The move comes just a month after the council voted to support a proposition also aimed at protecting city and town monies, proposed for the November ballot.

The lawsuit concerns a state proposal to borrow sales tax money from local cities and towns. The funds would be used as collateral for the recently adopted $15 billion bond measure. Known as the "triple flip," a name playing on the state's promise to return the borrowed money using other revenue sources, the proposal will take effect July 1.

Local officials believe that the plan unfairly asks them to bail out the state government, when the town has worked to remain fiscally prudent.

"We basically look at our revenue and that's how much we spend every year," Mayor Steve Glickman said. "But the state just says, 'we'll go into debt.' That's like saying: 'I'm going to enjoy this luxurious lifestyle, just put it on my credit card' and go into debt."

Glickman also said that Los Gatos could be financially self-sufficient if the state did not keep borrowing money from the town's revenues.

"We're chiming in to say, 'yes, the state got itself in trouble but it is trying to pay [its debt] back with our money,' " he said.

Under the triple flip, local governments could lose up to a quarter of their sales tax rate to the state. Sales tax in California is set at 8.25 percent; the amount generated by this tax is then distributed to a variety of agencies depending on the city or town.

For every dollar spent in Los Gatos, the state receives 5.5 cents, the town receives 1 cent and the remaining 1.75 cents goes to transportation and public-safety measures.

Los Gatos' share of sales tax could drop to .75 cents per dollar after the triple flip, putting the town's greatest source of revenue at risk. Sales tax accounts for 28 percent of the town's general fund, generating an estimated $6.8 million in the 2003­04 fiscal year.

But even if it is successful, the lawsuit may not have any effect on the town's position. The suit only applies to charter cities such as Cerritos, which operate under slightly different regulations than general law cities such as Los Gatos. The charter cities allege that the state does not have the right to limit their ability to collect sales tax.

Regardless, many general law cities like Los Gatos are joining in the lawsuit to send a clear message to Sacramento: drop the proposal.

"The hope is that it will have an effect on general law cities by in effect nullifying the triple flip on all cities," said Orry Korb, town attorney.

Few have any faith in the state's promise to pay back the loan. Officials pointed to previous instances, such as the recent pledge to provide local governments with the car tax backfill, as a reason to be wary.

"We're not exactly trusting of the state," said Glickman.

Officials also expressed concern over the lack of a specific repayment method.

"They say that they will reimburse local government, but they have not, to my knowledge, committed to any method of doing so," Korb said. "And one must question how they will do that."

One idea floating around is that the state may just give back money it previously took from cities, such as property taxes.

The lawsuit is the second major effort among local governments to address the state's fiscal practices. Over the past month, momentum has been building behind the Local Taxpayers and Public Safety Protection Act, an initiative to increase local control over tax dollars. Sponsored by the League of California Cities, the act would require the state to get permission from local taxpayers before it could borrow money from cities and towns.

CITIPAC, a political action committee established by the League, is hoping to put the act on the November 2004 general election ballot.

Glickman, who supports CITIPAC, said the initiative would align the state's fiscal practice with the town's approach.

"Do what we do: live within your means, and if you want to spend more, go to the people and say here's what we want to do," he said.