Orange voters will likely decide on another sales tax measure this year after residents rejected a smaller proposed tax increase in 2024.
City leaders say a 1% tax measure is the only true lifeline for the historic town and they need more revenue to quell a structural deficit that was bubbling up for a while or they may face bankruptcy in a couple of years.
Going into the next fiscal year, staff also say they will have to transfer $17 million from three different spending buckets, including the capital improvement fund, to balance the budget.
Councilman Jon Dumitru said the transfer is a one-time patch but officials need to consider long term solutions or make severe cuts.
“We’re pulling roughly $17 million out of funds just to keep the lights on and we’re continuing to defer millions in internal liabilities that we’re going to have to pay at some point. We’re going to have to catch up. This isn’t a long term plan right now. It’s exactly what has been done for decades, which is kicking the can,” he said at the March 24 city council meeting.
“We have to make some real tough choices. If we don’t have a true, hard discussion of a path without new revenue then we need to be prepared for what services we’re going to cut next and how soon and how fast the residents are going to feel it. I think we need to be honest that cost cutting alone is not going to solve this,” Dumitru continued.
Orange City Council members directed staff last week to come back with a 1% sales tax increase ballot measure after floating the idea of legalizing and taxing cannabis sales as well as a host of other tax measures to help dig the city out of a hole.
City leaders say while a 1% tax increase won’t create significant future surpluses, it is one of the only tax measure proposals out there that will keep them above water on its own in a town when residents shot down a 0.5% sales tax increase two years ago.
Councilwoman Arianna Barrios said if they are going to ask voters to again consider a sales tax measure they have to be prudent with spending, publicly worrying that if the measure fails they’d face municipal bankruptcy.
“I also want us to be thinking about contingencies if it fails again. Because if it fails again, my guess is we’re going to be looking at fiscal bankruptcy,” she said.
“If we won’t show the fiscal discipline that needs to be shown as we’re moving through this crisis. Why should anyone trust us?”
Councilwoman Kathy Tavoularis said they should not just focus solely on a sales tax and even the 1% measure – if passed – would only allow the city to just get by in the next couple of years and not allow them to make improvements or hire more staff.
“We’re asking for a sales tax to be mediocre,” she said. “If we don’t present a sales tax now, that is catastrophic but if we do present a sales tax now, that’s not enough to get us to where we need to be as a city.”
Mayor Dan Slater and Councilwoman Ana Gutierrez raised concerns that they aren’t able to retain employees or give staff substantial raises to be competitive with other cities, with Slater saying it is leading to exodus from city hall.
“We continue to bleed quality, good employees from every department,” Slater said. “With this budget, all we can consider is 2% and 3% raises, but we’ve got to catch up. We’re so far below median and that’s why we’re losing these quality employees and that’s just not sustainable.”
A Structural Deficit
City Manager Jarad Hildenbrand said the city’s structural deficit is driven largely by nearly $18 million in debt service as well as other long term obligations and they’re looking to stabilize it, but bringing in more revenue will be essential to maintain current public services in the future.
“We are eliminating and freezing positions, fully funding known costs such as overtime and workers compensation, and deferring certain one time capital projects so we can focus limited resources on core operations and near term stability,” Hildenbrand said at last week’s meeting.
“If we want to keep Orange, Orange, additional ongoing revenue will be necessary. Without it, future budgets will require more belt tightening and will involve further reductions to visible public services,” he said.
According to a staff report, officials have been underfunding the workers’ compensation fund to minimize impacts to the general fund with the hopes of replenishing the fund with future year-end surpluses but it now has a negative balance.
“Due to ongoing General Fund constraints, negative balances in the Workers’ Compensation, General Liability, and Employee Accrued Liability Funds totaling approximately $17.3 million will continue to be deferred,” reads the staff report.
Hildenbrand said the city eliminated 56 full time vacant positions in next year’s budget, dropping full time staffing positions under 700 and will keep 50 vacant positions on the books.
Staff are also transferring out about $9.6 million from the general fund to cover unfunded liability to CalPERS and vacation payouts.
Staff say impacts and delays to public services are being felt across the board from vacancies and the $17 million transfer in will delay capital improvement projects, warning that if there is a drop in sales tax revenue they would only be able to hold on for six months.
They also say they have exhausted cuts.
“Any other cut from here on out will be catastrophic. You’re talking about closing down a fire station, you’re talking about closing down the library, you’re talking about contracting out our key services,” said Trang Nguyen, the city’s finance director.
“We can’t cut ourselves to prosperity,” Hildenbrand said, adding that even the new fees adopted like paid parking in Old Towne Orange aren’t going to make much of a difference.
Orange County Cities Look to Voters to Bail Out Budget Woes
Orange officials are grappling with how to avoid municipal bankruptcy and correct a longtime structural deficit as leaders in other OC cities like Costa Mesa, Fullerton and Santa Ana are also expected to ask voters to bolster their municipal budgets through tax increases this year.
In the past couple years, cities across Orange County have struggled to balance their budgets as city spending outpaces revenues, leading officials to look at not only tax measures but parking enforcement and rates.
In Santa Ana, officials directed staff to prepare a tax measure ballot to keep Measure X — a sales tax measure approved in 2018 expected to start to sunset in three years and drop annual revenue by $30 million if not maintained by the voters.
In Fullerton, officials are expected to add tax measures to this year’s ballot amid a dire revelation that staff mistakenly accounted for over $10 million in reserves that was actually already allocated and that they may nearly deplete their reserve by next year.
Last summer, hired consultants warned Orange City Council members the city would be bankrupt in a couple of years if they don’t make radical changes to their budgeting.
[Read: An End to The ‘Orange Way’: Scrambling to Prevent Municipal Bankruptcy]
That blunt assessment came months after a 0.5% sales tax increase on the 2024 election ballot that would have generated $20 million annually for a decade failed to get enough support.
Earlier this month, Orange City Council members debated asking voters to consider making the town a charter city and including tax increases in that proposal that Tavoularis previously said would bring in $10 million in revenue.
[Read: Another Orange County City Eyes a Governing Charter]
Tavoularis doubled down on her support for a charter proposal and asked staff to look at selling one of their assets – pointing to the Orange Water Department.
“We’re going to need to sell something big to continue to live,” she said.
Drumming Up Revenue in Orange With Taxes
City Staff said a 1% sales tax increase – if passed by the voters – would eventually generate $38 million in revenue a year and bring the city to an operating surplus by 2028-2029 fiscal year.
Staff say raising the city’s hotel tax from 10% to 14% would be expected to bring in an additional $2.5 million but on its own the city would still be facing an operating deficit through 2032.
A 4% utility tax, they say, would bring $10.7 million annually but the city would still be going through a deficit for the next six years.
They add that a 14% tax to park at garages with at least 200 spots would bring in $3.1 million to the city.
Staff also say legalizing and taxing cannabis sales at 7% could help generate more revenue for the city.
Slater pushed for putting a 1% temporary sales tax on the ballot with a citizen oversight committee to determine its spending as well as conducting a survey on people’s appetite for the measure, hotel tax increase, legalizing cannabis and other tax options.
“We are losing revenue to other cities because we do not allow the sale of cannabis,” he said.
“This is a source of revenue that we’re losing with all the hospitals we have, the college’s students we have, I’m sure that they would be customers as well. Not advocating for it. I don’t use it, but people are going to continue to use it, and it’s a revenue source.”
Hosam Elattar is a Voice of OC reporter. Contact him at helattar@voiceofoc.org.