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Santa Ana City Council members voted Tuesday to put a sales tax increase on the November ballot that would establish the highest sales tax rate of Orange County’s 34 cities.

The measure would increase sales taxes by 1.5 percent – from the current 7.75 percent to 9.25 percent of each sale – and is estimated to bring in an estimated $63 million extra to the city each year.

It comes as the city faces a fiscal crisis simply to maintain existing service levels. The city’s labor costs have been skyrocketing, particularly employee pensions, with most of the pension cost increase being for current and former police employees.

The city is upside-down financially, with shortfalls estimated to grow from $10 million this fiscal year to a nearly $40 million per-year shortfall in the 2021 fiscal year, in a series of deepening gaps. The gaps also do not take into account any future employee raises or an economic downturn in coming years, each of which would further widen the shortfall.

City officials said the tax increase is needed to plug the budget shortfall to maintain services, as well as make improvements to infrastructure like roads, parks, and outdated information technology.

“We’re not receiving enough revenue from the city to sustain the services that we need to provide as a city,” said Councilman Juan Villegas, pointing to what he said were 189 vacant employee positions in the city budget.

Given the $40 million-plus funding gap in future years, it appears most of the $63-million tax increase would go toward maintaining existing services and the pension cost increases for the existing workforce and retirees, with the remainder supporting expansions.

City Manager Raul Godinez told council members two thirds of the sales tax increase, or about $40 million per year, would allow the city to maintain the “status quo, at best.”

Asked by Councilman David Benavides if the city is looking at a “potential bankruptcy a few years out” if new sales tax revenues aren’t brought in, Godinez said, “that is correct.”

At the City Council’s direction, the ballot title for the tax increase will be: “Santa Ana Neighborhood Safety, Homeless Prevention and Essential City Services Enhancement Measure.”

The words “Homeless Prevention” were not in the staff-recommended ballot title, but were added at the meeting at the request of Councilman Vicente Sarmiento. Public opinion polling over the last year or so has found homelessness at or near the top of voters’ concerns in Orange County. And city staff say it is the number-one concern they now hear from residents.

City officials did not have an estimate for how much of the extra $63 million per year would go toward homelessness prevention and other new services, versus filling the budget shortfall for existing services.

The measure does not commit the new dollars to be spent in any particular way, and the city has not released a plan for how the extra $63 million per year would be spent. During the City Council’s hour-long discussion of the measure Tuesday, council members did not say when they would provide a spending plan.

“Before [the Orange County Transportation Authority puts] things on the [ballot], they do two, three years of outreach, and work on how much [money], what’s it going to be used towards, what kind of oversight is there going to be, etcetera. And we didn’t do that in this case,” said Councilman Jose Solorio, who voted against putting the sales tax measure on the ballot.

As a general tax increase measure, it needs support from 50 percent of voters to pass. If the funds were earmarked for a specific use, the threshold increases to two-thirds, or 66.7 percent, of voters.

In an interview Wednesday, Godinez said the city will conduct outreach, which he said would be “very neutral,” this fall to educate the public about the sales tax measure. 

“I have’t figured out the timing yet” for the outreach, Godinez said. “[But] we are going to develop an outreach plan.”

If the measure passes in November, the city manager said, a plan for spending the estimated $63 million would be developed as part of the budget for the fiscal year that begins July 1, 2019 – the first year the new money would come to the city.

Godinez said officials are initially looking “to try to fund a bunch of one-time capital expenditures,” include sidewalks, streets, parks, and upgrading outdated information technology.

“There will be an opportunity to really improve the physical environment,” he added.

And the order of priority for funding, he said, is “homeless response,” “emergency response for public safety,” and “youth-related spending.”

The city measure is in addition to a $420 million-plus school bond the Santa Ana Unified School District board placed on the November ballot.

While not all of a city’s sales taxes are paid by its residents, the $63 million per year, when divided by the city’s roughly 75,000 households, comes out to an average of about $840 per year per household, or $8,400 over the first 10 years of the tax increase.

City Council members discussed several sales tax options, ranging from a half-percent to 1.5-percent increase, and ended up choosing the largest of the options.

