Santa Ana Confronts Big Budget Shortfalls That Could Last Years

JEFF ANTENORE, Voice of OC Contributing Photographer

Santa Ana Mayor Pro Tem Michele Martinez speaks during a City Council meeting at City Hall on Tuesday evening, June 6, 2017.

Santa Ana officials say they’re working hard to plug major long-term budget shortfalls, as auditors warn the deficits will become harder to bridge in future years due to rising employee pension costs and a slowdown in revenue growth.

If the deficits continue and the city has to draw from rainy day funds, it could be pushed to the brink of bankruptcy a few years from now, like it was in 2011. City staff say they’re trying to find ways to save costs and grow revenues so they don’t have to draw from the reserves.

“We’re going to be working really, really hard to not touch [the reserves],” Deputy City Manager Robert Cortez said in an interview Monday.

The city council is scheduled to vote next week on downsizing the city jail to save costs, but there would still be a roughly $9 million annual gap in each of the next two fiscal years, which is expected to grow even larger afterwards.

If the City Council, staff and unions come to an agreement that finds $9.3 million in additional ongoing savings next fiscal year, Cortez said, that solves the next two years of shortfalls and helps significantly with any shortfalls beyond that.

City staff are projecting major structural budget shortfalls that grow significantly in the coming years: $2.2 million this fiscal year, $14.4 million next fiscal year and $19.5 million the year after.

And it’s expected it could get worse if nothing’s done.

“As we’re going into this period now of an economic slowdown…the bad news is that expenditures are not gonna slow down,” said Mark Alvarado, an auditor hired by the city to examine its reserve policies, during a presentation to the council last week.

“It’s gonna be more difficult to be balancing budgets in year three, and in year four, and in year five than it is in the 17-18 budget.”

Pointing to the shortfalls, several council members are now taking a hard-line position on expanding the city workforce and growth of employee compensation in labor negotiations.

Additionally, auditors found the city, under former City Manager David Cavazos, wasn’t transparent about the fact that in the middle of the fiscal year, it was changing the use of funds that had been budgeted to fill vacant employee positions.

And the news comes after years of rosy budget projections from Cavazos, who was ousted by a majority of the City Council in December.

The budget shortfalls are largely due to the recent elimination of the city’s contract with U.S. Immigration and Customs Enforcement to house its detainees in the city jail (loss of $11 million per year), and skyrocketing pension costs (up $22 million since 2014 and continuing to rise). Another factor is the city reducing its potentially illegal transfers from enterprise revenues – generated by water, trash, and sewer bills – to cover city operating costs for general services like police and parks.

And as employee pension costs continue to rise significantly, tax revenues are expected to slow in their growth in the coming years, further exacerbating the shortfall.

The city’s share of pension costs have skyrocketed in recent years, from $11.9 million in fiscal year 2014 to $25.5 million this fiscal year and a projected $33.8 million next fiscal year.

About a quarter of the city’s employees work for the police department, and police account for 61 percent of the anticipated pension costs next year.

City officials expect to have to use $2.2 million in reserves to cover this year’s shortfall. The latest available figures put the city’s general fund reserves at $77 million last June.

Among the options City Council members are slated to vote on next week is a directive to downsize the city’s mostly-empty jail from a 512-bed Type II jail to a smaller holding facility. That move would save $4 million next fiscal year and $8 million the following year, according to staff.

Even with those savings, city staff say another $18 million in reserves is needed over the following two fiscal years – $9.3 million and $8.9 million, respectively – if additional cost savings and revenue increases aren’t found.

Last week, council members voted to change the city’s reserve policy to allow operating reserves to dip to 16.7 percent of annual expenditures, from the current level of over 20 percent.

The decisions came just after Alvarado presented council members with the reserves analysis performed by his company, Kelly Associates Management Group.

Among other issues, auditors found problems with the way the city, during Cavazos’ time as city manager, was having city departments not fill their empty budgeted positions and then re-designating those funds for other purposes in the middle of the fiscal year.

While it’s not uncommon for other cities to find savings through unspent personnel costs, Alvarado said, a formal process was put in place in Santa Ana to “take those savings” from department budgets in the middle of the fiscal year and re-direct those expenditures to something else.

That left the public with the impression that the city could fund, say, 200 police officers, when in reality it was only allocating the money for 180 officers, he said.

Alvarado stressed that if this process continues, it’s important to make clear how many employees the city actually can fund based on the dollar amount in the department’s budget.

Councilwoman Michele Martinez said she was frustrated at the “misinformation” that Cavazos provided the City Council about city finances.

She said she had introduced the proposal to hire an auditor in December “due to the financial inaccuracies” about the city’s financial positions. She was a deciding vote that month to oust Cavazos from his position as city manager.

Martinez said she wants to be able to hire more police and code enforcement officers, “but the reality is that we need a true assessment” of the city’s finances, not just the reserves. She indicated she wouldn’t vote for the city budget or move forward with labor negotiations until that happens.

In the long term, Alvarado said cities across board are looking at potential shortfalls caused by costs increasing – particularly for employee pensions – while revenues slow down and potentially decline.

