Why three California cities are fiscal standouts

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Three California cities stand out for managing their financial obligations better than others, according to a recent report from Truth in Accounting, a think tank that analyzes government financial reporting.

Irvine, Fresno and Stockton were among 12 of the 75 largest U.S. cities studied who made the think tank’s “Sunshine Cities" list of cities with more financial resources than obligations, a key indicator of long-term financial health, according to the report. The report evaluates city finances similar to how an individual would estimate their net worth. Irvine ranked number one, Fresno was fourth and Stockton sixth. Charlotte, Washington, D.C., and Plano, Texas, also made the top five.

The best answer she received from the finance director of a "Sunshine City" as to what it was doing differently from a "Sinkhole City" was “We do something weird for governments, we only promise services and benefits we can afford,” said Sheila Weinberg, TIA’s founder and chief executive officer.

Irvine has the distinction of topping the list of TIA’s "Sunshine Cities" for the third year running. Irvine Mayor Christina Shea called it a testament to the City Council and staff’s commitment to ensuring tax dollars are managed wisely.

“Unlike most cities, Irvine’s city government has enough resources available to pay all of its bills, including public employees’ retirement benefits,” the TIA report states.

In terms of pension funding, Fresno is in a position that all pension funds should be in, said Pete Constant, executive director for the Retirement Securities Initiative, noting the city’s pension fund is currently 108% funded. The city has its own pension system, outside the California Public Employees' Retirement System.

Pension funds rise and fall with the market, so when the market is at its peak, the fund should be slightly overfunded and when the market drops, it should be slightly underfunded, but oscillating around 100% funded, Constant said.

“In Stockton, employees agreed to eliminate retiree healthcare benefits and some bondholders agreed to take lower payments for bonds,” Weinberg said. “So, they were able to get rid of legacy costs, and since they have not been incurring more costs — though we did suggest they need to keep an eye on pension liabilities, because they seem to be creeping up.”

Stockton officials say they aren't taking the do-over it attained through its 2012 bankruptcy lightly.

“We were able to restructure some of our bond debt in the bankruptcy,” said Matt Paulin, Stockton’s chief financial officer. “We don’t have any retiree healthcare debt. That has really helped our financial situation.”

Though Stockton has $387 million in outstanding bonds and $516 million in unfunded pension benefits, its assets exceeded its liabilities by $263 million in fiscal 2018, according to the TIA report, earning it a B grade from the think tank.

The city has been able to stay in the black through the hard work of the council and city staff, Paulin said. Through the bankruptcy, the city created a 20-year financial forecast that has helped keep the city on track, he said.

“It is a sophisticated and dynamic model that we use around discussions with the council,” Paulin said. “There have been a few times when we were sitting around with the council and they asked what the picture would be like if they made a change. We then plug it into the model and it provides a picture of what that would look like in the long term.”

That doesn’t mean everything is rosy for the city. Like other cities there is constant tension between working to keep pension liabilities in check versus service and infrastructure needs.

“There is always a balance between what we can afford and what the community wants,” Paulin said.

The roughly half-billion dollars of unfunded pension benefits is a concern. The city has set up a pension trust fund and pays the UAL payment at the beginning of the year saving the city $1 million a year in interest costs, Paulin said.

The think tank called 63 of the 75 most populous cities "Sinkhole Cities," with obligations greater than resources. New York City claimed the distinction of the worst municipal finances in the U.S. for the third year in a row, according to how the think tank views government finances. Chicago, where TIA is located, came in second on the sinkhole list.

The report essentially subtracts a city’s assets from liabilities and then divides by the number of taxpayers to come up with what each taxpayer would owe if the cities wanted to break even. New York individual taxpayer’s burden would be $63,100 and Chicago taxpayers would need to pay $37,000. The average across all 75 cities is $7,040.

“We have good news this year. The cities are fully reporting all of their liabilities on their balance sheets, including those related to retiree health care benefits,” Weinberg said. “The bad news is for every $1 of promised retiree health care benefits, the 75 cities have only set aside 13 cents to fund these promises.”

TIA has always included pension and OPEB liabilities in its calculations, so its people were pleased when the Governmental Accounting Standards Board began requiring that cities include pension and OPEB be included on government balance sheets.

The weight of retirement obligations facing many California cities and districts will be evident March 3, when voters will be faced with hundreds of local tax and bond measures.

The California Tax Foundation website lists 234 local sales and parcel tax increases and bond issues on the statewide March 3 primary election. That is nearly 170% more than the 87 local tax and bond measures voters faced in the June 2016 election, when they approved 67.

An unwillingness to face pension liabilities head on may be the reason some cities are asking voters for tax increases, Constant said.

He advises cities to stop looking at their financial struggles as a revenue shortage problem if they are facing a pension management problem.

“These agencies are looking at the problem as a revenue shortage and seeking more revenue,” he said. “They go to voters and ask for additional revenues, and then voters expect restored or enhanced services, when the money is going to alleviate budget pressures. They need to look at paying down their pension liability, so that it doesn’t further degrade their ability to provide services.”

The way many cities are paying down unfunded liabilities is akin to making interest-only payments on a credit card, he said.

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