Even if you don't live in California, your local government is probably poorer than it used to be. As states put together their 2004 spending plans, they face a budget deficit more than twice that in fiscal 2003, ended June 30. A survey of 41 states and the District of Columbia pointed to a combined shortfall of $78.4 billion. That means more program cuts, higher state taxes and less money flowing to cash-strapped cities, towns and counties.

What are municipalities doing to cope? Many are continuing to doggedly pursue retail development to get sales-tax revenue. Retail has emerged as something of a white knight for many local governments — a segment that they can count on for revenue when all else fails.

“It's an interesting dynamic,” says Craig Semmelmeyer, founder of Main Street Property Services Inc. of Lafayette, Calif., a retail consultancy. “In California, at least, retail sales-tax revenues seem to be the only safe harbor for cities, and those that have done a good job of developing a solid retail base are in much better financial shape than those that have not.”

In fact, political leaders everywhere remain unabashed in their enthusiasm for retailing. At this spring's ICSC convention, Boston Mayor Thomas Menino and Washington Mayor Anthony Williams made similar pitches — namely that financial problems won't get in the way of doing deals. In Cleveland, which is struggling with high office vacancies and is eager to attract new housing and retail, city officials this year created a tax-increment financing district for a retail and entertainment development on Euclid Avenue — until now a little-used financing incentive in that city.

“There are always opportunities in hard times,” says Bill R. Shelton, a partner in The Buxton Co., a market research firm that specializes in retail site selection.

A year ago, Buxton created a retail recruiting system called CommunityID, which helps match retailers with cities. “We thought there was a niche out there in communities that wanted to increase their retailing base,” says Shelton, who also is dean of the economic development program at Texas A&M University. Buxton first assesses the client's potential for retail development, an analysis that costs $20,000. Next, using a database, it finds 20 retailers that would be successful matches for the community, and provides a specific marketing package directed at each of those retailers. That step costs $40,000.

So far, Buxton has contracted with 41 municipal clients, evidence, says Shelton, that “retailing is too enticing to be ignored.” The first client was Denton, Texas, where Buxton evaluated a proposal for a retail development on 52 acres. That development — Denton Crossing, a 470,000-square-foot-center owned by Hunt Properties — will open in October. The cost to Denton (not including Buxton's fee): A rebate on a portion of the sales taxes the center generates, which could total more than $10 million over 15 years.

Still, it takes money to attract retail. San Jose is still pursuing retail, even though $17 million in cuts forced by the state's $38 billion deficit means less promotional money. “It is a significant hit, and we're feeling the pain proportionately more than others,” says Kelly Kline, a senior development officer who specializes in retail efforts.

Some cities, however, aren't missing the state development dollars — because they never had any. Agencies don't miss what they've never had, making those that rely on non-public funding less susceptible to the downturn. The Downtown Cleveland Partnership, for instance, is funded by local businesses, philanthropic organizations and banner-ad revenues, says Executive Vice President Joseph Marinucci.

The agency is trying a variety of strategies. For example, by emphasizing the creation of downtown housing, it hopes to attract a supermarket and other retail services, says Marinucci.

San Jose is trying to find cost-effective ways to do the same work — for instance, sending regular e-letters on retail opportunities instead of expensive mailings. But no amount of efficiency will make up for the lost millions. Kline notes that many development programs with money attached to them — grants for facade and tenant improvements, for instance — are on hold.

“We've got to keep the momentum going until we reach happier budget times,” she says.