Fullerton’s leaders found out their budget is in much worse shape than they realized this week, when city staff told them they erroneously accounted for over $10 million in reserves that was actually money already spent.
It comes right as they need to spend almost all their remaining reserves, with city staff warning them that without major budget cuts, their reserves will be almost empty by the end of next summer.
Now, council members are asking how their staff missed a $10 million mistake for years, with an unclear path to balancing the municipal budget that’s due at the end of June – all while the city stares down a nearly $14 million deficit that officials will have to close.
“You’re talking about a balance on our reserves that shouldn’t have been there,” said Mayor Fred Jung in a Thursday interview. “I don’t want to say it’s deceptive, but it’s not realistic.”
“I think we were set up to fail.”
How Did Fullerton Misplace $10 Million?
At Tuesday’s city council meeting, staff explained that over $10 million of the city’s roughly $26 million in general fund reserves was actually allocated for specific purposes, meaning they have a substantially weaker contingency bucket than they expected.
“These funds remain part of the city’s overall fund balance, but are now set aside in a way that better reflects their intended purpose,” said Steven Avalos, the city’s finance director, at Tuesday night’s meeting.
Around $2.9 million of the money was meant to go to the city’s successor agency and was sent to the general fund in an accounting error, while the remaining $7.1 million was either spent on balancing the budget or was already allocated to other projects without noting that in the budget.
Tax Measures on Horizon Amid Projected $14M Budget Deficit
City staff are projecting a roughly $13.7 million deficit going into the next fiscal year this summer and ending that year with their contingency reserve at 2% – significantly below the 10% contingency minimum set for themselves.
The shortfall comes as officials in a host of OC cities – including Fullerton – are once again eying placing a variety of tax measures on the ballot this year as they continue to struggle to get a handle on widening budget gaps as spending steadily outpaces revenue.
Last fall, city council members directed staff to reconvene their fiscal sustainability ad-hoc committee with potentially new members to help formulate two 0.5% tax measures – one to fund infrastructure improvements like road repairs and another for public safety.
[Read: Another Orange County City Considers Tax Increase to Solve Budget Woes]
City staff said the city manager will meet with the city’s fiscal ad hoc committee to discuss the budget issues on March 30 at the Fullerton Community Center boardroom, which will be open to the public and livestreamed on Zoom.
Jung said a sales tax is essential now, and urged Fullerton residents who’ve overwhelmingly denied previous tax increases to approve the new one that he’s seeking to put on the ballot that would go toward fixing the city’s crumbling roads.
[Read: How Did Fullerton’s Roads Get So Bad?]
“The burdens haven’t changed. The systemic things and foundational issues the city had five years ago, we still have it now,” Jung said in an interview. “We’ve got to find other ways to generate revenue and modernize our city.”
Councilman Ahmad Zahra said the drop of the reserves to 2% was indicative of future massive cuts to public services.
“Either major cuts are coming or our fate is going down the same road as Westminster, because this city council couldn’t care less, apparently, because elections are more important,” he said at Tuesday’s meeting.
After the meeting, Zahra highlighted that a tax measure wouldn’t help the city in the near term since their new budget is due in June, while the soonest a tax increase could start up is next year.
“This is a massive failure,” Zahra said in a Thursday interview. “A sales tax is not going to save us because these cuts have to happen now.”
Council Members Sound Off on Staff and Each Other
Zahra publicly questioned how city staff missed out on the errors in the past.
“The successor agency has been around for a long, long time. Any city manager worth their knowledge would know that,” he said during Tuesday’s meeting. “We wiped out our entire reserves from one year to the next because of a clerical error of $10 million. That should raise massive red flags.”
Jung agreed the error was massive, but pushed back on Zahra for scrutinizing staff.
“It’s so tiresome that you continue to do this and you continue to jab away at staff,” Jung said on Tuesday. “It is egregious and it is significant. What I don’t appreciate is you continuing to interject things to downgrade staff, most of whom were not here when this occurred.”
Earlier in the meeting, Zahra said the issue was being minimized.
