Santa Ana is facing a major, ongoing financial shortfall that could drive the city to the brink of bankruptcy again if it’s not addressed through cutting costs and raising new revenues, according to city officials.
Among the options being considered are closing the city’s main library on Sundays, issuing more parking tickets, and asking voters to hike the city’s sales tax rate.
“The current situation is not sustainable,” said Deputy City Manager Robert Cortez during a budget update Tuesday at the City Council’s regular meeting.
“This is alarming,” said Councilman Vicente Sarmiento, calling the situation “dire.” He suggested the city consider selling naming rights for the city-owned stadium, Eddie West Field, to companies like AT&T or Verizon.
City executives said during the public discussion the city faces shortfalls of $8.1 million this fiscal year, $17.1 million next fiscal year, which starts July 1, and $31.9 million the following fiscal year.
If the city makes no changes and relies solely on its operating reserves to fill the budget gap, the city would be pushed to the brink of bankruptcy in about two years, Sarmiento said.
Among the measures being considered to deal with the crisis: closing the city’s main library on Sundays ($50,000 savings each year), cutting four staff positions for summer sports programs ($50,000 savings each year), getting the Santa Ana Unified School District to pay half of school crossing guard costs ($424,000), and generating nearly $200,000 in new parking enforcement revenue.
Council members previously said they were interested in asking voters in November to raise the current 7.75 percent sales tax to 8.25 percent or 8.75 percent.
Cortez said the city needs to overhaul its way of doing business.
“Maintaining the same level of service, the way that you capture revenue – it just needs to change,” Cortez said. “Santa Ana needs to transform itself into a new organization that is more nimble, more effective, more efficient, more productive.”
Two of the main drivers of this year’s shortfall are skyrocketing pension costs, mostly for police officers, and City Council-approved raises for city employees, about two-thirds for police, according to city officials.
If the shortfalls are not addressed, the city would burn through its $42.4 million in operating reserves over the next couple of years, Sarmiento said.
“What’s really troubling is, I remember the years [when] we were going through our recession period, I think…our fund balance – our general fund balance got as low as $3 million. And so I think we would probably be in a worse place in a couple years than we were during that global recession that forced us [close to] a Chapter 9 bankruptcy,” Sarmiento said.
After the 2008-09 Great Recession, Santa Ana was pushed nearly to bankruptcy, forcing it to outsource its fire department to the Orange County Fire Authority. The city had to cut its full time staffing levels by 40 percent during that crisis, city staff said Tuesday.
Currently, the city’s general fund reserves and unappropriated general fund money total $62.4 million, according to city staff. The projected shortfalls, if not addressed, total $57 million between now and June 30, 2020.
City staff presented a plan Tuesday to get the finances back in order over the next two years, through using one-time money, cutting ongoing costs, and increasing ongoing revenues.
To plug the current and future budget holes, city officials plan to draw at least $21 million in one-time money from the general fund. The plan calls for using $6.1 million to $8.1 million in one-time general fund money to plug this year’s shortfall, at least $7 million next fiscal year, and $7.8 million the following year from general fund reserves.
[Click here to read city staff’s May 1 presentation about the fiscal crisis.]
The reserves are known as operating reserves and economic uncertainty reserves. While government reserves are typically saved for keeping services running during economic downturns, Santa Ana is facing its fiscal crisis at a time when the economy is growing and revenues are increasing.
The fundamental issue, city staff have said, is the city’s labor costs are growing much faster than the city’s revenues.
City staff’s new plan calls for balancing the budget by the start of the 2020-21 fiscal year in July 1, 2020. All city departments have been asked to make cuts, staff said. No cuts have been proposed for police officer positions, which city staff said is already understaffed at 0.9 officers per 1,000 residents.
Councilman Sal Tinajero said it recently took 45 minutes for Santa Ana police to respond to a domestic violence call.
Councilman Jose Solorio pointed to 55 vacant positions in the Police Department and suggested the city had funding for them. But staff said the department has already been spending its full budget this year, even with the vacant positions.
Millions of dollars in new pot shop money is expected to come into the city beginning this year due to the legalization of retail marijuana.
When they were preparing last year to allow retail marijuana sales in January, the City Council directed that the money to go toward new youth programs, expanded police enforcement, and administrative costs.
“Part of the interest of council is that if we are going to enter this…area of business, that there would be direct benefit to community,” Benavides said Tuesday.
But given the fiscal crisis, staff recommended Tuesday the new marijuana money instead go toward plugging this year’s budget hole. For next year, staff recommended using one-third of marijuana projected revenues, or $2.6 million of the roughly $7.8 million total, to partially reduce the budget shortfall.
Council members have expressed interest, including on Tuesday, in asking voters in November to tax themselves more by raising the sales tax rate, as Westminster and Fountain Valley did in 2016.
“Be bold. Be innovative. And go get me some money,” Tinajero told city staff, expressing frustration staff didn’t suggest the tax increase. Solorio also expressed interest Tuesday in asking voters to raise the sales tax.
During a discussion of the shortfalls in February, the idea of asking voters to approve some type of increased city revenue was supported by a majority of the seven council members: Sarmiento, Solorio, Juan Villegas, and David Benavides.
