A federal appeals court on Thursday began considering whether Gov. Arnold Schwarzenegger can be held in contempt for refusing to release money to improve inmate health care, testing the limits of federal intrusion into states' control of their prisons.

In a hearing before the 9th U.S. Circuit Court of Appeals, Deputy Attorney General Daniel Powell argued that a judge's demand for a $250 million down payment violates state sovereignty and federal law. A court-appointed receiver wants that money to go toward his $8 billion plan to build seven new medical and mental health facilities for the state's 33 adult prisons.

Powell told the three-judge panel that the plan goes far beyond what's needed to remedy the prison health care system. The state cited proposed amenities such as therapy rooms, basketball courts and bingo boards. Powell added that the state already has taken steps to improve care that has been ruled unconstitutional.

The demand for billions to improve inmate medical care comes during a time of "extreme fiscal crisis," the state argued. California is struggling to bridge a $42 billion budget gap, furloughing employees two days each month, cutting billions from education and social services and considering a variety of tax increases.