DALLAS - California Gov. Arnold Schwarzenegger's proposed budget understates the shortfall by about $1.5 billion, leaving a funding gap of $16 billion in fiscal 2009, according to a report from the Legislative Analysts Office yesterday.

The LAO, the Legislature's budgetary watchdog, proposed an alternate approach to Schwarzenegger's spending plan, swapping across-the-board cuts for more targeted reductions in spending.

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