COMMENTARY ON FISCAL REFORM : Erosion of Local Revenue Spells Disaster for City Government : Municipal control is being seriously undermined by taxpayer initiatives, state budget actions and the recession.

Proposition 13, the major symbol of California’s oft-canonized property taxpayer revolt, was the first great wave of change in local government financing that challenged cities to trim the fat from municipal budgets and streamline service delivery. Even as that measure is challenged in the state and federal Supreme Courts, a new set of breakers is poised to crash upon our cities. Without widespread fiscal reform and changes in state government’s recent policies, these waves portend a disaster that could forever change the face of city government.

Cities reduced their budgets in the wake of the property-tax-limitation initiative but soon realized that there were many municipal services their residents did not want to do without. Cities initiated entrepreneurial crusades to support more police, faster emergency response times, open playgrounds and a litany of other desired services. They blazed a trail of commercial, light or high-tech industrial and tourist-related developments to create a more diversified revenue base of sales taxes, transient occupancy taxes and other fees.

Unfortunately, no revenue approach is recession-proof. Orange County cities have experienced significant, double-digit reductions in sales and transient occupancy tax revenue in the past 18 months.

At the same time, a combination of voter-approved initiatives and California’s severe economic downturn have strapped a fiscal straitjacket on the Legislature and the governor. With their budgetary flexibility narrowed, officials in Sacramento have looked increasingly at local revenue as a way to balance the budget.

In the past two years, for example, state budget actions have reduced revenue to cities across California by $211.7 million. Those reductions occurred in a climate where cities’ revenue statewide had already declined 17.5% per capita over the 10-year period after Proposition 13. During the same period, the state’s population increased by more than 20%.

Cities have also sought to reduce costs by investigating the regionalization of services. Many cities in South County, for example, are exploring a regional police force proposal.

Out of this maelstrom bubbles a combination of tax equity issues and new proposals to shift more local revenue to Sacramento.

Orange County--particularly county government--finds itself in the untenable position of being a so-called “donor county” on most health and social service programs; that is, our county sends more locally generated revenue to the state than we receive in return. Local government’s portion of the property tax pie--both cities and the county--is considerably less than that of other major California urban areas. For example, the county of Orange receives 18% and cities, on the average, receive 12% of every general property tax dollar. In Los Angeles, county government receives 42% and cities get 19%.

Although a recent Superior Court ruling ordered the Legislature to implement new formulas by 1993, the state is expected to appeal. In the meantime, these tax inequities are forcing county government to seek out and implement aggressive new fee programs that are taxing our residents through cities for services that used to be covered by property taxes. For example, many cities now must pay a per-prisoner jail booking fee. That money comes from general funds that pay for services like police and fire.

The governor’s 1992-93 budget proposals point to further erosion of local revenue. Last year, cities statewide lost 50% of court fines and forfeitures, which would otherwise help underwrite local police operations, and 47% of cigarette tax revenue to help bail out the state’s trial court-funding program.

The state’s share of the court-funding program was scheduled to increase to 55% in fiscal 1992-93; however, the governor’s budget proposal calls for the status quo, a net reduction of $143 million.

Other proposals in the budget call for permanently shifting all city cigarette tax revenue to the state general fund. The governor is also looking to shift all property tax revenue received by enterprise special districts--for example, those operating water or electric utilities and waste disposal facilities--to the state budget.

It is important to remember that the governor’s proposal is only the starter’s gun in a race toward a balanced state spending plan that has careened unnervingly through chaos the past two years.

The Golden State is in dire need of sweeping fiscal reform. These reforms must be backed by sound policies that ensure a predictable and stable financial base for local government and budgetary independence for cities from the programs and costs of other levels of government.

The next round of legislative actions in Sacramento could forever undo local government and local control.

It will take a tidal wave-sized political will to accomplish sweeping changes in government finance to avert the disaster that looms on local government’s horizon, threatening to destroy our ability to fund local services. Such a solution will also require strong and vocal support from California residents, businesses and interest groups who believe that we still possess the resilience and creativity to fix the problem.