“Pension spikes” are going to hit cities “hard,” he said.

Alvarado said it’s important that the city do long-term financial projections “frequently,” which should be factored into the city’s labor negotiations.

Santa Ana’s general fund reserves have dramatically grown in recent years, he noted, reaching $77 million at the end of the 2016 fiscal year – which he said was “great.”

But in a word of warning, Alvarado said those reserves had been above $40 million about a decade ago, but experienced a “huge drop” during the economic downturn, to the point where they were nearly depleted.

The city came close to having to declare bankruptcy in 2011, and ended up outsourcing its fire department and cutting police spending to make ends meet.

Councilman Sal Tinajero, who is among the council members who have clashed with the city police officers’ union over the past year, said the city’s financial sustainability will require limiting the growth of employee costs.

He said it’s important for the public and unions to understand “we cannot continue to increase different salary scales” when there’s an economic slowdown, since the city would ultimately have to cut staff.

In a comment apparently aimed at Councilman Jose Solorio, who often says the city needs to fill more employee jobs to provide key services, Tinajero said when council members say they should increase positions, “they are acting in a very irresponsible manner.”

Solorio, meanwhile, said “the city has a history of underestimating revenue,” which he said keeps the number of employees smaller than it could be.

He said he believes the city has in the past been content to let itself “shrink and shrink and shrink” instead of doing things like additional business taxes to keep the city at the “same levels of services” and staffing “and to grow it.”

To raise revenues, council members also talked about a potential tax increase.

Listening in the audience were the heads of the city’s two main labor groups: Gerry Serrano of the police union and Mike Lopez of the general employees’ union.

Lopez told council members the general employees he represents stand ready to partner with the council on generating extra revenues and saving costs. Serrano didn’t comment publicly.

Mayor Miguel Pulido had a different takeaway than the rest of his colleagues, saying “as we have more revenue, and this– this audit gave us a pretty good picture of things, we’ll be able to do more” for community members.

“Whatever we can afford, let’s try to get those positions filled,” Pulido said, adding the city will get “a lot of revenue” from the OC Streetcar project and over $1 million per year from a proposed hotel project on Main Street.

Nick Gerda covers county government and Santa Ana for Voice of OC. You can contact him at ngerda@voiceofoc.org.

  • WileyPost

    Hey….I thought the illegal aliens are a boost to the economy? If that was true; Santa Ana should be wallowing in surplus income….I guess reality just doesn’t follow the leftist narrative…

    • Deapster

      I think they sent it all back to relatives in Mexico – no longer circulating in Santa Ana. Bummer.

  • Bob Comment

    A badly managed city realizes that sanctuary city status doesn’t pay their bills.
    It looks as if no one in city government bothered to check what the counsel sanctuary vote would do the city budget.

    • Deapster

      No mas dinero.

  • Ken Churchill

    “Mayor Miguel Pulido had a different takeaway than the rest of his colleagues, saying “as we have more revenue, and this– this audit gave us a pretty good picture of things, we’ll be able to do more” for community members.”

    The photo at the top of the article is Michelle showing the community how much more they were going to get.

  • Deapster

    Santa Ana, our very own Puerto Rico. Keep it up, good governance fans.

  • City staff say they’re trying to find ways to save costs and grow revenues so they don’t have to draw from the reserves.
    Wow, what a bunch of morons. NEWSFLASH, all you have to do is FREEZE all cop/ff/$100K+ employee salaries until the budget is level and the pension fund is 100% funded. Easy solution. There is NO reason gov employees should be getting, or are entitled to, annual raises, especially “public safety” who are all earning $200K+ before overtime, when the city is in a cash flow bankruptcy.

    • Deapster

      Much easier to let crooks out of jail and reduce jail boarding expenses. No skin on the other union employees. They can’t be fired.

      After all, the inmates were all in for victimless crimes anyway.

    • LFOldTimer

      You’re on a roll.

      The public safety pensions account for about 75% of the pension problem.

      But they are heroes and they deserve. Just ask the clowns who have been using illegal informants in the OC jails.

  • Deapster

    Wow, so this is what 100% Latino surnamed operations look like. Thanks for the insights. So glad we consider Latinos a protected class under the CVRA.

  • Jack Milliken

    Tax the rich! Whoops – no more rich left in Santa Ana

    • Make it a requirement that City employment requires mandatory residency.

      • Deapster

        Good one. Yes, the “rich” today are all government employees. Make them stay and pay.

  • Robert Johnson

    How is that Sanctuary City vote going, and the loss of millions by the Feds. LOL.

  • verifiedsane

    Is that a toilet I hear flushing…or just the Santa Ana Mayor & Counsel trying to spin the bad news they have created….

    • “… trying to spin the bad news they have created….”
      Yep!

  • Cynthia Ward

    News flash, nearly ALL are sinking ships, some are just better at not coming forward with the info. Now that reporting regs have changed, you will see all municipalities coming clean on their unfunded liabilities and it ain’t gonna be pretty. The pension shortfalls are not because we are paying people more, it is because the pension systems like PERS are not meeting projections (which anyone can see were pie in the sky, but officials pretend to believe they are real numbers to justify the deals they make for campaign dollars) BTW-no, we cannot put public employees into 401k systems (I used to think the same once) because they are ineligible for Social Security and the pension is all they have. Try setting up a 401K system as the only income for someone’s retirement and it ends up looking a lot like the pension system. But none of that is the fault of the rank and file staff, who have no say over any of it, and work their butts off for a “customer” that often abuses them.

