Imagine yourself watching a sexy television ad about municipal finance. If you're having a hard time with that, imagine trying to write one. That's Mike Madrid's job. A longtime Republican political consultant, Madrid is working on a campaign to persuade voters in California to protect the finances of cities, counties and special districts from poaching by the state. His polls suggest voters are sympathetic--most of them believe local taxes should stay in the hands of local governments. But the complexity of the financial machinations involved makes it very hard to get their attention, let alone persuade them to support an initiative on the subject. "When we would break the money out into different, specific revenue streams," Madrid says, "the voters' eyes would glaze over in focus groups."

The League of California Cities, the major force behind the initiative campaign Madrid is running, wanted at first to place its initiative on this year's state ballot. Now it has backed off and is trying for March 2004. The whole process has been frustrating for the league--even many local officials are dubious about the ultimate prospects for passage. But then, feelings of frustration are something that California's cities and counties have grown used to.

A quarter-century of prior initiatives and policies have left localities here at the financial mercy of the state. Cities control less than half of their discretionary spending--the state tells them what they can do with the rest. The situation is even more desperate for counties, which have final say over less than one-third of the money they spend. The League of Cities initiative wouldn't change any of that. It would simply lock into place those revenues that localities still do control, using the year 2000 as a baseline.

Whatever happens with the initiative, localities in California don't expect things to break their way significantly anytime soon. All the many billions of dollars that the state has taken from them over the years, they figure, are gone for good. The state government, for instance, has shown little inclination to return to localities the property-tax dollars it has shifted to the K-12 education budget over the past decade. So the locals, at this point, simply hope that no more is taken away.

But the threat of further losses is all too real. The state of California is facing a deficit in the neighborhood of $20 billion. Localities know they are going to get hit again. The only question is, how hard. "The governor and legislature have said that they are not going to balance the budget on the backs of local government this time," says Steve Szaley, executive director of the California State Association of Counties. "Of course, none of us are buying that."

What the localities fear most is that when the moment to balance the budget actually comes, the legislature will stiff them on car-tax revenue. Back during the flush days of 1998, the state decided to slash vehicle license fees, promising to make good the lost dollars this tax cut would mean for local governments. But the state has to appropriate that payback each year. This year, that gesture would cost $4 billion. The suspicion that the legislature ultimately will refuse to pay up haunts city and county officials all over the state. "They have their budget to balance," says Jake Mackenzie, a city councilman in Rohnert Park, a small Northern California town. "It's sort of tough luck in terms of local government."

If localities in California are starting to flinch, they are not alone. Forty-three states are grappling with revenue shortfalls this year, which leaves governors and legislatures with three choices: cut state spending, raise taxes or shift the burden onto somebody else. Given the political unpopularity inherent in the first two options, it's no wonder many states are looking to squeeze as much money out of local government as they can.

Last year, as a candidate for governor, New Jersey's Jim McGreevey criticized his predecessor for stinginess in offering state aid to towns and school districts. But he froze that aid in his own budget this year. Wisconsin Governor Scott McCallum went much further--he proposed to end the state's 90-year tradition of sharing revenue with localities, a move that would eventually have cost the localities $1 billion a year. North Carolina Governor Mike Easley is withholding $209 million in payments owed to local governments in shared tax income and reimbursements.

"It was painful," says Fred Terry, an alderman in Winston-Salem, which lost $7.2 million out of its $200 million budget. "It may not sound like that much, but when you're counting on that money and it doesn't arrive, it puts you in a pinch."

There have been some victories for localities in state capitals this year. Most notably, the Virginia legislature voted to allow the Washington-area suburbs to hold a referendum that would raise local sales taxes to pay for more roads, ending the state's decades-old stranglehold on transportation policy. For the most part, though, the state legislatures have been looking at localities as if they were ATMs.

It's not that local officials quarrel with the need to freeze aid payments or make one-time cuts to grapple with a gaping deficit. Their worst fear is that such short-term fixes won't do much to solve chronic budget problems next year, or the year after that. If the red ink continues to flow another two or three years, locals worry, the cutbacks inflicted on them won't be quick or simple ones. They are likely to be deeper structural cuts with the potential to cripple the capacity of local governments for a long time to come.

No doubt some of the fears are exaggerated, but what they reveal is that many years of heavy-handed treatment, in California and other places, have left localities wary of the legislatures and governors they must report to. It's a wariness that spreads beyond the fiscal arena, into such areas as transportation and land use, in which any state needs the full cooperation of localities to put its policies into place. The requisite goodwill is no longer there. "The state has, from our point of view, been such an unreliable partner that it's hard for us to trust them," says Chris McKenzie, executive director of the League of California Cities.

