Local officials see bright side of budget diversion proposal.

While local cities and agencies must make deeper budget cuts this year than expected, thanks to a far-reaching deal with Gov. Arnold Schwarzenegger, the prospect of those cuts being restored in two years has minimized the grumbling.

Under the agreement, local governments take a $1.3 billion hit in each of the next two fiscal years, with the reductions coming almost evenly from cities, counties, special districts and redevelopment agencies. In return, Schwarzenegger pledged to support a new initiative on the November ballot that, starting in 2006-07, would restore the $1.3 billion to local governments and prevent any future diversions without a vote of the people.

"No question, there is more short-term pain here," said John Shirey, executive director of the California Redevelopment Association, representing local redevelopment agencies. "But in the long term, we're saving a lot of money."

L.A. County Administrative Officer David Janssen said last week that every probation camp would still have to close unless the state Legislature intervened with some additional funds. Also on tap for county cuts: group homes for juvenile offenders, some road improvement projects and mental health programs for children.

The city of Los Angeles now faces a $49 million cut instead of the $39 million first proposed in January. Some of that money could come from the city's reserve fund, which was increased to $112 million. No final decisions will be made by the City Council, however, until the budget is approved by the Legislature.

"We think this $10 million more is definitely manageable," said Ellen Sandt, assistant chief administrative officer.

Other cities, including Long Beach and Burbank, adopted a similar approach, proposing budgets to account for the property tax diversion in Schwarzenegger's January budget. With this new agreement, Long Beach will now have to go back and cut about another $2 million, while Burbank must slice another $800,000 or so.

L.A. County benefits

In his January budget, Schwarzenegger proposed taking $914 million in property tax revenues from counties, $188 million from cities, $135 million from redevelopment agencies and $98 million from special districts.

A consensus developed among local government officials that counties took too hard a hit. The result was a push for more equitable distribution. Counties, cities and special districts will now each give up $350 million in tax revenues, while redevelopment agencies will yield $250 million.

The biggest beneficiary of this renegotiation was Los Angeles County. In the January budget, the county stood to lose $289 million in property tax revenues and $183 million in various program cuts, for a total of $472 million. With this agreement and some restorations of programs in Schwarzenegger's May budget revision, the total cut to the county is now pegged at $273 million.

Some cities, meanwhile, adopted placeholder budgets and opted to wait until Schwarzenegger's May revision to enact cuts. Others, like Cerritos, delayed submitting their budgets altogether until after the May revision.

Cerritos City Manager Art Gallucci said he's including the $3.3 million hit from the state's revenue diversions in budgets for both the city budget and the redevelopment agency.

"The cuts are slightly steeper than what we were looking at in January, but we're still able to deal with it," he said. He declined to give details of the cuts, saying he wanted to present them to the city council first.

What concerns Gallucci more is a pair of bills moving through the Legislature that would enact permanent swaps of sales taxes that now go to cities for property taxes. Cerritos, which is home to one of the region's largest auto malls, is heavily dependent on sales taxes.

These two bills--ACA 30 by Assemblyman Darrell Steinberg, D-Sacramento, and SB 1774 by Sen. Ross Johnson, R-Irvine--have also drawn concern from the League of California Cities. "If they pass, they would be a deal-breaker for our budget agreement," said spokeswoman Megan Taylor.

Paying the state

The budget agreement holds bigger proportional cuts for redevelopment agencies and special districts.

Redevelopment agencies will take an additional $115 million hit from the state on top of the $135 million the governor proposed in January, while special districts--including water, lighting and community service districts--will see their reductions more than triple.

Redevelopment agencies are in a special class because they will have to pay $250 million out of their own budgets into special county accounts.

"The question is, where is that money going to come from?" said Shirey. "Many of our member agencies don't have the money in their budgets. They will have to get the money from the general funds of their parent cities."

Shirey said the association is working to develop a loan program to allow member agencies to borrow so they can get through the next couple of years until revenue diversions are slated to end.

Many of the state's 2,200 special districts are also bracing for cuts. Those districts that charge ratepayers for their services, such as water or sanitation districts, would give up roughly 40 percent of their property tax revenues, while districts that have no ratepayer bases would give up 20 percent.

"We have long experience with this from dealing with the property tax shifts through the ]990s," said Nell McCormick, deputy executive director of the California Special Districts Association. "Some may make service cuts, while others will probably tap their reserves. They will do everything they can to avoid raising rates."

McCormick said that even these steep cuts were preferable to the likely alternative. Schwarzenegger had initially proposed a permanent hit of at least $100 million a year from special districts. But earlier this year, momentum was building in the Legislature for a $400 million annual diversion of property tax revenues.

"This deal is much better than that," McCormick said. "At least we know that if voters approve the initiative in November, this is only a short-term situation."

Short-Term Pain

In budget deal, cities will forgo millions this year.

City            Amount sacrificed

Los Angeles            $49
Long Beach               5
Santa Monica           2.7
Torrance               2.3
Pasadena               2.2
Glendale               2.1
Beverly Hills          1.9
Burbank                1.8
Santa Clarita          1.6
Pomona                 1.3

Source: Californiacityfinance.com