California cities and counties will take a multibillion-dollar hit to help close the state's massive budget gap.

Closed-door negotiations between Gov. Arnold Schwarzenegger and legislative leaders are targeting city and county coffers to help bridge a $26.3 billion shortfall.

Revenue is one critical aspect of a wide-ranging budget deal that appeared near on Thursday. All sides say only a handful of issues remain, but negotiations stalled late Wednesday in a dispute over Proposition 98 school funding.

No talks were held Thursday.

Schwarzenegger, in a news conference, said he is "very close" to striking a deal.

"There's a will there, in this building, of both parties to get it done," he said.

Bolstering state coffers with local government funds would replace revenue lost by killing proposals to hike taxes on cigarettes, impose an oil extraction tax and raise vehicle registration fees to bankroll state parks.

A three-pronged revenue package totaling more than $4 billion this year from cities, counties and special districts is the acknowledged choice within budget negotiations, according to multiple sources familiar with the talks.

Senate Republican leader Dennis Hollingsworth is pushing an alternative idea, involving borrowing against redevelopment funds, but it likewise involves local government.

Aaron McLear, Schwarzenegger's spokesman, declined comment Thursday.

Jean Hurst, lobbyist for the California State Association of Counties, said recession has taken a huge toll, and local governments would be hard-pressed to shoulder a heavier load.

"If we're talking about all three components, I think 'devastating' is not a strong enough word to describe how it will affect local government," she said.

The three-pronged revenue package from local governments consists of:

• Borrowing $1.9 billion in property taxes from cities, counties and special districts. Under voter-approved Proposition 1A, the money would have to be repaid within three years.

• Taking $1.7 billion in redevelopment funds, including $1 billion from coffers for construction of low- and moderate-income housing. To compensate, the life of redevelopment agencies would be extended for one year, assuring additional funding before they expire.

• Taking $986 million this year from gas-tax funds used by local governments for transportation-related public works and maintenance projects, such as repairing potholes, repaving roads or plowing snow. A similar sum is proposed for 2010-11. Losses could be offset partially by federal stimulus funds.

Hurst, of the California State Association of Counties, said the three-prong plan likely would be challenged in court, if adopted, as an unconstitutional taking of local funds.

In crafting the revenue plan, proponents have tried to lessen the impact on local government. For example, cities and counties potentially could offset the $1.9 billion loss in property taxes by borrowing money, using the security of the state's repayment commitment to attract investors.

But Hurst said the concept could backfire.

"Keep in mind, the state's credit rating is really lousy, and Wall Street is not particularly interested in purchasing notes that are affiliated with the state," she said. "If we can't market that debt, it's a cut."

Spokeswoman Eva Spiegel said the League of California Cities opposes all three elements of the proposed revenue package.

"If any of the three were (adopted), it would be devastating - and all three would be horrific," Spiegel said.

Hollingsworth is floating his proposal as a substitute for the gas tax and property tax raids. It would extend the life of participating redevelopment agencies, for numerous years, in return for a commitment to borrow against their revenue stream and commit a percentage to the state.

Any deal struck by Schwarzenegger and legislative leaders that siphons money from local government coffers is sure to be hotly contested and unpopular with many members of both parties. But palatable alternatives have not surfaced.

"I think they're misguided," Sen. Bob Dutton, R-Rancho Cucamonga, said of proponents of the three-prong package emerging from budget talks. "I can't support it."

Sen. Alan Lowenthal, D-Long Beach, said he doesn't like the idea of targeting local government, either.

"I think it's terrible," he said. "Do I think it could happen? Yes, because there's no money."

Rather than revenue generation, the issue that delayed negotiations Thursday involved Proposition 98, which ensures schools and community colleges a minimal level of funding, roughly 40 percent of the state's general fund.

Proposition 98's complicated formula allows for cuts in years of fiscal distress. Under most economic conditions, state law is clear that any reduction in the base used to calculate future school funding must be restored eventually.

But under one scenario, encompassing the past fiscal year, Proposition 98 is unclear on whether such school-funding cuts must be restored.

Democratic leaders and education groups want the law to be changed to clarify the ambiguity, thus assuring schools $9.5 billion in restoration funds from last year and setting a precedent for the future.

Schwarzenegger has agreed to restore the $9.5 billion from last year, but he has balked at altering state law, saying education groups should place the issue before voters.