The city of Lindsay, in Tulare County, is California’s fourth highest risk city according to the California state auditor. And that was before the COVID-19 pandemic. Its fiscal condition will likely deteriorate further as residents shelter at home, raising the specter of sharp service cuts or even Chapter 9 bankruptcy for the city. The mistakes Lindsay’s leadership made to create its financial situation and the actions taken to resolve it (or not resolve it) could offer lessons for other cities statewide.
According to its latest audited financial statements, the Lindsay is “functionally bankrupt.” It can cover its operating costs but can’t build reserves or pay off debt. Both the state auditor and city management attribute much of city’s problems to construction and operation of the McDermont Field House, a 185,000 square foot athletic and entertainment complex that opened in 2009.
For a city of 13,474 people, the McDermont project seems ambitious. This may be because it was inspired by a city council visit to New York City’s Chelsea Piers – a sports complex that serves a city of over eight million residents. The facility which includes an arcade, volleyball and basketball courts as well as a soccer field, cost more than anticipated and operates at a loss. The city reduced its losses in 2017 by outsourcing management of the field house.
Lindsay also loses money on a Wellness & Aquatic Center, which it developed in conjunction with the local hospital district. Both this facility and the McDermont Field House are closed indefinitely due to the COVID-19 crisis. The lack of income from membership fees could widen the city’s operating deficits at both facilities. An extended closure could impair the value of these properties, necessitating write-downs and reducing the city’s governmentwide net position.
In the bigger picture, operating fitness and wellness facilities is not a core competency for municipal governments, and Lindsay’s experience shows why these non-core activities should be avoided.
Although the city still has a positive net position overall, it is in the red after capital assets – such as the sports facilities – are excluded. And Lindsay’s general fund, essentially its checking account, is overdrawn. As of June 30, 2019, the city had a negative general fund balance of $4.2 million, quite large for a government with general fund revenues of just $7.5 million. Fortunately, the city did not deepen its financial hole during the 2018-2019 fiscal year: indeed, it ran a modest surplus of $62,000.
In the current fiscal year, Lindsay hopes to further improve its general fund position through a new source: cannabis revenues. In February, Valley Pure opened a dispensary on the site of the old Chamber of Commerce. Lindsay’s budget projection includes $150,000 in cannabis revenue, a number that may be achievable because the statewide shelter-at-home order exempts cannabis dispensaries.
Unfortunately, other effects of the lockdown will be negative. Sales tax revenues, including those from an emergency tax rate increase ratified in 2017, make up over a third of general fund inflows. These revenues should be heavily impacted by the pandemic. There may also be a reduction of Utility User Tax revenue to the extent that this levy applies to now-shuttered businesses. Property tax revenue, by contrast, should not be affected in the short-term.
To deal with its fiscal crisis, Lindsay should consider selling its sports facilities. It should also take a hard look at the costs of employee and retiree benefits. For example, unlike some California cities, Lindsay subsidizes retiree health care benefits. Although it only paid $38,000 in retiree health care benefits in the 2018-2019 fiscal year, this cost is likely to rise. The city’s other post-employment benefit liability is $1.6 million. Lindsay’s net pension liability, at $8.8 million, is much larger, but also harder to address due to legal protections for pension benefits.
Finally, the county and state may be able to assist the city without injecting new funds. Some of the property tax levy on city properties goes to the Lindsay Hospital District. But this district is largely vestigial because its hospital has long been closed. Action by the Tulare County Local Agency Formation Commission (LAFCO) and the state legislature could liquidate the hospital district and transfer both its assets and property tax revenue stream to the city.
As California, and the country, sinks into what may be a deep recession, fiscally troubled local governments like Lindsay will struggle to keep the lights on. Now is the time to reduce the government’s footprint and focus on the core functions of government before doing so becomes the job of a bankruptcy court judge.
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Marc Joffe is a senior policy analyst at Reason Foundation. He is the former Director of Policy Research at the California Policy Center.