Six months ago, Santa Ana was in a $30-million budget hole, and the corridors of City Hall echoed with whispers of bankruptcy. Employees feared the city wouldn’t make its payroll, while a major credit rating agency declared the city’s financial picture bleak.

But that picture has brightened considerably since then. Interim City Manager Paul Walters now is declaring that not only will the budget be balanced going into the 2012-13 fiscal year but the city will have a little money left over to put in its reserve fund.

“There’s still a lot of work to be done — a tremendous amount of work to be done,” said Walters, who is also the city’s police chief. “But we’re out of crisis mode. We’re healing.”

Walters said the turnaround is thanks in large part to renegotiated labor contracts.

New deals with the Santa Ana Police Officers Association and service employees are expected to save the city $10.7 million in the next fiscal year, and about $4.5 million this fiscal year.

Brighter-than-projected economic circumstances and the retiring of dozens of employees also play a role. But the biggest reason is the City Council’s decision last month to dismantle the city’s fire department and outsource its services to the Orange County Fire Authority.

The outsourcing, which was done with the blessing of the fire union, not only shaves $10.5 million off the general fund budget, but also frees money stored in internal service funds bound to workman’s compensation and vehicle replacement, among other costs.

How much extra cash will be transferred into the general fund because of these other savings is yet to be seen, but Walters said he expects it to amount to several million dollars. “Now all of the sudden, next year your whole formula changes,” he said.

On the revenue side, there has been an unexpected uptick in traditional revenue, such as sales tax and utility users tax, Walters said. The total increase is projected to be about $2 million, he said.

City officials were particularly worried about utility companies challenging whether the tax — which is many years old — applies to newer phone technologies. Councilman Sal Tinajero said this was the main reason that employees worried the city wouldn’t make its payroll last November.

So far, the businesses are still paying the tax, city officials said.

And though city leaders statewide bitterly fought Gov. Jerry Brown’s successful effort to dismantle redevelopment agencies, there seems to be a silver lining in Santa Ana.

Because some redevelopment projects are still under way, the city believes it will be able to keep property tax revenue that would otherwise be diverted to other public agencies.

And like other agencies statewide, Santa Ana will be the beneficiary of redistributed revenue that used to go to redevelopment. Walters said the city is expecting a $3-million increase in property tax revenue because of redevelopment’s end.

But these projections aren’t firm, Walters cautioned. An oversight committee is expected to judge whether ongoing redevelopment projects qualify for property tax revenue.

Finally, 47 employees decided to retire recently, saving about $5 million to the city, Walters said. Some of those savings, however, will affect other special fund accounts.

Walters said the only employees who will be laid off in the coming fiscal year will be employees whose payroll was funded by redevelopment.

Beginning next fiscal year, Walters said he hopes to start building a reserve fund. The city’s unrestricted fund balance, which acted as the city’s reserve, was nearly spent in recent years as the economy sank.

“My vision — and certainly the City Council’s vision — is to have a model city, a place you want to work, live and play,” Walters said. “Coming from where we were, that’s a monumental goal.”

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