BUDGET FUNDING SHRINKS ARNOLD'S VLF REPLACEMENT $1.8 BILLION LESS THAN HOPED.

Byline: Harrison Sheppard Sacramento Bureau

SACRAMENTO - Hidden behind the jubilation of city officials last week when Gov. Arnold Schwarzenegger found a way to get them car tax revenue they lost was a harsh reality: They're still getting at least $1.8 billion less this year than they once thought they deserved.

Much of that money is being deferred for three years so the state can get its fiscal house in order, under a deal crafted by former Gov. Gray Davis and expanded by Schwarzenegger.

But about $500 million has simply disappeared, a result, state officials say, not of any new policy but of the state receiving less revenue than expected from the vehicle license fee.

Still, local officials aren't complaining too loudly. Until Schwarzenegger pulled an end-run around the gridlocked Legislature on Thursday, they feared they wouldn't get any car-tax money at all this year.

``The other choices were quite grim,'' said Ron Loveridge, president of the League of California Cities and mayor of Riverside. ``I think to a city, it may not be everything one originally had hoped, but what is coming exceeds expectations and we are pleased.''

Schwarzenegger is using his executive authority to provide payments known as the vehicle license fee ``backfill'' to local cities and counties, after the Legislature refused to act on three pending backfill bills before leaving town for the month.

The money is a major source of local government budgets, funding in some cases a third or more of city and county operations. The biggest chunk of local budgets goes to public safety, so police and fire chiefs had been lobbying hard - writing letters, making calls and holding press conferences to pressure lawmakers.

``The need for local government to maintain those services, essential services of police and fire protection, is paramount from a public policy perspective,'' said Rob Stutzman, Schwarzenegger's director of communications.

But when Schwarzenegger decided to circumvent the Legislature, his administration said the figure to be paid to local communities was $2.65 billion - almost a $1 billion drop from the figure cited only weeks earlier of $3.6 billion.

In the intervening time, two things happened:

First, in November, Schwarzenegger proposed increasing by $500 million the amount cities and counties were ``loaning'' to Sacramento until 2006-07, raising the total loan to $1.3 billion.

The loan deal had originally been crafted by Davis and the Legislature to help the state balance its books while still technically meeting its obligations to local communities. It represented the amount of backfill cities were due in the first three months of the fiscal year, before the tripling of the car tax took effect.

At that time the loan amount was $825 million, but state officials observed a shift in car sales: More Californians were buying cars in those first three months to beat the car tax increase. Therefore more revenue came in before Oct. 1 and less afterward. Schwarzenegger proposed increasing the loan by the corresponding amount.

And second, the state discovered car owners were paying about $500 million less in vehicle license fees overall, apparently because they were buying fewer and cheaper new cars.

Some local officials remain skeptical they will ever see that deferred $1.3 billion, given Sacramento's history of breaking promises to local communities.

``I don't believe we'll be paid back,'' said Bill Fujioka, Los Angeles city administrative officer. ``Because the state still has such a huge problem. There's been so many changes over the past few years where they said 'We promise you.'

``The backfill was always a promise, then there was an 'Oops.' You can almost feel that oops coming (again).''

In the meantime, cities and counties still have to cut their budgets this year by $1.3 billion because they can't deficit finance their budgets. Los Angeles city, for example, has to make at least $45 million in cuts this year because of the loan.

Fujioka also remains skeptical the city will see the additional $105 million it is due this year from the backfill because he suspects the Legislature could still trip up Schwarzenegger's move. He is still assuming the city budget will take a $150 million hit this year and won't change that assumption until the money is in hand.

H.D. Palmer, a spokesman for the governor's Department of Finance, said Schwarzenegger's move to provide the backfill was a demonstration of his commitment to local governments and maintaining his promise made during the campaign that his cutting the car tax will not hurt local cities.

``Throughout the campaign and now as governor, he's talked about the importance of local government and it being able to have more authority and more decision-making at the local level,'' Palmer said. ``In terms of his commitment to following through and providing funding to local government, there was no doubt he followed through.''

County officials are even more concerned than city officials because such a large part of their budget comes from the state - not just from the vehicle license fee, but multiple sources.

They fear what Schwarzenegger has given them in one pocket with the car tax this month he could very well take from another pocket next month when he proposes his 2004-05 budget and when the legislature considers his proposed midyear cuts for 2003-04. His $1.9 billion in proposed midyear cuts include many programs in health and social services that are provided by counties through state funding.

Palmer could not comment on how the governor will treat local governments in his budget proposal next month because it is still being crafted.

More than three-quarters of Los Angeles County's $17 billion budget comes from state and federal governments for mandated programs.

``Any cuts in health and welfare programs - mental health, physical health - are going to impact county operations,'' said Los Angeles County Chief Administrative Officer David Janssen.

``We're anticipating based on the preliminary reductions we're going to see quite a few cuts in that area.''

Harrison Sheppard, [phone]

harrison.sheppard(at)dailynews.com