SACRAMENTO (AP) _ Gov. Arnold Schwarzenegger on Wednesday will propose a plan to close the state’s $15.2 billion deficit by borrowing against future state lottery revenue and making cuts to some state programs.

The budget proposal Schwarzenegger will release also backs away from a politically unpopular plan to suspend the state’s minimum school funding guarantee. Instead, he will boost education funding by about $1.8 billion in the 2008-09 fiscal year when compared with current year spending.

Schools still would lose about $4 billion in anticipated revenue because Schwarzenegger’s plan would not include program cost-of-living increases.

The governor’s proposal merges his plan for the fiscal year that starts July 1 with his broader idea to reform the state’s budget process. He seeks to create a rainy day fund that would ease the effect of year-to-year revenue fluctuations on state programs.

The centerpiece of Schwarzenegger’s budget proposal is seeking to raise $15 billion over the next three years by selling bonds based on anticipated lottery revenue. He will use about $5.1 billion of that in the 2008-09 fiscal year to help erase the deficit, administration officials told The Associated Press.

The other $10 billion would remain in the reserve fund the governor wants to create.

Adding the anticipated $5.1 billion in lottery bond revenue and saving the $4 billion in education spending leaves the administration with some $6 billion in cuts needed to balance the budget.

In remarks prepared for delivery during his budget briefing, Schwarzenegger said if his reforms had been enacted in 1998, the state would not be facing the same massive problem it is today.

“No other big state has such volatile up-and-down revenues. But this roller-coaster revenue problem has a simple solution: If we save money during the above-average years, we will have enough money for the below-average years,” he said in the prepared statement shared with The Associated Press.

The revenue proposal ‚Äî which administration officials refer to as “securitizing” the lottery ‚Äî would require voter approval because the lottery was established through the initiative process.

If it fails, the governor will ask the Legislature to approve a temporary 1 cent increase in the state sales tax to pay for the reserve fund. It would last no more than three years.

Schwarzenegger also will propose a surcharge on homeowners insurance policies that would raise $69 million a year for the state’s emergency services, spokesman Aaron McLear told the AP.

The budget the governor will release Wednesday also backs away from some other politically unpopular proposals in the $141 billion budget plan he released in January.

He is dropping a plan to close 48 state parks and cut back lifeguards at 16 state beaches. Instead, he will propose boosting fees $1 to $2 at some of the most popular state park destinations.

Earlier Tuesday, administration officials said Schwarzenegger’s revised budget will abandon a plan to release 22,000 low-risk prison inmates early. Projections showed that a declining inmate population will save the Department of Corrections and Rehabilitation about $300 million, roughly $100 million less than originally estimated.

In addition to closing the $15.2 billion deficit, the governor also wants lawmakers to set aside a $2 billion reserve fund for 2008-09.

“This sounds amazing. How does all this work? It sounds risky, almost like a Rubik’s cube budget, not a long-term, structurally balanced budget,” said newly sworn-in Assembly Speaker Karen Bass, D-Los Angeles, in a statement. “We’re going to put this under a microscope and make sure we protect education and the most needy Californians.”

In his prepared remarks, Schwarzenegger said the lottery has been an underperforming asset. His plan would let the lottery pay out more in prizes in hopes of attracting additional revenue.

“So we will modernize the lottery and go to voters in November, asking them to approve both a constitutional amendment establishing the rainy day fund and plans to securitize future lottery revenues,” he said.

Last year, California’s lottery generated $3.3 billion in total revenue.

By selling bonds based on anticipated revenue, Schwarzenegger is taking a different approach on an idea he has talked about for months. Previously, the governor discussed leasing the lottery operations to Wall Street investment firms.

He had said the state could receive as much as $37 billion ‚Äî half up front and the rest in fixed annual installments. Schwarzenegger was relying on an estimate by Lehman Brothers, which had projected the value of California’s lottery between $16.1 billion and $37 billion.

An AP investigation earlier this year, based on public records requests, showed a value for the state lottery that potentially was much lower. Six other Wall Street investment banks estimated the value of a long-term lease at between $7 billion and $29 billion with smaller upfront payments, usually less than $9 billion.

Schwarzenegger believes the lottery could yield much more for the state, by changing the potential payouts to lottery players as Sen. Dean Florez, D-Shafter, has proposed. It also would allow the state to better compete with Indian gambling and horse racing.

Under the plan, schools would continue to receive the roughly $1.3 billion a year in lottery proceeds they currently do, if not more, the administration said.

In addition to the lottery plan, the longer-term budget reform proposal would require approval from voters on the November ballot. Schwarzenegger said the sales tax proposal is merely a fallback position.

“We have confidence that our economy will rebound and we will grow our way out of our problem. But in the unlikely event that the trigger is pulled, the tax would be temporary,” Schwarzenegger said in the prepared remarks.

Democrats and Republicans in the Legislature remain far apart in their philosophy on closing the budget deficit. While Democrats have floated plans to increase taxes or fees on everything from strip clubs to music downloads, Republicans signed an oath pledging to block any tax hikes.

Schwarzenegger officials said his plan largely avoids fee increases. It does, however, include a revised version of his proposal to add a surcharge to residential and commercial property insurance to boost the state’s firefighting capability and other emergency-response services.

Property owners would be assessed a graduated fee depending on the location of their property. Homes and businesses in areas at high risk for earthquakes, floods or fires would be assessed 1.4 percent on their property insurance. Those in lower-risk areas would be charged 0.75 percent — about $12.50 a year or $6.75 a year, respectively, on an average $900 annual policy, McLear said.

The governor’s January proposal included a flat fee on all homeowners insurance policies.

A budget deal requires support from two-thirds of members in both houses of the Legislature.

The new speaker of the state Assembly, Karen Bass, said solving the budget shortfall is her top priority. She has floated the idea of raising income taxes on the wealthy and levying sales taxes on services.

Earlier this year, the nonpartisan Legislative Analyst’s Office recommended eliminating or reducing a dozen tax loopholes to generate $2.7 billion in revenue.

Schwarzenegger has sent mixed signals on bringing in new revenue. He has said he opposes tax increases but said he would consider proposals to close loopholes.

Schwarzenegger initially forecast a $14.5 billion deficit for the 18-month period starting last January, a figure that quickly grew to an estimated $16 billion.

Lawmakers met in special session and cut that figure to about $7.4 billion for the next fiscal year by authorizing more borrowing, delaying some payments and making cuts and other budget changes.

Lawmakers are supposed to approve a new budget each year by June 15, a little more than two weeks before the start of a new fiscal year. They have only rarely met that deadline.

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Associated Press Writers Steve Lawrence and Samantha Young in Sacramento contributed to this report.
Schwarzenegger to propose lottery borrowing to close deficit