California’s counties and cities, at ground zero of the state’s economic woes, are tightening their belts sooner and tighter than state officials in Sacramento, who have been grappling unsuccessfully for months with a $40 billion-dollar budget shortage over 18 months.

Unlike the state, which derives most of its money from income taxes, local governments rely largely on sales and property taxes.
“The counties are in the more vulnerable position because they are more dependent on state aid,” said Michael Coleman, a fiscal policy consultant to the League of California Cities.

Over the years, funding for state-ordered programs at the local level have been cut in Sacramento but the money for those same programs has been steadily choked off. The state’s tight fist, coupled with the economic downturn, is giving local governments a double whammy.

The disparity between what the state orders and what the state provides is perhaps the single biggest bone of contention between the state and county governments.

"One day, there is going to be a day of reckoning,” said Sonoma County Administrator Bob Deis. “You can’t have it both ways. They never face up to that fact.” Sonoma County, he added, faces a revenue drop of up to $32 million and between 200 and 300 layoffs through next year.

 Each county or city, large or small, has its own individual problems, but experts say the fundamental issue applies to most of the 58 counties and 450-plus cities: Sales taxes are down as people buy less. Money from property taxes is down as values drop and land is reassessed. Local obligations that include spiraling costs of pensions and health care are draining local treasuries. Cities and counties both provide services – some of them ordered by the state – that are vital to the public, such as social services, law enforcement, fire protection, street cleaning and trash pickup.

“A lot of our counties have reopened their budgets because of declining revenues and demands on services,” said Jean Hurst of the California State Association of Counties. “In the current year, folks are all over the map. Counties are looking at hiring freezes, not filling vacant positions,layoffs and furloughs. Santa Barbara shut its doors during the Christmas holiday. Yolo County shut down yesterday until January. We’re seeing a lot of those actions to save money.

Dollars aren't trickling down from the state to the local level, prompting local and state budget writers hunting federal dollars to look hopefully to the incoming Obama administration for help. The state, with a one-year shortage approaching a fifth of its total General Fund, is especially interested in federal help.

“Right now, we’re sort of beating the bushes for grant funding for services from the federal government,” said Hurst “Really, in this economy, you are looking at cutting services or raising revenue. So, when it comes down to it, we’re going to cut services.”
And as the state’s economic condition weakens – 42,000 jobs were lost in November and the state’s 8.4 percent jobless rate is the third highest of any state – there is a ripple effect throughout the agencies that provide public services.

“The first cut had a $112 million impact on Los Angeles County. Now, we’re waiting for the other shoe to drop,” said Bill Fujioka, the county’s chief administrative officer. “The difference between the cities and the counties is that we (the counties) provide the social services, such as indigent health care, for example, and there is a huge impact on other social programs like welfare and children’s services.”

The Schwarzenegger administration has ordered furloughs and layoffs of state workers to help balance the books. But even since those orders were announced the economy has weakened even more. Moreover, pruning the 240,000-member state workforce saves money, but doesn’t result in the kind of dramatic-enough savings to balance the state’s books. State operations cost about $2.2 billion a month, perhaps more – a figure that doesn’t include such things as payments to welfare recipients, contractors or construction. In addition, many state employees’ salaries – perhaps 40 percent – are covered by special funds and fees, such as in Caltrans, the Department of Insurance and the Highway Patrol. They are not covered by the General Fund, where the budget-balancing problem resides.

With unemployment high, politicians are uneasy about raising taxes to bring in more money or making Draconian cuts.
A Dec. 16 report by the Legislative Analyst, the Legislature’s nonpartisan fiscal adviser, said that if taxes alone were used to cover the shortage, there would have to be a 2-cent statewide sales-tax increase, a 15 percent surcharge in the personal income tax and a 2 percent hike in the corporate tax rate. If cuts alone were used, funding would have to be eliminated for the University of California and the California State University System, welfare recipients and an array of developmental services, mental health programs and in-home care. The numbers, however, referred to budget emergency as it existed in the fall – it has become worse since then.
Schwarzenegger has offered a mix of taxes and cuts to deal with the shortage, but his proposals – largely because of his proposed 1.5-cent sales tax increase, found little support among Republicans in the Legislature. The governor later vetoed a Democrat-authored mix of taxes and cuts that reached his desk through simple-majority votes.

The political impasse, meanwhile, continues in the Capitol.

 “Is this going to be with us awhile? We think it is.We’re going to have to suck it up. We are not going to use games or gimmicks,” Deis said.