NEWS ANALYSIS : City and County Needs Are Focus of Budget Battle

SACRAMENTO —  The state budget battle has a new poster child: local government.

Like the public schools a year ago, cities, counties and special districts have become the focus of this year’s fight to balance the state budget.

This week, the dispute over funding for local services--everything from police and fire protection to sewage treatment and cemetery management--led the Legislature for the seventh consecutive year to miss its constitutional June 15 deadline for passing the budget.

Unlike a year ago, however, this contest is not strictly partisan. Republicans and Democrats are crossing party lines to form loose alliances. Interest groups normally aligned with Republicans are deserting the state’s GOP governor. And the legislative leadership has so far been unable to exert its will on the rank-and-file membership.

At issue is how much property tax revenues, if any, the state should shift from local governments to schools so that it can maintain a commitment to public education without further depleting its own resources.

The immediate legislative debate is the tip of a political iceberg. There is an emerging consensus in Sacramento and throughout the state that a fundamental reorganization of state and local government is in order 15 years after California’s landmark Proposition 13 cut property taxes and shifted fiscal powers from local governments to the Capitol. But there is considerable disagreement over how the system should be overhauled.

For this year, Gov. Pete Wilson says that a $2.6-billion tax transfer is the only way to balance the budget. The state, he says, can no longer afford the bailout of local governments enacted 14 years ago after voters passed Proposition 13. His proposal would reverse that policy and then some, transferring more money from local governments than they got from the state in 1979.

Wilson would soften the blow on local governments by repealing a long list of state-ordered programs and granting a six-month extension of a temporary, half-cent sales tax surcharge scheduled to expire June 30. He wants to give that sales tax revenue--about $700 million--to local governments and have voters on a county-by-county basis decide whether to make the tax permanent.

“The shift was not selected, it was not a whim, it is not even a choice,” Wilson said recently. “It is the only source (from) which we are able to come up with the money necessary to meet the obligations (to schools) imposed on state government by the Constitution.”

But local officials and their allies in the Legislature say the governor’s proposal is simply a short-term fix that would allow the state to dodge responsibility for its own fiscal woes while shifting the problem to the local level.

His sales tax plan, they say, would result in a patchwork of tax rates and services that would be confusing, disrupt commerce and make some counties into magnets that would attract the poor from other regions.

Orange County supervisors joined a growing list of dissenting counties in the state when they voted unanimously this week to ignore Wilson’s proposal by promising to refuse to turn over an estimated $59 million if the governor makes good on his threat to snatch property tax revenue from the state’s 58 counties.

If necessary, the supervisors said, they will file a lawsuit against the state.

If Wilson wants to restructure government, he should do it in a calm, well reasoned fashion, not in an emergency, local officials say.

“Let’s do it in a way that’s orderly and makes sense,” said Ed Edelman, chairman of the Los Angeles County Board of Supervisors. “You can’t do it with a budget crisis facing you.”

Business groups also oppose Wilson’s plan. The California Chamber of Commerce, the California Taxpayers Assn. and the Building Industry Assn., close allies of the governor, say his tax shift would reduce the incentive for local governments to approve residential and industrial development.

If cities and counties get only a small portion of the property tax, they say, local governments will be reluctant to approve projects that might be beneficial to the economy but will not produce enough tax revenue to pay for the municipal services they require.

The debate is clouded by disputes over basic facts.

There is disagreement, for example, about the history of the state’s relationship with local governments. Wilson contends that a $2-billion property tax shift would return state and local finances to where they were when Proposition 13 was passed. He says the remaining $600 million of his proposal is justified on other grounds, such as removing property tax support for special districts that are supported by charges on those whom they serve.

Local officials, however, insist that the bailout cannot be viewed in isolation because its value has eroded over the years as the state has taken other local government revenues and shifted some state burdens to the counties.

There is also discord over the effect the cut would have on local services. Wilson says his proposed property tax shift would cut local governments’ discretionary revenues by 9%, even less if the sales tax is extended and transferred to the local level. But counties are threatening to release criminals and lay off sheriff’s deputies. Cities say they will shut parks and close libraries.

“It’s kind of like a marriage that’s in trouble,” said Assemblyman Phillip Isenberg (D-Sacramento). “One spouse says to the other, ‘If you don’t come home on time for dinner, I’m going to kill myself.’ The other says, ‘Isn’t that a bit out of proportion to the sin?’ And the first one says, ‘Oh you don’t understand.’ ”

Their differences, however, must be reconciled before progress on the rest of the budget can continue, because every dollar shifted from local governments to the schools saves the state a dollar from its own budget. Until that number is determined, lawmakers will not know how much money will remain in the state treasury and available for other programs.

“Once local government goes, the budget goes,” said state Sen. Frank Hill, a Whittier Republican. “That’s the tumbler that has to click into place, and everything else will fall in a matter of hours. It drives the decision on everything else.”

In that respect, the issue is similar to the fight over school funding a year ago, when Wilson and Democratic legislators jousted for weeks until finally enacting a budget Sept. 2, 64 days into the fiscal year.

But in that battle, Wilson had virtually every Republican lawmaker on his side. Although some Democrats advocated giving in to the governor, few supported him.

This year, Wilson has found himself with little support in either party. If anything, on the issue of the property tax shift he seems to have more allies among Democrats than Republicans.

Democrats were the first to suggest the $2.6-billion tax shift, and Democratic Assembly Speaker Willie Brown of San Francisco, who has been the governor’s nemesis in the Legislature, supports the idea, although he says it lacks the votes to be enacted. One of Brown’s top lieutenants, Majority Floor Leader Thomas M. Hannigan of Fairfield, praised Wilson recently for proposing the tax shift and not backing down.

“To the governor’s credit, he’s in fact stuck with his notion on ending this bailout,” said Hannigan, a former city councilman and county supervisor. “I happen to agree with him. We have to step to the plate at some point and do it.”

But most rank-and-file Democrats say they would rather transfer $1.3 billion--half the amount proposed by Wilson. Instead of shifting the half-cent sales tax to local government and subjecting it to the whim of the voters, they would keep it in the state treasury and dedicate it to erasing the deficit.

Republicans also are divided. Most say they will support a tax shift of no more than $1.3 billion. But few are willing to vote to extend the sales tax, and they have yet to propose an alternative that would balance the budget.

Times staff writer Lily Dizon contributed to this story.