California's local strategists, as they search for ways to win sympathy and support for their cause, might want to examine the successful public relations campaign waged by localities in Wisconsin against McCallum's budget proposal. That state has a shared-revenue system that is a remnant of the Progressive Era, designed to equalize payments across the state on a per capita basis, so that even residents of property-poor areas can count on a minimum level of services. It's separate from money the state grants to localities for roads, computers or other specific programs.

McCallum threatened earlier this year to do away with the entire system, and not just because Wisconsin was looking at a $1.1 billion deficit. The governor said his ultimate purpose was to get rid of wasteful layers of local government. He complained that there were 54 units of government within a 10-mile radius of where he stood in downtown Madison. McCallum figured if he cut off one of their major funding sources, some of those units would be forced to consolidate, thus reducing duplication. "People here agree there ought to be consolidation," he says. "It's just that they want to have control after they consolidate--not the other guy."

Wisconsin cities used a number of tactics to challenge McCallum, attacking the honesty of his numbers and describing services they would be forced to cut if the governor's plan went through. For weeks, those budgetary horror stories seemed to turn up in the lead of just about every newspaper story about the controversy. Then the stories were featured in a series of television ads the League of Wisconsin Municipalities ran knocking McCallum's ideas--the first such direct- to-voter ads that the league had ever run.

The strategy worked spectacularly, aided by the governor's own failure to recommend specific steps that would help towns to merge. The plan reached the legislature "dead on arrival," in the words of one legislative aide.

But while Wisconsin's shared-revenue system may have survived McCallum's assault this year, its long-term prognosis is still shaky. One portion of the program has not been granted an increase in seven years (it's due for one this year), while the other major portion has been frozen since 1981. The fact that it shuttles money from one unit of government to others with few strings attached puts it at risk politically. "People don't like to run for office to be a tax collector for somebody else," says Dan Thompson, executive director of the Wisconsin municipal league. "That's always a hard sell."

The shared-revenue system is certain to face renewed attacks in coming years, and local officials will spend a considerable amount of time trying to repel them. "When the livelihood and survival of your community depends on the funding of state shared revenue," says Jane Wood, city manager of Beloit, "that becomes your consuming priority."

Beloit, just north of the Illinois border, receives the most shared revenue in the state on a per capita basis. Its local government has produced a brochure suggesting that if that state money were taken away, it would be able to meet its bond obligations and retiree health insurance payments, but then would have only $4.6 million left to fund nearly $30 million worth of current services. Beloit, in other words, would go broke.

Perhaps the most important lesson of this year's state-versus-local war in Wisconsin was the ability of the local forces to turn the public argument around, suggesting that instead of accusing cities and counties of waste, McCallum should get the state's own house in order first--getting rid of the swimming pools and planes that it owns before cutting off funding to localities for the parks, libraries, police and fire service that everybody loves.

It is a tactic that local officials in other states are likely to turn to as they become more desperate. In California, local governments are already starting to train their ammunition on the state's management problems, from the electricity deregulation debacle to the fact it managed to dig itself a $20 billion hole.

There is a historical irony in all this, because California used to be one of the strongest home-rule states in the country. Communities can enact charters and ordinances, change their names and annex their neighbors without the permission of the legislature. They used to have control over their own budgets and property taxes as well. All that changed in 1978, when the statewide Proposition 13 ballot measure not only cut property tax revenues roughly in half but also gave the state authority over their distribution.

This became a crucial power in the 1990s, following passage of another ballot initiative requiring the state to devote 40 percent of its general fund to elementary and secondary education. The property tax that had once funded basic county services became, in essence, a state tax used to finance K-12 education. "Since 1993," says Alameda County Supervisor Keith Carson, "when the state started shifting more dollars into the Department of Education, just our county alone has lost $1.48 billion in revenue."

Several legislators have proposed giving back to the localities a portion of the money the state has transferred to education, but even those proposals would put strings on almost all the dollars involved. Tom Torlakson, chairman of the Senate Local Government Committee, concedes that his bill, which would give localities transportation money if they build more affordable housing, has no chance to succeed in a deficit year.

As a candidate for governor in 1998, Gray Davis sounded pretty friendly to the local cause. "We will give the money back," he said, "because it wasn't ours to start with." Two years later, however, when the state was enjoying a surplus of more than $12 billion, Davis vetoed a measure, passed unanimously in both legislative chambers, which would have allowed localities to keep the increased property tax revenue they received because of rising home values.

