MOORLACH UPDATE — Local Debts Versus State Surplus — July 29, 2019

With the requirement by the Government Accounting Standards Board to include the unfunded actuarial accrued liability for retiree medical for the fiscal year ended June 30, 2018, many municipalities have been slow to release their annual outside independent audits, as they have been waiting for actuarial reports. Although we’re still waiting for a number of Comprehensive Annual Financial Reports (CAFRs) from several of California’s 482 cities, we do have them from all 34 of Orange County’s cities. For states, I’m still waiting for Illinois. For California’s counties, it’s Modoc.

Some cities started recognizing this unfunded liability a year or so earlier than this year’s deadline. Most have reflected information in the disclosures and footnotes accompanying their annual audited financial statements. Unfortunately, amounts that should be on the balance sheet, but are not, can be difficult to understand for a layperson when reviewing a one-inch thick financial report.

The metric I’ve been using over the years is very simple. Take the Unrestricted Net Assets or Unrestricted Net Deficit from the Basic Financial Statements for Governmental Activities and divide that number by the population of the municipality. The populations are provided by census data and other sources.

I’ve already provided the 2018 rankings for California’s Community College Districts (see MOORLACH UPDATE — Recognizing Movement — June 7, 2019). Since there was so much movement in the college rankings, I included the number of positions, up or down, each District had moved.

I’ve done the same for Orange County’s cities in Table 1 below.

There is movement in the listing, but the top 16 cities are still the top 16 cities, and the bottom 11 cities are still the bottom 11 cities. In the middle of the pack, the city of Los Alamitos made a significant improvement in the standings, moving from 22 to 17.

Due to the now-required inclusion of the retiree medical liability, Table 2 provides the change, year-over-year, of the approximate journal entry that had to be made. This is shown in the first column. I have ranked the 34 cities in the order of the magnitude of the added liability to each balance sheet.

The cities of Mission Viejo and Stanton overfunded their retiree medical commitment and show them as assets. Four cities actually had net increases in their funding toward the retiree medical liability in the past year (new actuarial costs less funds set aside). One city has shown no liability in 2017 or 2018 for its Other Post Employment Benefit (OPEB).

The legacy cities, those either incorporated for some time and/or having both their own police and fire departments, have had to reflect sizable liabilities. In fact, combined, Orange County’s cities have added nearly a half-billion dollars of debts to their balance sheets this past year just for OPEBs.

The year-over-year change in the combined Unrestricted Net Deficit for Orange County’s 34 cities has risen $631 million in the last year. This is reflected in the second column of Table 2. Consequently, overall the retiree medical liability inclusion of $469 million represents three-quarters of the cumulative negative growth of net assets in Orange County.

We should be thankful, as the Los Angeles Unified School District had to add $15 billion to its liabilities, making for a dismal balance sheet (see MOORLACH UPDATE — $15 Billion Obligation — December 27, 2018).

Every city has a different story. A dozen cities have improved their Unrestricted Net Position in the last year, in spite of the retiree medical recognition. Using the city of Anaheim as an example, the retiree medical was the major cause of its Unrestricted Net Deficit increase.

The data are from the Comprehensive Annual Financial Reports for June 30, 2018 and June 30, 2017, provided on each city’s websites. The data provide an objective metric, from audited financial statements, to see what the range is and where city leadership can pursue improvements.

California’s Governor has enjoyed spreading around a $21.5 billion “surplus,” yet California’s cities have not enjoyed the same personal income tax largess. Cities rely mostly on property and sales tax revenues, which have not seen the same growth as the state’s income tax revenues. Moreover, the state has not seen fit to spread much of the wealth with its counties, cities and school districts. You can understand why cities have been putting sales tax rate increases on their local ballots (see MOORLACH CAMPAIGN UPDATE — OC Ballot Measures — October 17, 2018).

