Several LA County towns – including Montebello – on brink of financial distress, state auditor says – Whittier Daily News
The State Auditor’s Office has released its annual list of California’s most financially at-risk cities, and several LA County cities have once again earned the unwanted honor of being included.
Topping the list for the fifth consecutive year is the city of Compton. San Gabriel also remains in dire financial straits, but fell from second place in the 2019-20 fiscal year to third place in the 2020-21 fiscal year. Montebello, on the other hand, saw its ranking deteriorate, falling from seventh to fifth place.
All three cities were placed in the high-risk category, which is reserved for cities at “high risk of waste, fraud, abuse or mismanagement, or which have major challenges associated with their economy, efficiency or their effectiveness,” according to the California State Auditor.
The city of Torrance, another regular on the risk list, showed slight improvement as it moved from position four to position six and moving from the high-risk category to the moderate-risk zone. The city of Redondo Beach stumbled in its financial situation and fell from 33rd on the list to 12th. Montebello, West Covina and Los Angeles also made it into the top 20 most at-risk cities.
The annual report was launched in 2019 and calculates financial risk scores for 482 cities based on a number of factors, including reserves, debt burden, liquidity, revenue trends, funds and pension obligations, and post-employment benefit funds and obligations.
The ranking does not reflect the current state of the cities’ finances, but rather an overview of financial health based on an analysis of audited financial statements from the previous fiscal year – which, in the case of this year’s report, is the financial year 2020-21.
The city of Compton has not yet released its returns for the 2020-21 fiscal year, and because it has a history of not preparing them, it has received a high-risk designation in each category, according to the listener. The Auditor’s Office will release an independent report and analysis of Compton’s finances on Thursday, October 13.
One of the commonalities between all of the cities in Los Angeles County that make the top twenty is the importance of retirement obligations. Each of these cities received a “high risk” rating in this category – with the sole exception of Los Angeles, which received a “moderate risk” rating. The cities all also struggled with their general fund reserves and post-employment benefit funds, ranking as either “high risk” or “moderate risk” in those categories.
A spokesperson for the city of San Gabriel said in a written statement that this year’s ranking does not accurately represent the city’s current finances.
Preliminary results for the last fiscal year that ended June 30 indicate that for the first time since June 30, 2015, the city will end the year with $9.5 million in reserves, exceeding the reserve target by 17%.
In addition, the spokesperson stated that in May 2019, San Gabriel implemented a fiscal sustainability policy to recover from the negative unlimited reserves position, and that it generated a positive net change in the balance of the funds for four consecutive years, despite the COVID-19 environment. .
The city received a “low risk” rating for its debt and revenue trends, reflecting the positive results of some of these actions.
Nonetheless, his score was heavily impacted by the city’s exorbitant pension obligations. According to the state auditor’s report, San Gabriel had a net pension liability of $75,697,699 in the 2020-21 fiscal year. The city’s -$577,433 in unrestricted general fund balances also contributed to its poor ranking, as did its “high risk” liquidity ranking.
The city was ranked fifth in the state due to an insufficient general fund reserve, high debt, and only has enough cash and investments to cover 55% of its outstanding bills at the end of the year. ‘year.
But City Manager Rene Bobadilla, in an emailed statement, said he strongly disputes and disagrees with the state auditor’s methodology and the calculations that generate their ratings.
“Specifically: The information the state uses for its liquidity calculation is limited to the general fund cash as of June 30, 2021,” Bobadilla said. “Montebello has more than enough liquidity at all times, and liquidity is not an issue for us.”
Regarding general fund reserves, Bobadilla said this was an area of weakness due to past management decision-making and historically poor financial planning. This is an area that Montebello is committed to improving, he added.
The city has had issues dating back to the 2010s when it only has enough cash and investments to cover 55% of its outstanding bills by the end of the year.
A December 2018 state audit found the city was on an uncertain financial footing due to running a golf course, hotels and a water system – all of which could require grants – while relying too heavily on ad hoc sources of money and a lack of competitive bidding.
Still, the city has had balanced Montebello budgets for the past two years.
The city of Torrance greeted the annual report with an optimistic outlook, celebrating its demotion to the moderate-risk category and anticipating further improvement in its ranking next year.
