By Jim Christie

SAN FRANCISCO, Dec 18 (Reuters) - Cash-strapped California cities will think twice about outsourcing work to companies to cut costs after a state court blocked one city's ambitious plan to hand several services to the private sector.

The state's Supreme Court last month backed an appeals court decision against the City of Costa Mesa's outsourcing plan, which garnered national attention when a city worker jumped to his death from the roof of the city hall after being fired.

Huy Pham, 29, was one of about 200 Costa Mesa employees notified they could lose their jobs under the outsourcing plan, which the southern California city's unions have sought to stop with a lawsuit.

The unions won an injunction in county court blocking the plan. This put California's "general-law" cities on notice they may only privatize certain services. By contrast, the state's charter cities, like Los Angeles and San Francisco, have more control over how they conduct their affairs.

The decision may greatly restrict plans by officials of California's general-law cities, which follow laws crafted by the legislature, to hire private companies on a large scale.

The League of California Cities thought the decision so important it asked the Supreme Court to "depublish," or strike it from official records, but the court declined.

"By having that published it can be cited by other courts in other lawsuits as precedent," said Patrick Whitnell, general counsel for the League. Public employee and their unions may now use that precedent to block outsourcing plans.

Costa Mesa, a city of 110,000, has rescinded its layoff notices while other cities are reviewing how outsourcing plans and tie-ups with contractors may be affected.

"Our city managers are concerned," said Sam Olivito of the California Contract Cities Association, a group for local governments that rely on private companies to deliver services. "We've always applied the law as we believe it to be, which is they can contract out for any service."

PINCHING PENNIES BY GOING PRIVATE

Slumping revenue helped tip Stockton and San Bernardino, two sizeable but down-on-their-luck California cities, to file for bankruptcy earlier this year, triggering concerns other financially troubled cities in the state would do the same.

They have instead held down spending, sought tax increases and cut payrolls, contributing to the loss of 370,000 local government jobs across the United States since February 2010, according to the Center on Budget Policy and Priorities.

Officials have increasingly looked to the private sector as a way to lower costs. Costa Mesa's plan estimated savings of more than $22 million over five years from outsourcing services including animal control, park works and jail operations.

Lafayette City Manager Steven Falk kept a close eye on Costa Mesa's plan as it seemed to borrow a page from his northern California city. Lafayette incorporated in 1968 and its 38-person work force has hired regional agencies and private firms to deliver services for nearly 24,000 residents.

Lafayette's police department is staffed by the county sheriff. Uniformed city work crews are employees of private contractors. They also handle street cleaning, traffic signal operations, printing, garbage pick-up and emergency planning.

"We contract for everything. It's easier to tell you what we don't contract for than what we contract for," said Falk.

Lafayette likely will not be affected by the appeals court decision, Falk said.

SEEKING 'CHARTER CITY' STATUS

California has more than 480 cities, the vast majority following general-law rules. Charter cities have far more ability to outsource to shore up finances.

Costa Mesa officials suffered another setback last month when voters rejected a measure to make their city a charter city like San Diego.

San Diego is far more nimble with contracting and has used its voter-approved "managed competition" program to reduce spending. Under the program, the city is putting certain operations up for bid from private contractors, but city employees may also compete to maintain the services.

San Diego employees have held on to street-sweeping, publishing and fleet services under the program, with bids saving more than $3 million a year. Spending more than $30 million a year on trash collection, San Diego is reviewing putting that up for bid too.

As a charter city, Costa Mesa would be able to outsource to cut similar spending, which could also help in reducing pension costs.

San Diego voters tackled their city's rising pension costs in June by backing a measure to scrap pensions for nearly all new city workers. They'll now get 401(k)-style accounts.

About $18 million of Costa Mesa's roughly $100 million general fund is set aside for pensions, up from about $5 million in 2000 even though the work force has shrunk over that time, said City Councilman Jim Righeimer.

Costa Mesa's charter-city measure would have required voter approval for increases to retirement benefits. Fewer employees due to outsourcing would have helped Costa Mesa hold down pension spending, said Righeimer, who aims to put another charter measure to voters in 2014.

He predicts other general law cities across the state will likewise put charter city measures on their ballots.

Follow us on Twitter @ReutersLegal | Like us on Facebook