Of the nation’s 75 most populous cities, two of the top three – in terms of fiscal health – are Irvine and Stockton, suggesting the power of both beige and bankruptcy, according to data from the nonprofit Truth in Accounting. Fresno is the third city showing decent fiscal health.
But all of California’s other big cities are “sinkholes,” according to the report. That means they’re in the red, with what they owe eclipsing what they have, thanks largely to unfunded pension and retiree health care promises, the report said.
Related: How broke is your California city?
Schoolmarm-like, with ruler in hand, Truth In Accounting doled out letter grades based on the “Taxpayer Burden” per household. All three surplus cities earned “B” grades. Earning “C’s” were those with “burdens” of less than $4,900 per household, including Long Beach ($1,500), Riverside ($2,600) and Santa Ana ($3,400).
Barely squeaking by with “D’s” – burdens between $5,000 and $20,000 per household – were Anaheim ($5,300), Los Angeles ($7,200) and San Jose ($10,600).
Flunking with “F’s” – burdens exceeding $20,000 per household – were Oakland ($20,700) and San Francisco ($27,500).
The overwhelming majority of the cities examined – 64 of the 75 – did not have enough money available to pay all of their bills, the study found. But you won’t find those details in the oft-inscrutable financial reports governments must produce, which most often show neatly balanced columns.
“We’re not looking at this as a numbers game,” said Sheila Weinberg, a CPA and Truth in Accounting’s CEO. “Democracy is being undermined because citizens are not getting the accurate information they need to make decisions.”
Current practices in accounting and budgeting allow the true financial health of cities to be obscured, the report said, “and citizens are deceived, or at best, misled.” Without access to transparent financial information, the report asked, “how can citizens be knowledgeable participants in their governments?”
Governments obfuscate with simple tricks: Right now, they don’t have to include the value of the health care benefits they’ve promised to retirees on their balance sheets, giving a false sense of fiscal fitness. The study found that 21.3 percent of all promised retiree healthcare benefits— totaling $119.5 billion — was not reported in Fiscal Year 2016, the most current reporting year available.
Not so long ago, governments weren’t required to include the huge cost of pension liabilities on their balance sheets, either. That changed in 2014, and billions of dollars instantly disappeared from the bottom lines of thousands of governments.
Some still use tricks to downplay that debt, however, Weinberg said: They use older figures for their pension debt, even though newer (and almost always bigger) figures are available.
This practice allows elected officials to use money to keep taxes lower and pay for politically popular programs when that money is really already spoken for, the report said.
But at the end of the current fiscal year, a new accounting rule will kick in that requires governments to factor retiree health care liabilities into their balance sheets. Expect billions more to instantly disappear.
How Irvine gets to No. 1
“Unlike most cities, Irvine’s elected officials have only promised the amount of benefits they can afford to pay,” the report concludes.
There are structural differences, however, that put the beige-is-beautiful city on firmer financial footing than most others: Irvine does not have its own fire department, which means it doesn’t shoulder those expensive public safety pension bills; and it has never offered post-employment health benefits to retirees, said Irvine City Manager Sean Joyce.
Stockton, meanwhile, faced “a staggering debt burden” before it declared bankruptcy in 2013 – but then shed many financial obligations – and now has more than enough to pay its bills. That came at the expense of retirees, who gave up health care benefits, and bondholders, who lost a dramatic 50 percent on their investments, according to Moody’s Investors Service.
In less stellar shape: Long Beach had $2.7 billion available in assets to pay $2.9 billion worth of bills, according to the report. Unlike most cities, Long Beach got kudos for transparency, reporting all pension and retiree health care debt on its balance sheet.
Riverside had $818.9 million available to pay $1.1 billion worth of bills; Santa Ana, $301.6 million to pay bills of $664.2 million; Anaheim, $1.1 billion to pay bills of $1.7 million; Los Angeles, $12.4 billion to pay bills of $21.4 billion; San Jose, $1.6 billion to pay bills of $5 billion; and Oakland, $1.2 billion to pay bills of $3.9 billion.
As jarring as those figures might seem, they’re probably optimistic, said Joe Nation, director of the Stanford Institute for Economic Policy Research.
That’s because they’re based on what cities themselves report – and cities calculate their pension debt assuming a much rosier return on investments than Nation believes is realistic. For example, Stanford’s Pension Tracker calculates Anaheim’s debt to be $6,300 just for pensions, which is higher than the $5,300 per household figure Truth In Accounting calculated for pensions and retiree health combined.
Balancing acts
Fred Smoller, associate professor of political science at Chapman University, said cities are caught between a rock and several hard places.
Proposition 13 slashed property tax revenues; public employee unions want generous pensions; voters want services they’re not willing to pay for; and state government imposes unfunded mandates and isn’t shy about raiding local government bank accounts to balance its own budget, he said.
Mark Petracca, political science professor at UC Irvine, is skeptical of the whole exercise.
“Our inclination is to view a ‘deficit’ as a bad (though that doesn’t seem to bother the Republicans in Congress as much as it once did when Ross Perot was around to remind us) and a ‘surplus’ as good,” Petracca said. “But why should any city have a surplus, beyond what might be appropriate and necessary as part of a ‘rainy day’ fund? So, some residents in Irvine, Stockton, and Fresno might appropriately want to know … when they’ll be receiving their municipal refund check.”
State Sen. John Moorlach, R-Costa Mesa, is a CPA whose specialty in this sort of financial analysis. His office is preparing a ranking of all California cities and how much unrestricted money they have – or owe – per capita. While Truth In Accounting looked at just 75 cities nationwide, Moorlach is crunching the numbers for all 476 cities in California.
Getting the information has not been easy, even for a senator’s office, Moorlach said.
In its report, Truth In Accounting said that must change. “Cities’ efforts to climb out of their current financial holes must begin with honest government accounting and budgeting.
“How can cities begin to find solutions to crushing debt if they don’t know how much debt there is?”