California’s Most Financially Stressed Cities and Counties

Introduction:  Due to the healthy response generated by this study, and justifiable expressions of concern by many whose cities we found to be financially stressed, we would like to state that the rankings developed herein are based on information contained in 2013 financial statements, that is, financial statements for the fiscal year ended June 30, 2013. Therefore the data we used is nearly 18 months old. In a few cases, we couldn’t find 6-30-2013 financial statements and had to rely on 6-30-2012 financial statements. Therefore it is important to emphasize the rankings we have produced are based on the financial condition of California cities then, not now. It is possible that many of these cities have improved their financial condition. If we were able to assess the financial health of California’s cities as of 6-30-2014, these rankings would inevitably have changed.

It is also important to acknowledge that any attempt to rank the financial health of a city, or any financial entity, will rely on criteria and formulas that are debatable. How much emphasis to place on historical performance, debt, unfunded liabilities, cash flow, general fund balance, budget deficits vs surpluses, interest and pension expense, and a host of other relevant data will cause differing results. Nonetheless we believe the rankings we have come up with, based on the information we had to work with, would not have been substantially different if we had used alternative but credible systems of analyses.

If there is anything factually inaccurate in this study, pending review by our lead authors, we will insert a corrective note into the text of this study where the inaccuracy appears. If an official representing any of the cities that have come up high on the list of financially distressed cities wishes to post a rebuttal to our findings, even if it refers to activities that occurred after the period we analyzed, they are welcome to post them in the comments section of this study. It was impossible for us to contact every city in California when preparing this study, for obvious reasons. But our goal is not to issue these findings and stifle any subsequent dialogue, quite the contrary. 
Ed Ring  –  November 11, 2014

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Over two years have passed since the cities of Mammoth Lakes, San Bernardino and Stockton filed for municipal bankruptcy. While this quiet period reminds us that municipal insolvency is a rare event, some cities and counties are more vulnerable than others. If the economy enters another recession, some of these at-risk municipalities could be compelled to enter bankruptcy.  And even without an economic downturn, these distressed municipalities will be challenged to provide adequate services, avoid tax increases, pay vendors on time and continue operating without imposing unpaid furloughs on their workers.

Working with Civic Partner, a firm that collects and analyzes municipal finance data, the California Policy Center has ranked over 490 California cities and counties with respect to their bankruptcy risk. This report contains the complete list as well as brief reports on the most vulnerable local governments.

To compile the ranking, we collected and analyzed audited financial statements published by approximately most cities and counties in California. Local governments typically produce audited financial statements if they issue municipal bonds or if they receive more than $500,000 in federal grants annually.

Governments are usually required to produce audited financial statements within six to nine months after their fiscal year end, which, in California, is generally June 30. Many governments miss the filing deadline. For our study, we used 2013 financial statements where available, but, in some cases used 2012 statements when we could not obtain a more recent filing.

Our data is distinct from that published by the State Controller’s Office (SCO) in its Cities Annual Report and Counties Annual Report documents. The controller reports contain unaudited data and do not conform to US Governmental Accounting Standards. We have found multiple large discrepancies and omissions in this data set, and believe that the state would be better served if SCO relied on the financial audits we have used.  More recently, SCO has started to publish local government financial statistics in a more user-friendly form at https://bythenumbers.sco.ca.gov/. The source of the data for the new SCO web site is the same unaudited information used in the annual reports mentioned above.

Once we located the audited reports, we extracted general fund revenue, expense and balance data, along with pension and interest expenses and total revenue for all governmental funds.  We entered this data into a scoring model created last year by Public Sector Credit Solutions in a research project funded by the California Debt and Investment Advisory Commission (CDIAC) – a unit of the State Treasurer’s Office. Although the research was supported by a state entity, the model itself and the findings reported here are not endorsed by any official entity. They are a product of the California Policy Center, Civic Partner and Public Sector Credit Solutions.

The scoring model uses a composite of four financial metrics derived from the information we collected.  These metrics are:

  • General Fund Balance / General Fund Expenditures – This is a measure of the cushion present in the government’s key fund – essentially its checking account.  General fund balance depletion was associated with the Vallejo, Stockton and San Bernardino bankruptcies – as well as those of Detroit and Harrisburg.
  • General Fund Surplus or Deficit / General Fund Revenues – This ratio indicates whether the general fund balance is improving or deteriorating – and at what rate.
  • Change in Annual Revenues (Total Governmental Funds) – Declining revenues were strongly associated with the Vallejo and Stockton bankruptcies, as both cities faced falling real estate values. We broaden the scope to include funds other than the general fund since many cities and counties divert large proportions of their revenue to special funds.
  • Interest and Pension Expenses / Total Governmental Fund Revenues – This is a measure of “uncontrollable” costs which cannot be avoided even if the city or county implements layoffs. During the Depression, cities with high interest burdens defaulted on their municipal bonds at much higher rates than those with more moderate debt burdens. A high interest burden was also associated with Desert Hot Springs insolvency at the turn of the millennium.

We then calculate a default probability score based on a weighted average of these four metrics. The scores are calibrated to reflect the estimated probability that a local government will either declare bankruptcy or default on its general obligation bond issues within one year. The calibration reflects the low historic incidence of bankruptcy and default by US cities and counties. In an average year, about one in 1000 of these entities declares bankruptcies and/or defaults on general obligation bond issues. This historic default rate of 1/1000 = 0.10% is close to the median default probability in our universe.