During that discussion, the increase level they discussed would boost the sales tax revenue to the city by either 50 percent or double. That equates to roughly $25 million to $50 million per year extra to the city, if the current level of sales in the city continues.
The shortfalls this year, according to city staff, are mainly driven by increased pension costs ($5.9 million), raises the council approved for police officers and other city staff ($3.1 million), increases to Fire Authority and CARE Ambulance contracts ($2.0 million).
And the city’s expanded jail contract with the U.S. Marshals Service is coming up short, generating roughly $1 million to $2 million less in revenues than the $10.2 million the police department had projected for this fiscal year, according to staff. They said there’s also been fewer staffing costs, which reduces the financial impact of the lessened revenue, but staff didn’t say by how much.
The City Council approved the employee raises as staff projected shortfalls of millions of dollars. About two thirds of the raises went to police officers, who are about one third of the city’s overall staff.
Before the new labor contract, the median total compensation for a Santa Ana officer was about $213,000 per year, including $111,000 in pay before overtime and $88,000 in benefits, according to city data published by Transparent California.
The police union was the city’s largest campaign spender in the most recent election, in 2016. And it started this election year with about three quarters of all Santa Ana campaign money that was in the bank.
If the union continues to fundraise at the rate it did last year, it will have over $675,000 to spend on the November 2018 City Council election.
During the last City Council election, the police officers’ union spent $400,000 to support council candidates they endorsed – more than any other Santa Ana election spender, by far. The general employees’ union spent less than $2,000, according to campaign finance reports.
The police union’s contract expired the same day as the general employees’, June 30, 2017. Council members approved the police union contract five days later, on July 5, and the general employees waited five months for their contract to be approved.
“We’ve heard the city leadership say for months how we have a shortfall when it comes to money…But even before we knew we’re gonna fill some of the budget shortfalls, you found a way to give one of our bargaining units a nice raise,” said Kim McPeck, a city employee and member of the general employees’ union bargaining committee, in public comments to the council in August while negotiations were still ongoing.
“They say at least…a third of those [police union] members got at least an 8-percent raise. Why are you willing to find money for them, and nobody else?” he asked, saying he was reading comments prepared by another union member.
“We are not naive. We see behind the curtains. Is this council sending a message to us that we have to support one of your campaigns to get more money and a fair contract?”
Council members didn’t directly respond to his comments, but said they hoped to find the money to provide raises for the general employees. They approved raises for the general employees in December.
Santa Ana’s budget problems are structural, meaning they’re on track to get worse every year, staff said. And the shortfall projections do not take into account any future raises for police officers and other city staff.
The City Council will decide in the coming weeks whether to approve raises that go into effect July 1, just after the two largest existing union contracts end. Any new raises would increase the budget shortfall.
Santa Ana has been ranked as having one of the youngest populations in the United States among similar-sized cities. The 2010 U.S. Census found 31 percent of its population was under age 18.
The city’s small library system – one main library in the Civic Center and one branch library – already is one of the most underfunded of all 482 cities in California based on funding per resident, according to state data.
Santa Ana’s libraries operated on about $12 per resident in fiscal year 2015-16, compared to a statewide average of $51, according to the most recent available data from the California State Library.
The county government’s library system – which serves 24 of the county’s 34 cities and doesn’t include Santa Ana – operated on $29 per resident the same year, according to the state data.
During community outreach meetings about the budget, city staff said the most common theme was residents wanted more youth programs and more diverse options for youth programs.
Other major themes, staff said, were the need to shift funding from police to youth programs, a need for additional parks, and a need for affordable housing.
Councilwoman Michele Martinez noted the city’s two largest revenue sources are sales and property taxes, and that the city is short-changed in its property tax percentages because the formula is based on 1970s levels before Proposition 13 passed.
Martinez expressed frustration at the city’s inability to update its antiquated general plan and zoning code, which she said could have spurred economic development that would boost the city’s tax revenues.
The land use and economic development sections of Santa Ana’s general plan were last updated 20 years ago, in 1998.
Most of the city “is constrained due to the fact that we have outdated general plan and…zoning code,” Martinez said. “We must – if we’re going to want to generate the amount of revenue that is needed to sustain this city moving forward, we need…[to] realize that our best bang for our buck is property tax [revenue].”
Martinez said she’s been trying to get the general plan updated since she first got on the council 12 years ago, and wondered what happened to the $4 million the council allocated years ago for updating the plan.
“I’m very disappointed, because four years ago we allocated $2.5 million to update the entire [general] plan. And I’m not sure what happened to the money, where that…policy decision was made, those allocations of those funds.”
“Land use and economic development go hand in hand,” she said.
City staff explained at Tuesday’s meeting that over the course of this fiscal year, the projected shortfall narrowed from $9.3 million to $8.1 million.
“So really, we’re in the positive, you know, a million and change,” Solorio responded.
“I wouldn’t necessarily view it as a positive,” replied Cortez, the deputy city manager. “I would view it as, you’re using less of your [one-time money] to bridge a gap.”
Solorio disagreed, saying of the change from $9.3 million shortfall to $8.1 million: “I think that’s – that’s pretty positive.”
The council next plans to publicly discuss the budget at their May 15 regular meeting, before public budget approvals on June 5 and June 19.
Nick Gerda covers county government and Santa Ana for Voice of OC. You can contact him at ngerda@voiceofoc.org.