Over a million Orange County residents live in cities spending beyond their means this year, and questions are growing over how their leaders are planning to fix growing budget deficits long term.
It’s a problem affecting the three largest cities in the county as well as smaller cities and the county government itself, all of which face structural deficits this year where their annual revenue is outpacing their spending, forcing them to use up their savings instead to stay afloat.
Former County CEO Michelle Aguirre, who just retired last week, told supervisors on her way out they missed the mark on a structurally balanced budget by roughly $75 million this year and there’s no sign it’s going to get better next year.
“Simply put, we have exhausted all resources available to us, but we are resilient,” Aguirre said. “You will see that we have no general fund requests for additional resources, because there are none to be given.”
[Read: Orange County Leaders Warn of Dangerous Budget Future]
While the county still has significant reserves to draw on, many cities don’t, with many having already drawn down their reserves to balance their budgets in previous years.
What’s Driving the Deficit?
While most cities are still managing to achieve a technically balanced budget, which is required by California law, they’re doing it using one-time funding – like reserves and property sales – that will eventually run out.
The biggest problem city leaders highlight is that their annual expenses are outpacing the increases to their annual revenue, leading to a gap that keeps growing every year due to a number of factors such as inflation and labor costs.
“Financial conditions continue to decline due to external factors, particularly in unexpected expenditures,” said Irvine’s Deputy Director of Administrative Services Jonathan Nih to city council members at their June 9 meeting. “Economic pressures continue to create fiscal challenges as expenditures outpace revenues.”
“The key drivers for the higher costs are due to labor, healthcare escalations, inflation and unexpected events.”
As revenue lags, many city leaders have continued signing off on wage increases for the public sector unions like police and fire, despite questions on how they’ll pay for them.
Several cities also staved off earlier problems by using one-time federal COVID bailout funding leftover from the pandemic to stabilize their budgets or secure one-time projects, but as that money dwindles, they’re having to face the problems they put off years ago now.
[Read: Orange On Track for Bankruptcy in Three Years Without ‘Radical’ Change]
Several cities such as Fullerton and Westminster have faced warnings for years about financial peril ahead from their city staff, while officials in cities like Irvine are just now finding out they have a problem.
Which Cities Are in the Worst Shape?
Anaheim is in the best shape of Orange County’s three largest cities, facing an over $60 million structural deficit this year they say will be patched by over $120 million coming into the general fund next year when a set of bonds they used to upgrade the resort area are paid off.
[Read: Anaheim’s Budget Deficit Eats Half of $120 Million in Expected New Tax Revenue]
No other Orange County cities have that kind of bailout on the horizon.
This year, Santa Ana faced a $13 million deficit they had to reduce through a series of spending cuts in order to balance out their budget.
According to the city’s future financial outlook, Santa Ana is also projected to face a roughly $30 million deficit in the 2028-29 fiscal year just as their 2018 sales tax increase, Measure X, is expected to start to sunset, with budget deficits expected to widen more after that year.
“Looking ahead, expenditures are projected to continue to grow faster than revenues, and this is largely driven by inflationary cost increases, negotiated labor increases, contractual costs and growing pension obligations,” Alex Trinidad, the city’s finance director told council members.
“The outlook also reflects the schedule of Measure X rate decrease beginning in April of 2029 which contributes to the increasing long term fiscal pressure.”
In Irvine, leaders are grappling with how to address a budget shortfall that could reach $47 million by 2030.
During a city council meeting on June 9, officials also heard a budget update that recapped how the council is already facing a $6 million deficit for the current fiscal year and a projected $9 million deficit for the next fiscal year.
[Read: Irvine Officials Deadlock on How to Close Multimillion Dollar Budget Deficits]
Irvine City Council members voted to balance the 2025-26 budget with a one-time budget transfer of $6 million from the Asset Management Plan Fund.
Officials also voted to address next year’s $9 million budget deficit by keeping some vacant positions, pausing the city’s non-emergency vehicle replacement program and adding a slew of small fees.
Staff said they will return at a special meeting on Aug. 3 to discuss long-term financial planning for the 2027-28 fiscal year and beyond.
“We can’t keep operating on a deficit and not expect to go into a hole,” Irvine Councilmember Melinda Liu said at the June 9 meeting.
In Orange, officials faced a projected $20 million dollar deficit as they struggled to quell a long-time structural deficit – one that city-hired consultants warned them last year could lead to municipal bankruptcy if they don’t get a grip on it.
In Fullerton – a city similar in size to Orange – officials are expected to adopt a budget in the third end of July, weeks after the state deadline.
City council members there voted to keep spending at the same levels as their current budget until they adopt a new one next month.
The college town is projected to face a nearly $14 million deficit after a multi-million dollar accounting error saw the city run through $10.1 million in unassigned reserves quicker than elected officials expected.
