SACRAMENTO - Gov. Arnold Schwarzenegger Wednesday told county leaders unhappy with parts of his budget plan that eliminating the state's deficit will require sacrifices.

"Everyone here has to tighten the belt, because if we don't balance our budget we risk every program for years to come,' Schwarzenegger said at the California State Association of Counties conference.

Leaders of the group, which represents county governments throughout California, came away from a meeting with Schwarzenegger encouraged the governor wants to include them in developing his budget, said Steve Szalay, the group's executive director.

Schwarzenegger's proposed $99billion 2004-2005 budget would take $1.3 billion in property taxes from cities and counties.

Counties say the cut is too large they would be responsible for $900 million of it and don't like that it's billed as permanent.

"We know we are going to be a part of the budget solutions,' Szalay said. "That's not a surprise to us. But we want it to be reasonable proportions and not ongoing and permanent.'

Department of Finance spokesman H.D. Palmer says dialogue with the counties has been productive.

"We've been in discussion with them as they work to develop alternatives and we look forward to that continuing,' Palmer said.

Funding for local governments has been an issue since Schwarzenegger took office in November. Cities and counties threatened legal action against the state last year after Schwarzenegger rolled back the tripled vehicle license fee that would have generated $4billion for the cash-strapped local governments.

His move cost local governments millions of dollars a day, and in December Schwarzenegger declared a financial crisis to impose spending cuts to pay the cities and counties.

Last week, 38 cities sued the state over the $15 billion deficit bond voters approved March 2 when they passed Propositions 57 and 58. The suit was filed last Thursday in Alameda County Superior Court over plans to repay the bond with cities' sales taxes.

The bonds will pay off short- term loans due in June. But the state faces a projected $17 billion deficit for the new fiscal year beginning in July, according to the independent legislative analyst's office.

Also last Thursday, state Controller Steve Westly announced a proposal to generate $1 billion for the state by cracking down on under the table businesses, collecting unpaid taxes and cutting waste.