Cities and counties with default probability scores much higher than 0.1% have substantially elevated risk. The highest default probability among the California local governments we evaluated is 4.01% for the City of Compton – reflecting forty times the bankruptcy risk of a typical US city or county.

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LOCAL GOVERNMENTS MOST AT RISK – THE UNLUCKY 13

This section includes brief descriptions of the most vulnerable cities and counties as measured by our model. We excluded Stockton and San Bernardino both of which continue to operate under bankruptcy protection.  Mammoth Lakes emerged from bankruptcy without having to adjust its debts and is not among the most distressed municipalities according to our model.

(1)  COMPTON  –  Default Probability, 4.01%

In July of 2012, Standard and Poor’s downgraded Compton’s bond rating after an independent auditor refused to express an opinion on the city’s 2011 financial statements amid allegations of corruption and fraud. At the time, the city’s bank account was $2 million short of the $5 million in notes it had due, and officials were unable to secure short-term financing. Bankruptcy seemed inevitable for the city of 93,000 with high poverty and an unemployment rate of 20 percent. City council faced scrutiny for recklessly overspending revenues by $10 million for four consecutive years and draining a $22 million surplus. General fund shortages were routinely covered with cash from restricted funds resulting in a $43 million deficit. After hiring more than 100 new employees between 2007 and 2011, the city was forced to make deep cuts, laying off 15 percent of its workforce and dramatically reducing services – bad news for a city where the unemployment rate has grown to 13 percent and the median income hovers at $21,832.

At the height of the crisis, council members abandoned plans to establish a $19.5 million police force. Instead the city continues to contract its police services with Los Angeles County Sheriff’s Department for $17.5 million annually. Through 2011, the city fell behind on its monthly payments to the county and accumulated $369,000 in late fees. Additional cuts and layoffs followed. Despite the fiscal emergency, Compton has continued to issue bonds through efforts by the county to divert city tax revenues to a bank-controlled reserve fund. Officials have worked hard to bring the city back from the brink of bankruptcy, and Compton has begun to rebuild reserves. But the city’s recovery is progressing at a painfully slow pace. City council has implemented a long-term, 15-year repayment plan to address past debt, and the 2014-2015 balanced budget passed without furloughs or layoffs. However, the city maintains a negative general fund balance in excess of $40 million, and services remain at a minimum.

View press release from City of Compton in response to study, posted Nov. 12th: “City of Compton’s Rebuttal…
View City of Compton’s Financial Transparency Page.

Sources:

Compton Financial Crisis Worsens, More Cuts Loom, Nov. 1, 2011, myfoxla.com
http://www.myfoxla.com/story/18391615/compton-financial-crisis-worsens-more-cuts-loom

City of Compton Annual Financial Report for the Year Ended June 30, 2012
http://www.comptoncity.org/images/stories/dept/cm/72538461823648162385483457.pdf

Compton on Brink of Bankruptcy, July 18, 2012, Los Angeles Times
http://articles.latimes.com/2012/jul/18/local/la-me-0719-compton-bankruptcy-20120719

Ten California Cities in Distress, May 15, 2013, USA Today
http://www.usatoday.com/story/news/nation/2013/05/15/ten-california-cities-in-distress/207621http://www.usacityfacts.com/ca/los-angeles/compton/economy/

Compton, CA Income and Economy, USA City Facts
http://www.usacityfacts.com/ca/los-angeles/compton/economy/

FY 2014-2015 City of Compton Budget Review, June 3, 2014
http://www.comptoncity.org/images/stories/dept/cm/376458234689579834652436774.pdf

(2)  KING CITY  –  Default Probability, 3.38%

King City’s efforts to contain the flow of cash started back in 2011, when a $150,000 hole opened in the budget as a result of dwindling property and sales tax revenues. Budget cuts and layoffs followed. To complicate matters, the city became embroiled in scandal when six city police officers, including two high-ranking officials, were charged with bribery and embezzlement early in 2014. With one-third of the police force on leave, the sheriff’s department has been contracted to patrol the city. Further jeopardizing the city’s finances is its participation in a joint powers worker’s compensation fund, MBASIA, which, according to the latest city audit, has $10 million in liabilities and a negative net position. All of this has come at a time when the city, where citizens earn a median salary of $18,885, is most in need of strong leadership to stabilize its finances. Current officials are working hard to get the city back on track. Looking forward, King City’s finances may benefit from a one-half cent tax increase scheduled to go into effect in April 2015. Funds from the tax increase will be used to rebuild the city’s reserves and police force.

Sources:
City Prepares to Make Budget Cuts, Considers Layoffs, Jan 26, 2011, King City Rustler
http://www.kingcityrustler.com/v2_news_articles.php?heading=0&story_id=600&page=72

City Continues to Work Toward Closing $150,000 Budget Gap, March 30, 2011, King City Rustler
http://www.kingcityrustler.com/v2_news_articles.php?heading=0&page=72&story_id=673

King City Police Officers Arrested in corruption scandal, Feb. 25, 2014
http://www.montereyherald.com/news/ci_25223763/king-city-police-officers-arrested-corruption-scandal

City of King 2013 Comprehensive Audited Statement, June 30, 2014
http://rpt.civicpartner.com:90/cafr/490DC870-C2FF-4BAC-8A81-DED72E264E31.pdf

City of King, CA Income an Economics, USA City Facts, 2013
http://www.usacityfacts.com/ca/monterey/king-city/

King City Makes Most Financially Distressed City List, The Salinas Californian, Nov. 6, 2014
http://www.thecalifornian.com/story/news/local/2014/11/06/king-city-makes-financially-distressed-city-list/18595461/

