Heading Off a Fiscal Cliff: How Are OC Cities Planning For Budget Shortfalls?

Even Orange County is in deep financial trouble.  Watch as city after city, school district after school district propose new bonds, sales tax increases, fees and permit increases—while cutting basic services.

“Most cities in Orange County receive the lionshare of their tax dollars from property and sales tax, along with some funding from special taxes on hotels and occasionally other revenue like cannabis taxes. 

But as costs have climbed in recent years, many cities say that taxes haven’t kept up with their increasing costs, especially as revenue from sales tax continues to drop as people move to online shopping.

Samuel Stone, an associate professor at Cal State Fullerton who studies municipal finance, points to California’s Prop. 13 as a barrier for cities to generate revenue.”

Instead of responsible financial management, they blame Prop. 13—passed 46 years ago –as the cause of their incompetence.  You would think that would want homeowners to be able to afford their homes—but Prop. 13 which SAVES homes is to blame for their corruption.

Heading Off a Fiscal Cliff: How Are OC Cities Planning For Budget Shortfalls?

BY NOAH BIESIADA AND HOSAM ELATTAR, Voice of OC,  6/5/24   https://voiceofoc.org/2024/06/heading-off-a-fiscal-cliff-how-are-oc-cities-planning-for-budget-shortfalls/

Some city leaders are starting to sound alarms over Orange County’s financial future, highlighting the need for new revenue as tax revenue drops in an effort to keep critical municipal services. 

Those talks come as some cities are hitting a fiscal cliff, with places like Orange and Fullerton facing multi-million dollar budget shortfalls this year they say are largely driven by a lack of new money coming in. 

“This is a situation every city in Orange County is dealing with,” Fullerton Councilman Fred Jung said. “We’re all going to struggle over what revenue generation looks like.” 

“It should be the number one issue,” he continued. “If it’s not, you’re not doing your job right.” 

Most city leaders only take a deep look in their pockets once a year heading into June, when they draft the next year’s budget and decide how to spend taxpayer dollars on public services like public safety, libraries and parks.

This time, some are beginning to discuss how to bring in more money.

And making cuts.

Where Is the Funding Problem Coming From?

Most cities in Orange County receive the lionshare of their tax dollars from property and sales tax, along with some funding from special taxes on hotels and occasionally other revenue like cannabis taxes. 

But as costs have climbed in recent years, many cities say that taxes haven’t kept up with their increasing costs, especially as revenue from sales tax continues to drop as people move to online shopping.

Samuel Stone, an associate professor at Cal State Fullerton who studies municipal finance, points to California’s Prop. 13 as a barrier for cities to generate revenue.

Stone said the 1978 initiative puts limits on property tax, requires an election to raise taxes or introduce new ones at the local level and at the state level requires a supermajority vote by the state legislature to raise new revenues.

“I don’t know that there’s a lot that California local governments can do at this point,” he said. “If you increase rates, you will increase the revenue from it, but every time you increase rates you are eating into your capacity a little bit.”

Stone adds that budgets have two sides: revenue and expenditures.

“You have to be able to look at both and make decisions about both to get them to balance,” he said.

The biggest expense most cities face is public safety, whether they have their own fire and police departments or they contract with the OC Fire Authority and OC Sheriff’s department to handle that service. Most of those costs go to paying public safety personnel their salaries along with their pension costs, which continue climbing for cities every year. 

Stone called pensions “the elephant in the room.”

“Some cities have been successful at kind of restructuring their pension liabilities through a variety of means, including pension obligation bonds,” he said. “It’s usually a very substantial cost and those are based on promises that previous generations of elected officials made to previous generations of public safety and public sector employees.”

That combo of dropping sales tax and rising salaries is bringing cities that were once financially strong to their knees according to Jodi Balma, a political science professor at Fullerton College. 

“It used to be that if you had a thriving local economy with mom and pop stores, your residents were basically the engine of your economy, both being a store owner and also the consumers,” Balma said. “That reality has changed.” 

Balma said that stimulus money from the federal government during the COVID-19 pandemic helped mask the problem, but as that money is starting to run dry, cities are running out of options, including ones that have previously been healthy. 

“They’ve been healthy in their spending, but now they’re forced to look at their reserves,” Balma said. “I think that indicates a need for change on the revenue side as we realize some of our cities are not going to make it.”  

Facing Financial Woes

In Orange, officials are staring down a $19 million budget deficit that city leaders say was sparked by years of financial mismanagement and will drain the city’s reserves in two years if officials don’t make cuts.

But leaders there, so far, have avoided hard choices about what services to cut – with about half the council against putting a hiring freeze on police officers and a majority of officials looking to institute new city fees, along with discussions of a possible sales tax hike.

They’re not the only officials contemplating a sales tax increase in OC.

Laguna Beach officials asked residents in April how they would feel about a sales tax increase in April to boost city revenue.

[Read: Laguna Beach Officials Consider Raising Taxes]

Fullerton’s budget has been rocky for years, with city staff projecting a $5 million deficit in the general fund for this next fiscal year as of their April report, where they noted the city manager would “bring back options over the next year,” to “stabilize the budget.”  

Meanwhile, other cities like Aliso Viejo and Huntington Beach are projecting a stable budget for this year, but warn they could be operating in multi-million dollar deficits within the next five years without some sort of change. 

Leaders in Santa Ana warn of a looming sales tax cliff on the horizon with their own sales tax measure – Measure X – expected to decrease in five years resulting in a projected $30 million loss of revenue that could see beloved city events like the Winter Village tossed aside.

“As we look at this fiscal cliff, it’s something that we’re going to have to do,” said City Councilman David Penaloza at the May 16 meeting. “We’re going to have to have an equal approach across all city events. That is the unfortunate reality.”

What New Ideas Are On the Table?

As cities grapple with declining sales tax revenue and rising costs, city council members across Orange County are calling for “economic development.” 

But ideas on what that looks like vary greatly from city to city. 

Several cities have pushed ahead with temporary sales tax increases to stabilize the budget, such as Westminster, which has repeatedly asked voters for more sales tax on the ballot – successfully increasing the city’s sales tax rate to a total of 8.75%.

Orange City Council members are currently weighing putting a similar sales tax increase question to the voters. 

Fullerton has refused to consider a sales tax hike after their previous efforts were shot down in 2020, with Jung saying he wants to focus more on bringing in foreign business and investment to grow a shrinking sales tax base.

“As we become more global and the economy is not so US centric, we have to think and look globally,” Jung said. “Why can’t Orange County be the gateway for all of that?” 

In Orange, officials are asking local hospitals to pitch in and sponsor civic projects, along with floating possible new fees on Chapman University, like a fee for use of police and fire services on campus.

Santa Ana Councilman Phil Bacerra has been pushing for the creation of an observation deck at the city’s iconic water tower to help bring in revenue to the city as officials also consider implementing new fees like a tax on cigarette litter.

“This is an item that will actually generate revenue,” he said at the May 16 meeting.

“We know it will.”

Balma said that while temporary sales tax hikes can serve as a bandaid, city leaders need to get serious about approaching the state about sending more sales tax revenue to the city instead of the state. 

“Even though the state collects sales tax from online purchases, that doesn’t come to the local entity,” Balma said. “We need to, long term, realize that the costs are going up and the revenue is going down and renegotiate what that looks like with the state.”