SACRAMENTO -- Lawmakers should slash proposed funding for UC Merced in half, leaving the campus with $10 million in 2004-05, the state legislative analyst said Wednesday.

State budget woes prompted Elizabeth Hill to make the suggestion in her annual analysis of the governor's budget, which predicts California will face a $17 billion problem next fiscal year.

Assuming voters approve the $15 billion bond on the March ballot and other fixes take place, Gov. Schwarzenegger's budget proposal would fill most of the gap, leaving the state about $780 million in the red.

Hill suggested the Legislature tweak the proposal, including scrapping a property tax shift from local governments for a plan that takes sales tax revenues. She also suggested changing higher education, transportation and social service funding.

Lawmakers will consider Hill's analysis while debating and shaping the budget. "We've got tough choices to make," Hill said about University of California at Merced funding. "We think that [because] the campus isn't open yet, there are opportunities for savings."

Hill's report said she did not receive a spending plan from UC Merced: "Lacking an expenditure plan for the budget year and no detail on expenditures in the current year, we can find neither justification nor rationale for the $10 million."

But Larry Salinas, director of governmental relations for UC Merced, said Hill now has that information, and he chalked up her harsh recommendation to bad timing.

UC Merced officials had to retool their campus plan following news in January that Schwarzenegger approved just $20 million of $30 million that they had requested. Also, a UC report to the Legislature is due in mid-February -- after Hill prepares her report, Salinas said.

"It's a timing issue with them," Salinas said. "As far as we're concerned, we have provided the Legislative Analyst's Office the information they need in order to make a fair and objective assessment."

Assembly Member Barbara Matthews, D-Tracy, agreed, saying she will make sure her colleagues get the update.

"There is clearly justification for the dollars," Matthews said. "We're all mindful of the economic situation, but it is still time to open this campus."

Said Sen. Jeff Denham, R-Salinas: "I will have to work with each of my colleagues to justify the expenditures."

UC Merced plans to open in 2005 with 1,000 students.

Salinas said it is not unusual for the Legislative Analyst's Office to hesitate when it comes to UC Merced. Last year, Hill reserved judgment on former Gov. Gray Davis' proposal for the campus, saying she didn't have enough information.

UC officials met with 17 legislators in the past two weeks who have agreed to give the campus a fair shake, Salinas said.

Though he doesn't expect it to happen, receiving $10 million less could postpone the opening date and affect other campus resources, he said.

UC Merced has streamlined its plans, including narrowing the academic curriculum and pushing back the hiring of some faculty, Salinas said.

Also watching their resources are local governments, which had mixed reactions Wednesday to Hill's suggestion to alter Schwarzenegger's plan for them to pay the state. He wants to shift $1.3 billion in property taxes from cities and counties to K-14 school districts.

"Property tax should not be a rainy day fund to help balance the state budget," Hill said. Instead, she suggested a plan that, in part, would take $400 million in sales taxes from local governments.

Bart Bohn, administrative officer for Fresno County, said Hill's proposal is worthy of debate. The county gets about $54 million in property taxes each year, compared with less than $15 million from sales taxes.

"I think we would be very supportive of the governor exploring the Legislative Analyst's Office's alternative," Bohn said.

Fresno Controller Ruthie Quinto was not as optimistic, saying the state should stop relying on local governments to plug funding holes: "They need to stop taking local revenue streams."

Sales taxes are a major revenue source for the city. They account for about 33% of general fund revenues compared with property taxes, which make up about 26%.

Hill's other suggestions include:

Establish long-term goals that would set higher education fees as a fixed percentage of the cost of educating students.

Remodel the Drug Medi-Cal Program to provide greater authority and resources for community-based treatment services and call for more long-term reform of the entire system.

Repeal Proposition 42, which dedicated gasoline sales tax to transportation, and replace the lost revenue with a gas tax increase.