California Gov. Arnold Schwarzenegger gave his final State of the State address Wednesday morning, highlighting major compromises of the past year on the state's budget crisis and new water legislation and signaling his hopes for the new year, including tax and budget reform and a major emphasis on cutting prison spending and preventing more cuts to public education.

The governor opened his speech with a bit of levity, using a bizarre anecdote to compare the teamwork of his pet pony and pot belly pig getting into his dog's food bin to the team work of legislators in Sacramento tackling the tough problems of 2009.

"Last year we had a pig and a pony year," he said. "The message is about working together. We got California through the front end of the worst financial crisis since the great depression."

As expected, Schwarzenegger devoted much of his speech to pulling the state's economy out of the gutter. But the biggest surprise of the speech came when the governor turned his attention to public education, which saw a terrible 2009 with K-12 education losing billions in state funding and public higher education institutions raising tuition and fees by as much as 32 percent.

Schwarzenegger raised the often-cited statistic that California spends more on its prison system than it's public education system -- 11 percent on convicts and 7.5 percent on students.

"What does it say about any state that focuses more on prison uniforms than caps and gowns?" Schwarzenegger asked?

In a surprise move, the governor asked the state legislature to pass a constitutional amendment he plans to propose that will prevent California from ever spending more on prisons than public education.

"The concept is long overdue. We should be spending more on education than incarceration," United Teachers Los Angeles President A.J. Duffy said in response to the governor's proposal.

But despite throwing a bone to public education advocates, Schwarzenegger said his top priority for this coming year is "Jobs. Jobs. Jobs." He said his budget proposal for the 2010-2011 fiscal year, expected to be released early next week, will dedicate $500 million to a jobs package the governor said will train 144,000 workers and create 100,000 new jobs.

Schwarzenegger also announced an effort to streamline construction projects. That's code for preventing projects from getting bogged down by small, but often powerful opposition efforts. In some cases that means environmental activists and organizations, as was the case when a handful of residents in the city of Walnut filed a lawsuit calling for a new environmental impact report for a proposed NFL stadium in the San Gabriel Valley. Schwarzenegger signed a bill in October exempting the stadium from state environmental laws, allowing the project to go forward. "This is the best kind of action state government can create - action that cuts red tape, generates jobs, is environmentally friendly and brings a continued economic boost to California," he said at the time.

Other parts of the governor's proposed jobs package include extending a tax credit for first-time home buyers and exempting "green" manufacturing companies from paying sales taxes on equipment. He did not mention what industries would fall under that category.

The governor said he wants to see the legislature enact tax and budget reforms this year. In one confrontational moment, the governor addressed state legislators directly, saying that he had sent along a tax reform proposal suggested by his Commission on the 21st Century Economy back in September. "Where is it?" he asked.

Schwarzenegger called last year's budget crisis, in which the state barely covered a nearly $60 billion budget gap, California's Katrina. He said the legislature is in for another tough year with another $19.9 billion budget shortfall expected. He said difficult cuts would need to be made.

"What can we say at this point except the truth?"

However, Schwarzenegger said he will not touch public education spending in his proposed budget. He said 30 years ago the state devoted 10 percent of its general fund money to public education and only 3 percent to prisons. Now, he said, California devotes close to 11 percent of its general fund money to prisons and just over 7 percent on education.

Saying the state's priorities have become "out of whack," the governor proposed an amendment to the state constitution that would bar California from ever spending more on prisons than public education. "Choosing universities over prisons is a historic realignment of our priorities," he said.

To reduce prison spending, Schwarzenegger called for allowing private prison operators into California to create more competition and drive down the cost of incarcerating inmates. California spends about $50,000 per inmate per year. The governor said the next 10 biggest states spend closer to $32,000 on prisoners per year.

Looming over the discussion of what to do about the California's swelling prison system is an order by a panel of federal judges to reduce the state's inmate population by 40,000 over two years. Schwarzenegger submitted a plan to the judges in November, but also appealed to the U.S. Supreme Court, arguing the judges do not have the authority to order the population-reduction plan.

Vice President of Prison Fellowship ministries and former Republican leader in the state assembly Pat Nolan said he is concerned the governor's wish to privatize the prison system puts too much emphasis on building new prisons and not enough energy into looking for alternatives to lowering the prison population.

Nolan said that preventative and early treatment for the mentally ill and drug users has worked well in others states, "including tough-on-crime Texas, which has found that they can actually lower the number of prisoners. There are alternatives that would help lower the prison population without a mass release, but also without the great expense of building new prisons."

Finally, the governor said the state needs to turn its attention to reforming the pension system for public employees. He cited numbers that suggest the current system is wildly unsustainable. Schwarzenegger said pension system costs have risen nearly 2,000 percent over the last 10 years, while state revenues have only risen 24 percent in that time period. That means taxpayers are being forced to shoulder more of the burden for state employees' retirements.

While Schwarzenegger opened his speech with a bit of light humor, he closed urging state legislators to make sacrifices commensurate with those of the veterans returning to California from Iraq and Afghanistan.

"No matter how big the problems that the state is facing, those Californians in uniform will tell you this is the greatest place to come home to," Schwarzenegger said. "We must fulfill our sacred trust to keep California a great place to come home to."