Local Officials Expect Further Sacramento Budget Pressure

By HOWARD FINE

Staff Reporter

Local officials were given a stay of sorts after voters approved Proposition 57, the $15 billion bailout package to help solve the state’s deficit crisis.

But it’s not likely to last long. For even with the bailout, the state faces a mammoth structural deficit that has local governments bracing for hundreds of millions of dollars in state cuts as they prepare their own budgets.

“Our biggest concern is that people will think that now that Proposition 57 is passed, the state’s fiscal problems are solved,” said Megan Taylor, spokeswoman for the California League of Cities. “While it’s true that had it failed, cities’ positions would be far worse, people will be shocked once next year’s budget is passed and cities start slashing payrolls and services.”

Gov. Arnold Schwarzenegger’s proposed budget calls for the permanent annual transfer of $1.3 billion in local property taxes to the state. That’s on top of millions of dollars in sales tax cuts as the state uses those dollars to pay off the Proposition 57 bonds.

The budget plan is preliminary, and will be revised in the next several weeks as more tax revenues flow into state coffers. And there’s no guarantee that the state Legislature will go along with Schwarzenegger’s property tax shift.

Nonetheless, local government representatives remain worried.

“The big question is: With a structural budget deficit of $7 billion to $11 billion for each of the next several years, where is the state going to find that money?” said David Janssen, chief administrative officer for Los Angeles County. “The answer I fear is that a large part of that will be from us in local government.”

Topping the list of concerns is the property tax shift. For L.A. County alone, that represents a $289 million cut for the 2004-05 fiscal year, increasing in successive years. For the city of Los Angeles, the state’s property tax shift takes away an estimated $135 million a year, bringing the total budget deficit for 2004-05 to between $250 million and $300 million. Other cities around L.A. County would lose tens of millions of dollars from the property tax shift.

Janssen sent a memo to the County Board of Supervisors in late January laying out the scope of budget cuts for next year should Schwarzenegger’s budget actually get passed. To close this hole, Janssen has proposed cutting 1,300 budgeted positions in the Sheriff’s Department, 545 positions in the Parks and Recreation Department, 445 in the Probation Department and nearly 200 in the District Attorney’s office. In addition, Janssen said his office is considering furloughs for employees and a 1 percent salary cut for all county employees.

None of these cuts would be made in the budget Janssen plans to introduce next month. “That’s just a placeholder budget; what we’re really waiting for is the governor’s May revise and the final state budget.”

At the city level, L.A. Mayor James Hahn’s budget director, Doane Liu, recently released a draft list of budget priorities that would result in cuts from or elimination of arts programs, youth programs, property inspections and the city’s television channel.

But that could just be the beginning.

“We have a structural budget deficit of $160 million, and that’s before these latest cuts from the state,” said L.A. City Councilman Bernard Parks, who chairs the council’s budget committee.

Parks said that $30 million in cuts must be found just to balance the budget for the current fiscal year, which ends on June 30. “We’re not at the point this year of considering layoffs; rather we’re focusing on cuts in services or discontinuing spending lumps of money. But there’s no guarantee that we can avoid layoffs next year,” he said.

Besides state cutbacks, Parks said he is concerned about the impact of federal budget cuts. “They have a $500 billion deficit over there in Washington; some of that is bound to show up in California and trickle down to us.”

Another matter of concern, Parks said, is the $200 million in pay raises approved for the next three years, including $80 million for police officers and $40 million for firefighters. “Each one of those contracts went above what was set aside for them,” Parks said.

Other cities around L.A. County are also making cuts. The city of Long Beach, which confronts a $63 million budget deficit next year, is considering cutting 200 positions. City Manager Jerry Miller told the Long Beach City Council last month that the shortfall is nearly 50 percent higher than anticipated, thanks in large part to state budget cuts.

Even smaller cities are feeling the pinch. Burbank, for example, faces a $4.5 million shortfall for its 2004-05 budget; about 25 percent of that is from the property tax shift. City Financial Services Director Derek Hanway told the City Council that his office would present cuts to the council next month. Among the possible strategies: furloughing employees and consolidating its police helicopter operations with nearby Glendale.

There is even some fallout from the passage of Proposition 57. The $15 billion in bonds to be sold in the coming months are supposed to be paid back in part with sales tax dollars collected from local governments. This would hit cities heavily dependent on sales taxes, such as Beverly Hills and Cerritos, disproportionately hard.

Last week, the city of Cerritos, which stands to lose $7 million out of its $80 million general fund budget from the sales tax payback, filed suit in Alameda County Superior Court, along with 30 other cities. The suit challenges the state’s right to use local sales tax dollars to pay off its debts.

“We’re not saying that the bonds are illegal, just that they cannot use a quarter cent sales tax from cities to pay off the bonds,” said Cerritos City Manager Art Gallucci. “They want to balance their own budget by making cities cut services, and that’s not right.”

If the suit is rejected, Gallucci said he would present a raft of cuts in services to the council.

Meanwhile, Hahn has been leading the charge for a statewide initiative now collecting signatures for the November ballot. The initiative would require a vote on any state shifts in local revenue streams like the one Schwarzenegger has proposed.

The League of Cities’ Taylor said the initiative would be retroactive to November 2003. If it were to pass, the governor’s plan to shift property taxes would be nullified and the state would have to hunt for another revenue source to replace that $1.3 billion.

But with a crowded ballot shaping up for November, Taylor said it would be an uphill battle to pass the initiative. “That’s our top priority right now, so that we don’t have to face the prospect of the state balancing its books on the backs of local government year in and year out,” she said.