If approved by voters in November, the measure would increase Santa Ana’s sales tax rate from 7.75 percent to 9.25 percent for 10 years, from April 2019 to April 2029.

Then, the rate would fall to 8.75 percent for the following 10 years, before returning to the 7.75 percent rate in 2039 – if no other sales tax changes are made before then.

At the request of local car dealerships, council members are also pursing a rebate for car sales, in which people would receive a check in the mail paying them back for the increased sales tax amount. The rebate program would come back to the council in the future for approval.

The vote to put the sales tax increase measure on the ballot was 4-to-2, with councilmen Vicente Sarmiento, Sal Tinajero, David Benavides, and Juan Villegas supporting it. Councilwoman Michele Martinez was absent from the meeting.

Solorio and Mayor Miguel Pulido voted against it. Pulido said he supported a 1-percent increase instead, and Solorio cited his concerns about a lack of preparation and public outreach.

Pulido said the 1.5-percent increase is “tougher to put that before the voters” than a 1-percent increase.

And he said other ways of raising money should be explored, like having non-police employees pay more toward their pensions, and new contracts for law enforcement to fill empty beds in the city jail, which has had hundreds of empty beds.

“Let’s go work on another contract. Jail’s still gonna be there three years from now, and 10 years from now. Let’s fill it up, and bring in that $8 million,” Pulido said.

After the 1.5 percent proposal passed, Pulido’s fellow council members pressed him to take a vote to put his 1 percent measure on the ballot.

The council canceled their 4-to-2 vote for the 1.5 percent measure and re-opened the matter. Pulido cast a vote in favor of the 1-percent proposal, which died for lack of support by his  other colleagues. The council then re-authorized their 4-to-2 vote for the 1.5 percent measure.

At Sarmiento’s suggestion, the council also directed city staff to change the ballot language from describing it as a 1.5 “percent” increase to a 1.5 “cent” increase.

Sarmiento said he wanted the change from percent to cent “ ‘cause 1.5 percent of what? That’s misleading…That’s vague.”

The measure would, in fact, affect the percentage of sales taxes, and is not a fixed-cent amount.

Santa Ana’s fiscal crisis comes even as city revenues grow by millions of dollars per year in an expanding economy. City officials have attributed the fiscal crisis to sharply growing costs for employee salaries and benefits.

Pensions for current and retired employees, mostly for police officers and other Police Department staff, have been the single largest driver of the ever-worsening budget holes, according to city finance officials.

Total city spending on pensions is projected to rise 80 percent over the next five years, from $45 million this fiscal year to $81 million.

Another major factor in the worsening budget shortfalls was the cancellation of the city’s jail contract with U.S. Immigration and Customs Enforcement (ICE), while leaving many of the jail staff in place without another revenue source to fully replace the ICE contract.

The shortfall projections – which show the city on a pathway to bankruptcy if unaddressed – do not take into account any future economic downturns or any future raises to city staff.

“None of these projections include a downturn in the economy, which everybody says is, within the next two years, a very real possibility,” Godinez said.

Economists have been projecting an economic downturn, and police union officials have been seeking a raise this year. The police union has the most well-funded campaign finance committee in Santa Ana for the next City Council elections in November.

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.

At their meeting Tuesday, council members also voted to place a measure on the November ballot asking voters to change the city’s City Council election system from at-large to district-based voting.

If approved by voters, Santa Ana’s first district-based election would take place in November 2020. There are three scheduled City Council vacancies this November, and one in 2020.

A court hearing is scheduled for July 30 in a lawsuit seeking to block any Santa Ana City Council elections until district elections are put in place.

Some on the City Council tried to place a district elections measure on the June ballot so it would take effect by November, saying it would level the playing field for candidates not backed by the police union’s money and advice.

Pulido, who was supported by the police union in the most recent election, blocked the June measure by refusing to sign the paperwork, saying the council had illegally approved it. A judge later ruled Pulido had a duty to sign the documents, but did not decide whether the council illegally approved the measure.

Correction: After 2029 the rate will drop to 8.75 percent for 10 years. A previous version of this story said it would drop to 9 percent. Voice of OC regrets the error.

Contact Nick Gerda at ngerda@voiceofoc.org and follow him on Twitter @nicholasgerda.

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