Santa Ana Faces Major Budget Shortfall, Officials Say

Kaitlin Washburn for Voice of OC

Santa Ana City Hall (left).

Santa Ana officials face a troubled financial future, with top staff projecting a $14 million shortfall for city operating costs in the upcoming fiscal year and a $19.5 million deficit the following year.

The city also has a projected $2.2 million shortfall for the current fiscal year, which ends June 30.

The news, discussed at Tuesday’s City Council meeting, reverses years of positive budget outlooks, and could spell long-term trouble if not addressed, top officials said. a

“We have a major structural deficit,” said Councilwoman Michele Martinez, who has emerged as the council’s deciding swing vote on major decisions. She blamed part of the shortfall on the city’s subsidizing of a 512-bed jail that essentially doesn’t house city arrestees.

The city expects to spend a total of $238 million next fiscal year for operating expenses, known as the general fund budget.

City staff attributed the projected shortfall to a mix of revenue reductions – mainly the $11 million a year loss from the cancelled jail contract with U.S. Immigration and Customs Enforcement (ICE)– as well as cost increases.

Another $2.4 million a year was lost by reducing the use of water bill revenues for general city services like police and parks, according to Acting City Manager Robert Cortez.

On the expense side, he said the city is required to pay millions of dollars more next year for employee pensions and health insurance.

None of the council’s six members who were present disputed Cortez’s conclusions about the size of the deficit or his explanation of it. The other council member, Mayor Miguel Pulido, left early in the meeting without explanation and didn’t return.

Council members discussed finding new revenue sources, including speeding up approvals for real estate development, allowing new types of marijuana businesses like cultivation and manufacturing, and developing vacant properties owned by the city. And cost savings could come from downsizing the mostly-empty city jail into a smaller holding facility, several council members said.

Most council members suggested next year’s projected shortfall would limit their ability to expand city spending – including in ongoing labor negotiations with city employees. Both of the city’s main worker groups – police and general employees – are in negotiations for new salary and benefit contracts. Their current contracts expire June 30.

Councilman Sal Tinajero, who has been highly critical of the police union’s leadership, said officers “need to be rewarded,” but “in a manner that we can sustain.” Councilman David Benavides asked questions of staff that emphasized any salary and benefit increases would further grow the deficit.

Martinez said the city “cannot continue to move in a path” that’s not sustainable for hiring police, and that the “funding is not there” to fill many of the city’s vacant positions. And Councilman Vicente Sarmiento said he’s “worried” about the shortfall and the structural financial issues would be considered in the labor negotiations.

Councilman Jose Solorio suggested the city look at generating revenue from the roughly 90 empty parcels of land it owns – either by selling the land, partnering with private companies, or offering to local public school and community college districts.

The city could “make better use of our land” to generate additional resources, Solorio said.

And several council members agreed the city needs to add staff who generate revenue to the city, such as in planning, development approval and economic development.

“We’re sort of crippling ourselves” by leaving those positions understaffed, Benavides said.

Solorio also reiterated his call for expanding the city workforce by filling 124 vacant positions, mostly in the police department. As he has in the past, he said the jobs already are paid for in the budget.

The city has “a number of budgeted, authorized” vacant positions that could be filled, he said.

But Martinez said “the reality is the funding is not there for some of those positions.”

Meanwhile, Martinez and Tinajero launched extended criticism of the costs of the city’s jail, which Martinez said has been subsidized by city taxpayers to the tune of $4 million per year. Tinajero put the subsidy figure at about $100 million over the two decades since the jail opened.

The jail was planned during a crime wave in the 1990s, and when cities were charged large “booking fees” to keep inmates at county jails. But the county no longer charges Santa Ana those fees, and the jail hasn’t been used to house local arrestees since 1999, according to city staff. City arrestees are instead held at county jails.

Martinez said the city needs to “immediately” convert the jail into a smaller holding facility known as a Type 1 jail, which holds inmates for no more than 96 hours. It’s the type of jail used by Anaheim, Fullerton, Huntington Beach, and other cities in Orange County.

Martinez said converting the jail to Type 1 would save the city over $5 million next year and $11 million the following year.

To make up for the loss of ICE revenue, Martinez, Tinajero, Sarmiento and Benavides are looking at converting part of jail into a mental health facility, particularly by contracting with the county, which receives funding for public mental health programs.

But Councilman Juan Villegas, who works for the county as a sheriff’s special officer, was skeptical if that’s realistic.

The county already is working with four different mental health facilities including a crisis center, he said. “It’s a little difficult to kind of convert the jail to that type of facility” because there has to be special environment when working with that population, Villegas said.

Villegas, Solorio, and Mayor Miguel Pulido have opposed ending the ICE contract, saying it’s a critical revenue source for the city.

If city budget holes aren’t plugged through revenue growth, spending reductions – or both – they typically have to be filled by pulling from rainy-day emergency reserves, which eventually run out if continually drawn down. Santa Ana was pushed to the brink of bankruptcy in 2011 when its reserves were nearly drained after a series of large budget deficits.

Part of the new projected shortfall is the city reducing its use of revenues from residential and business water bills for general city services. That change came after Martinez repeatedly alleged the city’s use of water and trash revenues to pay for other services is unethical and illegal under California’s Proposition 218, which bans cities from using property-related fees – like water delivery, garbage service, and sewer service – to cover other city costs.

And ending this practice – which the city calls “enterprise fund transfers” – would be a further hit to the general fund in upcoming years, Martinez said. The city is transferring $15 to $20 million per year from enterprise funds to the general fund, she said.

Part of the city’s budget woes stem from a structural problem with its largest source of money – property taxes.

Largely due to its overcrowded housing, Santa Ana has among the lowest property tax revenues per resident of any city in Orange County. Multiple families often live in a single apartment, though the extra occupancy doesn’t generally lead to additional property tax revenue for city services.

Tuesday’s deficit projection marked a stark departure from the rosy projections of surpluses in recent years by former City Manager David Cavazos, who was ousted from his job by four members of the council in December. Years ago, Martinez publicly raised concerns about his projections.

As for growing pension costs, Cortez said police pensions account for $20.7 million each year from the general fund, firefighters are $7.3 million, and the rest of city employees are $5.7 million.

Martinez said – and Cortez agreed – that it’s preferred for cities to have pension costs not exceed 10 percent of their general fund spending. In Santa Ana’s case, Cortez said it’s about 15 percent, which Martinez described as “very troublesome.”

Council members also are looking at ways the city can cash in on the legalization of commercial marijuana. Starting in January, cities will be able to allow for-profit marijuana growing operations, research and development businesses, and manufacturing and distribution companies – as well as regulate and tax them – due to voters’ passage of Proposition 64 in November.

Solorio said a series of proposed changes to the city’s pot shop rules – including extended hours – could increase city revenues from the shops from $2.5 million in the current fiscal year to $5 million next fiscal year.

The City Council plans to discuss the budget further during an economic development committee meeting May 15 and a budget study session May 16.

The first hearing on the final budget is scheduled for June 6, with final adoption on June 20 before the new fiscal year starts July 1.

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