California's severe budget crisis could worsen further if state leaders fail to resolve a dispute with the federal government over a successful family-planning program for the poor.

State officials say the Bush administration has given them a terrible choice: Lose $262 million in federal funding this year and $315 million in subsequent years, or hire 1,300 additional workers to verify eligibility for the program, which serves 1.65 million Californians.

A federal agency wants the state to do a better job of determining which of the clients are undocumented immigrants.

The Centers for Medicare and Medicaid Services (CMS) has given California until Friday to make a decision, although negotiations continue and the deadline could be extended.

The dispute is occurring as state leaders wrestle with an $11.2 billion budget shortfall. Gov. Arnold Schwarzenegger has called a special legislative session to deal with the budget problems and has proposed major cuts in education, Medi-Cal and other programs.

The family-planning controversy "couldn't come at a worse time for the state than right now," said Stan Rosenstein, chief deputy director of the state Department of Health Care Services.

"We can't afford to invest hundreds of millions of dollars on people to process paperwork at a time where we're talking about cutting some of the most vital services," he said.

The state estimates it would cost $128 million annually to hire the additional employees.

The controversy involves the state's Family Planning, Access, Care and Treatment Program, or Family PACT.

It provides services to women and men who earn less than 200 percent of the federal poverty level. Participants can receive birth control, reproductive health services and education about sexually transmitted diseases. The program does not provide abortion counseling.

The federal government covers $315 million of the $432 million annual cost. The state picks up the remainder.

By any measure, both sides agree that Family PACT has been a success that saves taxpayers money.

The state estimates the program averts nearly 170,000 unintended pregnancies each year. That saves an estimated $1.5 billion because if the pregnancies occurred, the state and federal governments would pay for prenatal care, delivery and health care for the newborns.

"It's such a clear financial benefit to the state to provide these services; there's fiscal reasons that even a Republican governor can love," said Heather Estes, president and CEO of Planned Parenthood: Shasta-Diablo, which includes clinics in Contra Costa County.

For several years, the state and federal governments have been negotiating how to account for undocumented immigrants in the program. The federal government will not pay for them. It covers only people who have been in the United States legally at least five years.

California covers everyone because any child born in the United States automatically becomes a citizen and thus would be eligible for health care. "The care for the citizen child could go on for years," Rosenstein said. So, avoiding an unintended pregnancy makes financial sense, he said.

For years, the state has estimated that 14 percent of the Family PACT clients are undocumented immigrants and has deducted that from the federal government's share.

But a 2005 review by the Centers for Medicare and Medicaid Services found that 24 percent of the clients were ineligible under federal guidelines, and the status could not be determined for an additional 35 percent, said CMS spokeswoman Mary Kahn.

Concerned that California was dramatically underestimating the number of undocumented immigrants, the Centers for Medicare and Medicaid Services told the state it wanted each person's eligibility verified individually. The state has vigorously opposed that requirement.

As it works now, people show up at a clinic, fill out a document stating their income and receive services on the spot. No one asks about immigration status.

Under the federal plan, people would have to produce a passport, birth certificate, government photo ID or other document. This paperwork would be reviewed by a state employee who would verify eligibility before people obtain services.

The state estimates it would need 1,300 additional employees to scrutinize the 2.4 million applications it receives each year. That would add $175 to the cost of serving each client in the program. The average amount spent now per person is $261.

The federal proposal has upset many clinic leaders who worry about how it might affect people who may not have the mandatory paperwork.

"Once you require documentation, you're going to lose the patient," said Tanir Ami, executive director of the Community Clinic Consortium, which represents clinics in Contra Costa and Solano counties. "Teenagers, particularly, are not going to have access to these documents.

"It's a push for an increase in bureaucracy, which we know is geared toward keeping people out of the system," she said. "It's frustrating to everyone that the concern about dollars going to undocumented individuals is hijacking the entire program."

Having to bring paperwork back to a health clinic, or drop it off somewhere else if eligibility offices are set up, could be difficult for low-income people who may not have access to a car or have difficulty getting time off work, Estes said.

"It puts a barrier in the way of preventive health care," she said.

The state offered more than two years ago to increase the estimate of undocumented immigrants in the program to 17.8 percent. It remains willing to negotiate an acceptable percentage, but federal officials have rejected that idea, Rosenstein said.

Centers for Medicare and Medicaid Services spokeswoman Kahn defended the federal government's push for individual verification.

"The CMS officials are insisting that every enrollee be eligible because that's the law," she said.

Schwarzenegger in September warned federal Health and Human Services Secretary Michael Leavitt that the changes "would further destabilize our budget negotiations."

"As you and I discussed on multiple occasions last year, a review of these numbers indicates that, from a financial perspective, the CMS proposal makes little sense to either the federal or state government," Schwarzenegger wrote.

Rosenstein said last week that federal officials have verbally offered to give the state time to implement the changes and he was waiting for a written proposal. The federal government has extended the deadline for compliance several times as the negotiations continue. But the extensions have come at a cost — the estimate of undocumented immigrants in the program has increased to 24 percent.

Clinic leaders, meanwhile, have been attempting to get a decision delayed until July, when the state's budget year will have ended and President-elect Obama will be in office.

"They are hurting a really good program," Ami said. "I don't see the win in that."

Reach Sandy Kleffman at 925-943-8249 or skleffman@bayareanewsgroup.com.