Westminster residents may soon face some tough choices on their local budget, having to decide between extending higher local sales taxes or figuring out how to absorb $13 million in yearly losses with cuts to city staffing and services.

“Clearly we’re not going to be able to make up that sales tax money anywhere else,” said Finance Director Sherry Johnson said in an Aug. 16 phone interview. “But we’re trying to.”

The city budget is also set to take hits from increasing employee pension and public safety costs, as well as legal costs from lawsuits by numerous city employees alleging City Hall wrongdoing and corruption.

Before voters approved a one-cent sales tax increase in 2016, Westminster faced an annual budget crisis since the state ended the use of redevelopment agencies in 2011. Every year, the city had made cuts and drew from its reserves to pay off its annual deficit.

The sales tax increase took effect in April 2017.

If voters approve an extension of the sales tax increase in a possible future ballot measure before it phases out in 2022, staff says it could mean the difference between ensuring the city’s budget is either balanced or underfunded for years to come.

Current projections of next year’s 2020-21 budget indicate it will be under by roughly $151,000, and it would mark the first time general fund expenses outrun revenues since the 2016-17 fiscal year.

The projected deficit was originally larger — around $1.2 million — before the City Council in May approved a program that reexamined costs for special city services to bring in an estimated $1 million in extra cash and shrink the funding gap.

But current estimates “will no doubt change” as “this is still over a year away” and the city still has to negotiate with its labor unions at the end of the current fiscal year, Johnson said.

City Manager Eddie Manfro during a May city council meeting said the projected shortfall for the 2020-21 budget will “definitely be different based on how we do this year (2019-20).”

The city began the current 2019-20 fiscal year with an estimated $24 million in the general fund, which pays for public safety, community services and city administration, and staff expects the year to close out with a balance of $25 million.

The incoming 2020-21 deficit comes as the sales tax increase, which voters approved to save the city from bankruptcy, has been bringing in lower revenues than expected over the past two years.

Originally, the tax was projected to provide the city with annual revenues of $13.9 million. But the actual revenue received for 2017-18 was $12.1 million, and the 2018-19 fiscal year is currently projected at $13.1 million.

Staff attribute the lower-than-expected numbers to the loss of big retailers across the city, namely in the Westminster Mall, and slow sales at car dealerships, which generate a large share of the tax revenue.

But “once the transaction tax expires, the fund balance evaporates almost immediately,” Johnson said during a May 22 Council meeting.

“These are projections based on current trends and costs, and we are always conservative and there are opportunities for savings,” she said. “But even so, over $13 million in revenues will be a huge loss that can only be offset by deep cuts in personnel and services.”

At that meeting, Councilwoman Kimberly Ho asked Johnson if there were possible savings the city could make that they hadn’t yet considered to avoid bringing the sales tax increase back before voters.

“Thirteen million is a big hurdle to get over,” Johnson replied.

This fiscal year the city has around $63 million budgeted for spending. Johnson at the May meeting said the majority of those expenditures are related to rising public safety costs related to police and fire services, which make up 76 percent of the total cost.

That’s a 3 percent increase from the last fiscal year, due to increases in contracts with the city’s employee unions, the Orange County Fire Authority for fire services, and payments into the California public employee pension program (CalPERS).

The current fiscal year has $2.1 million carved out to pay for police pensions. That number is set to rise to $2.3 million the following year.

An around $4.1 million unfunded pension liability is estimated for police this fiscal year, and that’s projected to rise to $4.7 million by 2021.

City’s Disputes with Employees Remain Costly

The city also has nearly $2 million of its legal liability fund budgeted for spending. The money partly goes to attorney fees and settlements when faced with legal challenges by its employees, as well as liability insurance for the city.

Though the taxpayer general fund pays into the legal liability fund, it also gets its revenue by charging other city departments an amount of money determined by a “methodology of which departments are more likely to have legal expenses,” Johnson said.

The city charged the police department $971,000 this year for liability claims, nearly half of the city’s liability spending budget for this year and the most out of all the city departments.

Over the last several years, at least eight employees have brought claims against the city alleging discrimination, corruption and wrongdoing in their work environment — many of which the city has opted to settle for hundreds of thousands of dollars in exchange for employees not discussing their allegations publicly.

Many of those claims are coming out of the police department.

In 2016, former police chief Kevin Baker got a $500,000 payout after filing a legal claim that alleged rampant corruption at City Hall.

This year, former police officer Brian Perez — who along with other officers won a 2014 federal discrimination lawsuit against the city — got a $550,000 payout for another claim he filed against the city in 2017.

The city has not returned requests for information on the total amount of money it’s spent defending itself from employee legal claims over the last ten years.

But in May, three more police officers, Jose Flores, Ryan Fletcher, and Matthew Edinger, as well as a top administrator, Cmdr. Cameron Knauerhaze, came forward this year accusing former police chief Ralph Ornelas — Baker’s successor — of passing qualified officers over for promotion and fostering a culture of wrongdoing at the department.

The city rejected all four officers’ claims on June 4.

Irma Moisa, an outside attorney representing Westminster against the four officers’ claims, has denied their allegations, adding that the city “welcomes the opportunity to defend itself in court.”

Dennis Wagner, the officers’ lawyer who’s represented many of the employees bringing claims against the city, called the situation in Westminster “a mess.”

“Public employment cases are dangerous,” Wagner said, because “typically there is a statutory provision for attorneys’ fees” that agencies will have to pay on top of a judgement if they lose a case.

Manfro announced Ornelas’ retirement on April 29, amid an outside investigation into the former chief that began in February over possible “policy violations” and concluded with findings that are still secret despite numerous requests for them by Voice of OC.

The city is currently using executive search firm Bob Murray and Associates to conduct the search for Ornelas’ replacement while Mark Lauderback, a deputy chief under Ornelas, fills in as acting chief.

That search firm’s services, according to the contract, will cost the city around $18,000.

Brandon Pho is a Voice of OC intern. Contact him at bpho@voiceofoc.org or on Twitter @photherecord.

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