For Californians still reeling from this year's record budget standoff, it's deja vu, less than a month after the shouting died.

Fighting falling revenues, Gov. Arnold Schwarzenegger is preparing a list of up to $3 billion in new budget cuts – and schools should prepare for the worst, school business officials warned this week.

"Cuts are coming," the California Association of School Business Officials said in a written statement to members. "How big is the question that begs an answer."

Rising unemployment, rocky retail sales and the nation's mortgage crisis are casting a pall over the Capitol.

H.D. Palmer, a finance spokesman for Schwarzenegger, said new projections show that the state will take in $3 billion less this fiscal year than anticipated weeks ago.

"Absolutely no decisions have been made," Palmer said of the state's next move.

The rocky outlook revives the specter of partisan battles over cutting state programs, reducing school funding, or raising revenues by tax increases or loophole closures.

State finance officials are preparing a "potential range of options," Palmer said, but he declined to say whether they include either tax hikes or massive cuts to schools or other programs.

"I have never talked about a potential range of options before either the governor has presented them or the Legislature has agreed to them – and I'm not going to do that now," Palmer said.

A key question is whether lawmakers will be called back to Sacramento to wrestle with the issue before January, when they are scheduled to reconvene for a new legislative year.

Schwarzenegger is scheduled to propose a budget in early January for the upcoming fiscal year.

"If the governor and legislative leaders make a determination that we need to take action before (then), we'll be ready with a range of options," Palmer said.

Schools are potential budget-cutting targets for two reasons: They consume more than 40 percent of the state's general fund budget, and under Proposition 98, their guaranteed level of funding declines as state revenues fall.

Put simply, state officials could dip into school funding without suspending Proposition 98 if a deal were struck between Schwarzenegger and a majority of both legislative houses.

In their warning to districts, school business officials suggested that contingency plans be developed and no new employee contracts be struck until the revenue crisis is resolved.

"Watch your cash flow, and don't make any long-term commitments right now," spokesman Dennis Meyers said of the group's advice to members.

The California Teachers Association declined comment Friday.

Jack O'Connell, state superintendent of public instruction, said new cuts would be devastating. Schools already are receiving about $2.5 billion less than they anticipated, according to the Department of Finance.

"I would hope that investment in the future would take precedence, and that public education will be spared," O'Connell said.

State leaders should focus on economic expansion and additional revenue, perhaps a tax increase, to weather the storm, he said.

Incoming Senate President Pro Tem Darrell Steinberg, D-Sacramento, turned thumbs down Friday on the notion of cutting school funding.

"There's no secret that the state's fiscal condition has deteriorated since we passed the budget," said Jim Evans, Steinberg's spokesman.

"That said, Democrats will be resistant to education cuts in the coming year," Evans said. "We should be investing in our kids' futures, not making it more difficult for them to succeed."

Kevin Gordon, a veteran education lobbyist, said he doubts that legislators would vote to cut school funding in midyear, but if they did, the scars would run deep.

"It would do monumental damage to schools because never again could they trust that they could plan on anything from one month to the next, let alone from one year to the next," Gordon said.

Assemblyman Roger Niello, R-Fair Oaks, said he is not pushing any proposal but that it would make sense to consider cuts, rather than a tax hike, if the state must take action.

"To impose an increased tax burden certainly is not wise economic policy," he said. "Right now, the economy isn't shaky – it's in dire straits."

Niello said he remains undecided about the state's next move. He would not consider it a budget cut to dip into school funds, however, because Proposition 98 permits it when revenues dive.

"I have no doubt that the education community would disagree with me," he said.

Call Jim Sanders, Bee Capitol Bureau, (916) 326-5538.