The California State Auditor is Again Driving Without a Dashboard
Last spring, when I wrote “The Rise of Zombie Cities,” I thought that, by now, some of my statements would have been proven prophetic. In the article, I discussed the results of the California State Auditor’s 2022 report on the “Fiscal Health of Cities.” I also noted several negative trends affecting city finances, such as CalPERS investment losses and the spending down of 2021 federal relief (ARPA) funds. These important fiscal events occurred after the financial reporting period used by the State Auditor in his analysis and would have negated many of the positive results he reported. I ended with a prediction: “if cities fail to engage fully in the question of what they should do and, after resolving that question, evaluate how they should do it, the 2023 State Auditor’s report on the fiscal health of cities will reveal more high-risk, zombie cities.”
Unfortunately, no such report is forthcoming from the State Auditor.
When I recently visited the California State Auditor’s website page that had hosted the Local High-Risk Dashboard for several years, I was met with the announcement that “the California State Auditor’s Office (State Auditor) removed the local government high-risk dashboard from its website in October 2023.” This action eliminates a crucial resource for city officials, journalists, analysts, and residents with which to evaluate their cities individually and comparatively. (Some cities use financial metrics for self-evaluation, but they rarely complete and report such evaluations routinely.)
During the first few years of the high-risk dashboard, I failed to recognize the value of the State Auditor’s ratings. From my perspective, the rating methodology lacked nuance, and the analysis relied heavily on historical numbers that I considered to be obsolete. The usefulness of the ratings and other dashboard results were further eroded by the State Auditor’s unambitious production schedule.
But last year, I was encouraged by the accumulation of multiple years of ratings, which established the ability to evaluate both individual city and state-wide financial trends. I also appreciated that the State Auditor called out the 52 cities that were delinquent in the preparation of their financial statements. These cities were adopting budgets without the benefit of audited financial statements for the previous fiscal year, and they made it impossible for anyone to perform a timely analysis of their financial positions. Ironically, the official reason given for the State Auditor’s abrupt abandoning of the high-risk dashboard is that the State Auditor has prioritized staff resources to focus on completing State of California’s own overdue financial audit for the year ending June 30, 2022.
In retrospect, the longevity of the local high-risk dashboard has always been uncertain. Three California city bankruptcies, one in 2008 and two in 2012, coupled with evidence of severe financial stress and rumors of bankruptcy in other cities created pressure for the State to do something about the financial condition of California cities. The State’s response was to initiate a high-risk local government agency audit program, led by the State Auditor. It was from this program that the high-risk dashboard emerged. The State Auditor may have underestimated such an undertaking. As the data analysis, city audits, reports, findings, and follow up demands accumulated, it became clear that the State Auditor has neither the will nor the resources to chase down cities for their delinquent financial statements. Nor does it have the resources to stay on top of cities’ progress in implementing the corrective actions intended to address their management and financial deficiencies. It appears that the State Auditor’s Office has instead been busy fulfilling its oversight role with respect to the multitude of problem state agencies, as evidenced by its recent “Assessment of Issues and Agencies That Pose a High Risk to the State.”
So where do we go from here?
City officials are unlikely to object to the State Auditor’s retreat from assessing their organizations’ financial status publicly. Perhaps someone else will pick up the slack. As for my concern about the growing number of cities who are delinquent in releasing financial statements and the negative financial trends that will increase the number of high-risk cities: I will have to evaluate these issues city by city, without the convenience of a one-stop shop.
Mark Moses is a senior fellow with California Policy Center. He has thirty years of experience in local government administration and finance. His recent book, The Municipal Financial Crisis – A Framework for Understanding and Fixing Government Budgeting, was published by Palgrave Macmillan in 2022 and is available from major online booksellers. https://munifinanceguy.com/ Twitter: @MuniFinanceGuy