Orange could face bankruptcy without sales tax hike, new developments, experts say

Accounting consultants recently gave the Orange City Council a grim financial forecast: if the city does not change course, it will barrel towards bankruptcy in as soon as three years.

Additionally, Orange faces a projected budget deficit of $46.5 million by 2031, according to Grant Thornton Advisors, a consulting firm hired by the city.

“We don’t see the problem with the city as overspending or a bloated government,” said Shawn Stewart, a principal with the firm, during the Orange City Council meeting on July 22. “We see this more [as] a revenue problem.”

Stewart quoted an unnamed department manager who described the situation as City Hall having a “Nordstrom appetite” but a “Walmart budget.”

The consultants prescribed a “radical” course to avert bankruptcy, including a 1% sales tax hike, slashing 12% from department budgets and aggressively courting business development in the city.

“It has to be really clear to everybody where we’re at,” Councilmember Jon Dumitru said in response to the forecast. “It’s not a wish, want, or pie-in-the-sky trying to fund stuff. It’s to keep the city alive at this point.”

Stewart called Orange’s looming fiscal crisis an “inflection point.” The city could face bankruptcy risks by 2029 with a $26.8-million budget deficit projected. But Stewart also claimed that the city is in a good position to resolve its financial woes in time.

A sales tax hike is seen as a short-term solution to shore up Orange’s immediate budget needs.

Orange residents narrowly rejected a ballot measure seeking to raise the city’s sales tax by 0.5% for 10 years last November. Bob Hawkey, another accounting consultant, stated that the earliest Orange could ask for the 1% sales tax hike would be late 2026.

He suggested that members of the City Council communicate clearly with constituents about Orange’s fiscal crisis in the run-up to any future ballot measure.

Consultants also concluded that while there was no misappropriation of COVID funds, the manner in which a previous council chose to spend them caused a shortfall in the city’s finances.

“They took $28 million in COVID funds, which is a one-time payment, and hired 39 individuals,” Hawkey said. “That accounts for about $19-million a year. The unfortunate implication of that is a long-term unfunded problem that the city now faces. The check has now come due.”

With expenses outpacing revenue by 12% every year, consultants urged the council not to fill dozens of staff vacancies as another tough decision to consider to get the city back on solid financial ground.

Citing how serious a bankruptcy forecast is, Councilmember John Gyllenhammer said that leaving all staff vacancies unfilled would give Orange a more immediate $3-million budget surplus and asked consultants if their projection included those vacancies as hires.

Hawkey later stated that the $46.5-million budget deficit projection is a shortage of revenues based on numbers his firm was given.

“I just need to assess the numbers you were provided, but I believe you assessed with what you got,” Gyllenhammer said.

For Orange’s long-term future, Hawkey proposed a “radical” approach to attracting new development. He said the city was decades behind where it should be and has reputation as not being an easy place to do business despite its assets, which include Chapman University, the Orange Mall site near the 55 Freeway and proximity to Disneyland.

Hawkey was surprised by what he called an “apathy” towards Chapman University when there should be a long-term master plan in place.

“They should be building student housing,” he said. “Students have lots of money to spend, and the ability to increase enrollment, to increase the [spending power] that they have, is an opportunity to increase revenues for the city [and] to grow Chapman University as a very powerful asset.”

Hawkeye called the mall site a “potential gem” for the city while urging the council to attract spillover development from the neighboring Anaheim Resort as hotel bed-tax revenue could be another key source of critical funding.

“The long-term solution for the city should not be the 1% tax increase,” Stewart added. “The long-term should be, ‘Let’s get the right economic base.’ Then you don’t need that higher tax base.”

Consultants plan to share their findings with incoming City Manager Jarad Hildenbrand. They reassured the council members that time is on their side, but that the clock could run out if they don’t act soon.

“I just really want to emphasize where we’re at,” Councilmember Dumitru said. “We’re kind of handcuffed [into] having to make a very tough decision rapidly.”