VALLEJO, Calif. -- When the economic crisis deepened this fall, this city already was losing scores of police and firefighters because it could no longer afford the rich salaries and benefits it offered after the Sept. 11, 2001, attacks. Now, with crime on the rise and tax revenue sinking, this San Francisco Bay area city faces more cuts in police and fire department budgets.

It is a scenario being closely watched by the many other California municipalities that offered the same lucrative pay packages -- and that now face...