For the first time in years, the Santa Ana City Council passed a balanced budget this week without having to tap reserves, thus officially ending a budget crisis that had some city leaders considering municipal bankruptcy.

The $196.5-million 2012-13 general fund budget was balanced primarily through the outsourcing of the fire department and concessions from police officers and service employees. But city officials went further, revamping their financial policy to guard against the previous fiscal approach, which relied on dipping into reserves and various internal fund accounts.

To balance the budget in recent years, the city’s unrestricted general fund balance — a $41.4-million reserve — was nearly spent.

“This is a major departure from how we’ve done business, and I think that can’t go unsaid,” said Councilman Vincent Sarmiento.

The new policy establishes a two-tier reserve system. An “unassigned reserve” is to be restricted to meeting cash flow needs with the goal of funding it at 15 percent of operating expenditures, and in the future possibly 20 percent. An “economic uncertainty” reserve, which city leaders hope to eventually fund at 10 percent of operating expenditures, would cover unexpected revenue shortfalls.

It would take a two-thirds City Council vote to authorize a transfer from the reserves to cover any deficits built in to the budget. A plan to replenish the reserves would have to accompany such a decision. Reserves to hedge against economic downturns couldn’t be tapped more than two consecutive years.

“We have to live within our means for the most part,” said Finance Director Francisco Gutierrez when describing the new policy.

Outsourcing the fire department has lowered the minimum funding requirements for special funds set up to cover workers’ compensation and city liability claims, officials say. Cash for the unassigned reserve would initially come primarily from excess funds in these accounts, City Manager Paul Walters said.

Last November, Moody’s Investors Service downgraded the certificates of participation for Santa Ana’s 1998 City Hall expansion project by two notches, from A2 to Baa1, which followed another Moody’s downgrade the year before. City leaders hope that with the new reserve funds they can obtain an upgrade, the staff report says.

And when the City Council contracted with the Orange County Fire Authority to take over the city’s fire department, it agreed to set aside $2.8 million — equal to one month’s worth of authority services — as financial security should the city miss a payment.

The requirement was built in to the contract because of concern that the city was facing significant cash flow problems. City officials plan to ask for the money back after the establishment of the unassigned reserve fund, according to the report.

Despite this year’s balanced budget and the structural changes, challenges still remain. Some of the union concessions, most notably a freeze on overtime pay, are effective only until the 2013-14 fiscal year. If those costs return, the budget will increase by an estimated $7 million and create a $2.3-million shortfall, according to a city budget presentation.

City officials must also continue to deliver services with a dramatically lower work force than in years past. The city has reduced its workforce by 582 employees over the past five years, according to a letter from City Manager Paul Walters.

Most of the budget deficit can be traced to skyrocketing public safety costs and the impact of the recession. In recent decades, Santa Ana politicians cut deals with public safety unions that gave politicians a public-safety-first credibility. As a result, public safety costs rose from 50 percent of Santa Ana’s general fund budget in the early 1980s to 60 percent by the 1990s.

In the last several years, the cost of public safety has consumed well over 70 percent of the general fund budget. Even with the cost-cutting measures taken, the budget for the next fiscal year is more than 72 percent dedicated to public safety costs, according to the city’s budget presentation.

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