Costa Mesa firefighter Mike Ruhl is welcomed home by his wife Megan and 2-year-old son Bradley at their Mission Viejo townhome. (SCOTT SMELTZER, Daily Pilot / July 5, 2012)

Then, in 2010, the city increased a tax on hotel stays — its first tax increase in 20 years, Roeder said.

"[Keeping taxes steady] is to be applauded, to a great degree," he said, "but you also have to look at what are the consequences of that. How much you can afford to reasonably do?"

Facing anemic sales tax revenue and a need to cut, Costa Mesa leaders were constrained by high employment costs. They couldn't make a substantial dent in the budget by simply pulling back on infrastructure spending. That inflexibility is now one of the fundamental arguments for restructuring government.

It also didn't help when Costa Mesa lost about $5 million overnight, when its investments in Lehman Brothers disappeared when the investment firm declared bankruptcy in 2008.

As the city burned through its general fund reserves, it had to borrow from other internal funds, like the one reserved for replacing old vehicles and other equipment.

City leaders cut back on park and building maintenance, moves also seen at other cities around the state.

General fund cash levels dropped during the three years Costa Mesa was running a deficit—in fiscal years 2007-08 through 2009-10. Some called it a cash crisis, but experts and city administrators say the city had viable options, such as short-term borrowing or using cash in other funds, in case of an emergency.

Administrators and council members waited to cut employment costs — the first furloughs were in 2009, a year after sales tax receipts began to drop — and used reserves to backfill the difference.

During the April 2009 council meeting when they approved the furloughs, Foley said, "My goal here tonight is to not eliminate one job. That is my goal."

While some on the right have criticized Foley, a Democrat, and the rest of the council of her era, Wood, the retired Anaheim city manager, said Costa Mesa's approach was sound.

The goal is to keep a steady level of services for residents and businesses, he said: "You don't cut [when] the first-year revenues are off."

Eventually, the city reduced its full-time staff from 610 employees to 480, using a combination of layoffs, early retirement incentives and leaving open positions vacant.

By the end of the 2010-11 fiscal year — four months after the council issued its layoff notices — its budget was balanced again.

Now, employees are challenging the pink slips in court, and the ideological battle in Costa Mesa is expected to continue.

mike.reicher@latimes.com; joseph.serna@latimes.com

Twitter: @thedailypilot