(3)  SUTTER CREEK  –  Default Probability, 2.79%

Once a bustling mining boomtown, Sutter Creek has settled into a quaint, historic town where citizens make ends meet on a modest median income of $25,510. When the city’s general fund deficit ballooned from $150,000 in 2008 to more than $1 million in 2010 and 2011, auditors raised doubts about its ability to continue as a going concern. They also made note of the city’s incomplete financial records, as well as weaknesses in financial reporting procedures. Council members took corrective action to simplify the budgeting process and trim down costs for Fiscal Year 2012-2013. Cost-cutting strategies included steep program and expense reductions, and outsourcing functions when possible. Unfortunately, these actions may not be enough to keep the general fund afloat as the city faces a calPERS increase from 28 percent to 33 percent, and an increase in health benefit costs of $200 monthly per SEIU 1021 member. These increases, coupled with the city’s $100,000 general fund repayment obligation leave Sutter Creek’s fund balance in a vulnerable financial position for the foreseeable future.

Sources:

Sutter Creek City Council, Aug. 5, 2009, tspntv.com
http://webcache.googleusercontent.com/search?q=cache:12LDPkg7MFcJ:www.tspntv.com/item/7143-sutter-creek-city-council+&cd=1&hl=en&ct=clnk&gl=us

City of Sutter Creek 2010 Audit
http://www.cityofsuttercreek.org/docs/063010-COSC-AuditedFinancialStatement.pdf

City of Sutter Creek 2011 Audit
http://cityofsuttercreek.org/agendasminnutes2013.html

City of Sutter Creek 2012 Audit
http://www.cityofsuttercreek.org/docs/2012%20Audited%20Financials.pdf

City of Sutter Creek 2013-2014 Final Budget, June 17, 2013
http://www.cityofsuttercreek.org/docs/031814-FinalBudget-2013-2014.pdf

City of Sutter Creek, CA Income and Economy, USA City Facts, 2013
http://www.usacityfacts.com/ca/amador/sutter-creek/

(4)  IONE  –  Default Probability, 2.17%

Officials in historic Ione have struggled to get a firm grip on the city’s finances for years, depleting reserves and making cuts to balance the budget. On numerous occasions, auditors have commented on the city’s inconsistent accounting methods and habitual inter-fund borrowing. In 2011, miscalculations and erroneous revenue projections left a $500,000 hole in the city’s budget. A 2011-2012 Amador County Grand Jury Report revealed multiple instances of mismanagement and questionable fiscal practices. The city has since made efforts to rectify its past issues. However, citizens of Ione, who enjoy a relatively high median income of $34,514, remain apprehensive about the future of their close-knit community.

According to recent public records, Ione’s current budget priorities include building a reserve fund and paying down principal and interest on inter-fund loans, but both will present an ongoing challenge as the city struggles to keep pace with rising pension liabilities. While the city expects to see a modest five percent increase in tax revenues over the current fiscal year, grant funds are expected to decrease. Under the circumstances reducing the city’s structural deficit will be a long-term undertaking.

Sources:

Lone Faces Massive Budget Shortfall, Oct. 12, 2011, CBS Sacramento
http://sacramento.cbslocal.com/2011/10/12/ione-faces-massive-budget-shortfall/

2011-12 Amador County Grand Jury Report: City Administration City of Ione, Sept. 4, 2012
http://www.voiceinione.com/Documents/GrandJuryReports/2011-2012/2011-2012GJR-Response.pdf

City of Ione Finance Workshop FY 2012-2013 Mid-Year Review, Jan. 31, 2013
http://ione-ca.com/home/ione/MyMedia/audits/20120131%20Finance%20Workshop_MY%20Budget%20Review.pdf

City of Ione 2012 Audit Report, June 30, 2013
http://ione-ca.com/home/ione/financials.htm

City of Ione, CA Income and Economy, 2013, USA City Facts
http://www.usacityfacts.com/ca/amador/ione/

Ione Continues to Wrestle with Budget Issues, April 16, 2014, kvgcradio.com
http://www.kvgcradio.com/local-daily-headlines/2997-ione-continues-to-wrestle-with-budget-issues

Ione Council Sees 2014-15 Budget – Enjoys Surplus from Last Year, June 5, 2014, Amador Ledger Dispatch
http://www.ledger-dispatch.com/news/ione-council-sees-2014-15-budget-enjoys-surplus-from-last-year

(5) MAYWOOD  –  Default Probability, 1.46%

By the time the 2008 recession hit Maywood, the city had already been operating with a deficit for several years and had been dipping into reserves to balance the general fund.  A significant part of the problem has been traced back to an underpriced 2003 police contract that cost the city millions annually. By 2010, the Maywood’s financial situation had spiraled into chaos, and the city lost its worker’s compensation insurance coverage and was quickly running out of cash. Following a unanimous vote by city council, the police department was dismantled and replaced by the Los Angeles County Sheriff’s Department, all 100 city workers were laid off and municipal services were outsourced to the neighboring city of Bell for a monthly fee of $50,833. At first, becoming a 100 percent contracted city (the first in the country) appeared to be a brilliant solution to Maywood’s financial problems, but the plan fell apart when evidence of payroll corruption were uncovered in Bell. In the wake of the scandal and resulting criminal investigations, Bell canceled its management agreement. Maywood was left to operate without an official budget for nine months while a brand new mayor tried to pick up the pieces.

