Several Los Angeles Cities in Dire Financial Straits

Three cities, Compton, San Gabriel and Motebello, were placed in the high risk category, according to the California State Auditor, while Torrance moved to the moderate risk zone. Several other cities ranked in the top 20 most at-risk.

Oct. 12, 2022 •

Clara Harter, Los Angeles Daily News

(TNS) — The state auditor’s office released its annual list of California’s most financially at risk cities and multiple L.A. County towns once again earned the undesirable honor of inclusion.

Top of the list for the fifth year in a row is the City of Compton. San Gabriel also remains in dire financial straits, but dropped from second place in Fiscal Year 2019-20 to third place for FY 2020-21. Montebello, on the other hand, saw its ranking worsen from seventh place to fifth.

All three cities were put in the high risk category, which is reserved for cities at “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.

The City of Torrance, another regular on the risk list, showed a slight improvement by dropping 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 footing and went from 33rd on the list to 12th. Montebello, West Covina and Los Angeles also ranked in 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, pension funds and obligations, and post-employment benefit funds and obligations.

The rankings are not a reflection of where the cities’ finances currently stand, but rather a snapshot of financial health based on an analysis of the prior fiscal year’s audited financial statements – which, in the case of this year’s report, is FY 2020-21.

The City of Compton has yet to turn in its statements for FY 2020-21, and because it has a history of not preparing them, it was given a high risk designation in every category, according to the auditor. The auditor’s office will be releasing an independent report and analysis of Compton’s finances on Thursday, Oct. 13.

One commonality among every L.A. County city that made the top twenty is significant pension obligations. Each of these cities received a “high risk” ranking in this category – with the sole exception of Los Angeles, which received a “moderate risk” ranking. The cities all also struggled with their general fund reserves and post-employment benefit funds, ranking as either “high risk” or “moderate risk” in these categories.

San Gabriel

A spokesperson for 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 from the most recent fiscal year that ended this past 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 reserves goal of 17 percent.

Also, the spokesperson said that in May 2019 San Gabriel implemented a fiscal sustainability policy to recover from the negative unrestricted reserves position, and that it has generated a positive net change in fund balance for four consecutive years, in spite of the COVID-19 environment.

The city received “low risk” rankings for both its debt burden and its revenue trends, reflecting positive results of some of these actions.

Nevertheless, its score was dinged heavily for 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 FY 2020-21. The city’s -$577,433 in general fund unrestricted fund balances also contributed its poor ranking as did its a “high risk” liquidity ranking.

Montebello

The city was ranked fifth in the state because of insufficient general fund reserve, high debt, and has only enough cash and investments to cover 55 percent of its unpaid bills at year end.

But City Manager Rene Bobadilla, in an emailed statement said he strongly disputes and disagrees with both the state auditor’s methodology and calculations that generate their ratings.

“More specifically: the information the state uses for its liquidity calculation is limited to general fund cash on hand as of June 30,2021,” Bobadilla said. “Montebello has more than ample cash on hand at any given time, and liquidity is not an issue for us.”

With regard to general fund reserves, Bobadilla said this has been an area of weakness due to previous management decision making and historically poor financial planning. This is an area Montebello is committed to improving, he added.

The city has had problems dating back to the 2010s when has only enough cash and investments to cover 55 percent of its unpaid bills at year end.

A December 2018 state audit said the city was on unsure financial footing as a result of running a golf course, hotels and a water system — all of which may need subsidizing — while relying too heavily on one-time sources of money and a lack of competitive bidding.

Still, the city has had balanced Montebello budgets the last two years.

Torrance

The City of Torrance met the annual report with an optimistic outlook, celebrating its downgrade to the moderate risk category and predicting 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 dwindled down to just $600,000 during the pandemic – and its extremely high pension obligations, Torrance Finance Director Sheila Poisson has said.

Since then the city has taken several steps to improve its finances.

In June voters passed Measure SST, a half cent sales tax increase that went into effect Oct. 1 and is predicted to raise $18 million in revenue annually. The City also made $19.8 million worth of permanent budget cuts in the general fund, reflecting a 11.5 percent decrease. It received around $24 million in federal pandemic assistance in fiscal years 2020 and 2021 combined.

The city took steps to alleviate its extremely high pension obligations by issuing lease revenue bonds to make a $349.5 payment to CalPERS in October 2020. Poisson predicts the refinancing of pension liabilities will improve the city’s standing in next year’s California Auditor Report as, due to a normal one-year reporting 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 hotel occupancy tax is on track to do the same by the end of the year, Poisson has said. The rate of rebound is partially due to pent up demand and likely not sustainable in the long-term, she added.

“The city will continue to build up its reserves and pay down pension obligations,” said City Manager Aram Chaparyan in a written statement. “These strategic efforts will improve our financial standings even more next year to keep Torrance moving forward.”

Reserves are estimated to be at $45.5 million as of 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 the $349.5 lease revenue bonds, and the water fund has a $4.6 million debt balance, Poisson has said.

Redondo Beach

With its ranking of 12th on the risk list, Redondo Beach fared much more poorly than its neighboring beach cities – Manhattan Beach came in at number 68 and Hermosa Beach at 163.

However, Redondo Beach City Manager Mike Witzansky said Tuesday that he’s “not overly concerned with these metrics,” and expects the city’s ranking to improve dramatically in next year’s report which will reflect the city’s fall 2021 pension debt refinancing, as pension debts make up much of the report’s factors.

The city refinanced its pension bonds from a 7 percent to 2.8 percent interest rate, Witzansky said, which will save the city more than $100 million in pension costs over roughly the next 25 years.

A decline in travel when COVID was still peaking also affected the city’s funds, he added.

“For us, 2021, given COVID was likely even tougher compared to our peers because we have so much transient occupancy tax revenue that was decimated” by the pandemic, Witzansky said.

Redondo also last year got an AA credit rating, Witzansky said, or measure of its financial stability, out of a total possible AAA.

The top 30 “at risk” city rankings in the state auditor’s rankings: