MOORLACH UPDATE — Measure It, Improve It — March 14, 2018

To borrow a now famous quote from management guru Peter Drucker (whom I had the pleasure to hear speak a couple of times): “If you can’t measure it, you can’t improve it.”

So, taking the “Governmental Activities” column from the Basic Financial Statements in the Comprehensive Annual Financial Report (CAFR) of our County’s cities and dividing one key number by the city’s population, we provide a metric for success. It has been a goal I focused on while serving as a County Supervisor. The higher the resulting metric, the better the status of the balance sheet. The lower, the more that fiscal improvements need to be pursued.

As the numbers are based on objective data from the audited financial statements and the city’s published population, we have a clean metric. Consequently, I’m not trying to be combative or confrontational, as the metric is a tool and nonemotional.

As my home city is in last place, it shows that this tool picks no favorites. But, it shows that city councils and citizens need to focus on improving their balance sheets. And this task is being faced by cities across the state, especially with defined benefit pension plan contribution rates rising.

Many cities are having the necessary tough discussions. The city of Escondido has had transparent meetings on addressing its current fiscal climate (see https://www.escondido.org/Data/Sites/1/media/PDFs/CalPERS/NewCalPERSPensionFundingWorkshop9.27.17.pdf and https://www.escondido.org/Data/Sites/1/media/PDFs/CalPERSUnfundedLiability/09.27.17SRUnfundedLiabilities.pdf). These discussions are becoming the norm.

The goal for this exercise: work together, find solutions at the state level, and get appropriate policies and strategies in place sooner than later, as waiting to take action will be the biggest mistake.

My editorial on this topic is provided in the OC Register and is the first piece below. A related press release on the overall analysis that you’ve been seeing in my UPDATEs of late is the second piece below.

Most Orange County city finances bleed red ink

By JOHN MOORLACH | Orange County Register

https://www.ocregister.com/2018/03/14/most-orange-county-city-finances-bleed-red-ink/

The Costa Mesa City Council will have to turn its Unrestricted Net Position number around, according to a financial report.

LEONARD ORTIZ — STAFF PHOTOGRAPHER

Kudos to the Orange County cities of Cypress, Tustin, Irvine and Laguna Beach for enjoying the most sound balance sheets among Orange County’s 34 cities.

But cautions go out to Costa Mesa, Brea, Newport Beach and Anaheim for scoring the worst, and possibly entering a fiscal danger zone.

My rankings are based on what’s called a Comprehensive Annual Financial Report. There is no central repository for these. But you should be able to read these CAFRs, as they’re called, on the finance pages of your city’s website, or call the city for a hard copy.

In each CAFR, specifically look for the “Basic Financial Statements,” starting with the page titled “Statement of Net Position.” Usually it’s somewhere around pages 15 to 30. Look at the top row for “Government Activities.” Then look down the column to where it says, first “Net Position,” then “Unrestricted.” That’s the number you want: the Unrestricted Net Position, or UNP.

It will be a positive number, or, if there are (brackets) around it, a negative number. Also notice if it says at the top “in thousands,” meaning you should add three more zeroes to the number.

The UNP number is the key because it is about purely governmental activities. It doesn’t include, for example, concessions from what are called “business-type activities,” such as operating vending machines at a library.

I divide the UNP by the city’s population to see where it falls within the range. This metric shows how much you, as a resident, are affected by city finances. If it’s a positive number, especially a high one, then all to the good. If it’s negative, then it’s time for you to get more involved with your elected council members.

Let’s look at an example on page 18 of the CAFR for Costa Mesa, for the fiscal year ending June 30, 2017. The UNP is a deficit of $161,805,274. If we divide that by the city’s population of 114,044, the per capita UNP equals ($1,419). This is the share for each resident (not household).

Just 19 of our 34 cities run positive per capita UNPs, while 25 cities run negative ones.

Such is the impact of unfunded actuarial accrued liabilities (UAAL) resulting from defined- benefit pension plans.

Here are the per capita UNPs for the top 10 cities:

1. Cypress: $1,805

2. Tustin: $1,754

3. Irvine: $1,624

4. Laguna Beach: $1,159

5. Laguna Niguel: $1,154

6. Lake Forest: $677

7. Dana Point: $668

8. Laguna Woods: $595

9. La Palma: $566

10. Aliso Viejo: $534

Now, if that per capita UNP is a negative number, then it’s a warning sign. And if it’s a high negative number, then your city is in critical fiscal condition.

Here are the 10 cities at the bottom of the list:

34. Costa Mesa: ($1,419)

33. Brea: ($1,312)

32. Newport Beach: ($1,269)

31. Anaheim: ($1,145)

30. Santa Ana: ($1,134)

29. Huntington Beach: ($1,128)

28. Fullerton: ($868)

27. Orange: ($738)

26. Fountain Valley: ($689)

By the way, the per capita net position for the County of Orange is ($963), which would rank it seventh from the bottom if it were a city. That’s what a $1.7 billion investment portfolio loss in 1994 from the county bankruptcy, caused former County Treasurer Bob Citron, a Democrat, can do to a balance sheet. Contracting out the Sheriff’s Department also adds to the county UAAL.

This is part of my project to track the per capita UNPs of all 482 California cities. You can follow that on my website: district37. cssrc.us (or: JohnMoorlach. wordpress.com). I will be updating the data every six months, the next time being in August.

High municipal debts, rising interest rates and a volatile stock market are warning signs. The cities at the bottom of my list need to wake up and get serious, and soon. For when the next downturn arrives, they may not be able to borrow from lending institutions or from the municipal bond market. It will not be pretty.

John Moorlach, R-Costa Mesa, a former Orange County treasurer-tax collector and supervisor, represents the 37th District in the California Senate.

Senator John Moorlach Ranks California’s

482 Cities for Financial Soundness

FOR IMMEDIATE RELEASE

March 14, 2018

***

Sacramento, CA – Which California cities are in financial distress and which are sound? Today State Sen. John Moorlach releases the first edition of his new report, “Senator John Moorlach Ranks California’s 482 Cities for Financial Soundness.”

The report examines the audited finances of the state’s 482 cities. Specifically, it looks at each city’s Comprehensive Annual Financial Report, and the per-capita share for a city’s Unrestricted Net Position, or UNP.

A negative UNP shows a city has fiscal concerns that city officials should be aware of. If they are not aware of the problem, this is a useful tool for the city residents to hold their elected officials accountable.

“Why the project?” Senator Moorlach asked. “Well, in the California Senate I carried some eight public employee pension reform measures in 2017 alone. And did the cities come to testify in support? No. And, are they now highly concerned about their predicament? Yes.”

Senator Moorlach plans to update the study every six months.

A copy of the study is available on Senator Moorlach’s website by clicking HERE.

If you would like to request an interview with Senator John Moorlach, please contact John Seiler at john.seiler or 714-662-6050.

About Senator John Moorlach (R-Costa Mesa):

State Senator John Moorlach represents the 37th district of California, is a trained Certified Financial Planner and is the only trained CPA in the California Senate. He gained national attention 23 years ago when he was appointed Orange County Treasurer-Tax Collector and helped the County recover from its bankruptcy filing – at the time the largest municipal bankruptcy in U.S. history. Follow him on Facebook & Twitter.

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