TRENTON - Gov. Christie on Tuesday proposed a $29.4 billion spending plan that would increase aid to school districts and cut taxes for corporations, while looking to contain Medicaid costs and calling for greater sacrifices from public workers.

Christie said his budget, which would reduce spending by 2.6 percent, would restore fiscal order while funding priorities key to the state's success.

He cautioned that New Jersey, struggling with soaring taxes and pension and health-care obligations, is not out of harm's way.

"We must continue on the path to reform, and continue to make the hard choices, in order to fund these key priorities," the Republican governor said in an address to the Democratic-controlled Legislature, which has until July 1 to approve a budget.

By that reckoning, Christie proposed doubling homestead property-tax credits for senior citizens and middle-class homeowners if lawmakers approve a plan for public employees to pay more for their health benefits.

That drew criticism from Democratic lawmakers, who said the governor was pitting citizens against one another.

"What the governor took today was the opportunity to divide people, to play people against one another. . . . We'll evaluate [the benefits proposals] on their own merits, not under the threat of a loss for someone else," said Assembly Majority Leader Joseph Cryan (D., Union).

"It's not fair to villainize anyone. It's not us against them," Senate President Stephen Sweeney (D., Gloucester) added in a news conference after the speech. He also is calling for public employees to contribute more for benefits.

The state did not send out rebates in 2010. The current budget allows only for residents to receive one-quarter of what they got in 2009 as a credit on their property-tax bills in the spring. Eligible recipients are senior and disabled residents earning up to $150,000 and homeowners making up to $75,000.

Christie's budget anticipates at least $323 million in savings next year if changes are approved in public employees' health benefits.

The governor also said he would immediately make a $506 million contribution to the pension system, which is required under a law passed last year - if lawmakers approve changes he is seeking to the way New Jersey funds public employees' retirement.

Christie, who says he doesn't think the Democrats' plan to change the system goes far enough, wants all government workers to pay 8.5 percent of their salaries toward pension benefits. He has proposed raising the retirement age and rolling back a 9 percent pension increase enacted a decade ago.

Senate Minority Leader Thomas H. Kean Jr. (R., Union) praised Christie's focus on public benefits changes, school aid, and the economy.

"All that taken together charts a very clear course for better opportunities in the future," he said.

Christie's proposed budget includes a $249 million increase in aid to districts, most of which is formula aid. Funding also would rise for the interdistrict school-choice program and charter schools.

However, while some district superintendents expressed relief that it appeared that their formula aid was not slated for a cut, the additional aid will not bring them to the precut level. Last year, Christie cut the aid nearly $820 million, on top of midyear reduction of more $400 million.

In addition, this year the districts will be restricted by a 2 percent cap on property-tax increases, compared with the previous 4 percent cap, and leaders in many districts say their costs have risen.

Christie's budget calls for decreased state payments for teacher retirement benefits and school-construction debt service. Full details about possible effects of those reductions could be not be obtained Tuesday.

All told, school aid would decrease by $287.8 million to $10.2 billion, not including accounting adjustments.

The governor is "increasing funding in certain areas, but school employees are going to be the ones paying for it," said Barbara Keshishian, president of the New Jersey Education Association. "He is pitting senior citizens and just New Jersey citizens in general against public-education employees."

State aid to towns, cut by $445 million last year, will stay level. A special category of aid to cities such as Camden, known as "transitional aid," will be cut $10 million, or 6 percent.

The budget also proposes nearly $200 million in tax cuts for businesses, restoring some of the Democratic-sponsored proposals vetoed by Christie last week.

Christie's plan would phase in the "single-sales factor" of calculating how much of a corporation's income is taxable, amounting to a tax break for companies headquartered in the state and selling to a national market.

It also would double a research-and-development tax credit and raise the estate-tax exemption to $1 million, among other changes. It would allow businesses to offset losses in one category of income against gains in another, and carry forward losses from one year over 20 years.

The fate of health care in Christie's budget plan was mixed.

The Pharmaceutical Assistance for the Aged and Disabled and Senior Gold Prescription Assistance programs would see no changes in funding. Hospitals would receive $20 million more than in the current year's budget.

But to pay for these priorities, Christie said, changes in Medicaid are needed.

He is proposing $250 million in savings for the joint federal program that provides health insurance for 1.3 million low-income and disabled residents. That would come from moving many recipients into managed care and cracking down on Medicaid fraud.

His plan anticipates another $300 million in savings by applying to the federal government for a waiver that would allow more flexibility in administering the program.

The state is struggling to fill a shortfall in Medicaid after losing $1 billion in federal stimulus money for the program. Christie complained that he could not make meaningful changes because of restrictions in the new federal health-care law.

Funding was reduced for nearly every state agency. Taking the biggest hits were the Department of Environmental Protection, where spending was chopped by 10 percent, and the Department of Health and Senior Services, where funding was cut by 15 percent.

Christie didn't shy away from the fact that the state would no longer automatically fund longtime programs.

"For too many years, our government has operated under the belief that the base line, the place you begin, is to continue to fund every program in the budget, regardless of the fiscal climate, regardless of the economy, and regardless of the effectiveness of the program," the governor said.

"Not anymore."