By Alfredo Santana
A state audit on the financial viability of California cities ranked Pico Rivera as a city with a low risk of defaulting on its obligations, and graded Compton as the worst for failing to submit its annual accounting statements.
Out of 453 cities statewide that submitted their financial reports on revenues and expenses for the 2018-19 fiscal year, Pico Rivera landed at number 316, with 81.96 out of 100 possible points for overall risk, due to its strong handling of reserves and ability to pay salaries, contracts and contributions to its employees’ retirement fund.
Compton was flagged as the riskiest city in the state, due to its failure to submit any financial reports by the June 30 deadline. Santa Fe Springs was at 118, with 61.28 out of 100 points tailored for risk, while Inglewood was at 115, scoring 60.99 out of 100 points.
Both Inglewood and Santa Fe Springs were ranked as cities with moderate financial risk. The state ranks the cities’ fiscal risks by grading them on a scale from 100 to zero, starting with the riskiest, and placing the most solid ones with the strongest scores closer to solvency.
A combination of factors that include lack of transparency running their books, or a mix of issues weaved to managing growing expenses with stale or receding revenues earn the cities’ grading for risk.
Pico Rivera reported in fiscal year 2018-19 an overall budget of $293 million, which included capital assets such as properties, investment bonds, stocks, city vehicles and pension liabilities. The city issued a general budget of $62.5 million, accounting for operating revenues and expenses.
“I am proud of our city council and staff for taking prudent steps throughout the year to ensure we can continue to provide critically needed programs and services for the residents of Pico Rivera,” Mayor Gustavo Camacho said in a statement. “Our goal and commitment to our residents has always been to continue providing uninterrupted city services whether or not we had a downturn in the economy. I believe, given the state report, we are in a position to continue to honor that commitment.”
Inglewood had an overall budget of $238.1 million, and a $128 million general fund budget with a surplus after expenses of $56,179 for the aforementioned fiscal year, whereas Santa Fe Springs approved a $48.9 million general fund budget.
Overall budgets add revenues from special local tax measures, state propositions, utilities, grants, reallocation of certain state taxes such as gasoline and natural gas, and parking.
General budgets are assembled with property and local sales taxes, business permits and taxes, construction and refurbishing permits and fees, such as hotel and motel occupancy fees, card rooms fees and others.
California Deputy Auditor Mark Tilden said the state used 10 different financial measures to define the risks municipalities face while conducting business. The most important indicators are financial reserves, cash flow and debt burden compared to revenues and revenue growth.
“We use a methodology that details and explains each financial slot and expenses report on each city,” Tilden said. “Compton is number one overall in the financial report spectrum because of Compton’s lack of financial transparency in the last year.”
Tilden said that Compton’s refusal to comply with state law to submit full financial reports goes back to fiscal year 2013-14, the last time the city prepared a full fiscal statement.
“[The 2017-2018 statement] was so incomplete with revenues and expenses, that we were unable to use them,” Tilden said.
On the other hand, Pico Rivera scored good numbers in the retiree health benefit risk tab, an area that threatens many cities’ fiscal viability because of increasing annual policy costs tied to more comprehensive plans offered with receding income.
The city’s financial ranking is a stark contrast with neighboring municipalities such as Bell Gardens, ranked at 90, and Downey, with a risk score of 65. Both cities were labeled with moderate high financial risk.
Camacho said that the city’s financial success did not happen overnight and was devised in the years that reported positive revenues, thus allowing it to increase its general fund reserves “in case of an economic downturn.”
Furthermore, Pico Rivera reformed its pension obligations by sharing its costs with its employees.
The high-risk audit also uncovered fiscal flaws among other regional cities in the areas of cash flow and contributions to retirement programs.
For example, Huntington Park did not make the current ranking following its failure to issue financial statements before the deadline, Tilden said.
In the state’s previous audit, conducted from 2017 to 2018, Huntington Park ranked 128 out of 473 reported cities, with 59.35 out of 100 points possible for a grading of moderate risk.
Huntington Park began to experience financial stressors that year, tied to rising pension costs, following the city’s decision to offer more medical benefits to retirees while revenues started to decline.
“Those are lethal combinations,” Tilden said. “Somehow the city did not show new revenue streams and I think that’s where they began having problems.”
A reporter reached out to Huntington Park officials to ask why no fiscal report was submitted to meet the state’s deadline, but no response was received by press time.
Another city dabbling with dangerous finances on its retiree fund is Downey. Ranked at 65, Downey was able to raise more revenues with the passage of Measure S, a half-cent sales tax increase that took effect in April 2017. Most of the $64.2 million raised was used to modernize and refurbish the aging library, renovate four fire stations and revitalize public parks.
However, the city “has some significant problems funding retirement obligations, and has not been able to add money to that fund,” Tilden said.
The outlook is bleak as the retirement funds gobble up more money. Downey contributed 11% of its total revenue to cover retirement plans for the 2018-19 fiscal year, and forecasts an increased share of 18% for fiscal year 2026-27, putting it in high financial risk in the sector.