Is your Orange County city at risk of financial meltdown?

Here’s a riddle wrapped in a mystery inside an enigma: How does a little city teetering on the brink of financial doom transform into one of the most fiscally sound in the state, all within the span of a single decade?

Ding ding ding! If you guessed it might have something to do with raising taxes, you’d be right.

Before we examine the Saga of Stanton, let’s get the view from 30,000 feet on the fiscal health of Orange County’s 34 cities (and apologize to Winston Churchill’s memory for stealing the opening line). None of O.C.’s cities — not a one! — is in such dire financial straits that it’s forced to wear the state auditor’s Scarlet Letter of Shame denoting “high risk of financial meltdown.”  Things are better than last year, when Anaheim was red, and better than our red-spackled pals in Los Angeles, not to be smug or anything.

But — and there’s always a but, isn’t there? — 11 of O.C.’s cities are perhaps too close for comfort. They’re the yellow Proceed With Caution cities, offering “moderate risk” to their residents. Main culprit? All that money they’ve promised public service workers (mainly cops and firefighters) for retirements, which they haven’t quite saved up yet. Annual revenues are also trending down for several cities, which is troubling, since expenses are pretty firmly heading in the opposite direction.

The vast majority of O.C. cities, though — 23! — are firmly Go-Go Green for the lower financial risk they pose to their residents.

Some rest easier because they’re younger, “contract cities” that don’t have their own (very expensive) police and fire departments (and the expensive pension obligations that come with them), instead hiring the Sheriff’s Department or Fire Authority to provide emergency services (which allows cities to share cost burdens).

Some got greener by hiking taxes and fees, as well and paying down pension debt and setting aside money to cover the health benefits they’ve promised retirees. And all that federal stimulus money certainly didn’t hurt.

Now look. We’ve spent a gazillion hours poring over audited financial statements to do this kind of analysis for you dear readers in the years before there was an auditor’s high-risk data dashboard. We’re not ashamed to admit that it’s one of our favorite new toys, and we encourage you to play with it, too. But not everyone shares our enthusiasm: The League of California Cities has quarreled with the auditor’s approach, saying it doesn’t provide necessary context or analysis to make the information useful, and that it lags behind current conditions because it uses audited financial statements (which are usually a year behind). We’re a big fan of audited financial statements, however; they’re the most reliable window into a government’s true finances because they sum up what has actually happened, and include long-term debt. Annual budgets are essentially estimates that remain in flux until the fiscal year ends, and don’t give you a picture of the city’s obligations over time.

“Local governments have the most direct impact on our daily lives, so it’s critical that they have their finances in order,” the auditor’s primer on the dashboard explains. “When they don’t, essential services are at risk of being downsized. … Understanding the financial situation and the factors that impact it allows city officials to tackle challenges and leverage their successes. And you can use that same information to advocate for your community and hold city officials accountable.”

So how’s your city doing?

Yellow: Moderate risk

Of these 10 moderate-risk cities, the most exposed was Fullerton, ranking No.15 (when No. 1 means “PANTS ON FIRE FINANCIAL MESS”) out of more than 400 cities statewide. This is not a list you want to rank high on.

Anaheim wasn’t far behind Fullerton, clocking in at No. 19, but at least it’s not red; followed by Costa Mesa at 26; Orange, 62; Newport Beach, 90; La Habra, 94; Huntington Beach, 95; Placentia, 102; Westminster, 104; Santa Ana, 115; and Brea, 144.

“Moderate” sounds sort of nice, but while these cities emerged with an overall moderate risk rank, many hit pants-on-fire-red in several individual categories, so residents should pay attention.

Fullerton, for example, faces general fund reserve issues (“This city may have insufficient reserves to cover its expenses in the event of a fiscal emergency, such as an economic recession. It has saved enough funds to cover about 2 months of expenses, and its reserves have been declining, on average, by 10 percent annually”) as well as revenue trends (“Rather than increasing, this city’s revenues have remained flat over the last few years. This may constrain the city’s ability to respond to economic changes and pay rising costs of services”). Several pension-related funding categories and funding for retiree health benefits are also areas of concern (The city’s plan has enough assets to fund 0% of employees’ costs).

Anaheim, while celebrating a move off the Scarlet Red list, hits pants-on-fire-red for its debt burden (“This city’s long-term debts equate to 177 percent of the city’s total government revenues, which may be too high for the city to pay back its debts without significant financial strain. In order to be low risk for debt burden, a city’s debt should ideally not exceed 40 percent of total government revenue”), revenue trends (“Rather than increasing, this city’s general fund revenues have decreased, on average, by 8 percent over the last few years. This may constrain the city’s ability to respond to economic changes and pay rising costs of services”), the burden of future pension costs as well as retiree health benefits (though it has more socked away here than Fullerton, at 38%).

Costa Mesa also struggled with downward revenue trends, which dropped by about 1 percent a year over the past few years, as well as the burden posed by pension costs. For Orange, Newport Beach, Placentia, Westminster, Santa Ana and Brea, the red was all about pension and retiree health costs. Pensions were an issue in Huntington Beach as well, though its retiree health benefits are well-covered.

