Pain quotient in state budget tied to return of vehicle fees. (Up Front).

Gov. Gray Davis' revised budget for 2003-04 goes much easier on local government funding than his original January budget, but city and county officials remain concerned they could lose several hundred million dollars in state funding.

The fear is that due to a quirk in the process of transferring vehicle license fee revenues to cities and counties, they could miss out on several months of those revenues. This could mean the loss of tens of millions of dollars each month -- right at the time when their cash flow is expected to be tightest.

Also, the general funds of many cities could take hits from a proposed diversion of redevelopment agency property tax funds to the state.

And with Republicans continuing to resist any tax increases, local officials are concerned that some of the tax measures in the Davis budget will be blocked, forcing the state to go after more local government funds to plug the record $38 billion budget gap.

The skittishness is especially true in the city of Los Angeles, where the City Council is locked in a battle with Mayor James Hahn and new Police Chief William Bratton over the hiring of hundreds of additional police officers. The Council has moved to postpone consideration of funding the new officers for six months, until the situation in Sacramento is clarified.

"Until we see the hard facts and have the checks in hand, we need to watch this very closely and exercise extreme caution," said Bill Fujioka, chief administrative officer for the City of Los Angeles. "That's why it's prudent not to make any additional expenditures until we have a better idea of what's coming from Sacramento."

Meanwhile, L.A. County still expects at least $100 million in funds to be taken away by the state and is proceeding with plans to eliminate thousands of positions to plug the gap.

The biggest concern, just as it has been all year, remains the fate of an estimated $4 billion in vehicle license fee revenues. In March, the Davis administration announced that the budget deficit was so bad that it would automatically trigger a restoration of fees that had been cut several years ago. But local government officials are afraid the restoration will be too little, too late, to avoid a severe financial crunch this year.

Timing uncertain

In the late 1990s, when times were flush, the administration of then-Gov. Pete Wilson pushed through a two-thirds reduction in the vehicle license fee paid by every vehicle owner. Much of the VLF goes to local governments to help fund police, fire and infrastructure programs.

In order to assuage local government concerns of a state raid on their coffers reminiscent of the early 1990s, California pledged to "backfill" local governments out of its general fund for every dollar in reductions. In the current year, the state is backfilling about $4 billion to local governments.

In his January budget, Davis proposed eliminating the state backfill, which would have resulted in huge losses for city and county budgets. City and county officials launched a lobbying blitz in the Legislature to block the move, to no avail.

In March, Davis administration officials announced that state receipts were about to fall low enough to trigger an increase in the vehicle license fee, paid by every vehicle owner, to pre-1998 levels. If such a trigger were enacted, it would eliminate the need for the state to backfill cities and counties out of its general fund.

Davis administration officials said the trigger will probably happen before July 1, but they are not sure. Even when it happens, it will likely take anywhere from one to three months for additional revenues to start flowing in to local government coffers.

Meanwhile, the Davis May revise has the state backfilling process stopping on June 30 and so far, the state Legislature has shown no willingness to tinker with that date.

"The Davis administration may have had the intent of having a seamless transition, but there are a lot of 'ifs' that need to happen first, and we're seeing no evidence that those ifs are being addressed' said Jean Korinke, lobbyist for the League of California cities.

As a result, the League issued an analysis on May 15 saying that cities throughout the state stand to lose anywhere from $300 million to $400 million for each month a gap in VLF funding persists.

Fujioka said that a two or three month delay in receipts of additional vehicle license fee revenues could cost the city $40 million in next year's budget.

Fujioka's counterpart at the county, Chief Administrative Officer David Janssen, said such a delay would cost the county $68 million per month.

"The real question is when the trigger for the restoration of vehicle license fees will actually be pulled and how long it will take to get the additional revenues flowing," Janssen said.

Other facts are figuring into the nervousness in the halls of local governments.

The May revise retains a $250 million diversion in redevelopment agency property tax funds to state coffers; if some redevelopment agencies don't have the financial resources to make those payments to the state, cities would be on the hook.

Trimming Losses

Estimated loss to Los Angeles County budget from proposed state
reductions. (in millions)

                                    Initial 2003-04
Program                             Budget Allotment   May Revise

Elimination of state backfill of          $472        $63 to $189
vehicle license fee
Deferral of mandate reimbursements        60.8                 40
Court funding                               26                 10
Local street and road fund                  18                  0
Child support agency allocation           10.6               10.6
All reductions                           598.6         145 to 271

Source: Los Angeles Country Administrative Office