Disneyland is open. Hotels are buzzing. But the home of the Happiest Place on Earth is now on California’s high-risk watchlist nonetheless.
The “high-risk” designation — equivalent to a municipal Scarlet Letter — means that these cities have “high risk for the potential of waste, fraud, abuse, or mismanagement, or that have major challenges associated with their economy, efficiency, or effectiveness,” according to the California State Auditor.
- On the red-light watchlist this year with Anaheim are the Southern California cities of Compton, San Gabriel, Torrance, Montebello and West Covina . Only 12 cities in the entire state are deemed high risk.
- Another 196 cities are coded yellow for moderate risk, including Los Angeles, Long Beach, Fullerton, Riverside and San Bernardino.
- And 215 cities are coded green for low risk, including Whittier, Temecula, Chino Hills, Santa Clarita, Aliso Viejo, Laguna Woods and Rancho Mirage.
The analysis peers into time far beyond the immediate outlook, where one-year stimulus funds are expected to fill many pandemic-induced holes in city budgets. Instead, the auditor collects and analyzes key financial data from the cities to measure their financial stability over time and arrives at these simple, stoplight-coded designations.
Does the city have enough cash on hand to cover unexpected expenses or revenue shortfalls, such as what was seen in the pandemic?
How heavy is its long-term debt burden — pension obligations, retiree benefits, bond repayments — compared to its income?
Are city revenues increasing, or decreasing, over time?
“We are confident that our assessment will help distressed cities get in front of impending challenges,” State Auditor Elaine M. Howle, a certified public accountant, says on the website that graphically illustrates the designations.
The League of California Cities, which represents them in Sacramento, quarrels with the auditor’s approach. “The dashboard fails to provide the necessary context or analysis to make the information useful,” spokeswoman Jill Oviatt said.
While the league “fully supports transparency and sharing data that’s relevant and meaningful,” the State Auditor’s dashboard falls short, she said. It uses the cities’ audited financial statements, which usually lag a year behind, and thus doesn’t project present-day conditions.
Audited financial statements, however, are considered the most reliable window into a government’s finances, as annual budgets are essentially estimates that remain in flux until the fiscal year ends.
Public safety pensions
Generally speaking, older cities that have their own police and fire departments face the greatest struggles.
That’s because public safety pensions are the most expensive retirement benefits these cities must shoulder. Retirement formulas were sweetened back when the stock market was roaring some 20 years ago, and elected officials were told that great returns on investments would cover increased costs. Unfortunately, that has not been the case.
Anaheim, ranked eighth worst in the state, has seen its annual contribution to the California Public Employees Retirement System leap more than 44% from 2019 to 2022, according to CalPERS data. In West Covina, it rose more than 41%. In Torrance, 40%. All in an effort to fill the gap between what’s currently owed to employees for retirement benefits, and what’s actually set aside.
“They’ve all long known what they have to do,” said David Crane, lecturer in public policy at Stanford University and president of Govern for California. “It takes political power to make it happen.”
The cities say they’re working on it.
“We welcome and share the report’s interest in the fiscal health of California cities,” said Anaheim spokesman Mike Lyster by email. “Anaheim is coming through the biggest challenge of our times after the year-plus closure of our theme parks, convention center and entertainment venues. We are in the early stages of economic recovery, and, longer term, have a bright outlook with billions in investment planned around our stadium, Honda Center and in and around the theme parks. Revenue from economic recovery and future investment will help us serve our residents and meet obligations in years to come.
“Beyond economic recovery, we continue to address budget issues,” he said. “We emerge from the pandemic fiscal crisis with the same mindset of managing labor and operational costs and holding the line on spending. After reforms in 2012, we also continue to make headway on pension obligations, with about 70 percent of our pension obligations now funded.”
The auditor’s ranking dinged Torrance in almost every category and labeled it the fourth worst in the state.
The city is projecting an $8.5 million surplus this year and a small deficit by the end of the next, thanks to a boost of $24 million from the American Rescue Plan Act. City officials, however, are betting big on the passage of a 3/4-cent sales tax measure as a possible solution to their ongoing financial woes. The measure would generate $26.7 million annually, but its a long shot as voters have already shot down a similar proposal as recent as March 2020.
“This would have a direct impact on the areas covered in the state auditor’s report as the proposal has a plan to dedicate $6 million to fiscal sustainability,” City Manager Aram Chapryan said.
