A lawsuit against the city that’s winding its way through the state’s legal system has the potential to decrease Long Beach’s budget by $9 million annually, officials said Tuesday.

The city is already facing a $37 million shortfall in the fiscal year starting in October 2023, but if it loses a lawsuit over Measure M water and sewer line transfer fees, future budgets could face an additional permanent shortage of $9 million.

The looming budget issue was outlined Tuesday to the Long Beach City Council’s Budget Oversight Committee.

The lawsuit stems from a 2016 challenge against the city’s practice of charging access fees to city-run utilities for using water and sewer pipes. The practice, in place for decades, had recently generated as much as $14 million for the city before it was challenged in court.

A ballot initiative (Measure M) allowing the fees in 2018 was approved by residents, but was almost immediately challenged and has since been wrapped up in a cycle of appeals.

A January 2020 ruling in favor of the appellant, Long Beach resident Diana Lejins, required the city to put an escalating amount of the funds it would normally transfer into the city’s coffers into an escrow account. The upcoming fiscal year that starts in October, and every year after that, requires a $9 million deposit until the case is settled.

The city’s director of financial management John Gross said that the city believes there is “better than a 50/50 chance of prevailing,” but in all likelihood the case is headed for the California Supreme Court after an appeals court issued its ruling in December.

“If the decision goes against the city, it’s not going to be easy, maybe not even possible to resolve it with another ballot question,” Gross said. “The revenue will likely be lost if there is an adverse decision.”

Gross outlined four scenarios that could play out, two with the city ultimately winning and two others where the city could have to repay tens of millions of dollars, likely through judgement bonds. Paying off the bonds could negatively affect the city’s budget by millions for up to 20 years, Gross said.

The two favorable scenarios for the city would see somewhere between $9 million and $27 million in escrow funds, depending on when a final verdict is made by the supreme court, eventually released to the city for it to use on one-time expenses. The $9 million reduction to future budgets would also be eliminated.

However, if the supreme court decides against the city, Long Beach would be responsible for repaying that money along with other money it spent after the passage of Measure M but before the 2020 ruling that required escrow deposits.

The range the city could owe could be between $25 million and $42 million, Gross said, adding that “it’s a big deal.”

“The city will have a lot of money to pay back and not an easy way to do it,” Gross said. “Hopefully it ends quietly and goes away at the end of this year.”

Councilman Al Austin, who chairs the committee, said the city’s projected budget issues were alarming. Austin said that everyone has the right to disagree with city operations but this issue is clear that litigation has impacts.

“I really wish we could get this behind us,” Austin said. “I think this is unfortunate.”

The city would typically be ramping up its budgeting process at this time of year, but the projected shortfall of $30 million for the upcoming fiscal year has likely been fixed by the City Council’s decision in March to allocate part of the federal funding from the American Rescue Plan on replenishing the city’s reserves and balancing the city’s budget in the upcoming year.

However, ongoing costs for the city continue to rise, meaning that the federal money will only provide short-term relief. City employees salaries are expected to increase by nearly $23 million next year and the insurance fund that covers liability issues and worker’s compensation is expected to grow by about $8.6 million.

The city will likely continue to face potential deficits as long as it continues to spend more than it’s taking in. Even with the federal funding, the city is facing over $47 million in shortfalls in the next few years.

“You have to solve the problem that you’re spending more than you’re earning and we’re not doing that in FY22,” Gross said.