    But Cavazos shifting unfilled positions funds in mid-budget is disgraceful. And Pulido not knowing that STREETCARS DO NOT PRODUCE REVENUE is just plain embarrassing.

    ALL of our government agencies are in for a rude awakening as we own up to the fact that we have built unsustainable cities, where the tax base DOES NOT COVER the long term cost to maintain the infrastructure, and the borrow-to-backfill-shortfalls model is about to collapse just in time for the pension pyramid scheme to implode. It’s a scary combo. We have some tough choices to make, and it starts with stupid projects like OC Streetcar that feed the egos of elected officials who like ribbon cuttings and fills the coffers of those who write campaign checks. If we were to really review spending in all of our government agencies, and eliminate things like funding for pro sports and massive corporate welfare schemes, and stick to ONLY those programs and projects that are absolutely outside the ability of individuals to fund without the collective efforts of our joined tax revenue, things would look a whole lot better. But good luck getting officials to scale back on the big projects they can put their names on. You can’t put a plaque on a stretch of new sidewalk or a rehabbed park toilet. But if we don’t do something soon, most of our cities will have not enough left for park toilets, OR big sexy projects to put their names on. The house of cards is wobbling, and it is time for fiscal responsibility. That is not specific to Santa Ana, although they do seem to be the poster child for irresponsible leadership.

    You want the Grand PooBah of epic fails? When you take away the kick-back spending to corporate welfare in Anaheim, (which officials have the nerve to include as “revenues”) we have only about what Santa Ana has, and we have over 20 million people a year requiring the use of our public services on that same amount. Economic engine? Where?

    • LFOldTimer

      “News flash, nearly ALL are sinking ships, some are just better at not coming forward with the info”

      The only reason the SA council came forward is because it was impossible to hide the gaping holes in the hull with water gushing in and the ship listing at a 45 degree angle.

      “But Cavazos shifting unfilled positions funds in mid-budget is disgraceful.”

      Blame the council They hired him, worshiped the ground he walked on and paid him like a rock star.

      I agree about the long-term prognosis for the OC cities. Next time the economy tanks the government won’t have the bailout money to rescue to sinking corporations that are leveraged to the hilt. And if they try to create it out of thin air it will detonate the bond markets and wash the stock market away with it. Then we’ll really be up the creek without a paddle. When you factor in the multi-million dollar government pensions that the workfare workers collect beginning at age 55 for the top heavy boomer generation – Katy bar the doors. When all those forces converge together it’s going to get really ugly.

    • The pension shortfalls are not because we are paying people more, it is because the pension systems like PERS are not meeting projections (which anyone can see were pie in the sky, but officials pretend to believe they are real numbers to justify the deals they make for campaign dollars) BTW-no, we cannot put public employees into 401k systems (I used to think the same once) because they are ineligible for Social Security and the pension is all they have.
      #1- the reason there is a shortfall is because of large salaries. #2- The pension ARE meeting “projections”, the ONLY reason it is not meeting them in the public sector is because the public unions are willfully using a discount rate of return that is 50% too high, so they can get MORE salary instead of funding their $100K @ age 50 pensions. #3- ALL the City employees can go BACK into social security, all it takes is a vote by the officials. But SS averages $14K per year at AGE 67!, Not $100K+ per year at age 50-55. #4-Last, it is the employees fault, they are the ones that out the system, or allowed the system, to be put into place with bogus funding. The fact is the employee pulls out EVERY SINGLE PENNY they put into the system (many times that is ZERO as their employee portion was paid by the City), plus interest, within 3 years.

      • LFOldTimer

        Thanks for giving those who don’t have a clue about how the public pension system operates a lesson in reality, SurfPuppy.

        Everything you stated is 100% accurate.

  • LFOldTimer

    What a farking clown show.

    Thanks for the free entertainment, SA Council.

    It’s hilarious standing on the outside looking in.

    Hint to all SA residents: You have the right to relocate in the USA. You don’t to remain aboard a sinking ship.

  • Speaking from a longer-term perspective, it will be nice when government (and school districts) start getting smarter and cut those overly-generous retirement packages for new hires and pay a little more in salary & benefits and convert to a 401K program . It has worked for the private sector for a heckuva long time. Some of these current government retirement packages are crazy insane. I’d rather spend my money on my own retirement package; not someone else’s. Geez.

  • LagunaTri

    Yes, junior, every time elected officials gave in to union demands, it was going to cost money in the future. As long as electeds continue to bow to unions for their support in elections, it’s not going to get any better. Public service? What a joke. More like self-serving clowns who don’t care about those they are supposed to serve. Public employees and politicians benefit while constituents pay more and more taxes for reduced services.

    • Deapster

      Every time a voter supports a union backed candidate, this is what you get.