LOS ANGELES — Placentia, Calif. is financially challenged, but not in immediate danger of declaring bankruptcy, city leaders say.
If Placentia's leaders don't take action, the Orange County city could face a $4.5 million deficit in its $30 million budget by 2017-18, according to a report from Cincinnati, Ohio-based consultant Management Partners.
"It is a difficult situation," said Mayor Scott Nelson. "We have to see what we can do to create a new model for the city."
City leaders asked Management Partners to draft a budget stabilization plan after the consultants provided the city with a five-year forecast, including the deficit projection, in May 2013.
In the plan provided to the city in December, the consultants said rate increases approved by the California Public Employees Retirement System, which weren't taken into account in the original five-year forecast, will compound the problem.
"Projected increases in retirement rates and associated costs will further exacerbate Placentia's structural budget deficit to the point of possible financial insolvency, absent significant changes in revenues and/or expenditures," the consultants said in the report.
Placentia City Manager Troy Butzlaff said the city is not in immediate danger of being insolvent.
"Talk to me in three years, if we don't do anything now to deal with the situation," Butzlaff said. "We are trying to get ahead of the situation."
City projections anticipate a $1.2 million deficit for fiscal 2013-2014, but the city hopes to bring in $725,000 in base rent annually through a 25-year contract with Lamar Advertising to install five billboards on city property expected to close in March.
City leaders have been successful at finding revenues to close a recurring $1 million deficit it has faced for the last five years. But with only $1.3 million in reserves, city leaders need to find a more permanent solution.
The city is contemplating such measures as shuttering its police department and contracting with Orange County Sheriff's Department for those services.
Consultants also have recommended increasing sales and property taxes, both of which would have to go to voters for approval.
The bedroom community of 50,000 is 96% residential making it dependent on property taxes. The state's Proposition 13 adopted by the state legislature in 1979 prohibited property assessments from rising more than 2% a year unless the property changes hands.
The city will present the consultant's recommendations at a community meeting planned for Feb. 12. Based on what residents say, Butzlaff and his staff will make recommendations to the City Council.
The city is in much better shape than it was in 2008, according to Butzlaff, when it had to issue a $5 million working capital deficit bond to pay back funds borrowed to pay for a grade separation project, he said.
The city, bisected by the Burlington Northern Santa Fe rail line, had initiated a grade separation project to alleviate congestion at 11 railroad crossings. A joint powers authority, called the Orange North-American Rail Access Corridor Authority, was created in 2000.
Originally budgeted at $300 million, projected costs to complete the grade separation plan burgeoned to over $500 million dollars, before the lack of sufficient funding forced the project to be scrapped in 2005.
In 2006, the city's former public works director, Chris Becker, and former city administrator, Robert D'Amato, were indicted on conflict of interest charges. Becker pleaded no contest in December 2008 to one count of conflict of interest. Charges against D'Amato were dismissed by an appeals court in October 2008.
In 2008, within a few months after Butzlaff was named city administrator, he discovered the city had a $5 million deficit and the city had been borrowing from restricted funds to subsidize the general fund. The auditors were prepared to give us a finding of not likely to continue as an ongoing concern, he said.
After discovering the shortfall, the city sold a $5 million privately placed working capital deficit bond.
The city hopes to refinance the private activity bond, which has balloon payments from $1 million to $1.3 million in the final three years, before it expires in 2019.
"We just concluded a request for proposal with 30 financial institutions and investors to see if we could do a private placement," Butzlaff said.
The goal is to get the interest rate on the bonds down to 4.5% to 5% from the current 7.5% interest rate.
"They were issued at the height of the economic downturn," Butzlaff said. "There wasn't a lot of debt being issued then, so we were forced to take what we could get between our bad credit and the market conditions."
He expects to hear this week from the city's financial advisor, Susan Harrell of Orange, Calif-based Harrell & Associates, on the result of the RFP.
Management Partners has given Placentia the tools to alleviate the structural deficit, Butzlaff said.
"This is the year to act, because all the recommendations will take time to implement," he said.
Standard & Poor's rates Placentia certificates of participation issued in 2003 BB-plus, according to the Municipal Securities Rulemaking Board's EMMA website.
