Cities Get Budget Break

Local governments have a “temporary reprieve” from the draconian cuts they appeared to face before California’s budget was approved, a Wall Street credit agency said Monday.

Fitch Ratings said the $99-billion budget won’t hurt local governments as badly as had been projected in Gov. Gray Davis’ January budget plan or its revision, released in May.

But it said the outlook for the next two years remains shaky.

Local governments will have to be careful with their money for fear of funding shortfalls and uncertainty as the state juggles tax increases and program cuts to deal with a projected $8 -billion deficit left over from this year’s budget.

That will increase pressure to impose some of the financial hits local governments dodged this time around

“Fitch views the future for local governmental entities as one demanding caution,” said Amy Doppelt, the credit agency’s managing director.

The agency notes that:

* Schools get a slight increase over last year, but much of the increase actually is deferred money from last year, or increases to handle growth in enrollment and pension fund contributions. Schools took three hits last year as the state trimmed its spending. The new budget gives districts more flexibility to spend their financial reserves.

* Cities and counties avoided losing more property tax money, and will sustain a “moderate” effect cushioned with some relief from what had been state-mandated spending. But there is uncertainty over a complicated sales tax and property tax swap to fund $10.7 billion in borrowing to patch together the state’s budget.

Cities and counties will get $845 million less than they had hoped from the increase in the state vehicle license fee, because the effective date was delayed three months into the new fiscal year. But most local governments had taken that into account.

* Davis had proposed that redevelopment agencies give up an increasing amount of money each year for 15 years, but lawmakers turned it into a one-time cut of between $135 million and $250 million, with the specific amount to be determined when lawmakers return from their summer recess.

Fitch has yet to weigh in on the state’s credit rating, unlike the other two major rating agencies.

Standard & Poor’s lowered the state’s rating to near junk bond levels, while Moody’s Investors Service downgraded the rating and kept the state on a credit watch for fear elected officials won’t be able to trim the state’s long-term spending imbalance.