Finally, if the state’s tax appetite were not enough, it is still raising taxes, mostly on basic necessities, like cellphone lines. This will mean less disposable income for residents to purchase items subject to sales tax or to move up into a larger home as the property tax increase will be too costly. This will not be a good trend for Sacramento’s subsidiary municipalities and the OC Register provides a dialogue on the subject in the column provided in Sunday’s Commentary section below. It sets the table for the provision of the local data provided directly below.

Table 1

Rank June 30,2018 Per Capita Rank June 30, 2017 Per Capita Change
1 Tustin $1,835 1 Cypress $1,805 1
2 Irvine $1,601 2 Tustin $1,754 1
3 Laguna Beach $1,540 3 Irvine $1,624 1
4 Cypress $1,517 4 Laguna Beach $1,159 -3
5 Laguna Niguel $1,035 5 Laguna Niguel $1,154 0
6 Dana Point $733 6 Lake Forest $677 1
7 Lake Forest $698 7 Dana Point $668 -1
8 Laguna Woods $599 8 Laguna Woods $595 0
9 Aliso Viejo $564 9 La Palma $566 1
10 Villa Park $491 10 Aliso Viejo $534 2
11 La Palma $481 11 Yorba Linda $423 -2
12 Yorba Linda $447 12 Villa Park $421 -1
13 San Clemente $361 13 San Clemente $350 0
14 Rancho Santa Margarita $353 14 Stanton $321 1
15 Stanton $330 15 Rancho Santa Margarita $287 -1
16 Mission Viejo $181 16 Mission Viejo $211 0
17 Los Alamitos $120 17 Laguna Hills $105 5
18 Laguna Hills $93 18 Seal Beach $83 -1
19 San Juan Capistrano ($165) 19 San Juan Capistrano ($6) 0
20 Seal Beach ($189) 20 Buena Park ($348) -2
21 La Habra ($584) 21 La Habra ($446) 0
22 Garden Grove ($631) 22 Los Alamitos ($487) 1
23 Buena Park ($697) 23 Garden Grove ($491) -3
24 Placentia ($987) 24 Westminster ($565) 1
25 Orange ($1,051) 25 Placentia ($583) 2
26 Westminster ($1,068) 26 Fountain Valley ($689) -2
27 Fullerton ($1,179) 27 Orange ($738) 1
28 Huntington Beach ($1,256) 28 Fullerton ($868) 1
29 Fountain Valley ($1,288) 29 Huntington Beach ($1,128) -3
30 Newport Beach ($1,374) 30 Santa Ana ($1,134) 2
31 Santa Ana ($1,482) 31 Anaheim ($1,145) -1
32 Anaheim ($1,545) 32 Newport Beach ($1,269) -1
33 Brea ($1,740) 33 Brea ($1,312) 0
34 Costa Mesa ($1,949) 34 Costa Mesa ($1,419) 0

Table 2

Rank City Retiree Medical
Change YoY
Change YoY
1 Mission Viejo $809,563 ($2,946,000)
2 Laguna Niguel $348,661 ($224,000)
3 Stanton $232,215 $295,000
4 San Juan Capistrano $53,741 ($3,741,000)
5 Laguna Hills $0 ($359,000)
6 Laguna Woods ($12,092) $233,000
7 Aliso Viejo ($40,354) $2,429,000
8 Villa Park ($92,999) $237,000
9 Lake Forest ($194,027) $1,731,000
10 Rancho Santa Margarita ($422,899) $3,467,000
11 San Clemente ($975,558) $545,000
12 La Palma ($1,055,124) ($1,379,000)
13 Dana Point ($1,203,785) $1,876,000
14 Laguna Beach ($1,598,059) $816,000
15 La Habra ($3,094,000) ($5,056,000)
16 Los Alamitos ($3,710,480) ($4,962,000)
17 Cypress ($4,717,348) ($13,847,000)
18 Irvine ($4,933,000) $8,499,000
19 Tustin ($5,159,284) $6,676,000
20 Seal Beach ($5,662,789) ($7,134,000)
21 Buena Park ($5,782,282) ($29,346,000)
22 Huntington Beach ($7,866,000) $8,346,000
23 Garden Grove ($10,175,285) ($24,906,000)
24 Orange ($13,681,913) ($45,286,000)
25 Fullerton ($14,200,984) ($46,475,000)
26 Brea ($15,759,208) ($20,953,000)
27 Yorba Linda ($17,460,790) ($27,933,000)
28 Placentia ($22,847,375) ($19,309,000)
29 Newport Beach ($24,201,323) ($12,043,000)
30 Fountain Valley ($31,602,037) ($34,231,000)
31 Westminster ($39,487,411) ($48,050,000)
32 Santa Ana ($47,157,171) ($114,372,000)
33 Costa Mesa ($49,152,118) ($62,853,000)
34 Anaheim ($138,177,000) ($140,994,000)
   Total ($468,978,515) ($631,249,000)