Maywood’s 2011 financial statements show that an auditor expressed doubts about the city’s ability to continue as a going concern. At the close of 2013, the city had accumulated a $500,000 deficit. Moderate revenue increases and surpluses are projected for Fiscal Years 2015 and 2016. Nevertheless, the city’s ability to remain solvent remains in jeopardy.

Sources:

City of Maywood 2008-2009 Budget Report
http://www.cityofmaywood.com/index.php?option=com_content&view=article&id=144&Itemid=145

Maywood to Lay off all City Employees, Dismantle Police Department, June 22, 2010, Los Angeles Times
http://latimesblogs.latimes.com/lanow/2010/06/sheriffs-dept-to-patrol-maywood-while-city-employees-now-face-lay-offs.html

Maywood, CA Plans to Disband ALL City Services, June 23, 2010, Huffington Post
http://articles.latimes.com/2011/may/14/local/la-me-05-14-maywood-20110514

California City That Outsourced Everyone is Snarled by Pay Scandal in Bell, Aug. 3, 2010, Bloomberg
http://www.bloomberg.com/news/2010-08-03/california-city-that-outsourced-everyone-is-snared-by-pay-scandal-in-bell.html

Maywood Strives to Bring Order to Financial Chaos, May 14, 2011, Los Angeles Times
http://articles.latimes.com/2011/may/14/local/la-me-05-14-maywood-20110514

Maywood passes Budget for 2014-15, Oct. 17, 2014, Los Angeles Wave

Maywood, CA Income and Economics, USA City Facts, 2013
http://www.usacityfacts.com/ca/los-angeles/maywood/economy/

(6)  ATWATER  –  Default Probability, 1.22%

Atwater city council declared a fiscal emergency in October of 2012. The city cited ongoing structural deficits and negative fiscal impacts from the state’s elimination of redevelopment agencies for its financial hardships. Since the beginning of the recession the city’s revenues failed to keep pace with expenses, leading to mounting debts and a negative general fund balance in 2011. Reserve funds were depleted to help finance an $85 million waste water treatment plant. By 2013, the city faced structural deficits of more than $4 million in the general fund and enterprise funds. During the months following the emergency declaration, the city responded to these economic challenges by dramatically reducing its workforce, cutting employee wages by five-percent and passing the Measure H half-cent sales tax increase to fund public safety.

With a relatively high unemployment rate of 14.7-percent and a median income of $23,083, Atwater citizens are in no position to shoulder the city’s financial problems. Unfortunately, city officials had to balance the current budget through a combination of utility rate increases and continued reductions in operating expenses. City services remain at a minimum, and staffing levels are down from 134 positions in 2008 to just 78 in 2014, a total reduction of 42-percent. Though workers have continued to absorb a significant part of the burden through mandatory 10-percent furloughs and increased health costs, the city’s financial condition remains weak. Significant increases to calPERS retirement costs loom on the horizon, and the city continues to operate without the cushion of reserve funds. The local economy suffered another setback when Mi Pueblo Foods, which served as the anchor store of the Bellevue Road Shopping Center, closed its doors in August 2014 and laid off 91 employees. With no additional revenue increases projected over the next five years and little left to cut from the budget, the city’s solvency remains doubtful.

Sources:

Ten California Cities in Distress, May 15, 2013, USA Today
http://www.usatoday.com/story/news/nation/2013/05/15/ten-california-cities-in-distress/2076217/

City of Atwater Comprehensive Audited Financial Report, June 30, 2013
http://www.atwater.org/doc_files/Atwater%20Fin%20Stmts%206-30-13.pdf

Atwater Hires a New Finance Chief, Sept. 9, 2014, Merced Sun Star
http://www.mercedsunstar.com/2014/09/09/3839325/atwater-hires-a-new-finance-chief.html

Atwater Adopts Barely Balanced Budget, May 6, 2014, Merced Sun Star
http://www.mercedsunstar.com/2014/06/24/3716140/atwater-adopts-barely-balanced.html

Mi Pueblo Foods Closing in Atwater, June 16, 2014, Modesto Bee
http://www.modbee.com/incoming/article3166434.html

Atwater, CA Income and Economy, USA City Facts
http://www.usacityfacts.com/ca/merced/atwater/economy/

(7)  HURON  –  Default Probability, 1.08%

 When the majority of cities started feeling the impacts of the recession in 2008, the farming economy of Huron had already reached a low point. Miles of fields that produced Huron’s agribusiness economy dried up as increasing federal restrictions reduced water allocations to a trickle. Huron’s “cash driven” migrant economy also dried up as workers left in droves for employment in neighboring cities, taking their money with them. The city’s annual budget provides for only the most basic services; there is no fire department, no hospital and no high school. In a city where the median household income is $21,041 and nearly half of the citizens live below the poverty line, crime is a persistent issue. On Nov. 5, 2013, voters passed Measure P, a one-cent sales tax increase to fund additional police services. Nevertheless, the city’s budget remains inadequate to meet the basic needs of the community. Auditors expressed a negative opinion of the city’s 2013 financial statements, citing a general fund deficit of $494,911 and a cash balance of $0. Despite a significant decrease in expenditures over a three-year period, the city has also been cited for using restricted funds to subsidize the general fund. With unresolved deficits and no reserves, the Huron’s financial situation truly appears to be on the verge of collapse.

