Gov. Arnold Schwarzenegger pledged to spare public schools, colleges and universities from the budget ax this year and proposed privatizing at least some of the state's prisons in his final State of the State address.

In a 27-minute speech, Schwarzenegger told a joint gathering of the Assembly and Senate that although the state faces a nearly $20 billion deficit, he was drawing a line with education.

"Because our future economic well-being is so dependent upon education, I will protect education funding in this budget. And we can no longer afford to cut higher education either," the governor said.

Schwarzenegger also called for a $500 million job-creation program, major changes in budgeting laws and in pension benefits for public employees, a push for more federal dollars and a constitutional amendment to guarantee that more money is spent on higher education than prisons.

No talk of deficit

But while setting an ambitious agenda, the governor did not talk about what probably will dominate his remaining time in office - deciding what state services will be scaled back or eliminated to make up the budget deficit. Schwarzenegger said the deficit is $19.9 billion, slightly less than $20.7 billion deficit predicted by the Legislative Analyst's Office.

That bleak news comes Friday, when the governor will unveil his spending plan.

He called the state's budget and tax systems cruel, saying they force lawmakers to choose between poor and sick children when cutting services, and called for changes.

His nominee for lieutenant governor, Sen. Abel Maldonado, R-Santa Maria (Santa Barbara County), said after the speech that social services indeed would take the hit.

"There's going to be cuts. They're going to come from health and human services," Maldonado said. He added that the cuts would be deeper if the state is unable to collect $6.3 billion from the federal government that state leaders believe California is owed.

Democrats applauded the governor's pledge not to cut education, but afterward leaders expressed skepticism about whether that is possible given the likely trade-offs. Education spending made up $45.5 billion of $84.5 billion in general fund spending this year.

"We don't support the notion that we're going to have a firewall on education and eliminate everything else. And, of course, what I'm concerned about is health and human services and the safety net, because safety net programs are on life support as it is," said Assembly Speaker Karen Bass, D-Baldwin Vista (Los Angeles County).

She and state Senate President Pro Tem Darrell Steinberg , D-Sacramento, said they also have concerns about a constitutional amendment guaranteeing higher education spending because they said it would be a prime example of ballot-box budgeting that limits lawmakers' control over spending.

"We need to begin setting the stage now to do no more harm, and begin thinking about how we reinvest in California," Steinberg said.

Private prisons

The governor said privatizing prisons would save "billions of dollars a year" that could be used for higher education. While that idea was praised by education leaders and advocates across the state, it appears to have little support in the Legislature as Democratic leaders roundly rejected it.

Assemblywoman Noreen Evans, D-Santa Rosa, said the idea simply does not make sense.

"He has a really good way of setting things up and saying 'We have no choice here, and this is what we must do,' and it's just not true," Evans said.

Sen. Mark Leno, D-San Francisco, chairman of the Public Safety Committee, said the governor's "rhetoric does not match his record."

"The prison crisis has become a state of emergency on his watch," Leno said. "Our disinvestment in higher education and our ever greater investment in prisons has happened under his watch."

'Jobs, jobs, jobs'

The governor also said a priority for the year would be "jobs, jobs, jobs," which won praise from both parties, but more so from Republicans as he included easing some construction regulations - a move they long have sought.

He proposed a package of bills that he said would train up to 140,000 workers and create or retain up to 100,000 jobs. That would be accomplished by providing reimbursement to employers for training new workers or retraining employees for new jobs. Employers could recoup up to $4,400 for each worker.

Schwarzenegger proposed paying for the $500 million program by borrowing from the Unemployment Compensation Disability Fund, a state fund created to compensate those unemployed because of sickness or injury.

The governor said the fund has enough money to cover claims and provide the loan.

He also proposed exempting some construction projects from legal challenges once they have completed an environmental review and called for a limit on punitive damages in lawsuits.

The governor proposed extending the popular tax credit for first-time home buyers, and allowing the credit to apply to purchases of previously owned homes.

Assembly Minority Leader Sam Blakeslee, R-San Luis Obispo, praised the governor's jobs proposal, noting that he is the author of a key piece of that plan - a bill that would exempt zero-emission vehicle manufacturers like Tesla Motors from sales tax on the purchase of new manufacturing equipment.

"We were very happy to see his emphasis on jobs - we can't afford to lose the Nummis," he said, referring to the Fremont automobile plant that is due to close in March. "These are huge employers in the state, and oftentimes a very small amount of seed money can make a huge difference to whether an employer leaves."

Priorities Gov. Arnold Schwarzenegger outlined these goals for 2010: Higher education and prisons: Schwarzenegger wants to prohibit the state from spending more on prisons than on higher education, in part by allowing private prisons. He wants 10 percent of the general fund to be spent on the University of California and California State University systems by 2014-15, when 7 percent would be spent on prisons. The changes would be made by a constitutional amendment, which requires voter approval, that would allow the state to contract with private firms to build, operate and manage prisons. That means new and existing prisons could be managed by private companies. Jobs and economic growth: Schwarzenegger wants to spend $500 million to create 100,000 jobs and train 140,000 people for better-paying work. He also wants to expand a $10,000 home-buyer tax credit, eliminate sales taxes on the purchase of green technology manufacturing equipment and make it easier for developers to get permits for construction projects. Tax and budget reform: The governor wants to reduce most personal income taxes and eliminate the corporation tax, minimum franchise tax and sales tax (except on gas and diesel fuels), and collect tax on business net receipts, with the exception of very small businesses. He wants the budget to require only a simple majority vote, not the two-thirds majority it now needs. (Tax increases would still need two-thirds approval.) He would require any new state program or agency that costs more than $25 million a year to pay for itself and prohibit the Legislature from being paid if it doesn't pass the budget on time. Pension reform: The governor said that pension costs for government employees have increased by 2,000 percent over the past decade while revenues rose 24 percent. The fund's $3 billion annual cost will eventually rise to $10 billion, he said. Help for veterans: Schwarzenegger announced a statewide initiative aimed at connecting returning veterans with jobs, housing, mental and physical health care, federal benefits and other support. It would establish nine regional centers and create the volunteer California Veteran Corps to serve as liaisons between the centers and combat veterans. - Marisa Lagos