Surpluses distract from big debts


During a recent meeting with allied organizations concerned about California’s high taxes, the question on everyone’s mind was: why do our political adversaries continue to push for even more taxes given that the state has a huge budget surplus? Also, how much excess revenue is there?

But like most questions involving public policy – and particularly those related to fiscal issues – the question quickly begot more questions. For example, what’s the difference between a surplus and a reserve? Also, should we look at just the general fund or should we expand the inquiry to special funds as well?

If one includes reserves from special funds and adds them to the generally accepted figure of the surplus, the answer is stunning. General fund reserves exceed $20 billion and special fund reserves exceed $16 billion. In short, California is sitting on over $36 billion. This doesn’t even include the billions kept in reserve by local governments.

So with all this good news, why do the state and local governments continue to press for ever higher taxes? The answer — which they prefer to conceal from the taxpaying public — is that they know that the bill will soon be due for all the accumulated government debt.

A large budget surplus provides a grossly incomplete picture of the fiscal health of a state, city or county. A budget is more like an income statement. The revenues exceeding expenditures in any given year do not reflect liabilities in the way that a balance sheet would. For example, if a family sees an increase in take-home pay because mom or dad got a raise, that obviously has a positive effect on the family budget. But if they are still losing ground every month because of a big mortgage that they can’t afford, one can’t conclude that the family is financially stable.

Public debt is the dark cloud hanging over all levels of government. At the national level, the economy is booming, unemployment is at record lows and the stock market seems to hit new highs on a daily basis. But few people are talking about the national debt. The Obama administration added more than $10 trillion to the national debt and, regrettably, the Trump administration is on a pace to match it. In the hyper-partisan environment that is Washington, where Republicans and Democrats disagree on just about everything, it is troubling that both parties have quietly agreed to increase the national debt limit while increasing spending.

The problem for California is that, unlike the federal government, it can’t print money. One estimate of total government debt for California exceeds a trillion dollars. Even if that estimate is at the high end, there is no disputing that, sooner or later, we will have to satisfy all the legally binding promises our political leaders have made to various interests. This includes all bond holders and, of course, all the public employee retirees who are the beneficiaries of some of the most generous pension plans in the nation.

If there is a silver lining to this story it is that some political leaders and pundits are shining a brighter light on the debt issue. Even former Gov. Jerry Brown was able to secure some minor pension reforms, and a recent court ruling opened the door to further reforms. Sen. John Moorlach, R-Costa Mesa, the CPA who blew the whistle on Orange County’s pending bankruptcy more than a decade ago, has exposed the dangerous path that the state and local governments are on and is receiving well-deserved recognition for his work. Finally, new accounting rules promulgated by the Government Accounting Standards Board (GASB) have made it easier for the media and citizen activists to determining the true financial health of their local communities.

The upshot of all this is that there needs to be greater focus on managing debt because as good as budget surpluses may appear, they will disappear in a heartbeat when — not if — we have a severe recession.


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