Sources:

California’s Disappearing Towns – Huron May Not Be Here a Year from Now, July 13, 2009, New American Media
http://news.newamericamedia.org/news/view_article.html?article_id=fe824636288f2231f5e75d0e0b6d7ca3

City of Huron Police Services Sales Tax Increase, Measure P (November 2013), Ballotopedia
http://ballotpedia.org/City_of_Huron_Police_Services_Sales_Tax_Increase,_Measure_P_(November_2013)

City of Huron 2013 Comprehensive Audited financial Report
Huron city_CAFR_2013.pdf

City of Huron Fast Facts, 2014, Fresno Council of Governments
City of Huron – Fast Facts | Fresno Council of Governments

(8)  CHICO  –  Default Probability, 0.88%

In 2013, questions raised by concerned city officials and third-party auditors exposed a $15 million deficit that had accumulated between 2007 and 2012. During those years, negligent auditors allowed the city’s eroding fiscal condition to slide while city council made empty promises to enforce stricter budgetary controls. As Chico’s revenues dwindled, the council reduced personnel costs through attrition, early retirements and layoffs, eventually cutting 70 positions including 19.5 positions in public safety. When workforce cuts failed to produce the savings needed to balance the budget, officials depleted reserves and relied heavily on inter-fund transfers to subsidize yearly general fund shortfalls, accumulating debts of $13.5 million in the capital and enterprise funds. By the end of 2013, officials were pressed to enact an aggressive debt repayment plan to prevent auditors from stating a negative opinion of the city’s 2012 financial statements. The 10-year deficit reduction plan, passed by city council in December of 2013, prioritized reducing existing deficits and restricted the use of new revenue sources. Fiscal Year 2013-2014 budget balancing measures included a five-percent reduction in wages and benefits, an additional workforce reduction of 50 positions (13%), $5 million in general fund cuts, and $13.1 million in debt reimbursements to restore the city’s depleted funds.

As Chico recovers, new development projects have been downsized to reflect the city’s long-term financial reality. It has been estimated that it will take the city 15 years to pay off current debts and restore reserve funds. The city’s struggle to catch up despite flat revenues reflects the hardship felt by Chico citizens who face an unemployment rate of 10.9 percent and scrape by with a median income of $17,847. The city experienced another setback with the 2012 defeat of Measure J, a tax on electronic communications, which leaves a $900,000 hole in the yearly general fund budget. Covering the loss will be a challenge as the city begins to make debt payments in Fiscal Year 2015-2016. The initial payment of $800,000 is scheduled to increase to $1.5 million, and yearly payments will continue until 2030 when the city’s debts are paid and $13.4 million is restored to its reserve funds.

Sources:

City of Chico 2012-2013 Annual Proposed Budget
http://www.chico.ca.us/finance/documents/2012-13CityAnnualPROPOSEDBudget.pdf

City of Chico Utility Users Tax, Measure J, Nov, 12, 2012, Ballotopedia
http://ballotpedia.org/City_of_Chico_Utility_Users_Tax,_Measure_J_(November_2012)

City of Chico 2013 Comprehensive Annual Report, June 30, 2013
http://www.chico.ca.us/finance/documents/CAFRFinal_000.pdf

Debt Catches up to Chico City Government, March 20, 2014, Chico ER News
http://www.chicoer.com/news/ci_25382327/debt-catches-up-chico-city-government

Chico Council Adopts $42.6 Million General Fund Budget, June 17, 2014, Chico ER News
http://www.chicoer.com/news/ci_25984458/chico-council-adopts-42-6-million-general-fund

Chico City Councilors React to Grand Jury Report, June 26, 2014, Chico ER News
http://www.chicoer.com/news/ci_26042532/chico-city-councilors-react-grand-jury-report

Chico, CA Income and Economy, 2013, USA City Facts
http://www.usacityfacts.com/ca/butte/chico/economy/

(9)  CALIPATRIA  –  Default Probability, 0.84%

The city of Calipatria has been running a deficit, with no reserves, since 2009. As revenues tanked, the council increasingly relied on inter-fund loans to supplement the general fund. By 2012, the city enacted across-the-board furloughs and eliminated council members’ monthly stipend to close the growing $112,000 gap. When the deficit grew to more than $400,000 in 2013, with nothing left to trim from the budget, city council considered the option of consolidation but could not reach a reasonable compromise on the issue. Citizens of Calipatria have maintained a median income of roughly $24,000, but without political consensus or a reserve fund, Calipatria’s future prosperity is in doubt.

Sources:

Calipatria Staff Looking Where to Make Cuts, July 1, 2011, Imperial Valley Press
http://articles.ivpressonline.com/2011-07-01/mayor-raul-navarro_29728998

Furlough Approval in Calipatria, June 26, 2012, Imperial Valley Press
http://articles.ivpressonline.com/2012-06-26/furlough_32445379

Calipatria Reviews Consolidation Options, May 30, 2013, Imperial Valley Press
http://articles.ivpressonline.com/2013-05-30/mayor-raul-navarro_39636628

Calpatria, CA Income and Economy, 2013 USA City Facts
http://www.usacityfacts.com/ca/imperial/calipatria/economy/

(10)  RIDGECREST  –  Default Probability, 0.76%

The state’s dissolution of redevelopment agencies in February 2012 created a ripple effect that forced Ridgecrest to declare a fiscal emergency on Jan. 11, 2012. For Ridgecrest, the loss of its redevelopment agency meant the city also lost money on investments, funding for key staff positions and additional property tax revenue. And it came at a time when the city could not afford to sustain any more losses. The general fund was already $4.25 million in debt to the wastewater fund for a cash flow advance city council approved in September of 2011. Measures implemented to address the city’s declining financial condition, including furloughs, layoffs, deferred maintenance and severe cuts to non-essential services, were insufficient to compensate for ongoing losses. At the close of 2012, the general fund had only $7,600 in cash.

