California Cities Irked by Borrowing Plan

By STU WOO and BOBBY WHITE

SAN FRANCISCO -- California Gov. Arnold Schwarzenegger, in his efforts to find funds to balance the state budget, has proposed borrowing $2 billion from municipal governments over the next fiscal year, a tactic that is rankling local officials up and down the state.

Mr. Schwarzenegger is invoking a 2004 law that lets the state demand loans of 8% of property-tax revenue from cities, counties and special districts. Under the law, the state must repay the municipalities with interest within three years.

Administrators of already cash-strapped cities and counties said the loans would force even deeper cuts in services. Fewer cops and fire engines would be on the streets, they said, and parks and libraries would be closed more often. And some local governments would be forced to lay off workers to keep their budgets out of the red, they said.

Mr. Schwarzenegger's proposal "suggests that financing state government and state-government services are more important than these basic community services," said Chris McKenzie, executive director of the League of California Cities. "I think it's something most of the public would disagree with."

The governor said California's worsening fiscal woes forced his hand. California faces a $21 billion shortfall after voters on Tuesday rejected a series of measures to help keep the state solvent. Lawmakers dictate $92 billion of the state's $131 billion budget for the fiscal year beginning July 1. "I absolutely despise taking money from local government, but as I said, this is only under the worst-case scenario," Mr. Schwarzenegger said last week.

Mr. Schwarzenegger on Thursday announced he is seeking more cuts to avoid borrowing $5.5 billion from Wall Street, as he had previously proposed. On top of the $9 billion in spending reductions he had already called for, he is considering slashing an additional $750 million from prisons and $600 million from colleges and universities, an official in his finance department said. The state is also looking at cutting hundreds of millions of dollars from various social services, as well as eliminating Cal Grants, a college financial-aid program, the official said.

The governor's proposal of borrowing from local governments must still be approved by the legislature. If it does so, municipalities are worried the state won't be able to repay the loans, given the state's fiscal plight. "They're hijacking our dollars," said Don Knabe, chairman of Los Angeles County Board of Supervisors. "They don't have money to pay us back. It's a joke."

Los Angeles County could lose the use of up to $500 million for the next fiscal year, Mr. Knabe said. That would add to the county's projected $300 million shortfall in its $23.5 billion budget, of which supervisors can control $3.5 billion. That could mean cuts to services like parks and libraries.

The state could borrow about $25.6 million from Contra Costa County, said Contra Costa administrator David Twa. He says the county is in no shape to cut back more after slashing $156 million from its budget and laying off 600 workers.

San Francisco would be forced to lend the state up to $90 million under the governor's proposal, said city Controller Ben Rosenfield. With the city already facing a $438 million budget gap, officials would likely borrow funds if the state takes their property-tax revenue, he said. "It costs us money to borrow," Mr. Rosenfield said. "It'll end up falling on future fiscal years."

Administrators in smaller counties also oppose the governor's idea. The budget deficit of Kern County, in the Central Valley, could increase by $26 million if the state goes through with its plan, said Allan Krauter, Kern's legislative analyst. "We're going to have more layoffs with this," he said.

City and county officials are lobbying the state to reconsider the proposal. Mr. McKenzie said the League of California Cities is considering filing a suit against the state. Mike Reagan, a supervisor for Solano County in Northern California, said officials in numerous counties are strategizing on how to stop the state from borrowing the funds.

Mr. Krauter of Kern County said local officials throughout the Golden State are sending a clear message to Sacramento: "State, you solve your problems. Let us solve ours."

Write to Stu Woo at Stu.Woo@wsj.com and Bobby White at bobby.white@wsj.com