“The problem I’m seeing here is that we’re downplaying a gap of $10 million,” Zahra said.
“Nobody is downplaying anything,” Jung interjected.“None of us are happy about it. You were briefed on it extensively so for you to grandstand here now, I point out, as if somehow you’re the victim in this.”
“I’m not the victim, the public is the victim,” Zahra interjected.
“What I see is the staff trying to correct the wrong and I appreciate them doing that,” Jung said, calling other council members to ask questions.
“Dude it’s $10 million,” Zahra said.
Councilman Nicolas Dunlap said it’s a complicated situation that officials needed to have a dialogue on.
“Then don’t interrupt me,” Zahra chimed in. “I was just asking staff questions.”
“Listen, let me speak. I sat there and listened to you for minutes, rambling on,” Dunlap said, slamming his hand on the dais.
“I’m not rambling, I’m asking legitimate questions,” Zahra interjected.
“Excuse me, please do not interrupt me. I’m not going to ask you again,” Dunlap shouted.
“Do not get angry, sir,” Zahra responded.
“I’m not angry,” Dunlap replied.
“You slammed your hand,” Zahra said.
“Hey pal, you haven’t seen angry okay – so be quiet, let me finish,” Dunlap shot back.
“Oh, show me please,” Zahra responded. “I bet the public would love to see you be angry.”
Dunlap then said ensuring the budget was accurate was paramount for them to succeed financially.
“Staff kind of shot us in the foot by including those flawed figures in the revenue to start with,” te said. “The underlying fundamentals of this budget have to be correct, because, if not, it’s hundreds of pages of garbage.”
Councilwoman Shana Charles said at the meeting the mistake needs to be investigated.
“It is important that we go back and find out why,” she said. “That we make sure that it doesn’t happen again.”
Charles said in a Thursday night email she still trusts the city’s budget, but believes the city’s auditing processes need reform.
“I’m not comfortable with leaving our audit processes in place at this point. This seems to have been missed for a number of years, as staff mentioned that part of the error dated back to 2021. We need reforms to ensure this doesn’t happen again,” she said.
“I am glad that our newly appointed city manager came forward with finding the error, as trust would have been more damaged if he covered it up. We clearly need to rebuild public trust in our budget process.”
Councilwoman Jamie Valencia said the accounting error was disappointing.
“I wasn’t on council when it occurred. I am trying to understand how we can prevent this in the future. It is something that we have to just get through and I just hope that we have a plan forward so that we can get through this,” she said at the council’s Tuesday meeting.
Grappling With Potential Spending Cuts
In an interview after the meeting, Jung said that the incident had lowered his trust in city staff, but called Zahra’s comments “overdramatic.”
Jung compared the city’s financial struggles to the City of Orange, where officials have grappled with ways to balance their budget.
He said Fullerton officials are going to have to look at some major changes to close the nearly $14 million deficit heading into budget season.
“We have to find a long term solution for all of that and it’s hard to do without some sort of revenue enhancement on the ballot,”Jung said. “I’m going to be more reliant on my independent view of things in this cycle.”
But no one has answers yet on where the cuts will come from.
Valencia did not respond to a request for comment.
Jung said he hopes to see the cuts focus on removing vacant job positions in the city budget, saying those roles will have to go unfulfilled, before there’s any discussion on cutting city programs.
Dunlap pushed back on proposals for a tax increase in an interview, saying the only way forward would be major cuts, calling for an audit to find wherever they could trim the fat.
“The simple reality is that tax increases alone will not solve this problem,” Dunlap said. “It’s not a revenue problem, it’s a spending problem.”
Zahra said he has “no idea” what they’re going to cut.
“When the public really truly understands what’s happening and the consequences of this there’s going to be a distrust in the entire city,” Zahra said. “The distrust is not just in our financing, but distrust in this council.”
Noah Biesiada is a Voice of OC reporter. Contact him at nbiesiada@voiceofoc.org.
Hosam Elattar is a Voice of OC reporter. Contact him at helattar@voiceofoc.org.
