State Fiscal Woes Threaten Cities’ Budgets and a Leading Job Engine

California’s budget mess promises to bring hefty tax hikes and deep service cuts. But there’s likely to be other fallout too: a blow to the state’s labor market.

In recent years, California’s public sector has posted the strongest employment gains of any major industry, acting as a cushion for the economy while other sectors crashed.

Over the last three years, combined federal, state and local employment in California has posted average annual growth of 2.9%, due in large part to increased hiring for public schools. Total nonfarm employment has averaged just 1.1% yearly growth over the same period as sectors such as manufacturing, high tech and transportation have lost thousands of jobs. New state unemployment figures are scheduled to be released today.

With a combined 2.5 million workers, state, local and federal government in California accounts for one of every six payroll jobs in the state. Two-thirds of those positions are with local governments, which employ teachers, police officers, firefighters, health-care workers and sanitation crews.

But this engine of job growth is running on fumes. California’s financial woes are forcing communities throughout the state to freeze payrolls, cut staff and contemplate future layoffs, meaning less octane for an already sputtering job market.

“We’re going to see hardly any growth at all in state and local government and maybe even some declines” in the next few years, said economist Lisa Grobar, director of Cal State Long Beach’s Economic Forecast Project. “It’s going to take the edge off job creation in the state and slow the pace of recovery a bit.”

In the Northern California city of Fremont, the cuts already have begun. The city canceled its Fourth of July parade to save $50,000 and is attacking core services such as public safety. Mayor Gus Morrison said the city recently rescinded job offers it made to eight police recruits who were set to join the force this year to replace retiring officers.

The last state budget crisis in the early 1990s “was a piece of cake compared to this,” said Morrison, who noted that the city survived that downturn without layoffs. “We’re getting into the meat and bone and gristle now.”

Through the first 11 months of 2002, California lost a net 9,200 payroll jobs as private-sector employers skeptical about the strength of the recovery showed little willingness to add workers. But the state’s losses would have looked much worse without offsetting gains in the public sector, which added more than 50,000 jobs over the same period, more than half of them in local education.

The trouble is, many of those hires were based on streams of revenue that are evaporating fast. Gov. Gray Davis recently proposed a budget with nearly $21 billion in program cuts, including a $5.4-billion whack at education, as well as a revenue grab that would deprive cities and counties of billions in tax dollars previously earmarked for them.

Unlike the federal government, state and local governments can’t run budget deficits. Virtually every community in the state faces tough choices heading into the next fiscal year, which begins July 1.

“It’s a double whammy,” said Larry Lisenbee, budget director for San Jose, which is facing a deficit approaching $120 million. “We were already struggling with the worst recession this area has ever seen. Now this.”

Northern California cities and counties have felt the pain earlier than the rest of the state because of the deep technology downturn that began in early 2001. Lisenbee said some quick trims and his city’s rainy-day fund helped San Jose weather the initial plunge in sales and hotel taxes. Now, with no rebound in the tech sector in sight, Lisenbee said what already was shaping up to be a $60-million budget hole would double under Davis’ budget.

The governor is proposing to strip local governments of $4.2 billion in “backfill” funds that the state had been paying to cities and counties to make up for revenue they lost when California trimmed vehicle license fees in 1998. That loss of that revenue alone would cost San Jose $57 million.

Lisenbee said San Jose has been under a hiring freeze for a year and a half and has “used every trick in the book” to cut costs rather than people from its workforce of 7,500.

“But if the governor’s stuff sticks, layoffs are a foregone conclusion,” Lisenbee said.

In Fremont, the loss of vehicle license fee backfill would mean an $8.9-million hit, equivalent to 9% of the city’s budget. Morrison said that could lead to the closing of fire stations and the layoff of firefighters.

During the last recession, public employment in California began declining in mid-1992, fully two years after nonfarm payrolls began their long slide, according to data from the Employment Development Department. Economists say that delay is typical of the public sector, whose rigid budget cycles, among other things, limit its flexibility to respond immediately to changing economic conditions.

Changes in government payrolls “tend to lag the recession,” said Mary Daly, economist with the Federal Reserve Bank of San Francisco. “You’re two years out before you feel the pinch.”

Daly said California’s deep budget problems will clearly put a lid on state and local hiring, which she expects to be flat for the next few years. The goods news, Daly said, is that the private sector appears poised to add jobs this year. And in contrast to the last recession, when federal employment in California declined along with military base closures and defense downsizing, the federal government looks prepared to keep adding positions here as part of its war on terrorism.

That’s small comfort to county and city officials who are worried that budget deficits will drive them to slash health and safety programs at a time when they must stand ready to respond to everything from smallpox outbreaks to truck bombs. Local officials likewise resent being tarred as big-spending bureaucrats who deserve their comeuppance after squandering public money during the boom years.

Lancaster City Manager James Gilley said the big employment splurge in his Antelope Valley town was hiring seven maintenance workers to preserve the infrastructure it has.

“Somebody has to mow the lawns, fix the sprinkler heads and clean the restrooms,” Gilley said. “It’s one thing to imagine that you’re just adding a lot of paper pushers. But that simply isn’t the case at the local level.”

Gilley said he has two high-level job openings that he needs to fill -- a director of public works job that pays $103,000 and the city clerk spot at $90,000.

But he’s considering delaying those hires as long as possible in light of the current budget climate.

There is no shortage of qualified applicants. Frank Benest, city manager of Palo Alto, said about the only good thing to come out of the Bay Area’s meltdown is the flood of top-flight corporate “refugees” seeking jobs with the city. But with a hiring freeze in place, Benest can do little but keep their resumes on file and lament a lost opportunity.

“We lost employees during the tech boom who could go across the street and get more money plus stock options,” Benest said. “Now is our chance to bring them back, but we can’t. Our city isn’t hiring. Nobody’s is.”