Orange Dips Into Its Reserve Funds to Balance Budget : Finances: Library hours are cut, hiring freeze is extended. Layoffs are called possible if state fails to guarantee revenue from vehicle license fees, taxes.

The City Council passed a $54.4-million budget this week that borrows from other funds to cover a $4.4-million shortfall, authorizes cuts in library hours and other services and extends the city’s hiring freeze.

Council members said they regretted the cutbacks and continued hardship for city departments, which have been operating with reduced staffs for more than a year, but warned that the worst may be yet to come.

“It is not business as usual,” Councilman Mike Spurgeon said. “And it won’t be for the foreseeable future. . . . All bets may be off, depending on what the state does in the next week or two.”

The city is waiting to hear whether the state budget will continue to guarantee cities the revenue from motor vehicle license fees and property taxes, which amount to $5.3 million in annual income for Orange.

If that revenue is reduced significantly, the city will resort to layoffs, said City Manager Ron Thompson. A $5-million loss could mean cutbacks of one-sixth of the city work force, he said.

“I hate to talk about that,” Thompson said. “I’ve gone through 30 years in my career without having to lay anybody off.”

The general operating budget reflects cuts of $953,877, defers most capital improvement projects, cuts park and street maintenance, and reduces or eliminates support for many community events and nonprofit organizations. Slightly smaller than last year’s $54.6-million financial plan, the spending plan does not propose any fee or tax hikes.

Library hours at the city’s three branch facilities will be cut by 30% because the city’s hiring freeze has left the department understaffed, Library Director Karen Leo said.

However, the council did approve $3 million in redevelopment funds to purchase property for the site of a new main library.

The budget projects a mild economic recovery next year and 5% growth in local sales tax revenue.

In January, the city trimmed $1.26 million from the budget in anticipation of a projected $2.6-million deficit. When the economy failed to rebound and sales-tax revenue dropped another 8% this year, the budget shortfall grew to $4.4 million, a deficit that will be covered by using $600,000 in city reserves and $3.8 million in state funds previously allocated to avoid layoffs.

This marks the third consecutive year that the city has dipped into its reserve funds to balance the budget, leaving the fund with about $6.2 million.

The reserve fund also lost about $3.2 million as a result of the investment scandal allegedly masterminded by Newport Beach money manager Steven D. Wymer, said Scott Morgan, assistant to the city manager.