Following the declaration of a fiscal emergency, Ridgecrest citizens passed Measure L, a 75 percent sales tax increase to fund public safety and essential services for five years, effective Oct. 1, 2012. Original Measure L revenue estimates of $1.8 million were adjusted down to $1.5 million – then down again to $1.3 million. After passing a shoestring budget for Fiscal Year 2013-2014, the city ran out of money mid-year and had to approve budget increases in December to pay for services rendered as it struggles to restore services and rebuild its workforce after a cumulative reduction of 22.5 percent.

Sources:

City of Ridgecrest Resolution Declaring a Fiscal Emergency, Jan. 11, 2012
http://ridgecrest-ca.gov/uploadedfiles/Government/RESO%2012-04%20-%20FISCAL%20EMERGENCY.pdf

City of Ridgecrest Sales Tax, Measure L, June 2012
http://ballotpedia.org/City_of_Ridgecrest_Sales_Tax,_Measure_L_(June_2012)

City of Ridgecrest 2012-2013 Approved Budget
http://ridgecrest-ca.gov/uploadedfiles/Departments/Finance/Budget_2012-13_with_Reso_attached.pdf

City Presents Draft Budget, July 4, 2012, News Review
http://www.newsreviewiwv.com/zarchives/2012-05-23/2012-05-23-story-01.html

Audit Presents Sobering Financial Outlook, Feb. 8, 2013, Ridgecrest Daily Independent
http://www.ridgecrestca.com/article/20130208/NEWS/130209805?refresh=true

City of Ridgecrest 2012 Comprehensive Audited Financial Report, June 30, 2013
https://ridgecrest-ca.gov/uploadedfiles/Departments/Finance/Ridgecrest_CAFR2012FINAL_LetterheadSecured.pdf

City’s Obligations Mainly Lie in Wastewater Fund, March 27, 2013, Ridgecrest Daily Independent
http://www.ridgecrestca.com/article/20130327/News/130329790

Council to Hear Budget Increase Requests, Dec. 3, 2013, Ridgecrest Daily Independent
http://www.ridgecrestca.com/article/20131203/News/131209920

City of Ridgecrest 2013 Comprehensive Audited Financial Report, June 30, 2014
https://ridgecrest-ca.gov/uploadedfiles/Departments/Finance/Ridgecrest_CAFR_2013_-_Final.pdf

(11)  SAN FERNANDO  –  Default Probability, 0.75%

San Fernando’s budget reflects the city’s history of extreme highs and lows. During high times in 2008, the city opened a $14.5 million aquatics center with an Olympic-sized pool, paid in part by property taxes. Shortly thereafter, the City’s economy began a steady decline, and by 2009 it was clear that aquatics center revenues could not keep pace with the cost of running the facility. In 2009 city council closed the center to the public for nine months out of the year to reduce costs. As the economy slumped, San Fernando’s median income dipped to $22,838 and unemployment grew to 12 percent. The city’s financial condition continued to slide as council members found themselves mired in scandal. In 2012 citizens pushed back in an election to recall corrupt council members, and under new leadership the city has begun the process of stabilizing its finances. Drastic cost-saving cuts, including layoffs and furloughs, have been made to address the city’s deficits. While unemployment has dropped to eight percent and the local retail outlook has improved, revenues remain relatively flat.

In 2013, auditors expressed doubts about the city’s fund’s ability to continue as a going concern, citing lack of liquidity in the general fund and the grants special revenue fund. Facing $4.2 million in obligations to the enterprise funds and no general fund reserves, city council declared a fiscal emergency, followed by passage of the Measure A one-half cent tax increase in June of 2013. Revenues from the tax increase will be used to pay off existing debt and build reserves. Despite higher than projected Measure A revenues, the general fund ended 2013 with a negative balance and a growing unfunded pension liability. In an effort to alleviate some of the hardship, city council recently reached an agreement transferring financial and operational responsibility of the Aquatic Center to Los Angeles County. A modest general fund surplus is projected for 2014 and will be used to reduce deficits in the general fund and self-insurance fund, but ongoing annual surpluses will be required to eliminate structural deficits, build reserves and meet growing expenses.

View rebuttal, posted Nov. 11th: “City of San Fernando Responds to CPC Study

Sources:

San Fernando Voters Recall Mayor Brenda Esqueda, Councilwoman Maribel De La Torre, November 6, 2012, Daily News
http://www.dailynews.com/government-and-politics/20121107/san-fernando-voters-recall-mayor-brenda-esqueda-councilwoman-maribel-de-la-torre

City of San Fernando City Council Agenda, March 4, 2013
http://www.ci.san-fernando.ca.us/city_government/city_council/agendas_minutes/2013/3-4-13%20CC%20Packet.pdf

City of San Fernando 2013 Comprehensive Annual Financial Report, June 30, 2013
http://www.ci.san-fernando.ca.us/city_government/departments/finance/divisions/cafr.shtml

San Fernando, CA Income and Economy, USA City Facts, 2013
http://www.usacityfacts.com/ca/los-angeles/san-fernando/economy/

San Fernando Annual Report – Measure A: ½ Cent Transaction & Use Tax, September 15, 2014
http://www.ci.san-fernando.ca.us/city_government/departments/finance/forms_docs/Measure%20A%20Annual%20Report%202014.pdf

