L.A. city, county strategizing plans for budget gaps.

When L.A. city and county officials release their proposed 2003-04 budgets this week, the picture will be troubling but not disastrous.

That could come later.

The county budget, to be announced April 14, is expected to cover a revenue shortfall of some $200 million, while the city budget, set for release on the 18th, is expected to close a gap of $30 million to $50 million.

City officials are prepared to initiate cuts, and though they have not identified which areas are vulnerable, they have been adamant about what's off limits--public safety. In fact, there are plans to hire up to 700 new police officers, for a net gain of 320.

"Police, fire and sanitation are sacrosanct, so that means we will need an open ear to cuts in all other areas," said L.A. City Councilman Nick Pacheco, chairman of the council's budget committee.

At the county level, the vulnerability is in health and human services, where Gov. Gray Davis' proposed budget includes substantial cuts that will directly impact the counties.

"We're hearing from community health providers and health care contractors' said Supervisor Zev Yaroslavsky. "A great deal of panic is setting in, even though it's not clear precisely how much will be cut."

Yaroslavsky said that a projected $200 million shortfall, which does not take into account the potential for further cuts in state funding, means county employees are not likely to see pay raises this year as their union contracts come up for renewal.

"Our employees are facing one or more years of very Spartan compensation. It's either that or layoffs, and I believe pay freezes or even pay cuts are preferable' he said.

'Holding our breath'

As bad as the budget picture seems, the size of the impending deficits are actually considered good news. Deficits of this size in multibillion-dollar budgets are considered manageable, albeit with some pain.

The potential for real fiscal trouble looms later this summer, however, if and when the state cuts back on hundreds of millions of dollars in vehicle license fees that ordinarily flow to local governments.

If the vehicle license fees are cut, the county would absorb an additional $470 million hit, pushing the total deficit to $670 million on a budget of less than $4 billion. The hit to the city would be $175 million, taking its deficit above $200 million on a budget totaling nearly $5 billion.

"The budget that comes out this week is really a placeholder' said Yaroslavsky. "We're all holding our breaths over here. If some or all of those vehicle license fees are cut, we're looking at reopening the budget process and making severe, across-the-board cuts. It could even come to massive layoffs, although we'll try our hardest to avoid that."

Another variable is the added cost of increased homeland security measures, whether through up-front budget allocations or additional overtime costs.

"Every time the nation goes to orange alert, local governments have to spend millions of extra dollars that right now are very scarce," said Megan Taylor, spokeswoman for the California League of Cities. "So far, only a minute portion of that has been returned by the federal government."

Taylor said most cities are presenting a best-case budget scenario up front and then warning they may have to chop later if the vehicle license fees are cut.

The VLF was reduced by two-thirds in the late 1990s as income tax revenues inflated along with the dot-coin bubble. When the fees were reduced, language was attached to the legislation allowing for a return to its original 2 percent of a car's value if the state had insufficient funds to balance its budget.

But raising the vehicle license fee, which would bring around $4 billion into state coffers, has become the subject of intense partisan debate over the last six months. Republicans have argued it would take a two-thirds vote of the Legislature to raise it; Democrats have said it merely takes an administrative fiat.

Davis has avoided the issue entirely in his budget, at the same time promising cities and counties they would not lose vehicle license fee funds.

Planning for the unknown

With the stakes so huge, some in local government are saying that cuts are best made now, as budgets are being crafted, rather than in a panic mode later on. Then, if the cuts don't materialize, the funds could be restored.

"It would be irresponsible of Mayor (James) Hahn to present a budget that doesn't include those cuts up front' one city council aide said last week.

But Hahn spokesman Matt Middlebrook disagreed. "It's so difficult to project what the VLF cut is going to be and when it's going to hit," he said. "The responsible thing to do is budget on what we know."

So far, the city has been able to skate by with limited cuts despite a deteriorating economy, primarily because the hot real estate market brought tens of millions of additional dollars into city coffers.

Last year, taxes on real estate transactions netted $58 million more than initially expected. With real estate activity continuing to boom, those revenues will likely continue to flow in the coming year. The difference: this time the boost has already been factored in, which is why the city budget deficit now only stands at an estimated $30 million.

Still, city officials said they were prepared to make deep cuts, should the situation warrant. One top city official said contingency plans have been drawn up and are ready to go, if necessary.

"We do have a plan and we've identified specific cuts to make if the VLF fees are cut, so we wouldn't be caught totally off guard," the official said.