SACRAMENTO — Gov. Arnold Schwarzenegger told lawmakers Tuesday that California must end its feast-or-famine state budget cycle — and made clear that famine is the prospect that lies immediately ahead.

He said the state faces a $14 billion shortfall over the next year and a half.

Although he gave no details of the budget he will propose Thursday, Schwarzenegger described it as "difficult." He said it will include no tax increases and indicated it will include cuts in programs for children, the poor and the elderly.

Noting that he recently briefed advocates for such programs, he said, "I had to look into their eyes and tell them. It's one of the worst things about being governor. Yet fiscal responsibility, like compassion, is a virtue, because it allows the necessary programs in the first place."

Schwarzenegger's previous State of the State addresses had been marked by optimism and ambitious calls for such endeavors as combating global warming, reforming healthcare and rebuilding California's infrastructure.

But most of his 2008 speech focused on reforming the state budget process. He said the state has no way out of its current fiscal crisis "except to face our budget demons."

The Republican governor's call for diminished expectations was not well received by leaders of the Democratic-led Legislature.

"Arnold is walking on stage and saying for the next couple of years we're going to have to hunker down," said Senate President Pro Tem Don Perata of Oakland. "I expected more. What he's really good at is selling California, but I wouldn't buy California based on what I heard tonight."

Assembly Speaker Fabian Nuñez, D-Los Angeles, said he welcomes Schwarzenegger's expected declaration of a fiscal emergency Thursday, noting it could begin "a long overdue conversation about the state budget and our state values."

But Nuñez said the Legislature's reaction to the crisis cannot be simply retrenchment.

"Clearly, cuts alone won't fix things," he said. "The conversation can't just be about price; it has to be about priorities, too."

Although neither Democratic leader specifically called for increasing taxes, education leaders said that would be a far better alternative than either another round of cuts for schools or a budget reform proposal that essentially locks in the status quo.

"That makes no sense," said Paul Chatman of Oxnard, president of the California School Boards Association.

The way to improve California and enhance its future, Chatman said, "isn't by keeping $48 in your pocket, shrugging and saying, That's all I have.' That mentality of no new taxes is going to keep the state right where it is. We've got to keep up with our competitors in other states and the rest of the world. They're investing, and we're not."

Dennis Smith, head of the California Federation of Teachers, said much of the budget shortfall is the result of Schwarzenegger's rollback of the vehicle license fee and noted that last year lawmakers reinstated a tax loophole that allows buyers to avoid paying sales taxes on yachts.

"We won't allow schoolkids to be penalized so SUV drivers and yacht owners can get tax breaks," Smith said. "It's the same old politics where kids, who can't vote or contribute to political campaigns, take the hit."

Senate GOP leader Dick Ackerman of Irvine said legislative Republicans agree with many of Schwarzenegger's budget proposals.

Democratic leaders, Ackerman said, "have to explain how you continue to spend more than you take in and not go bankrupt."

Administration officials said budget reform will be Schwarzenegger's top priority for 2008.

His proposal calls for the creation of a "revenue stabilization account" and would require the state to place into the account the surplus in any year in which tax revenues grow at an above-average rate. The account could be accessed only in years when tax revenues grow slower than average.

"We cannot continue to put people through the binge and purge of our budget process," Schwarzenegger said. "It is not fair. It is not reasonable. It is not in the best interests of anyone."

He said his proposal is modeled after a process used in Arkansas.

Perata said that is not a model that should be used to reconstruct the California dream.

"We have got to make California what brought Arnold Schwarzenegger here from Austria," Perata said. "He did not come to Montana, and he certainly didn't come to Arkansas. No one has ever said, California or Arkansas? I want to go to Arkansas.'"