CKEditor inserting special characters

I just upgraded to the latest version from 3.6, and everything is working great, except when I try to use the editor, it is inserting special characters all over the place.  This never happened before the upgrade.  For example, if I type:

Here is line 1

Here is line 2

And then I click the Source button to see the HTML behind it, I see this:

<p>Here is line 1</p>

<p>Â </p>

<p>Here is line 2</p>

This is just one example.  Sometimes spaces are being replaced with &acirc; and other similar quirks.  My site uses ISO-8859-1 character encoding, and changing it is not an option.  Can someone offer some advice?