Updated: There was strong push back yesterday from the administration on the report, which mirrors some of the commentariat's complaints about Schwarzenegger's budget. David Crane, the gubernatorial aide who is handling the lottery and budget reform plans, insists that the lottery plan is not a loan, but a sale, and that every penny will go to the rainy-day fund at the heart of the budget reform. 

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Gov. Schwarzenegger's plan to securitize the state lottery in order to fund a rainy day fund and balance the budget in the coming fiscal year is flawed, according to a report released today by the Legislative Analyst's Office, which advises the state legislature. Specifically, the bond would create the "strong likelihood that distributions to public education from the lottery would fall well short of their current levels—perhaps by $5 billion over the next 12 years combined." Schwarzenegger needs legislators to put his proposal on the ballot -- and needs voters to sign off on it. With the LAO saying education could be hurt, this proposal is likely going nowhere.

Liz Hill, the legislative analyst (and known widely and fondly as California's "Budget Nun"), also doesn't seem to much like the budget reform proposal the governor wants to put on the ballot. Schwarzenegger's plan is built around establishing a real rainy day fund for the state. But Hill writes in the report that by insisting on contributions to the fund right now, with the state shortfall estimated at $15 billion, the governor's plan could effectively lock the current shortfall in space and force across-the-board cuts.

What's the damage? If voters are going to vote on lottery and budget reform this fall, those proposals almost certainly will look a lot different than Schwarzenegger's.