SACRAMENTO -- State tax receipts are running $1.7 billion above projections, a surprise development that the Schwarzenegger administration insisted on Thursday will not ease the difficulty of curing California's budget ills.

Sacramento is more flush with cash than Gov. Arnold Schwarzenegger predicted in his January budget proposal. And Capitol observers speculate that the expected fight over spending cuts and tax hikes between the governor and legislative Democrats could end before it begins, easing the way for him to sign a balanced budget by the June 30 constitutional deadline.

But Schwarzenegger's chief budget spokesman, H.D. Palmer, downplayed the significance of the added revenues -- likening the situation to that of an employee who feels rich on payday before paying all of his bills. He added that the governor intends to pursue a Medi-Cal overhaul regardless of the additional tax revenue, a move likely to irk Democrats.

"Having the additional revenue sure beats the alternative," Palmer said. "But remember, there are a whole bunch of pieces of the revised budget that have to be factored in."

Among those, explained Palmer, are money the state owes as a result of losing various lawsuits, paying more for the prison system and losing potential savings because the Democrat-controlled Legislature did not adopt Schwarzenegger's mid-fiscal year proposals to cut spending.

In Schwarzenegger's $99.1 billion budget proposal in January for 2004-05, he recommended spending cuts of around $7 billion, including a $2.6 billion slice from the taxpayer-funded health care and welfare services for the poor, prized by Democrats, to help close a deficit the nonpartisan Legislative Analyst's Office had pegged at $17 billion.

Not counted in those proposed reductions were savings the administration hopes to achieve by reforming Medi-Cal, California's version of the federal Medicare program. Health and Human Services Secretary Kim Belshe is directing Schwarzenegger's effort to reform a system that has grown by 41 percent -- or $31.1 billion -- since 1999.

To stem Medi-Cal's growth and make it manageable over the long-term, the administration wants to adjust who is eligible for some medical services, implement co-payment requirements for some services and institute other changes that Belshe spokeswoman Nicole Kasabian Evans said would improve cost-effectiveness and protect access.

Leading Democrats are at best wary and at worst openly hostile to Schwarzenegger's plan -- which administration officials say will be released in detail in mid-May as part of his revised budget proposal -- leaving the door open to a tough budget battle despite the improved revenue picture.

The unexpected revenue "doesn't change the underlying problem," Assembly Budget Committee Chairman Darrell Steinberg, D-Sacramento, said, adding: "We'll look at savings (Medi-Cal reform) would achieve, but whether we adopt it depends on what it is -- its fairness, its effectiveness."

State Sen. Dick Ackerman, R-Tustin, slated to replace Jim Brulte as Senate Republican leader within days after Schwarzenegger releases his revised May budget plan, agreed with Steinberg that the added revenue is good news, but he said it doesn't diminish the need for significant spending cuts.

"I think the problem you'll see is that Democrats will want to go on a spending spree," Ackerman said.

One-time revenues, generated via tax-amnesty legislation, account for most of the $1.7 billion in increased receipts and cannot be depended upon to cover spending for ongoing programs like Medi-Cal and welfare.

Additionally, a number of revenue and savings proposals in Schwarzenegger's budget are not guaranteed to materialize: $500 million was penciled in from renegotiating Indian gaming revenue, as was $350 million in federal dollars and around $500 million in unspecified cuts to the prison system.

"Most of (the additional revenue) will be one-time money, which doesn't help the ongoing structural problem with the budget," said Jean Ross, an analyst for the California Budget Project, a liberal think tank. "It's not clear to me that net-net, the situation is any better."