Cities Get Concession as Wilson Retreats : Budget: Governor no longer wants municipal revenues to balance state coffers. Reversal angers counties, which would bear most of burden.

Gov. Pete Wilson, in a concession to business groups, city officials and conservative Republicans in the Assembly, has backed away from his plan to take money from city governments to help balance the state’s budget.

Wilson’s retreat has angered representatives of county governments--which now would bear the brunt of the governor’s proposed tax shift--and erects another obstacle to bipartisan agreement on the budget, now eight days overdue.

The move creates a gulf between the Administration and legislative Democrats on a key issue on which they had reported “conceptual agreement” two weeks ago.

That issue--how to reverse part or all of the state’s post-Proposition 13 “bailout” of local governments--is a central part of competing spending plans offered by Wilson and the Legislature’s Democratic leaders.

Both sides, recognizing that the bailout was enacted when the state was flush with money and local governments were hurting, want to repeal it now that the state is short of money. To do that, both sides would shift property tax revenue from local governments to the schools and then transfer general tax revenues from the schools to the state. But the similarities end there.

The Democrats propose taking $1.5 billion from cities, counties and special districts this year and $1 billion next year. The Democratic plan would allow county boards of supervisors, without a referendum, to increase the local sales tax by as much as 1 1/4 cents on the dollar.

Wilson’s original proposal, released June 20, was similar in principle but limited the shift to $1 billion. It would have allowed the counties to raise the sales tax by an unspecified amount.

But the governor, after detailing his plan, came under heavy criticism from cities, which said the loss of property tax revenue would force them to curtail police and fire services sharply, and from business groups, which feared that the new way of dividing up the tax revenue would give city governments less incentive to approve commercial and industrial development.

Wilson also took heat from Assembly Republicans, many of whom said they would not vote for a plan that allowed counties to raise the sales tax without a referendum. One critic called the proposal a “remote-control” tax increase.

The governor’s new plan, unveiled Monday, exempts cities from the property tax shift and would allow counties to raise the sales tax 1/4 cent--with voters’ approval.

This plan would take $932 million from the counties and special districts in 1992-93. But even if every county could get voter approval in November for a local tax increase, they would be able to raise only about $350 million in the first year and $700 annually after that.

To compensate, Wilson also suggests relieving county governments of their obligation as caretakers of last resort for the sick and the poor, giving them more flexibility to manage their programs with less money.

Debbie Thornton, a spokeswoman for the League of California Cities, said her organization is pleased that Wilson has modified his proposal but is cautious because the issue has yet to be decided.

David Doerr, lobbyist for the business-oriented California Taxpayers Assn., said his group believed that Wilson’s original proposal would have been bad for business. He said the cities’ share of property tax revenue would have been reduced to the point where city officials would no longer have any interest in attracting or approving commercial or industrial development.

“Cities make land-use decisions,” Doerr said. “They have to get some revenues from those decisions or they won’t have any incentive to approve development. The governor has seen that problem and has made the adjustment.”

But Democrats and county officials were not pleased.

Assemblyman Phillip Isenberg (D-Sacramento), an architect of the Democratic plan, said Wilson is “playing to the troglodytes”--a reference to the conservative Assembly Republicans who have called themselves “cavemen.”

“If you think the Proposition 13 bailout ought to be ended, then end it,” Isenberg said. “There shouldn’t be favored or protected or preferred categories of local government.”

Dan Wall, a lobbyist for the California State Assn. of Counties, suggested that a better and simpler solution to the state’s budget crisis would be to raise the sales tax statewide and give the extra money directly to the schools.

“We’ll need more money precisely at the time the sales tax falls off,” Wall said.

In other developments Tuesday:

* State Controller Gray Davis issued 34,426 IOUs, known as registered warrants, worth $27.9 million. Since July 1, when the state began the fiscal year without a budget, Davis has sent out more than 81,000 warrants worth nearly $75 million.

* The Assembly-Senate conference committee on the budget continued its review of Wilson’s proposed $40.1-billion general fund spending plan. The committee, dominated by Democrats, has rejected many of Wilson’s budget cuts but has adopted some new ones of its own and several measures to balance the budget.

* Assembly Speaker Willie Brown (D-San Francisco) canceled plans to attend the Democratic convention in New York next week to stay in Sacramento to participate in budget negotiations. Senate President Pro Tem David A. Roberti (D-Van Nuys) also decided to remain in California.

* Wilson did a group interview with several radio reporters and spent 45 minutes on a Sacramento radio talk show defending his proposal to cut about $2 billion from the $25 billion that public schools are supposed to receive under Proposition 98, the voter-approved constitutional amendment that protects education funding.

* The California State University system announced that four of its 20 campuses have decided not to take applications for the winter or spring terms. San Jose State, Sonoma State and Cal Poly San Luis Obispo will not admit new students in the spring semester. Cal Poly Pomona is closed for the winter quarter.

Wilson said he has issued a “standing invitation” to legislative leaders to resume negotiations. Those talks broke off on a sour note nearly two weeks ago with Speaker Brown goading the governor to make his proposed budget public and Wilson telling Brown to “shove it,” according to one witness. The two have not spoken since.

Times staff writer Carl Ingram contributed to this story.