Four Bay Area cities must address their serious financial risk
We’ve been warning for years now that too many California cities are in financial distress, failing to responsibly balance their income with their expenses.
New data from state Auditor Elaine Howle supports that concern. Wherever you live, you should use Howle’s new website, www.auditor.ca.gov/bsa/cities_risk_index, to understand the challenges your city faces.
Especially if you live in El Cerrito, Richmond, Oakland or San Jose. Those Bay Area cities rank among the worst 25 in the state, most at risk for financial distress. Howle deemed the first three to be at high risk, while San Jose barely managed to escape with a designation of medium risk.
We are now in the longest economic expansion in U.S. history. A recession is long overdue, and inevitable. It’s inexcusable how ill-prepared California cities are for the next downturn.
Many cities face financial challenges garnering enough income to meet the service demands of residents. But that’s not an excuse for fiscal mismanagement, for spending and borrowing more than a municipality can afford.
Failing to set aside sufficient reserves for a downturn, taking on too much debt and irresponsibly funding employees’ retirement benefits have left cities on precarious financial footing.
Howle ranked 471 of the state’s 482 cities based on key criteria from 2016-17 financial statements, including liquidity, debt burden, general fund reserves, revenue trends and costs for pension and retiree health care. Of those 471 cities, 18 were rated at high risk of fiscal distress and 236 at medium risk.
Of the 11 cities not ranked, nine were not large enough to require preparation of audited financial statements prepared in accordance with generally accepted accounting principles, and two had failed to do so. None of the 11 were in the Bay Area.
El Cerrito was the seventh worst on the list, Richmond was 12th, Oakland 13th and San Jose 23rd.
Each faces somewhat unique challenges. For example, El Cerrito has serious liquidity problems. San Jose’s and Richmond’s debt burdens pose high financial risks. El Cerrito, Richmond and Oakland have high risk because of their low general fund reserves.
All four cities face high risk for their pension obligations and future payment obligations. And they’re all at high financial risk because of their failure to adequately set aside funds to cover the cost of retiree health care benefits workers have been promised.
Howle has devised an excellent overview that exposes cities living beyond their means. But it’s also important to understand the limitations of the data.
It doesn’t distinguish between cities with revenue problems and those that overspend. It doesn’t examine which cities are paving their roads and which are letting them deteriorate, nor which are requiring employees to meaningfully share in the cost of their pensions and which are excessively generous with taxpayer money.
And it doesn’t identify cities that are shirking their responsibilities and balancing their books on the backs of their neighboring cities. At No. 377, Cupertino, for example, has low financial risk, but that’s in part because the city, which is home to Apple, fails to provide needed housing that adds to municipal costs.
Nevertheless, Howle’s findings should prompt serious financial discussions, especially in cities facing financial risk. It’s now up to residents, top city administrators and elected officials to figure out what to do about it.
Some cities, including San Jose, have already started. Others keep pretending the problem will go away.
It won’t.