When Addressing City Finances, Don’t Play the Blame Game

May 6, 2021 Updated: May 6, 2021

Commentary

After reviewing my ranking of Orange County cities based on their per capita unrestricted net positions, a resident approached his city council for an explanation.

He was informed, in writing, that it is just “a single indicator of the financial health of a city.”  This is true. It is a temperature gauge. And since every city has an annual audit and a quantifiable population, it is a simple tool to start the conversation about fiscal sustainability.

Every city has a different story. But all municipalities should strive to have a positive unrestricted net position, just like good businesses should have positive retained earnings.

Those stories begin to unfold with a little analyzing. In the case of one city, which we’re not naming, financial experts weighed in on the reasons for fiscal discrepancies. Many of them didn’t pass muster.

Here are the four reasons cited by this city’s finance staff, followed with my responses.

Lack of Land

The city claimed cities that are built out, and lack the ability to develop land, tend to be financially worse off.

My response? Many cities have little or no developable real estate left with which to add more homes, businesses, or retail shopping opportunities. But they do have an annual increase in real estate tax revenues of two percent.

With housing prices increasing, turnover in ownership provides an additional increase in annual revenues. If the new owner purchases a home in the city for $1 million, and the prior long-term owner had an assessed value of $500,000, then the tax revenues on that property will double.

Cities with developable land, such as Irvine, will also have to add additional services and increase staffing for an increasing population.

Leaning on lack of land is a weak argument.

New Cities Excel

The city’s finance department also claimed: “Cities that are newer don’t need to replace buildings and infrastructure yet, so they tend to be better off.”

This is also a weak argument. The State of California mandates that all homeowner associations require the owners of the structures pay monthly dues that include funding for reserves.

Reserves are established to pay for future large expenditures, such as new roofs for condominiums or townhouses, or resurfacing streets that the city does not maintain.

Unfortunately, California does not require this discipline of itself or its cities. That is why you have elected officials shocked that the roads are in such poor shape and that a gas tax needs to be increased immediately.

If every city were to methodically set aside funds for future infrastructure improvements, then they could be paid for without the need for councilmembers to scramble for financing strategies.

A Contracting Perspective

“Cities that have police or fire in-house versus contracting out tend to be worse off,” the city said.

This is probably one of the more honest observations that can be made.

Newer cities that contract for police services with the Orange County Sheriff’s Department and fire services with the Orange County Fire Authority (OCFA) have an interesting accounting advantage. They do not have to report the unfunded actuarial accrued liability (UAAL) for the expensive pensions of public safety employees.

This liability is reported on the county’s and the OCFA’s balance sheets. Where things may get interesting is when a city decides to leave the county or OCFA.  Will it be sued for the liability that accrued during the city’s contract period? Or will the city claim that the annual fees charged for services should have included its proportional share of the UAAL during that period?

One of the top financially-ranked cities is Laguna Beach. It does not have much in the way of developable land.  It has a rustic and functional city hall. And it has its own police and fire department.

The Wealth Advantage

“Cities that have a higher median income and higher income home prices tend to be better off,” the city said.

This could explain why Laguna Beach is faring well.  One source stated the average home price in this city is $2.5 million. Yet, Newport Beach has high average home prices and it is near the bottom of the rankings.  It is improving because it is aggressively addressing its UAAL for pension obligations.

A city with a large unrestricted net deficit has to go back in time and determine, year-by-year, what decisions were made to incur this result.

More likely than not, it was due to decisions made by previous city councils in approving defined benefit pension plan enhancements, retroactive to the date of hire, and providing lifetime medical benefits to retired city employees.

Both benefits are rarely found in the private sector.  They are too expensive.  But for years, these decisions created massive unfunded liabilities that, until recently, did not even have to be reflected on the balance sheet. Not being told the true financial costs, no wonder city councilmembers agreed to what the bargaining units asked for.

And no wonder everyone seems to be in a state of denial now.

You do not need to look for excuses.

Well-run cities had managers in place who told the truth and said no to certain union requests. Poorly- run cities acquiesced to the union demands and managers also personally benefited from the enhancements.

So why tell the city council to vote against these lucrative incentives?  Peeling the onion, year-by-year, and providing the true cost ramifications with current knowledge, will tell the true story of every city.

John Moorlach is a former Orange County Supervisor who most recently served as a state senator. He previously spent 12 years as Orange County’s Treasurer-Tax Collector, and led the county out of bankruptcy.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.