But the revenue situation is looking up this year, Costa Mesa said, with sales taxes surpassing pre-pandemic levels and hitting the highest level ever at the close of Fiscal Year 2022 in June (about $77.3 million). General fund reserves also increased despite the pandemic, and at 33% of general fund revenue far exceed the “industry baseline of 10%,” said finance director Carol Molina.

Newport Beach said it’s “committed to an aggressive payment schedule” to eliminate its pension debt by 2030, which will ease the burden on future city budgets. In 2018, the city council decided to increase annual payments to at least $35 million a year, $9 million more than required, and has since raised the annual payment to $40 million. “We believe that Newport Beach is in a strong financial position relative to many other cities and public agencies,” a statement from the city said.

One of the most financially fragile cities in the county has long been little Placentia, which is “pleased and optimistic” about how things are going. A new 1% sales tax hike in 2019 is providing millions for “much-needed investments in infrastructure and staff retention” (consider this foreshadowing on the Stanton saga). Also helping: Economic development projects like a new Marriott hotel, Audi dealership, retail center redevelopment, residential housing developments that bolster property and sales tax revenues, pay-down of pension debt. A general fund reserve policy — aiming to provide a stable revenue structure — has “blown past” its initial goal of 25%, and is now at 42%, a statement from the city said.

Santa Ana, too, is pleased that its score has been steadily improving each year, with half of the categories now green. “We have a strong reserve fund, a low debt burden and have increased our revenue through our diversified business base and new revenue sources such as legal recreational cannabis,” a statement said. “Our public safety pension costs are relatively high due to our public safety retirement formula, but our new …formulas are much more affordable in the long term. To improve our financial outlook, last year we refinanced our pension debt at a lesser interest rate, which is projected to save $138 million in the long run.”

Reminder: Retirement formulas were sweetened by your elected officials back when the stock market was roaring some 20 years ago. Officials were told that stellar returns on investments would cover the increased costs and everyone would be happy. Unfortunately, that was, how shall we say, dead wrong.

Go-go green

These Go-Go Green folks are doing better at book-balancing and debt management than their brethren. The 24 cities in this group, going from best to less-best (remember, higher numbers are better), are:

The aforementioned Stanton, clocking in at No. 419 statewide; Laguna Woods, 413; Lake Forest, 403; Laguna Niguel, 367; Rancho Santa Margarita, 360; Aliso Viejo, 336; Yorba Linda, 330; San Juan Capistrano, 327; La Palma, 301; Dana Point, 279; Tustin, 278; Mission Viejo, 273; Villa Park, 272; Laguna Beach, 268; Irvine, 255; Fountain Valley, 240; Laguna Hills, 238; Seal Beach, 237; Buena Park, 227; Garden Grove, 218; Cypress, 217; Los Alamitos, 213; and San Clemente, 175.

Note that more than half of them are those newer, “contract” cities. But don’t pop the champagne just yet: There are still concerns, even in green-land.

Downward revenue trends have earned red ratings for Laguna Woods, Lake Forest, Rancho Santa Margarita, Aliso Viejo, San Juan Capistrano, Irvine and Cypress. And many of these green folks still face serious issues with looming pension obligations, as well as retiree benefits they’ve promised but have been largely ignoring.

Garden Grove had the distinction of advancing from yellow to green this year, as its revenues have increased some 11% a year over the last few years. “Substantial growth in general fund revenues gives the city greater flexibility to respond to economic changes and pay rising costs of services,” the auditor says.

But the morality tale here is Stanton.

“Park closed due to budget cuts,” said the sign on the chain link fence around Hollenbeck Park back in 2012. “No trespassing allowed.”

Stanton teetered on the brink of bankruptcy. There was the Great Recession, of course. And the governor had nixed redevelopment agencies, which erased some taxes it used to keep. There was also, according to some critics, an extremely ill-timed purchase of land for a big park, not to mention those escalating pension costs.

The city declared a fiscal emergency, warning residents that, without an additional $1.2 million, it would tank. City Hall’s electronic sign flashed “FISCAL EMERGENCY.” Officials tried to sell folks on utility tax hike (only 10 O.C. cities have such a tax, we’ll note here), but it was soundly rejected. Parks closed. Workers lost jobs.

In 2014, the city tried again. This time, it was a 1-cent sales tax. It passed. In 2019, the hotel bed tax was hiked.

Some criticized the city for not reducing expenses rather than raising taxes, but it clearly worked. The amount Stanton collects in sales and use taxes has more than doubled, from $3.6 million in 2012 to $8.7 million in 2020, according to its own figures. Property taxes shot up tremendously as well, from $1.3 million to $6.6 million. As did revenue from fees and permits, and other taxes.

All told, Stanton’s revenue went from $13.9 million to $22.7 million. That’s an increase of 63% (over a span of time where inflation rose 29%). And that, folks, is one way to get from the brink of bankruptcy to go-go green.

Source: Orange County Register