SAN FRANCISCO - Los Angeles Mayor Antonio Villaraigosa began laying the groundwork for a year of belt-tightening in the second-biggest U.S. city during his state of the city address Tuesday night.

"The budget I will submit next week will test our city leaders like never before," Villaraigosa said. "With the national recession catching Los Angeles in its wake, we now face an estimated general fund deficit of $406 million."

Los Angeles - like San Francisco to the north and San Diego to the south - is facing budget cuts next year as the housing market slowdown and flagging retail sales reduce tax collections. The National Bureau for Economic Research's Business Cycle Dating Committee has not declared an official recession in the U.S. economy.

Villaraigosa proposed the elimination of 767 city jobs, as well as increases in development fees and trash bills. He also proposed moving parking and surplus property revenues - traditionally the province of the City Council - to the general fund. He said the city would not cut police officers, and he promised to increase funding for anti-gang efforts.

The mayor said the projected budget gap for next year is the biggest in city history. He will propose the fiscal 2008-2009 budget to the council on April 21. He must propose a balanced budget.

"The days for minor tune-ups and incremental fiscal adjustments are over," Villaraigosa said, pledging to build back the city's reserve fund and to reassess spending from the ground up with "zero-based budgeting" next year.

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