Aides to Gov. Arnold Schwarzenegger rolled out a new plan for closing California's gaping $40 billion budget deficit today that cobbles together elements of earlier proposals and adds a new tax increase, a shorter school year and a "what if" quest to borrow $4.7 billion.

"We are facing a major crisis, probably the most challenging budget situation the state has ever faced," said Mike Genest, Schwarzenegger's finance director. "The governor believes in acting immediately."

Schwarzenegger is out of state and vacationing at the family residence in Sun Valley, Idaho. But Genest and a half-dozen Finance Department staff members briefed reporters on a plan that incorporates a proposal of spending cuts and tax increases the governor made earlier in December.

That plan called for a temporary increase in the state sales tax, expanding the sales tax to cover some services, a nickel-a-drink alcohol tax, a new tax on oil production and a $12 hike on vehicle registration fees. It also called for $15.4 billion in spending cuts, including requiring state employees to take two-days-a-month unpaid furloughs through June 30, 2010 and give up two paid holidays each year.

The new elements include reducing the dependent care exemption on state income tax returns from the current $309 per dependent to $103; carrying over some of the deficit into the 2010-11 fiscal year; borrowing funds from voter-created programs that service the mentally ill and pre-kindergarten children's health services; changing the operating rules for the state lottery in an effort to make it more profitable, and borrowing $4.7 billion from the private sector.

The first two of these would require legislative approval. The third and fourth would also require voter approval. The fifth, Genest said, would require the financial market to get much healthier than it is now, and the state to have both a balanced budget in place and a "plausible" plan to pay the money back.

The proposal also allows school districts to reduce the length of the 2009-10 school year by five days, potentially saving the state about $1.1 billion.

"It's a massive shortfall," Genest said. "It's the kind of shortfall that cannot be addressed by waiting until July 1 to enact a budget. We have to act immediately."

The new plan - the latest of at least four iterations of a deficit-cutting proposal to be trotted out by the governor and legislative factions - covers both current budget year, which ends June 30, the new fiscal year that starts July 1.

It proposes to close the $40 billion deficit and create a reserve of about $1.6 billion by making $17.4 billion in cuts over the next 18 months; increasing taxes by $14.3 billion; banking on an extra $5 billion in money from the lottery and borrowing about $5 billion.

The plan envisions that state spending on general operations in the current fiscal year would drop from the $103.4 billion approved by legislators and the governor last September to $92.4 billion. In the fiscal year that starts next July 1, general fund spending would amount to $95.5 billion.

Genest said it was vital for the Legislature to act by Feb. 1 on $4.6 billion in cuts in current spending, because the longer it took, the less savings would be realized.

"The value of these things erodes dramatically," he said. "(Not making them) means we'd have to make even deeper cuts next year. So acting early is the key."

Genest acknowledged that the sorry state of the U.S. financial market, coupled with the inability of lawmakers and the governor to make a deal on closing the deficit gap, meant it was impossible for the state to borrow any money now by issuing Revenue Anticipation Notes (RAWs). But he also said the budget gap is too huge to close through spending cuts or tax hikes alone over the next 18 months.

"It's just so monumental," he said. "As you go through our solutions, you'll see these were really difficult choices. These are substantial tax increases, these are major program reductions."

Genest said the plan envisions that the economy will have improved enough by July and lawmakers and the governor will have reached some comity on the deficit to make issuing warrants possible then.

The advantage of RAWs is that they do not have to be repaid in the same budget year that they are issued but can carry over into the 2010-11 fiscal year.