ARNOLD OFFERS BUDGET DEAL TO MUNICIPALITIES.

Byline: David M. Drucker Sacramento Bureau

SACRAMENTO - Gov. Arnold Schwarzenegger has offered local governments a budget deal that would sting with immediate financial pain, but provide long-term comfort via a constitutional amendment barring the state from raiding municipal funds in the future.

A major component of the deal involves Schwarzenegger himself.

In exchange for municipalities abandoning their own initiative targeted for November, the governor would use his considerable political clout to urge legislators to place a constitutional amendment on the Nov. 2 ballot.

He would then campaign for voter approval with the same vigor he exhibited in pushing for Propositions 57/58 and workers' compensation reform.

``If the framework evolves into full-blown agreement, local governments will have the certainty they've sought, and that would be backed by a very powerful force in the form of Gov. Schwarzenegger,'' his chief budget spokesman, H.D. Palmer, said Saturday.

Under the proposal, local governments - including cities, counties, special districts and redevelopment agencies - would take a one-time, $2.6 billion hit spread over the 2004-05 and 2005-06 fiscal years that would not be repaid.

But a constitutional amendment would prevent future raids on local funds, used primarily to pay for law enforcement, protective services and road repairs.

Officials from cities throughout the state met in Sacramento on Saturday to discuss the deal, and the board of the League of California Cities, their lobbying arm, is expected to vote on a formal recommendation that its membership accept or reject it on Wednesday, a day before Schwarzenegger releases his revised 2004-05 budget proposal.

``Some cities can absorb the hit, some can't. It's pain,'' League of California Cities spokeswoman Megan Taylor said.

The proposal would cost cities, counties and special districts $700 million each of the next two fiscal years, while redevelopment agencies would give up $500 million

But a constitutional amendment would prohibit the state from raiding future car-tax, property-tax and sales-tax funds, and state laws costing municipalities money would be suspended if Sacramento failed to reimburse them.

The key to whether local governments accept the deal revolves around how the combined $2.6 billion hit is absorbed by California's 477 cities, 58 counties and additional municipal entities.

Dividing it up by population, or various tax-revenue streams, are some of the methods being studied, Los Angeles City Council President Alex Padilla explained Saturday while in Sacramento.

``It's definitely worth considering,'' Padilla, a Democrat, said of the Republican governor's proposal. ``But ultimately the judgment is going to be on the specifics.''

Schwarzenegger wants to close a projected $17 billion deficit without raising taxes, and has negotiated with various interest groups to secure their support for budget cuts and neutralize opposition from the Democrat- controlled Legislature.

Just before he released his initial $99 billion spending plan in January, the governor announced a deal with the education lobby that permanently cut $2 billion in public school funds but protected teachers' salaries. The administration is hopeful negotiations with local governments will end similarly.

``Our hope and expectation is that this framework will evolve into an agreement in the coming days,'' Palmer said.

An important part of the proposal involves eliminating the uncertainty of the state's ability to make vehicle license fee reimbursement payments to municipalities in times of financial crises like this one, which finds Sacramento facing a multibillion dollar deficit for the third year in row.

The state now reimburses local governments to cover the amount of money they would have otherwise lost due to the car-tax reduction, implemented first in 1998 and again late last year when Schwarzenegger eliminated former Gov. Gray Davis' unpopular tripling of the annual vehicle registration fee.

This deal would eliminate the reimbursement payments and replace them with $4.1 billion annually in property tax funds that are generated by local property owners to begin with.

This shift is expected to increase the incentive for municipalities to zone land for home-building, therefore adding to the amount of property-tax revenue generated.

``This may be very appealing to legislators who think cities are over-reliant on sales tax revenue,'' Taylor said.

David M. Drucker, [phone]

david.drucker(at)dailybulletin.com