California Governor Arnold Schwarzenegger has dropped a proposal for the state's $211 billion pension fund to lend the state government $2 billion to help close its budget gap, a spokesman said Thursday night.

Aaron McLear said the Republican governor took the idea of borrowing from the California Public Employees' Retirement System, best known as Calpers, off the negotiating table during a three-hour talk with top lawmakers on how to balance the state's budget, which requires closing a $19 billion budget gap.

California on Friday will set a record for operating its government without a spending plan in place. The state's fiscal year began on July 1 and lawmakers were supposed to have approved a budget in mid-June.

State Senate President Darrell Steinberg emerged from the meeting and told reporters he was hopeful the Democrat-led legislature could reach a budget deal with Schwarzenegger on Friday or during the weekend but McLear said there had been no major breakthroughs during the meeting.

"We still are where we were, we have a $19 billion deficit," McLear said.

Schwarzenegger and the legislature's minority Republicans want to balance the state's budget largely by slashing spending. They oppose tax increases. Democrats favor selected tax increase and delaying corporate tax breaks to raise revenue along with spending cuts.

The governor and top lawmakers will resume budget talks on Friday morning.