City Council Appears Ready to Hand Over Aquatic Center to Los Angeles County, October 4, 2014, San Fernando Sun
http://www.sanfernandosun.com/news/article_618dfbfa-4a4e-11e4-a7f1-332869db1ff8.html

(12)  BLYTHE  –  Default Probability, 0.74%

When city council attempted to declare a fiscal emergency on March 2, 2009, the general fund had been operating with structural deficits for 10 consecutive years – by 2008 the negative balance was close to $3.4 million. The city’s golf course and airport funds were also running deficits in excess of $1 million. The measure failed to pass by one vote. Auditors raised doubts about the city’s ability to continue as a going concern. City council narrowly reduced the deficit, shaving off $1 million through efforts including layoffs, drastic cuts to expenditures and essential services, and the sale of unneeded city assets. However, an end to the city’s financial instability was nowhere in sight. In 2012, the council rejected the proposed budget due to disputes about future funding of the Joe Wine Rec Center, and a continuing resolution was passed to allow the city to continue to operate for 45 days while the council drafted a new budget. Despite conflicts, council members reluctantly passed a “bare bones, keep the lights on budget” by the end of July.

The 2014-2015 budget has a balanced spending plan, but negative fund balances persist. The city’s workforce remains staggeringly low – down from 135 full-time positions in 2008 to just 69 in 2014. City infrastructure suffers from years of deferred maintenance, and the fire department is overdue for new protective gear. On July 29, 2014, city council passed a resolution declaring a fiscal emergency through June 30, 2015, and the Nov. 4, 2014 ballot will include measures to increase the sales tax by one-half cent and TOT by 3%. Citizens, who face an unemployment rate of 9% and struggle to pay their own bills on a median income of $16,877, remain skeptical of the city council’s ability to manage a successful financial recovery.

Sources:

Blythe City Council Continuing Meeting Agenda, March 2, 2009

City Deficit Nears $3.4 Million, June 12, 2009, Palo Verde Valley Times
http://paloverdevalleytimes.com/main.asp?TypeID=1&ArticleID=11146&SectionID=167&SubSectionID=468&Page=2

Blythe City Council Rejects Proposed Budget, June 28, 2012, Palo Verde Valley Times
http://paloverdevalleytimes.com/main.asp?SectionID=1&SubSectionID=1&ArticleID=17343

Council Approves Fiscal Year Budget after Contentious Debate, July 26, 2012
http://paloverdevalleytimes.com/main.asp?SectionID=1&SubSectionID=1&ArticleID=17441

Blythe City Council Special Meeting Agenda, June 29, 2014
http://www.cityofblythe.ca.gov/ArchiveCenter/ViewFile/Item/620

City of Blythe Demographics
http://www.cityofblythe.ca.gov/ArchiveCenter/ViewFile/Item/620

(13)  FIREBAUGH  –  Default Probability, 0.74%

The farming community of Firebaugh in Fresno County has been hit hard by the economic impacts of regional droughts. Since 2007, the agricultural industry that propped up Firebaugh’s economy has felt the squeeze of increasingly reduced federal water allocations from the Central Valley Project. Firebaugh’s hardships were compounded by the recession, and the city began enforcing mandatory furlough days for all employees when tax revenues bottomed out in 2009. Things went from bad to worse as local businesses closed or downsized operations – in 2010 Gargluilo Inc., one of the city’s top employers, cut its workforce by 33%, laying off 262 workers. The city’s unemployment rate spiked to 28%, and per capita incomes dwindled to $10,133. As revenues sagged, local businesses called in overdue bills for years of unpaid utility tax refunds, pushing the city into a $1 million deficit. With no relief in sight, officials began balancing general fund deficits with money transferred from water, sewer and airport funds. Of the $815,000 in debts incurred by the city’s funds through 2012, an estimated $230,000 remains unpaid as of June 2013 – the total amount is expected to be repaid by 2016.

City council declared a fiscal emergency on February 4, 2013, citing a negative cash balance of $834,695.00 and $0 cash reserves. In July of 2013, the city held a stand-alone election to reduce utility user tax rates and eliminate the $500 service cap that allowed businesses to receive yearly refunds. The tax reforms will provide an estimated $240,000 in annual revenue. Unfortunately that revenue increase was undercut by the closure of Westside Ford in July 2013. According to the city manager, the closure of the dealership – one of the city’s top revenue sources – equates to a loss of $77,000 in general fund revenue. Crippling economic challenges continue to hinder a full recovery as Firebaugh officials work to restore reserve funds, end mandatory furloughs, and reinstate two police positions that were cut from previous budgets.

Sources:

With Little Water Coming, Small Town Faces Extinction, May 14, 2009, Contra Costa Times
http://www.contracostatimes.com/bay-area-drought/ci_12302104

Major Employer in Firebaugh Announces Layoffs, May 23, 2010, ksby6 News

Firebaugh Ford Dealership Prepares to Close, Jan. 30, 2013, abc30 News
http://abc30.com/archive/8971769/

The City Council/Successor Agency of the City of Firebaugh Meeting Minutes, Feb. 4, 2013
http://www.ci.firebaugh.ca.us/pdf/Minutes13-02-04.pdf

Firebaugh Hopes Utility Tax Tweak Will Lead to Better Budget, Aug. 5, 2013, TMC News
http://www.tmcnet.com/usubmit/2013/08/05/7327837.htm

City of Firebaugh 2014-2015 Budget
http://www.ci.firebaugh.ca.us/pdf/budget_fy14-15.pdf

City of Firebaugh Demographics
http://firebaugh.org/demographics/

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COMPLETE CITY AND COUNTY RANKINGS

The following table shows all the cities and counties we analyzed in order from most to least vulnerable. We also show the estimated default probability calculated by the model.  This is our measure of the probability that the local government will file for bankruptcy within one year.  Because municipal bankruptcy is a rare event, all the probabilities are quite low.  Readers focusing on any given city may be more interested in the ranking and the distance between its default probability score and those of others.