The state did compensate for much of the money it had shifted to schools, but provided most of that money in the form of grants tied to a specific purpose and unavailable for other needs. Sacramento has been making decisions about funding priorities in communities located hundreds of miles away. Meanwhile, the more mundane and sometimes less visible costs of local government receive scarcely any state help at all. "We can't stop putting out fires and filling potholes just because the state decides it wants to spend money on something else," says Margaret Clark, a member of the Rosemead City Council in Southern California.

It is California's counties that fare worst under this system of earmarked grants: Counties provide more than $13 billion worth of state services annually, but the money the state sends them does nothing to help fund many less glamorous programs and services they are expected to handle purely as a local matter. "What we have in California," says Marianne O'Malley, of the state Legislative Analyst's Office, "is local administration. We don't have real local governance."

Cities have things a little easier, in large part because they still have a dedicated funding stream they can count on, namely, the sales tax. Of the 8 cents or so that the state collects on every dollar of sales, one penny of purely discretionary money makes its way back to the city of purchase. Naturally, this has led to a mad rush on the part of cities to land major retailers within their borders, notably big-box stores and car dealers. More than in any other state in the country, local planners court retail business in preference to residential development, and even to new industry.

The textbook example is Monrovia, a Southern California town that passed up a Kodak plant a few years ago, even though it would have brought several hundred manufacturing jobs to the city. All those employees, Monrovia's government reasoned, would cause wear and tear on the local roads, while the tax benefits from the plant would go largely to the state. The city wanted the site used instead for a Price Club discount store, even though it would generate far fewer jobs at much lower salaries, because a reliable portion of the sales- tax dollars generated would stay in Monrovia.

Other communities have been making the same seemingly perverse decision. "It may not be best from the perspective of smart growth and creating high-paying jobs," admits Jake Mackenzie, the city councilman in Rohnert Park, which recently sold some city land to attract a Costco warehouse store. "But we tend to act rationally under these circumstances." What's rational for a city in the short term, though, obviously can be irrational for the state as a whole.

An obvious solution to this problem would be some sort of revenue- sharing agreement between the locals and the state. But local governments in California are increasingly wary of such an agreement: They fear that their financial dependence leaves them in a weak negotiating position. They also worry that the legislature and the governor will change the terms of any deal after the fact. "There's not in this state the sense that we're all in this together," says Diane Cummins, fiscal adviser to state Senate President John Burton. "It's 'I don't trust what you're going to do to me.'"

This year, however, a bill to force some limited tax sharing within six counties in the Sacramento area did pass the Assembly. The bill, sponsored by Assemblyman Darrell Steinberg, would force localities inside the area to divvy up a portion of their future sales tax revenue growth. The city of sale would be guaranteed one-third of the money, and would be eligible for another third if it met stated housing and planning goals. The remaining third would be redistributed throughout the Sacramento area on a per capita basis.

Steinberg argues that since a limited number of Wal-Marts and Costcos are going to locate within the region anyway, it doesn't make sense for the local communities to fight over them, wooing developers with subsidies that they don't need and the communities can't afford. His critics counter that it is merely a backhanded way of transferring funds from Sacramento suburbs to the central city, where Steinberg himself once served on the city council.

But the real significance of the bill could be as a possible precedent for future statewide action. Steinberg's proposal has attracted support from diverse elements within the state but also has been derided by dozens of cities, many of which are lobbying hard against it even though they are located far from the affected area. "Any formula contained in state law to change the allocation of local revenues could easily be changed by a new state law," says Matthew Newman, director of the California Institute for County Government, "and that makes the locals nervous."

So the most important obstacle in the path of Steinberg's bill may simply be the mutual suspicion that hovers over the entire state-local relationship at this point. "Local government has good reason not to trust the state," says Patricia Wiggins, who chairs the Assembly's Local Government Committee. "The pressure on these communities to build housing without being able to use the property taxes from the housing is almost like an unfunded mandate."

The heated reaction to Steinberg's fairly modest bill suggests that any wholesale change to the state-local fiscal relationship may be a long time coming. In a climate of distrust, sweeping changes usually don't occur until the crisis is imminent.

There's one other factor, of course, that prevents a more rational distribution of funds between state and local government in California. That is the fact that the state benefits from the present arrangement. When times are good, the legislature can afford to be generous to localities, as it was in the immediate aftermath of Proposition 13. When times are tough, it can turn off the spigot, forcing the locals to take the blame for any resulting cuts in services. There is little incentive for state policy makers to abandon a system that grants them power through control of the dollars.