[Read: Auditors Question if Fullerton is Properly Overseeing Budget]
In Huntington Beach, officials adopted a budget that acknowledges a $15.6 million shortfall between recurring revenues and ongoing expenses, with Mayor Casey McKeon repeatedly warning residents they need to find new ways to increase revenue.
“We have structural budget issues we need to resolve,” McKeon said at the council’s April 22 meeting during a debate over a proposed rebranding contract. “If you guys don’t like this proposal, what proposal do you have to fix our structural budget deficit?”
In a written statement, city spokesperson Julie Toledo said the city does not “simply draw down $15.6 million from existing prior-year savings,” and that they were looking to other strategies to help shrink the gap.
Other cities like Laguna Beach are barely hanging onto a structural balance, with the city this year passing a general fund budget that’s over $360,000 in the black after having one last year that was over $1 million in the red.
Tax Hike Pitches Coming to a City Near You
For most cities facing a deficit, the first tool that city leaders reach for is a tax increase.
In Orange, city council members are once again turning to residents to help bail them out of their structural deficit after voters shot down a 0.5% sales tax increase in 2024.
Last month, elected officials there narrowly voted to place a 1% sales tax increase measure on the November ballot that, if approved by voters, would last 13 years.
If approved, the measure is expected to bring in $37 million in additional revenue to city coffers with city council members promising to make more significant cuts if the measure fails at the ballot box.
[Read: Is Municipal Bankruptcy on the Horizon if Orange’s Sales Tax Measure Fails?]
Officials in Orange also placed a separate ballot measure that would raise the hotel tax from 10% to 14% for hotels with 11 rooms or more.
Fullerton leaders have also discussed pitching their residents a sales tax hike if they can’t find another way to fix the budget.
Amid a poor financial outlook in Santa Ana, city council members are mulling placing a measure on the November ballot that, if approved by voters, would retain the Measure X sales tax increase indefinitely.
San Clemente will also have a sales tax on the ballot this year — but it’s specifically meant to raise money to get more sand on the beach, to address coastal erosion, and to fund projects to prevent wildfires in town.
Spending Cuts and Ideas for New Revenue
In lieu of a tax hike, several cities are looking for ways to increase tax revenue or cut spending, but are struggling to find any options that can make up the full gap.
Santa Ana City Council members adopted a balanced budget this year in part by cutting $11 million in spending, including slashing $5 million by eliminating vacant positions and reducing spending on part-time employees.
Other sizable cuts included cutting spending on park maintenance and dialing back the Police Activity and Athletic League after school program. Officials also slashed five city commissions to save a little over $38,000.
[Read: Santa Ana Officials to Purge City Commissions to Curb $13 Million Budget Gap]
Elected leaders are closing the remaining gap by increasing revenue by about $2 million, including a technology cost recovery fee expected to bring in $750,000.
Irvine leaders have instituted hiring freezes, holding some vacant positions and increasing some fees for athletic facilities and payments to the city made using credit cards. Leaders are also considering cutting some library services since they aren’t able to currently afford any major library upgrades.
City leaders also moved forward with a plan to charge for parking at the Great Park, giving residents about four hours free while charging visitors for every hour they stay in a move they hope can bring $3-5 million into the budget annually.
[Read: Irvine Looks to Charge For Parking at Great Park in Face of Budget Deficit]
In Orange, city leaders balanced the budget by eliminating and freezing $6 million in vacant positions and pulling $15 million from three different spending buckets like the city’s infrastructure fund into the general fund to balance their books.
Huntington Beach leaders have started greenlighting a number of controversial new programs, including trademarking the city logo, pitching city merch, putting ads on lifeguard towers, and even pitched expanding the city’s PR and film programs, but that was ultimately shot down.
[Read: Huntington Beach Shelves Plans for Film Commission and Expanded PR]
Several cities including Orange are studying switching to a charter city model in the hopes it could let them generate more revenue, highlighting options for more parking fees and similar increases.
[Read: Another Orange County City Eyes a Governing Charter]
Placentia leaders shot down a proposal from their staff that would’ve used reserves to fill a $1.4 million structural deficit, instead directing staff to layoff two staffers and make a series of other small cuts to eat up the gap.
Mayor Chad Wanke also highlighted that even with the balanced budget, they were pushing off millions of dollars worth of upgrades to buildings and that they needed to figure out a long term solution and that other cities do too.
“It’s difficult for any city to make cuts. A lot of cities are ignoring it,” Wanke said at the June 30 council meeting. “The County of Orange is looking at a looming deficit, we have cities that are looking at $30 million deficits.”
“We have a little bit of a crisis here getting this budget put together,” he continued. “But I think over the next six months, we’re going to need to look at further changes.”