The table also shows the latest year for which audited financials were available when we finished data collection earlier this month.  The unavailability of financial statements fifteen months after the end of the fiscal year is, in itself, a cause for concern.  The State Controller’s Office publishes the filing status of local agency financial audits every two weeks. The latest version of this report, including a complete list of delinquent filers, is available at http://www.sco.ca.gov/Files-AUD/SingleAud/sa_10_15_2014.pdf.

Details behind the default probability scores shown in the table below are available at Civic Partner’s web site:  http://www.publicsectorcredit.org/ca. This web site is currently in a testing phase – we welcome reader feedback on this tool.

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20141029-2_Joffe

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CONCLUSION

Elected officials, financial managers and concerned citizens are generally aware of their municipality’s financial condition. But due to the unavailability of good data, they are less aware of how their city or county compares with its peers.

By systematically collecting and analyzing audited financial statements from California local governments, CPC and Civic Partner have provided this missing context. We look forward to analyzing these reports each year and sharing our findings with policymakers and the general public.

For the cities on our distressed list, we hope this report serves as a wake-up call.  While officials in these cities were generally aware that they were facing fiscal challenges, they now know that their issues are particularly acute compared with peer municipalities. Also for cities and counties just below our “top ten”, we hope the report serves as a warning to take corrective action before they take their place at the top of future ranking.

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About the Authors:

Julie Lark is an AmeriCorps VISA alumni who has spent several years working with non-profits to build stronger, more prosperous communities. Her most recent projects include working on a research study for Public Sector Credit Solutions. She has a BA in English/Communications from Shippensburg University and is pursuing her MPA. In her spare time, Julie enjoys traveling and spending time with family.

Marc Joffe founded Public Sector Credit Solutions in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Prior to starting PSCS, Marc was a Senior Director at Moody’s Analytics. He has an MBA from New York University and an MPA from San Francisco State University.

Ed Ring is the executive director for the California Policy Center. Previously, as a consultant and full-time employee primarily for start-up companies in the Silicon Valley, Ring has done financial accounting for over 20 years, and brings this expertise to his analysis and commentary on issues of public sector finance. Ring has an MBA in Finance from the University of Southern California, and a BA in Political Science from UC Davis.

6 replies
  1. john m moore
    john m moore says:

    Some readers may wonder why Pacific Grove is not on your list. It is because the city uses an “unverified” audit. The auditors accept the city financial documents and give its opinions assuming that the numbers are accurate and that proper “Notes to Financial Statements” have been made. June 30 is the last day of Pacific Groves fiscal year. On that date, it has a sizeable “fund balance” in its general fund. The city manager and mayor claim that balance as a spendable reserve for the audited fiscal year; although a “note” should have been added revealing that the funds were already appropriated in the next years budget. According to its Financial Director, Pacific Grove will have a 3 million budget deficit in just three years.

    Reply
  2. Libi Uremovic
    Libi Uremovic says:

    this report is not accurate at all – the city of beaumont is beyond bankruptcy …. it has $300 million in debt, another $200 million in lawsuits pending, and no reserves at all….

    beaumont’s 2001 wastewater bond was called because it was disclosed that the city staff and council embezzle all the money and never built the recycled water facility…

    beaumont’s financial statements are forged – all the numbers are plugged … the city stole all the mitigation fees and need built the infrastructure…the city has less than a 5 year water supply remaining

    in the last 20 years beaumont has grown from 8,000 to 40,000 without building any fire stations … cal fires is trying to force the city to build fire stations, but the city is broke and any money it receives is embezzled by staff…..

    read more about beaumont corruption here: http://beaumontgate.org

    Reply
  3. Varun A
    Varun A says:

    Hey CPC – So this effort is amazing and really useful in terms of comparing the overall fiscal health of CA cities. Also appreciated is the independent auditing because the Controller data does not line up with CAFR and is pretty useless for a comparative analysis (would you agree? and is there an effort to clean this up ?).

    Question: How would you compare this methodology to Institutional ratings such as Moody’s / Fitch / S&P ? Can these results be used in the absence of institutional ratings data ?

    Thanks!

    Varun

    Reply
  4. Jim Nevin
    Jim Nevin says:

    Will there be a follow-up report? While Compton and Sutter Creek have made noticeable improvements to their individual financial standings, Ione has slipped further and further into debt; More than $10 Million dollars in long term debt vs a General Fund Budget of just $1.6 Million dollars. And a General Fund Reserve of almost $1 Million dollars.

    Reply
  5. Martha Poyatos
    Martha Poyatos says:

    The version of the report provides a disclaimer that audits were from 2013 and that in some cases audits were from 2012. I wonder about the correlation in rankings for cities with fire departments versus those served by fire districts. I would guess that the high cost of fire safety & related OPEB would set cities with fire departments apart from those served by a fire district.

    Reply
  6. argie dimebag
    argie dimebag says:

    My children needed to fill out IRS W-2 some time ago and were made aware of a business that hosts a ton of fillable forms . If people need to fill out IRS W-2 too , here’s http://goo.gl/XJaknn.

    Reply

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