that schools will always get such repayments.

The administration believes such a change would require voter approval.

Education advocates prefer to make repayment permanent because they feel the governor hasn't always made good on his past promises. In 2005, the administration agreed to repay $2.9 billion to public education after the state's largest teachers union accused Schwarzenegger in a lawsuit of taking school funding and refusing to pay it back.

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Associated Press Writer Don Thompson contributed to this report.