Faced with a $118 million budget deficit, the city of San Jose, Calif., recently decided it could no longer afford its own janitors. So the city's budget called for dropping its custodial staff and hiring outside contractors to clean its city hall and airport, saving about $4 million.

Los Angeles County Sheriff's deputies remove evidence and files from Maywood police headquarters. The sheriff's department has taken over policing for Maywood and many other cities across Los Angeles County. (David McNew for The Wall Street Journal)

To keep all its swimming pools open and staffed, the city is replacing some city workers with contractors.

"These are cases where the question is being asked, 'Is this a core service at the city level?'" said Michelle McGurk, senior policy adviser to the San Jose mayor.

After years of whittling staff and cutting back on services, towns and cities are now outsourcing some of the most basic functions of local government, from policing to trash collection. Services that cities can no longer afford to provide are being contracted to private vendors, counties or even neighboring towns.

The move saves cities budget-crushing costs of employee benefits like health insurance and retirement. Critics say contracting means giving up local control and personalized services.

Cities say they have little choice. Municipalities across the U.S. will face a projected shortfall of $56 to $86 billion between 2010 and 2012, according to a report from the National League of Cities.

"You can do across-the-board cuts for only so long," said Andrew Belknap, Western Regional Vice President for Management Partners, a government consulting group. "It's gone from the tactical cost cutting to get through a recession, to in some cases saying we have to exit that business or service altogether."

Maywood, a tiny city southeast of Los Angeles, is taking contracting to the extreme. The city of around 40,000 is letting go of its entire staff and contracting with outsiders to perform all city services. The city is disbanding its police force and handing public safety over to the Los Angeles County Sheriff. Its neighbor, the city of Bell, will take over running Maywood's City Hall.

Like many towns, Maywood is battling a budget deficit. But city officials said they were forced into the situation when the city's insurance carrier decided to cancel coverage because of the $21 million in legal expenses and judgments against the city stemming from the conduct of its police department. Without insurance, the city is barred from hiring employees who work directly for the city.

"We're on the cutting edge here. We're the tip of the spear," said Magdalena Prado, Maywood's community-relations officer, who works for the city as a contractor. Ms. Prado said she has gotten inquiries from cities across the country "wanting to know how this is going to play out. They're facing their own financial strains and looking to us as an example."

Maywood officials insist services will continue. The city has for years used contract workers to run services such as parks and recreation.

But not every transition is smooth, and city employees losing their jobs are seldom eager to help their replacements take them over.

Cities can face expensive lawsuits or severance costs when they lay off employees, although these costs differ in every city, depending on the union contract, the number of people losing their jobs and whether the contractor is willing to hire the former employees.

Maywood city council member Felipe Aguirre said the city negotiated severance packages with civilian employees, but the former police officers have been more difficult. The police union attempted to stop the city from dismantling the department by filing a temporary restraining order. The order wasn't granted, and the police department was disbanded July 1.

Los Angeles County Sheriff's Department officials say they are getting more inquiries from cities and towns who want to pay them to take over local policing. The Los Angeles County Sheriff's Department has policing contracts with 42 out of 88 cities in the county.

Lakewood, a small city near Long Beach, is known nationally for developing a model city structure, known as the Lakewood Plan, that contracts out some major services while maintaining local control over others. The city contracts 40% of its services to outside vendors, including public safety, which is run by the Los Angeles County Sheriff's Department. Other areas it continues to handle itself, including parks and recreation, city-hall administrative services and the water department.

Outsourcing is on the rise around the country. Johns Creek, an Atlanta suburb that incorporated in 2006, contracted all of its city-hall and public-works services with CH2M Hill, a Denver company that provides everything from staff to furniture. The city maintains its own fire and police departments, and employs its own city manager and finance director.

"The county was hard-pressed to provide the services here that people wanted and expected," said Doug Nurse, the city's spokesman, and a CH2M Hill employee. "We had everything in place. We were good to go."

In California, the state's $19 billion budget deficit is putting additional pressure on local governments. The state has begun to reduce the amount of redevelopment funds cities have traditionally received; Pasadena, for instance, had to hand $10.8 million back to the state.

In Long Beach, city officials are considering a plan to help close an $18.5 million budget deficit by hiring a private contractor to manage city marinas.

"We're trying to focus on core services so that non-core services can be eliminated eventually," said David Wodynski, the assistant director of financial management for Long Beach.

A recent Nevada state law requires cities and counties to study consolidating services and provide detailed analysis to lawmakers by September.

The Los Angeles suburbs of Burbank, Glendale and Pasadena are contemplating merging services such as tree-trimming, employee training, purchasing and police helicopters. All three face deficits, and reductions in state funds. The cities have already started a joint emergency-dispatch center that has grown to include other cities.

Glendale has faced an $8 million shortfall on a $170 million annual budget for the last three years, said city manager Jim Starbird, and has already cut police and fire personnel.

"We have to find ways to reduce the costs of services we provide," he said. "We can't just keep cutting services."