Gov. Arnold Schwarzenegger on Wednesday proposed propping up a shaky $101.8 billion state budget on a bet that California can wring more than four times as much money as now from its lottery.

In announcing that Sacramento is $17.2 billion short of what it needs to keep state government growing apace of recent years, Schwarzenegger said he planned to balance the books by denying cost-of-living increases to schools, reducing health benefits for the poor and borrowing money against future lottery earnings.

In January, the governor delivered his preliminary budget. On Wednesday, after Sacramento took stock of its income-tax receipts, he unveiled his revised spring budget that marks the beginning of hard negotiations on a spending plan for the fiscal year that begins July 1.

Reaction from state lawmakers was mixed. Some praised the governor's decision to spend more money on education than he proposed in January and to refrain from closing state parks and letting thousands of prison inmates out early to curb costs. Other legislators from both sides of the aisle were skeptical of the lottery gambit, one prominent Republican calling it a "gimmick."

"I can't tell you whether it is a gimmick or not," said Finance Director Mike Genest in a news conference at the state Capitol.

But Genest suggested it was a sound strategy not unlike one used at the onset of the decade, when the state borrowed against anticipated revenues from a landmark settlement with tobacco companies.

Genest said the goal would be to repackage and heavily advertise the lottery so it brings in $5 billion a year instead of the current $1.2 billion. That would require getting voter approval and schools' consent to use the money for general government purposes; currently, all proceeds go to education.

"We're not going to force anybody to play the lottery," Genest said.

But based on the experience of other states, he said, officials believe the California Lottery can generate substantially more money without taking money away from tribal casinos, which send a portion of their winnings to the state Treasury.

Tax hikes may await

If voters were to reject the strategy, Schwarzenegger said he is prepared to exercise a fallback option: temporarily increase the sales tax by a penny on the dollar, enough to generate $6 billion a year. The tax would expire in 2011.

Sen. Dennis Hollingsworth, R-Murrieta, who represents portions of Southwest Riverside County and North San Diego County, said the lottery plan "is really no different than the other tricks and gimmicks that have been used nearly every year since I was elected to the Legislature eight years ago to paper over our overspending problem."

And Sen. Christine Kehoe, D-San Diego, said she is skeptical the lottery can generate $5 billion a year.

"I really don't see how he (Schwarzenegger) can support those numbers," Kehoe said.

Even if he can, there's no getting around the notion that the budget would be built largely on the foundation of borrowed money, Kehoe said.

"This just puts most of (the budget gap) on the credit card again, a credit card that has been maxed out over the last five years," she said.

Moreover, neither lawmaker was impressed with the fallback option.

"It's putting a gun to the heads of the voters and saying, 'Approve this risky scheme or your taxes are going to go up,' " Hollingsworth said.

Kehoe suggested Schwarzenegger was trying to pass the buck.

"It sort of makes it look like it is someone else's decision when it is really the governor's decision," she said.

Besides being looked at as a way to boost revenues, the lottery is the linchpin of the governor's plan to smooth over year-to-year ups and downs of the budget cycle from this point forward. The idea is to deposit earnings in a "rainy day" fund that would grow in boom years and be drawn down in times of fiscal hardship.

"Over the last decade, for instance, revenues have increased an average of 5 percent per year," Schwarzenegger said. "But in one of those years, revenues shot up 23 percent. Then they went flat. Another year, they grew 14 percent. Then flat again this year. … 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."

Feast or famine

Schwarzenegger said the problem is Sacramento tends to dramatically expand programs when state coffers are flush with cash, then cut back when the budget news is bad.

"The cold, hard truth is that we cannot continue to run our state like this," he said.

As bad as the budget news is, it's not as if the $17.2 billion gap reflects a revenue drop of that magnitude.

On the contrary, revenues are projected to come in at about the same rate next year as they are this year.

Income taxes, by far the biggest source of Sacramento's cash, are expected to total $53.7 billion, a decline of $389 million. Sales tax collections are expected to grow by $1.1 billion to $27.3 billion and corporation taxes are expected to grow by $904 million to $11 billion, according to budget documents.

Sacramento also collects cash from motor vehicle license fees, and insurance, liquor and tobacco taxes.

In proposing another tool for easing future cash crunches, Schwarzenegger said he intends to appoint a bipartisan "tax modernization" commission to explore potential new tax sources. Some politicians have advocated taxing professional services, such as lawyer's fees.

On the spending side, Schwarzenegger proposed pumping $41.1 billion into K-12 schools. That would represent a 3.2 percent decrease from the $42.5 billion the schools are living on this year, but an increase of $1.5 billion from what the governor proposed in January.

As for higher education, Schwarzenegger is proposing to spend $11.76 billion on the state's public universities and community colleges, down slightly from $11.82 billion this year.

"I'm relieved that the teachers in San Diego will, hopefully, have their pink slips retracted," Kehoe said.

John Roach, superintendent of the Carlsbad Unified School District, said it was too early to know exactly what the proposal will mean to individual school districts.

"I think the governor is moving in the right direction," he said. "We just need to figure out what this means for us."

Retreat from school cuts

Before Wednesday's budget revision, Roach said he was expecting to cut as much as $6.2 million from what the district plans to spend next year. Now, he said he thinks the number will be no more than $4.5 million.

"That gives me a little glimmer of hope," he said, adding it remains unclear whether layoffs will be required.

The glimmer of hope wasn't enough to derail a gathering of about 200 teachers in Escondido on Wednesday afternoon to protest the spending plan for education.

"You can't trust Arnold Schwarzenegger," said Molly O'Hara, who teaches at Hidden Valley Middle School in Escondido.

O'Hara said people at her school have been anxious ever since the preliminary budget came out in January.

"There's a lot of emotions because of people not knowing how it's going to turn out," she said. "I really believe all the teachers will be OK. … My concern is for the students and how it's going to affect their education."

During the rally, teachers chanted and carried signs reading, "Fund the future" and "Save our teachers."

Kindergarten teacher Lorraine Silva said the original cuts could have wiped out class-size reduction efforts at Pioneer Elementary School.

There, she said, classes have gone from an average of 32 students to 20 over the last decade. And she said it would be disastrous if that trend were reversed.

"In a district with (a lot) of English language learners, it's detrimental to the students because they need more individual attention," Silva said.

Budget totals for other major sectors of state government included $29.8 billion for health and human services, up 0.2 percent from $29.72 billion this year; $10.14 billion for prisons, down 0.3 percent from $10.17 billion; $1.63 billion for business, transportation and housing, up 8.9 percent from $1.5 billion; and $1.62 billion for resources, down 13.5 percent from $1.87 billion.

Mark Watts, executive director for the statewide lobby group Transportation California, said he was pleased the governor wants to avoid touching the $1.5 billion in gasoline sales taxes that fund highways and public transit.

Staff writers Stacy Brandt and Tom Pfingsten contributed to this report. Contact staff writer Dave Downey at (760) 745-6611, Ext. 2623, or ddowney@nctimes.com.