Torrance’s high-risk ranking in last year’s report was primarily due to its very low reserves – which plummeted to just $600,000 during the pandemic – and extremely high pension obligations, the chief financial officer said. of Torrance, Sheila Fish.
Since then, the city has taken several steps to improve its finances.
In June, voters passed the SST measure, a half-cent sales tax hike that took effect Oct. 1 and is expected to generate $18 million in revenue a year. The City has also implemented permanent budget cuts worth $19.8 million in the general fund, which represents a reduction of 11.5%. It received about $24 million in federal pandemic assistance in fiscal years 2020 and 2021 combined.
The city took steps to ease its extremely high pension obligations by issuing rental income bonds to make a $349.5 payment to CalPERS in October 2020. Poisson predicts that refinancing the pension liabilities will improve the position of the city in next year’s California Auditor’s report because, due to a normal one-year lag by CalPERS, they are not reflected in this year’s report.
The city’s revenue streams are also rebounding. Sales tax revenue has surpassed pre-pandemic levels and the hotel occupancy tax is on track to do the same by the end of the year, Poisson said. The rebound rate is partly due to pent-up demand and is unlikely to be sustainable in the long term, she added.
“The city will continue to build its reserves and repay its pension obligations,” City Manager Aram Chaparyan said in a written statement. “These strategic efforts will further improve our financial position next year to enable Torrance to move forward.”
Reserves are estimated at $45.5 million at the end of June, based on unaudited year-end results. The city’s debt burden remains significant with a general fund balance of $407 million, most of which comes from rental income obligations of $349.5, and the water fund has a balance of debt of $4.6 million, Poisson said.
With its ranking of 12th on the risk list, Redondo Beach fared much worse than its neighboring beach towns – Manhattan Beach came in at number 68 and Hermosa Beach at 163.
However, Redondo Beach City Manager Mike Witzansky said Tuesday he was “not overly concerned about these measures” and expects the city’s ranking to improve significantly in the report. next year, which will reflect the refinancing of the city’s pension debt in the fall of 2021, as pension debt accounts for many of the factors in the report.
The city has refinanced its pension bonds from an interest rate of 7% to 2.8%, Witzansky said, which will save the city more than $100 million in pension costs over the next few years. next 25 years or so.
A drop in travel while COVID was still at its peak also affected city funds, he added.
“For us, 2021, given that COVID was probably even tougher compared to our peers, because we have so much transient occupancy tax revenue that has been decimated” by the pandemic, Witzansky said.
Redondo also earned a AA-plus credit rating last year, Witzansky said, or a measure of its financial stability, out of a possible AAA total.
The ranking of the 30 cities most “at risk” in the ranking of the State Auditor:
- Compton (0 out of 100 points)
- Calexic (33.03 out of 100 points)
- San Gabriel (33.54 out of 100 points)
- Lindsay (36.68 out of 100 points)
- Montebello (41.51 out of 100 points)
- Torrance (42.49 out of 100 points)
- Susanville (42.7 out of 100 points)
- Oxnard (44.34 out of 100 points)
- Blythe (44.46 out of 100 points)
- Richmond (45.09 out of 100 points)
- Oakland (45.44 out of 100 points)
- Redondo Beach (46.34 out of 100 points)
- El Cerrito (47.29 out of 100 points)
- West Covina (47.35 out of 100 points)
- Fullerton (47.91 points out of 100)
- Los Angeles (49.02 out of 100 points)
- San Diego (49.21 out of 100 points)
- San Rafael (49.93 out of 100 points)
- Anaheim (50.51 points out of 100)
- San Jose (50.55 out of 100 points)
- Auburn (50.91 out of 100 points)
- Pomona (51.47 out of 100 points)
- Petaluma (51.81 out of 100 points)
- Chinos (51.83 out of 100 points)
- Eureka (51.83 out of 100 points)
- Costa Mesa (51.97 out of 100 points)
- Lynwood (52.6 out of 100 points)
- Willows (52.74 out of 100 points)
- Yuba City (52.79 out of 100 points)
- Atwater (52.81 points out of 100)
Editors Robert Morales, Mike Sprague and Tyler Shaun Evains contributed to this report.