Sales tax juggle places local cities in Peril.

As public attention focuses on the local impact of a rollback in the car tax, cities heavily dependent on sales taxes face even bigger hits, thanks to the state budget deal passed in August.

As part of a complicated tax swap, the state will likely end up taking up to half of all city and county sales tax revenues to pay back nearly $11 billion in "deficit financing bonds" that could be sold sometime early next year.

About $2 billion in sales tax dollars would be taken from dries and counties each year for five to seven years. As part of the bill, the Legislature promised to reimburse, or "backfill," local governments with property taxes that now go to the state.

But city officials are skeptical that the reimbursements will materialize. The earmarked revenue streams are already being tapped for schools and other uses, and there may not be enough money left to replace the $2 billion.

"Every city is going to be affected by this," said Art Gallucci, city manager for Cerritos, which could be one of the hardest hit municipalities. "Everyone has been operating under the impression that the cities will be backfilled with those property tax dollars. But there is no guarantee of a backfill and the state has a lousy track record when it comes to promises like this."

Gallucci said Cerritos could lose up to $13 million, or 16 percent of its $80 million operating budget if the state takes half of its sales tax revenues and fails to reimburse it with property tax dollars.

Cerritos is heavily dependent on sales tax revenues from its giant auto mall and two major shopping malls.

He said if the backfill does not come through, "we would have to make very significant budget cuts" for the 2004-05 budget year.

Bigger than vehicle fee

The city of Torrance, home to Del Amo Fashion Center, the largest shopping mall in L.A. County, faces a similar situation.

"We could take an $18.5 million hit," said Kathy Keane, assistant to the city manager. "With a total general fund budget of $132 million, that would be devastating. Since we've already done a lot of consolidation and elimination of positions, the next step is actual layoffs."

Keane said the hit from the sales tax diversion would be far greater than the $6 million the city would lose if the recent increase in vehicle license fees were rolled back.

Los Angeles stands to lose $195 million, or about 4 percent of the total budget. "This issue has really been swept under the rug at the state level thanks to all the uproar over the car tax," said Rex Oliff, a budget analyst with the Chief Administrator's office.

The city faces a loss of $232 million in 2004-2005 if the car tax is rolled back and no reimbursements come from Sacramento.

All this potential turmoil is the result of a complex revenue swap that state legislators crafted as they searched for ways to close a record $38.5 billion budget gap this summer. With Republicans holding the line on new taxes, state legislators decided to borrow $10.7 billion in deficit financing bonds.

To pay back the bonds, state legislators decided to take half of the sales taxes earmarked for local governments. The legislators then promised that cities and counties would get reimbursed with property taxes.

The property tax stream they plan to tap is the same one the state took from local governments in the early 1990s to help balance its books in the last recession. Under the Wilson administration, the state took $2 billion a year (going up to $3 billion) from local governments in property taxes. Those taxes were then used to fund schools.

Cities and counties were supposed to be made whole with other revenue streams, but they never were. (A portion came back years later through a state ballot proposition that boosted sales taxes to fund police and fire services.)

This time, the state is promising to tap those same funds that were taken 11 or 12 years ago.

"It's like a giant shell game," said Dwight Stenbakken, legislative counsel for the California League of Cities. "The state essentially is paying us back with money they took from us earlier."

'Something's going to give'

The fate of the car tax adds to the fiscal uncertainty. Gov.-elect Arnold Schwarzenegger has pledged to repeal the recent tripling of vehicle license fees at the earliest possible moment But the $4 billion generated by the increase goes to local governments. When asked about VLF reimbursements earlier this month, Schwarzenegger said, he would "make sure" that local governments have enough funding.

Local officials aren't so sure.

"First the state has to find $4 billion to reimburse local governments for the VLF and nobody knows where that money is going to come from," Gallucci said. "Then they've promised to find $2 billion to reimburse local governments for the sales tax swap. And all this without raising taxes. Something's going to give and I fear it's going to be local governments."

In Torrance, Keane said the city stands to lose another $6 million if the ear tax increase is rolled back. Other cities with a high proportion of sales tax revenues--including Pasadena Glendale and smaller cities like Santa Fe Springs and Signal Hill--could also face steep losses.

"We've sent a letter to the Schwarzenegger transition office asking them for the opportunity to make our case to them, but we haven't heard back from them yet," Gallucci said. "Right now, so many other things are going on that we weren't really expecting an immediate response.

Last week, Schwarzenegger spokesman H.D. Palmer said the governor-elect "hasn't spoken to that specific issue (of sales-tax reimbursements) yet."

The tax swap is contingent on the deficit bond sale going ahead, and that's somewhat in doubt. Last month, the Pacific Legal Foundation filed a lawsuit challenging the constitutionality of the deficit financing bonds. It claims that such a bond measure must go to a vote of the people. Plaintiffs in a similar case against the state involving $2 billion in pension bonds won a victory in court last month.

In the last couple of weeks, there has been discussion of short-circuiting this legal challenge by putting the bond measure on the ballot next year, either in March or in November. While the official deadline has already passed for the March ballot, a two-thirds vote of the Legislature in special session could get around that deadline.

Even if the state manages to come up with all the reimbursement money, cities and counties could still wind up on the short end, thanks to a quirk in timing.

The state collects sales taxes every month and gives 1 cent of every dollar back to local governments. But property taxes are only collected every six months. This could create a cash crunch for cities as they lose their sales tax dollars but have to wait several months for the property tax dollars to flow in.

"In cities that are already having some cash flow problems--and there are many--this could force them to issue revenue anticipation notes to tide them over." said Lloyd deLlamas. a Diamond Bar consultant on local government finance issues. "Of course, when you issue bonds, you also have to pay interest, not to mention tens of thousands of dollars in fees. So even if they are paid back on a one-to-one basis, they still lose out."