The defeat last week of Proposition 86, which would have raised the state's cigarette tax by $2.60 per pack, raises a new hurdle for Gov. Arnold Schwarzenegger as he heads into his second term with health care at the top of his agenda.

The measure would have paid for insurance coverage for all of California's children -- a fact largely obscured during a campaign that focused on the other things the tax would have funded, such as emergency rooms and anti-smoking efforts.

Schwarzenegger has been pledging to find a way to cover the state's 800,000 uninsured children since 2003, when he was campaigning in the recall election. But the question of where to get the roughly $300 million it would cost to do that each year has been a stumbling block...

Now, advocates for universal children's insurance, who had been pinning their hopes on the ballot measure, are hoping the Republican governor will find a way to include a sweeping expansion of children's coverage in the health care reform plan he has promised to deliver at his State of the State speech in January.

"There's a major opportunity for the governor and the Legislature to start health care reform off on the right foot by covering kids first and covering them quickly," said Peter Harbage, a Sacramento-based health policy consultant...

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