Santa Ana officials are acknowledging they violated a state law regarding transparency and public input when the City Council approved a $1 million taxpayer subsidy for local car dealerships, money that would be drawn from emergency reserves while the city is facing budget deficits.

City staff now are urging the council not to pull the money from the rainy-day reserves, after new City Manager Raul Godinez said he learned more about the city’s upside-down financial picture, which includes the city already spending more than it earns.  But at a tense meeting Tuesday, council members overruled Godinez, saying they want to re-approve the original agreement – including the use of reserves – in the coming weeks.

“The action the council already took previously, that clear direction we already gave – I think that needs to come back,” said Councilman David Benavides, who was joined by a majority of the council in that view.

Councilwoman Michele Martinez, who was the only vote against the subsidy deal, criticized her colleagues.

“It’s unfortunate that we continue to move in this direction, and [are] not really holding ourselves accountable,” Martinez said. She said she was the person who informed staff that the city did not comply with the law by bypassing the public hearing process.

The subsidy, which the council approved in November, would draw $1 million from the city’s emergency reserves to pay for a new digital billboard along the 55 freeway for car dealerships at the Santa Ana auto mall, off Edinger Avenue.

The deal is structured in a way where officials don’t expect the dealerships to compensate the city for the $1 million taxpayer contribution.

The auto mall dealerships include luxury brands Audi, BMW, Volvo, and Lincoln. At the November meeting when the deal was approved, a manager of the BMW and Mini dealerships told the council their sales have been “number one in the nation for three years solid running.”

The agreement seemed ready to go after the November vote. But city staff say they found out about a problem.

State law requires local agencies, including cities, to provide specific details about the proposed subsidy in a written report before approving it, including how many jobs and how much tax revenue would be created because of the subsidy. The law also requires cities to hold a public hearing about proposed subsidies to invite input from constituents.

Santa Ana didn’t follow that law, Godinez wrote in a memo last week to the council.

“We became aware that we needed to file a community benefit statement” and hold a public hearing, Godinez told the council at their regular meeting Tuesday.

“Because of this requirement, we have to re-do that vote,” Godinez said. He plans to bring the item back for approval, with the written report and public hearing, at the Feb. 6 council meeting.

And Godinez, who took office just a few days before the original November vote for the subsidy, strongly urged the council to reconsider its prior decision to use the rainy-day reserves.

The city is financially upside-down, with a deficit of $390,000 last year and finance officials projecting a further $600,000 deficit this fiscal year that has likely grown larger. After the projection was issued in November, the City Council approved employee raises that added about $1.8 million in costs to the city this fiscal year.

“Now that I’ve gotten more familiar with our budget, I’m not comfortable recommending a loan from our general fund. And so we are proposing the auto dealers take out their own loan,” Godinez told the council Tuesday.

The dealers would still receive the subsidy under Godinez’ proposal, with the city paying for the sign over the coming years – just without the city fronting the money out of emergency reserves.

But most of the council – which holds the ultimate authority – insisted on using the emergency reserves to help the auto dealers.

“[The auto mall] brings in a tremendous amount of tax dollars into the city,” said Councilman Sal Tinajero. “It doesn’t seem right to not continue to move forward in a manner…by which we already voted.”

“I want to make sure that we still are going to have a good relationship with this group who is consistently bringing in revenue toward the city,” added Tinajero, who is running for mayor this year, as is Martinez.

Councilman Vicente Sarmiento said it was a “bad look for the city” to change its original deal, and both he and Tinajero told Godinez to speak with the dealerships.

Benavides, along with other council members, took Godinez to task for trying to change what the council had previously approved.

Staff can make recommendations or provide new information, but “to attempt to change the direction that the council already gave, I do have a problem with [that],” Benavides said.

Councilman Jose Solorio also emphasized that the council stands by its “policy call” to grant the subsidy out of emergency reserves, and went on to question whether the city needs to hold the public hearing and provide the written report required by state law.

Solorio described staff’s legal position as a “view,” and said the city should continue “to get more legal clarification as well whether it’s necessary to have more discussion regarding public benefit.”

Solorio noted that at the Nov. 7 meeting, both the city manager and city attorney recommended the council approve the item without mentioning a need for the written analysis or public hearing.

The city’s top lawyer replied that she and Godinez later learned the law does indeed require both steps.

“Subsequent to the council’s adoption of the proposal…it came to our attention that these loan agreements would be viewed as a subsidy,” said City Attorney Sonia Carvalho.

State law “requires cities, when they are going to offer a subsidy to a private business, to provide a public benefit analysis and to have a hearing on that public benefit analysis,” she said.

It was a change in staff’s prior assertion in November that the car dealership deal was not a subsidy.

Mayor Miguel Pulido abstained from the discussion about the auto mall subsidy, as he did when the subsidy was originally approved in November.

He said in November he was abstaining because he’s worked in the past with ICC Collision Centers, an auto body repair company that has worked with the Crevier dealers.

The transparency law for local government subsidies is Government Code 53083. It was introduced in 2013 by Assemblyman Das Williams (D-Santa Barbara) as AB 562, and took effect in January 2014.

Carvalho, the city attorney, said staff were recommending changes to the car dealership deal because the original subsidy – which council members now want to re-authorize – could be hard to justify in the written report required by the law.

“I do believe that maybe there was a little projection into maybe looking at the finances and saying, ‘Okay, some of those requirements and findings you need to make to show the public benefit, perhaps there might be some challenges to that,’ ” she said.

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

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