BIG HOLE IN L.A.'S BUDGET CITY OFFICIALS MULL APPEAL OF CELL PHONE TAX RULING.

Byline: RICK ORLOV

Staff Writer

An appellate court ruling that the city illegally hiked cell phone taxes leaves a $167 million hole in next year's city budget -- and the gap could widen if the courts strike down a second tax that voters did not approve.

The state Court of Appeal decision issued last week said the city violated the California Constitution when it imposed what amounted to a unilateral tax increase on cell phone use without first receiving the voter approval required by Proposition 218.

That leaves the city without $167 million it had counted on for the fiscal year that will begin July 1. An additional $100 million is threatened by a ruling affecting the telephone excise tax levied on Los Angeles residents.

"We have to look at this as the potential loss of a major source of revenue now," said City Councilman Bernard Parks, who chairs the council's Budget and Finance Committee, which is reviewing the $7.8 billion budget Mayor Antonio Villaraigosa proposed.

"I think we have to look at this as a way to begin saving today so we can be ready if we do have to take this hit.

"I think, in a worst-case scenario, you are looking at dramatic cuts in services, freezes and even employee layoffs."

Councilwoman Wendy Greuel, who co-chairs the committee, said the panel had been briefed on its options.

"Right now, we have to look at what will be in the best interests of the city and whether that is to appeal or accept the ruling," Greuel said. "We are trying to be as fiscally responsible as we can with this budget for next year to reduce the pressure in following years."

Not only trouble

The loss of the cell phone money adds to city government's difficulty trying to erase a $143 million structural deficit -- the difference between revenues and expenditures -- and overcome the loss of a $30 million transfer from the Department of Water and Power that a separate court has blocked.

Additionally, the Internal Revenue Service has announced it will discontinue the federal excise tax on time-only long-distance services. The city's telephone-tax ordinance is linked to this federal tax, which means roughly $100 million in city revenue may be at risk.

Nearly every city agency has been told to cut expenses, with only the Los Angeles Police Department receiving more money as it tries to boost its ranks. And some officials have voiced concerns that Villaraigosa may have underestimated -- by nearly $30 million -- how much employee pay raises and overtime for police and firefighters will cost.

With the budget picture worsening, Parks said Los Angeles officials and residents need to steel themselves for cuts.

"This is a road map for us," Parks said. "We need to use this 2007-08 budget as a way to prepare us for the future. You can't just come across that kind of money unless there's a sudden windfall."

Freeze considered

As part of the deliberations on the upcoming budget, Parks has asked for a report on how much money could be saved this year by imposing a partial hiring freeze and rescheduling training for LAPD recruits.

Chief Legislative Analyst Gerald Miller is scheduled to release recommendations today for next year's budget, including an analysis of the cell phone tax ruling.

The mayor's aides said Villaraigosa is reviewing the budget, and he also is debating whether to appeal the ruling to the California Supreme Court.

"This certainly adds to the uncertain environment we live in," Villaraigosa spokesman Matt Szabo said.

"The mayor was concerned with this, and that's why he held the line on spending in this budget, is increasing the reserve fund and is looking to eliminate the structural deficit over five years."

City Administrative Officer Karen Sisson acknowledged the ruling will cost the city revenue in the short term, but she said it might be in the city's interest to let the decision stand.

"What the court did was throw out a portion of the tax," Sisson said. "We want to go back and look at the ruling to determine, one, if there are grounds for appeal and also whether we can live with the decision."

Part of tax stands

Originally, officials were concerned the entire tax would be invalidated, resulting in the loss of $270 million a year.

Los Angeles has taxed cell phone use since 1993, initially levying 10 percent on users' monthly charges. City officials changed the method in 2002 and began calculating the tax based on a customer's airtime -- a switch that generated millions more in revenue.

Verizon, AT&T and other carriers filed suit, saying that Proposition218 requires voters to approve any tax hike.

City officials said they are wary of asking voters to change the taxation method, fearing that would jeopardize the revenue generated under the previous system.

rick.orlov(at)dailynews.com

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