ESCONDIDO -- A citizens group has begun picketing City Hall to protest plans for drastic budget cuts, contending that city officials should cover their budget shortfall with $19 million they have promised to the developer of a proposed downtown hotel.

Newly elected City Councilwoman Olga Diaz said Monday that she supports using the hotel money to help soften $6 million in proposed cuts, which include significantly less funding for libraries, 5 percent pay cuts for city staff, and staffing reductions in the police and fire departments.

But the rest of the council reiterated their objections to the idea Monday, arguing that the $19 million has been set aside to stimulate the city's economy, not cover day-to-day operations.

They also said it would be foolish to use a "one-time" windfall to cover expenses that will remain in the city's budget year after year.

However, Councilwoman Marie Waldron said the economic slowdown might become so severe that she would consider using a portion of the hotel money as an emergency reserve fund for the city.

City Manager Clay Phillips said the council could legally use the hotel money any way it wants if the developer fails to meet a Jan. 1 deadline for securing the rest of the financing for the roughly $67 million project.

The developer, La Jolla-based C.W. Clark, did not return phone calls Monday seeking an update on the project, a seven-story Marriott hotel.

Monday's picketing was organized by the Escondido Chamber of Citizens, an environmental group that helped pass the city's slow-growth initiative in 1998.

"We believe we must act now before the council sacrifices the welfare of the city for the sake of building a luxury hotel," said Lisa Prazeau, president of the group. "Our city doesn't need to lay people off when we've got this $19 million."

Diaz, who was endorsed by the Chamber of Citizens in this fall's council race, said she hopes to persuade her colleagues to let the hotel deal expire after she is sworn in to her council seat on Dec. 3.

"The hotel was a great project when the city had money and we had expectations we'd be getting more money," Diaz said. "But the hotel is a noncritical expense at a time when the city is planning extreme measures like closing a library branch."

But the city manager said he would urge the council to leave the $19 million alone if the hotel deal falls through.

The only way out of the city's crisis is to sharply reduce annual expenditures so they no longer exceed annual revenue, Phillips said.

"You'll spend that money real quick and you won't have made any important adjustments to your budget," he said. "And the money is earning interest for us, which is revenue."

The rest of the council emphasized the need to use the $19 million to increase and diversify city revenues.

"This hotel is not just a luxury," said Councilman Sam Abed. "It will be a major economic stimulus to the city."

Abed said the hotel is projected to generate between $2 million and $4 million per year in hotel taxes and other revenue for the city when its occupancy levels rise after several years.

It is also expected to increase sales tax downtown and bolster restaurants on Grand Avenue.

City officials agreed to provide the money to Clark to make the deal profitable for him.

Without the city money, the deal would not have been possible, they said.

Mayor Lori Holt Pfeiler said the city must restructure and trim its operations in response to the budget crisis, not compromise future economic opportunities.

She said it would also be unwise to "borrow" money from the hotel fund with vague plans to return it.

Councilman Dick Daniels said the council must keep the money for some other exciting opportunity if the hotel falls through.

"That's our seed money and our 'tomorrow money,' " Daniels said. "It doesn't make sense to use it for today's expenses.

Daniels said he appreciates that Diaz and the Chamber of Citizens are empathetic toward City Hall employees who are facing salary cuts, but that their approach is flawed.

Diaz and Prazeau said they understand the axiom of not using one-time money to solve long-term budget problems.

They said their recommendation is for the city to make substantial cuts, but to use some of the hotel money during the next few years to avoid severe cuts that endanger residents or threaten parks and libraries.

Waldron said she would hate to see the city give up its economic development nest egg, but that the economy might make it necessary.

Declining revenue has reduced the city's reserves from $14 million to $7.3 million in the last two years, and the $5.9 million projected deficit for this year would take them below $2 million.

"We're heading toward a serious depression, so I could see where we might have to use part of that money as a reserve," said Waldron. "But it would be very shortsighted to take it all."

Contact staff writer David Garrick at (760) 740-5468 or dgarrick@nctimes.com.