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Santa Ana City Council members, facing exploding labor costs that far exceed new revenues from the growing economy, approved a budget Tuesday that draws $10.2 million in one-time money to make ends meet in the new fiscal year.

That is on top of a $2 million budget gap last year and $6.1 million in one-time general fund money the city plans to draw to make ends meet in the current fiscal year, which ends June 30. The gaps are projected to grow to $32 million in the 2020 fiscal year, and $38 million the following fiscal year.

Citing the ever-worsening budget projections, most of the council moved Tuesday toward placing a sales tax increase on the November ballot.

“No one really likes taxes…But sometimes you have to do things that are necessary. And right now we have reduced services,” said Councilman Juan Villegas.

“We’re not making this decision” about raising taxes, he added, in comments other council members echoed. “We’re asking the public to make this decision.”

On a 5-1 vote, council members directed staff to prepare research and documents for their next meeting, on July 3, where they could place the increase measure on the ballot.

Santa Ana’s sales tax currently is 7.75 percent. Options under consideration by council members include a full-percent increase to 8.75 percent, which is estimated to raise an additional $40 million for city coffers each year.

Another option is a percent-and-a-half increase, to 9.25 percent, which would be the highest sales tax of all 34 cities in Orange County and would bring an extra estimated $63 million per year into the city.

Supporting the preparation of research for the sales tax measure were Mayor Miguel Pulido and councilmen David Benavides, Vicente Sarmiento, Sal Tinajero, and Juan Villegas.

Councilwoman Michele Martinez was absent and Councilman Jose Solorio voted no.

Last month, as council members showed interest in a sales tax measure, city staff hired opinion research consultants to conduct a poll and help craft public messages about the proposed tax increase to help it pass in November.

The research is being provided to the City Attorney’s Office, which is in charge of writing the ballot language that would describe the sales tax measure to voters, which state law calls the “impartial analysis.”

Council members laid out their support Tuesday for putting the sales tax increase before voters.

But at the end of the Council’s 25-minute discussion of the tax increase, Solorio noted the council hadn’t discussed how the tens of millions of dollars would be spent.

“If we do generate this kind of revenue…how might we spend it? You know, we haven’t done that,” Solorio said.

“An excellent point,” replied Pulido.

“We’re saying we want to raise approximately $40 million, but we haven’t really had [the] discussion about how to spend it,” Solorio said, calling the proposed tax increase “a regressive sales tax on working class [people].”

“We’re asking folks for a ton of dough, and we ought to have a thoughtful conversation about how [the money would be] spent,” Solorio added.

Pulido asked city staff to bring back options at the July 3 meeting for how the money could be spent. The council is scheduled to vote at that meeting on putting the tax increase on the ballot.

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.

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

The budget approved by council members Tuesday does not have as severe cuts as were originally proposed last month. The approved spending plan does not cut library hours or youth sports staff members, but does include plans to issue an extra $200,000 in parking tickets to raise new revenues.

But the approved budget does redirect millions of dollars in retail marijuana money that had been slated for expanded services, to instead go toward helping fill the existing budget gap for existing services.

When they were preparing last year to allow retail marijuana sales in January, the City Council directed that the money to be divided in thirds between new youth programs, expanded police enforcement, and administrative costs.

“Part of the interest of council is that if we are going to enter this…area of business, that there would be direct benefit to community,” Benavides said last month.

But given the fiscal crisis, council members are instead putting the new marijuana money toward plugging this year’s budget hole.

The full $2 million in projected retail marijuana money this fiscal year is slated to fill the budget hole, and for next year, the council plans on using one-third of marijuana projected revenues, or $2.6 million of the roughly $7.8 million total, to partially reduce the budget shortfall.

As part of the new budget, council members also increased the city’s legal defense spending for unauthorized immigrants who face deportation proceedings, which was requested by pro-immigrant activists organized under the group Santa Ana Building Healthy Communities.

In the current fiscal year, Santa Ana’s budget included $65,000 in city money for immigrant legal defense, plus a $100,000 one-time grant from the nonprofit Vera Institute of Justice.

Santa Ana’s payments increase in the new budget to $80,000, with no funds from the nonprofit grant.

Sarmiento, pointing to the separation of more than 2,000 migrant children from their parents at the U.S.-Mexico border, said, “It’s a very graphic and ugly time that we’re living in.”

Ten members of the public spoke about the budget during public comments Tuesday, all of whom spoke in favor of the expanded city spending on legal defense.

“We’ve been able to serve ten families, which means that we have ten more families from right here in Santa Ana who are able to stay together. We have people that have been able to stay in their homes, continue contributing to the economy here,” said Lindsay Toczylowski, executive director of the Immigrant Defenders Law Center.

“The families would have gone without these services if it weren’t for the support of the city of Santa Ana.”

The shortfalls this year, according to city staff, are mainly driven by increased pension costs ($5.9 million) and raises the council approved for police officers and other city staff ($3.1 million).

The City Council approved the employee raises as staff projected shortfalls of millions of dollars. About two thirds of the raises went to police officers, who are about one third of the city’s overall staff.

Before the new labor contract, the median total compensation for a Santa Ana officer was about $213,000 per year, including $111,000 in pay before overtime and $88,000 in benefits, according to city data published by Transparent California.

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.

During the last City Council election, the police officers’ union spent $400,000 to support council candidates they endorsed – more than any other Santa Ana election spender, by far. The general employees’ union spent less than $2,000, according to campaign finance reports.

The police union’s contract expired the same day as the general employees’, June 30, 2017. Council members approved the police union contract five days later, on July 5, and the general employees waited five months for their contract to be approved.

“We’ve heard the city leadership say for months how we have a shortfall when it comes to money…But even before we knew we’re gonna fill some of the budget shortfalls, you found a way to give one of our bargaining units a nice raise,” said Kim McPeck, a city employee and member of the general employees’ union bargaining committee, in public comments to the council in August while negotiations were still ongoing.

“They say at least…a third of those [police union] members got at least an 8-percent raise. Why are you willing to find money for them, and nobody else?” he asked, saying he was reading comments prepared by another union member.

“We are not naive. We see behind the curtains. Is this council sending a message to us that we have to support one of your campaigns to get more money and a fair contract?”

Council members didn’t directly respond to his comments, but said they hoped to find the money to provide raises for the general employees. They approved raises for the general employees in December.

Council members are scheduled to decide July 3 whether to place the sales tax and district elections items on the ballot.

“We are anticipating having everything ready on our end for the City Council to make a determination on July 3,” Garcia said.

At that meeting, the council also is scheduled to make its second and final vote to approve the new 2018-19 budget, which covers the fiscal year ending June 30, 2019.

Nick Gerda covers county government and Santa Ana for Voice of OC. You can contact him at ngerda@voiceofoc.org.