ALBANY, N.Y. – Gov. Eliot Spitzer took steps Wednesday toward a long-sought cap on local school spending and property taxes, using universities to create a high-tech economy, and leading Albany to hard spending choices so the state isn’t “paralyzed by challenging fiscal times.”

Spitzer called during his State of the State address for a bipartisan commission to consider capping growth in local school spending, a politically dicey idea opposed by powerful teachers unions and other school interests.

But after school taxes continued to rise last year at its annual 7 percent average pace despite a historic increase in state aid, Spitzer said it was time to reconsider his campaign position against spending caps.

“Experience has taught us that we need stronger medicine,” Spitzer said. “A rebate check may temporarily ease the pain, but it doesn’t cure the disease. In the end, it’s a losing game for the taxpayer if the state gives you a rebate check on Monday and then on Tuesday your local government taxes it away.”

To head the commission, Spitzer also took a rare look back. He chose his feisty Democratic primary opponent from 2006, Nassau County Executive Tom Suozzi.

On Wednesday Spitzer called a spending cap “a blunt instrument, but it forces hard choices and discipline when nothing else works.”

“I think it’s very promising,” said E.J. McMahon of the Empire Center for Public Policy, part of the fiscally conservative Manhattan Institute. “If the governor is serious, it could be a turning point for heavily burdened New York property owners.”

The commission, with the power to subpoena records and compel testimony, would examine the state’s unfunded mandates, find ways to cut costs in school instruction, ferret out wasted spending and make tax relief more effective for middle class families. While New York City would not be part of any cap plan, the other large city school districts of Yonkers, Syracuse, Rochester and Buffalo could see separate caps or no cap at all, said Spitzer’s director of state operations, Paul Francis.

Spitzer also wants to create an endowment of at least $4 billion to generate $200 million a year for the State University of New York and City University of New York. That could come from leasing the operation of the state lottery to a private firm for as long as 40 years after an upfront payment of tens of billions of dollars to the state. Any such deal would continue to provide about $2.1 billion – with annual growth – in revenue for schools while creating the higher education endowment. The state would continue to regulate all lottery games and any new games, Francis said.

Spitzer also proposed a $1 billion fund to help revitalize upstate downtowns and to help businesses, build roads and create “shovel-ready sites” to attract new employers.

While the annual speech is about ideas, the tougher part begins Jan. 22 when Spitzer proposes his second budget to the Legislature. He will have to deal with a $4.3 billion deficit and declining revenues because of a slowing economy. In addition, Spitzer wants to continue a $1 billion increase in school aid and steer more Medicaid funding away from hospitals to primary care and prevention to encourage early, lower-cost treatment.

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