Rich Pedroncelli / AP "This is going to be very difficult, and it's going to be very painful," Gov. Arnold Schwarzenegger said as he delivered his revised budget proposal Wednesday in Sacramento.

SACRAMENTO — Saying a worsening budget deficit requires the state to do something more than just cut spending, Gov. Arnold Schwarzenegger proposed Wednesday to revamp the California Lottery and sell the rights to the future revenues those changes would generate.

If voters won't go for that idea, Schwarzenegger suggested a 1-cent increase in the state sales tax that would stay in place until state revenues rebound.

He estimated the state could raise $5 billion in the 2008-09 budget year and $15 billion overall through 2011 by essentially borrowing from future lottery sales.

By counting on that revenue, Schwarzenegger was able to rescind some of the most controversial of his January budget proposals, including the suspension of the Proposition 98 school-funding guarantee and the closing of 48 state parks.

In addition, an unexpected decline in the inmate population allowed Schwarzenegger to withdraw his cost-saving proposal to provide early release to 22,000 inmates.

But his revised plan calls for sharp new cutbacks in health and human services programs — including a proposal that the state pocket $109 million in federal cost-of-living increases that would otherwise be paid out to about 1.3 million aged, blind and disabled Californians.

"We had to make some very difficult cuts," Schwarzenegger said. "No one wanted to do this. This is going to be very difficult, and it's going to be very painful."

The revised projection shows a $15.2 billion shortfall — the difference between what it would cost to continue existing programs as provided for in current law and the amount of revenues available.

The governor's proposal was assailed by Democratic leaders in the Legislature, who said the plan would shortchange California's future.

"What the governor's offering is a resignation," said Senate President Pro Tem Don Perata, D-Oakland. "Democrats are not going to accept this budget. I reject its defeatism and its pessimism."

In January, Schwarzenegger proposed closing the shortfall by making across-the-board, 10 percent cuts in nearly every department. But as revenues continued to fall amid a worsening economy, he said, he came to realize the solution would require new revenues as well — but something other than a tax increase.

The lottery, he said, was a logical place to look, because it is "an underperforming asset" that generates much less revenue than lotteries in other states. The California Lottery in 2006 generated $88 in per-capita sales. The average of all other states was $189.

"We have to utilize the potential of the lottery 100 percent," Schwarzenegger said. "The lottery is owned by the state of California. We should make it perform 100 percent."

Schwarzenegger said the backup plan of a 1-cent sales tax increase would be necessary to balance the budget only in the event voters rejected changes in the lottery. He called it "an insurance policy we hope to never use."

Republican leaders called the backup tax plan a deal-breaker.

"Tying this to a tax increase is a mistake," said Assembly Republican leader Mike Villines of Fresno. "It makes it a non-supportable issue. We're taking a really good opportunity and turning it into something that potentially can't pass."

Putting the lottery proposal on the ballot in November would require a two-thirds vote of the Legislature.

Although the administration did not release a written proposal of desired lottery changes, officials pointed to a bill by Sen. Dean Florez, D-Shasta, that would give lottery officials flexibility in prize allocations, permit the use of change-giving ticket vending machines and lift restrictions on gambling-related themes on scratch-off tickets. Lottery Director Joan Borucki estimated the changes proposed in Florez's bill would allow the lottery to increase sales from about $3 billion a year now to $4.5 billion to $6 billion within three years.

Under Schwarzenegger's plan, schools would continue to receive the approximately $1.2 billion per year in lottery revenues they now get, but the state would sell to private investors the rights to increased revenues that would result from loosening the lottery's operational rules.

The upfront money from the lottery deal would allow schools to receive their full minimum funding guarantee next year.

Education leaders reacted cautiously to the revised proposal.

"I welcome his new proposal and retreat from suspending Proposition 98," said Superintendent of Public Instruction Jack O'Connell. "But to say education is fully funded is an understatement."

O'Connell noted schools would still have to absorb a 10 percent reduction in funding for specific programs such as class-size reduction and school counselors. In addition, they would not receive a cost-of-living increase.

"With the price of gas alone increasing by nearly $1 a gallon over last year, the failure to fund a cost-of-living adjustment amounts to a serious budget cut in practical terms," he said.

The governor also seeks to restore about $98 million to the California State University system, reducing the budget cut he proposed in January from $386 million to $288 million.