Taxpayer Advocate: Santa Ana Illegally Transferring Funds

For years Santa Ana has been transferring millions of dollars raised from water fees to the general fund to cover public safety costs, a budget-balancing method that city officials say is justified but an attorney with a taxpayers advocates group calls illegal.

According to Tim Bittle, director of legal affairs for the Howard Jarvis Taxpayers Association, Proposition 218 prohibits using revenue from city-levied utility fees for general fund costs unless those costs can be justified as part of the cost of providing the utility.

City officials justified the transfer, which in fiscal year 2011-12 was $8.6 million, saying the money is going toward public safety, general capital assets and right of way maintenance. The officials argued that the largest portion, $6.8 million, was going to public safety because police officers and firefighters protect the city’s water infrastructure.

A city-commissioned consultant’s report arrived at the public safety figure by calculating the total value of all property in the city — $27.1 billion. The consultants then determined that $1.2 billion or 4.63 percent of the total includes water infrastructure.

Then they calculated 4.63 percent of $147.7 million, which is the overall police budget, and subtracted budget items that have nothing to do with water, like special investigations and animal services. The result was $6.8 million.

Bittle dismissed the report’s conclusions, saying its authors “play fast and loose with the numbers.” He said that claiming water infrastructure to be 4.63 percent of all property in a city as large as Santa Ana, which is 27.2 square miles, seems to be an inflated estimate.

Bittle also said that police officers and firefighters would need specific assignments for protecting water in order to make the city’s justification plausible. For example, part of a police officer’s duties would be to patrol water wells, Bittle said.

Instead, Bittle said, the city is violating a section of Article XIII of the state constitution, which states in part: “No fee or charge may be imposed for general governmental services including, but not limited to, police, fire, ambulance or library services, where the service is available to the public at large in substantially the same manner as it is to property owners.”

The requirement to justify utility fund transfers to cover general fund costs arose from successful lawsuits the taxpayers association waged against Roseville and Fresno, said Santa Ana City Attorney Sonia Carvalho. Case precedent was that a transfer could be legal if it can be demonstrated to be for costs arising from the utility.

Since those cases, cities throughout the state have been producing studies to justify their water fund transfers, Carvalho said. “Transfers from the water fund to the general fund are not per se illegal,” she said.

Fullerton recently had a dispute over a 10-percent water fee — about $2.5 million annually — that was being used to pad the general fund. City officials commissioned a study of water infrastructure impacts to the general fund and determined that street maintenance and the use of City Hall and a city maintenance yard for water services, among other costs, were reimbursable to the general fund.

Fullerton’s report makes no mention of public safety being a cost associated with water services.

Fullerton’s legitimate reimbursements to the general fund amounted to 6.7 percent, according to the report, and thus the city had overcharged residents by $9 million. City officials have yet to determine how they are going to refund the money to rate payers.

The issue in Santa Ana was brought to light by Santa Ana Councilwoman Michele Martinez. She said the transfers place the city at risk of being sued by residents who believe they are being overcharged.

Carvalho said that as long as the transfers are lower than the study’s justified amount — about $10 million — then the city is on solid legal footing.

The council for years has been approving city budgets without knowing that the water fund transfers were taking place, Martinez said. And she’s calling for an audit of the city’s finances, particularly because Finance Director Francisco Gutierrez said in an emailed statement to Voice of OC that he isn’t sure how long the transfers have been happening.

“If my finance director doesn’t know how long this has been going on, who does?” Martinez said.

A refund like the one Fullerton is facing and the loss of several million dollars in annual revenue to Santa Ana’s general fund would have severe consequences for the city budget.

After facing a $30-million budget deficit, city leaders passed what they said was the first “truly balanced budget” in several years. But the only way they were able to do it was by outsourcing the city's 128-year-old fire department to the Orange County Fire Authority. The City Council had previously passed budgets by almost entirely expending the general fund’s unrestricted general fund balance, which at its peak acted as a $41.4-million reserve.

After the reserve hit rock bottom, the council tapped various internal service fund accounts. City Hall insiders had described the method as tapping “hidden reserves” that previous City Manager Dave Ream had built to distort the city’s true financial picture.

The water funds used to pay for public safety would otherwise be dedicated to maintaining and replacing water infrastructure such as water mains, system improvements at reservoirs and wells, according to an emailed statement from Public Works Director Raul Godinez.

The city’s water infrastructure is old and in disrepair, Martinez said.

While the taxpayers association has successfully challenged other cities over water fund transfers, Bittle said, it would be up to the association’s board of directors whether Santa Ana will be the group’s next target.

“The law seems to be clear. I don’t know why there are these holdout cities that are ignoring it,” Bittle said. “At some point it has to become the duty of the citizens of the city to hold their city accountable. We can’t police the whole state ourselves.”

Please contact Adam Elmahrek directly at aelmahrek@voiceofoc.org and follow him on Twitter: twitter.com/adamelmahrek.

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