The CA Modifications option doesn't really do what I need it to do in this case because the actual taxable income isn't changing, just the amount that appears on form 3801 (California's passive activity loss limitations form) to carry forward to the next year.

The "Sch E Add a depreciation item that is State Only" option doesn't work because in this case I need to reduce the deductions on the CA return, not add more deductions.

Your second suggestion, "Sch E input > Income Statement > Depreciation & Amortization", it does work if I set a "State, if different" override amount.  Alright, that's one option.  But what a messy, terrible hacky way to have to do this. 

It really seems there is a bug with the software and it's not working the way it should.  The "source" field on the Other Expenses field should work.  But I don't know if there is really a good way to report ProConnect bugs.