UPDATE 3-NY gov proposes leasing lottery to raise funds

(Recasts, adds details, Republican response)

ALBANY, Jan 9 (Reuters) - New York Gov. Eliot Spitzer on Wednesday proposed leasing some of the state lottery's future revenues to raise billions of dollars for higher education, joining many other states privatizing their assets.

Spitzer, in his second State of the State address, again vowed to provide health insurance for all children in the state and said he favors creating a fund to help revitalize the upstate economy. He also said he wants funds for public housing and for parks.

Spitzer, a Democrat, sees higher education as one of the most important ways to combat poverty and strengthen the state's economy.

"If you want to participate in the innovation economy, a high school diploma is not always enough -- you're going to need a college diploma, or better yet, an advanced degree," he said in his address.

State and city universities and colleges now need $4 billion of investments, he estimated, and should hire 2,000 full-time professors, including 250 "eminent scholars," over the next five years.

Spitzer faces a weakening economy and low approval ratings, due to his simmering feud with Republican Senator Majority Leader Joseph Bruno and a bruising battle over driving licenses for illegal immigrants.

The governor on Wednesday defended his record during his first year in office against charges Albany's famed gridlock derailed his reforms. "There is more attention given to disagreement than agreement," Spitzer said an Albany radio show.

He stressed he wanted to work with lawmakers, saying, "The agenda going forward is one that will succeed only if there is a partnership, if there is an openness, a give or take."

But Spitzer, a former prosecutor, still displayed a touch of his hard-charging style, adding, "On the one hand, we can't abandon our ambition to pursue to our goals at full throttle. On the other, we must adapt to the fiscal realities that are now upon us," he said. "We see the economic storm gathering."

Sen. Andrew Lanza of Staten Island, responding for the Republican party, did not mention a lottery lease in a statement. Lanza, saying Spitzer last year tried to shortchange schools, end property tax reform, and close hospitals, pledged to again safeguard taxpayer from any more such measures.

"One year ago, New Yorkers said they were expecting change. But they didn't expect the kind of change they got," he said.

Adding Spitzer also boosted business taxes last year, Lanza stressed his skepticism about working in partnership. "I hope he is sincere, and that we will be able to work together and address the priorities that really matter to the people."

Spitzer vowed to fix health programs that, for example, underfund clinics and overpay for emergency room care, promising to overhaul reimbursement rates and encourage preventive programs to fight diabetes and heart disease.

"There will be affordable coverage for every single child in the State of New York," he said. Some 400,000 children in New York now have no health insurance. Spitzer also proposed a "Peace Corps" for doctors that will repay some medical loans, for example, if they move to underserved areas.

A $1 billion revitalization fund should be created for New York's upstate economy, which has been declining for years. The money would come from selling bonds and from pay-as-you-go capital.