Cuts are expected in Torrance even if the measure passes, though to a much lesser degree than if it fails, so the city can begin rebuilding its diminished reserves.
The small Los Angeles County city of San Gabriel, known for its historic mission, landed as the second worst in the state. A spokesperson for the city, Jonathan Fu, provided a statement calling the auditor’s ranking “well-intentioned” but “not representative of the city’s financial condition.” The city implemented a financial recovery plan in 2018 that included new accountability standards and internal controls, according to the statement.
“Despite the ongoing financial impact of COVID-19, we are anticipating higher than projected revenue for our current fiscal year which will help bolster our financial health,” the statement reads. “This would mark the fourth year of our revenues outpacing our expenditures, which is essential for our recovery and long-term financial sustainability.”
West Covina improved slightly from last year’s ranking, moving from the ninth worst to the 12th worst. It was less than one point short of being labeled a “moderate risk” instead.
The state auditor’s office previously declared the city had a high risk for bankruptcy in a December 2020 audit. It had used reserves to prop itself up for years, draining its rainy day fund by $10 million in a four-year period. The report prompted internal reviews that were still ongoing as of May 2021.
Councilman Tony Wu expressed surprise that the city hadn’t moved further in the rankings, saying he believes there have been clear improvements. A recent budget indicated the city’s reserves have increased by about $8 million in the past two years.
“I would think we would be around 120th, not 12th,” he said. “But it’s a step-by-step increment, which means we are in the right direction.”
Montebello ranked seventh worst in the state and was criticized by the State Auditor’s Office in 2018 for having suffered from structural deficits for “much of the past decade.” City Manager Rene Bobadilla did not return a request for comment. The city broke its years-long deficit streak in 2020 with a balanced budget and is predicting a surplus by the fiscal year’s end in 2022.
The city’s saving grace came from a sales tax increase passed in 2020 that generated $7 million this year.
So how’s your city doing?
Southern California cities coded yellow, with moderate risk, are Gardena, Lynwood, San Fernando, Claremont, Monrovia, Long Beach, Fullerton, Montclair, Los Angeles, Redondo Beach, Downey, Pomona, San Bernardino, Vernon, El Monte, Riverside, Orange, Costa Mesa, Cathedral City, Bell Gardens, Lake Elsinore, Alhambra, Glendale, Carson, Palm Springs, El Segundo, La Habra, Santa Ana, Covina, Arcadia, Pasadena, Indio, Inglewood, Placentia, Huntington Beach, Newport Beach, Santa Monica, Bell, Westminster, Redlands, Brea, Ontario, Coachella, Hemet, Norwalk, Hermosa Beach, Garden Grove, Hawthorne, San Marino, La Verne, Buena Park, Manhattan Beach, Hesperia, Culver City, Rialto, Monterey Park and Commerce.
Cities coded green, for low risk, are San Clemente, Rolling Hills Estates, Tustin, Simi Valley, Perris, Colton, Upland, Avalon, Los Alamitos, Azusa, Big Bear Lake, Beverly HIlls, Cypress, South El Monte, Loma Linda, Santa Fe Springs, Whittier, Dana Point, Brentwood, Lancaster, Burbank, Banning, Mission Viejo, Fountain Valley, Yorba Linda, Agoura Hills, Laguna Hills, Signal Hill, La Palma, Calabasas, Beaumont, Moreno Valley, San Jacinto, Seal Beach, Lomita, Bellflower, Jurupa Valley, West Hollywood, Corona, Paramount, Laguna Beach, Laguna Niguel, Pico Rivera, Temecula , Fontana, Lakewood, Desert Hot Springs, San Juan Capistrano, Industry, Irvine, La Canada Flintridge, Hawaiian Gardens, Canyon Lake, Malibu, Lawndale, Norco, Temple City, Indian Wells, Cerritos, Palos Verdes Estates, San Dimas, Aliso Viejo, Irwindale, La Puente, Twentynine Palms, Westlake Village, Walnut, Murrieta, Rancho Santa Margarita, La Habra Heights, Chino Hills, Villa Park, Menifee, Rancho Palos Verdes, Palmdale, Diamond Bar, Santa Clarita, Palm Desert, La Mirada, Rancho Cucamonga, Yucca Valley, Rolling Hills, Hidden Hills, Lake Forest, La Quinta, Stanton, Laguna Woods and Rancho Mirage.
Staff writer Robert Morales contributed to this report.
Updated 8/23/2021 with comment from David Crane
