ARTICLE
California and the US economy has been on high octane for more than a decade. According to the new forecast, when exactly the next recession will hit is unknown but for the foreseeable future, U.S. GDP growth is expected to continue at a steady 2.5% pace. At the state level, California’s economy has performed solidly so far in 2019 and is forecast to stay on track into next year. Overall, there appears to be no immediate concern about a slow down on the horizon. I like to search out information on financial reports that can provide a lens to the future. One such report was recently produced by the California State Auditor’s office, “The Fiscal Health of California Cities.” This online dashboard is part of a high-risk local government agency audit program to identify cities that could be facing fiscal challenges by assessing their levels of risk using various financial indicators. Through this transparent interface, California residents, state and local policymakers, and interested parties will have a data driven view of each city’s risk assessment. You can jump to the Auditor’s report here: https://www.auditor.ca.gov/bsa/cities_risk_index. The report identifies several data criteria to evaluate the high risk of each city from cash position/liquidity, debt burden, financial reserves, revenue trends and retirement obligations. They rank each city in each category and determine their overall ranking. The good news from the report, no city in Santa Cruz County is on the top of the list and according to the Auditor’s calculator, overall Capitola, Santa Cruz, Scotts Valley, and Watsonville are in the yellow zone (moderate risk). Methodology The California State Auditor (State Auditor) analyzed financial information for 471 California cities to identify cities that may be at risk for fiscal distress. They assessed risk by performing various financial comparisons and calculations that they refer to as financial indicators. They analyzed the finances related to each city’s governmental and business-type activities, including the general fund or main operating fund. Their analysis relied upon information from audited financial statements prepared in accordance with generally accepted accounting principles (GAAP) that they obtained through various sources such as city websites, the Federal Audit Clearinghouse, the Electronic Municipal Market Access website, and the California State Controller’s Office (State Controller). They also analyzed unaudited pension related information from the California Public Employees’ Retirement System (CalPERS) and the State Controller. Of course, with any financial analysis the methodology can be questioned by cities. Financial Indicators The Auditor selected a set of 10 indicators that enabled them to assess each city’s ability to pay its bills in both the short and long term. Specifically, the indicators measure each city’s cash position or liquidity, debt burden, financial reserves, revenue trends, and ability to pay for employee retirement benefits. In most instances, the financial indicators rely on information for fiscal year 2016-17, with certain limited information dating back to fiscal year 2014-15. Note: Many cities have experienced an uptick in their financial positions through revenue bonds, tax increases and an assortment of benefits associated with a strong economy during the last three years that are not included in this analysis. Nonetheless, let’s review the report’s findings. Liquidity This indicator measures a city's ability to pay its bills in the coming fiscal year by comparing the amount of cash and investments at year-end in the general fund to the fund's obligations. Debt Burden This indicator measures the extent to which a city is burdened by debt by comparing its long-term obligations, including bonds and notes payable but excluding retirement obligations to the revenues the city collects. General Fund Reserves This indicator evaluates whether a city has sufficient financial reserves to cover its expenditures during times of declining revenues or increasing costs. Revenue Trends This indicator measures the extent to which a city's general fund revenues are increasing or declining over time. Pension Obligations This indicator assesses the magnitude of a city's pension obligations by comparing its unfunded pension liability and any other pension-related debt to the revenues the city collects. Pension Funding This indicator measures the extent to which a city has set aside assets to pay for the pension benefits earned by its employees. Pension Costs This indicator measures the current financial burden of a city's pension costs by comparing its annual required contributions to its pension plan(s) to its annual revenues. Future Pension Costs This indicator measures the future financial burden of a city's pension costs by comparing its projected annual required contributions to its pension plan(s) to its present level of annual revenues. OPEB Obligations This indicator assesses the magnitude of a city's other post-employment benefits (OPEB), such as health and dental benefits, obligations by comparing its unfunded OPEB liability to the revenues the city collects. OPEB Funding This indicator measures the extent to which a city has set aside assets to pay for the other post-employment benefits (OPEB), such as health and dental benefits, earned by its employees. The Auditor used a points-based system to rank and categorize cities as either high, moderate, or low risk for fiscal distress. The Auditor weighted the results of the indicators by assigning varying numbers of points to each indicator based on our judgment of each indicator’s relative importance. How our cities ranked: Capitola 216, Santa Cruz 82, Scotts Valley 157, Watsonville 84 The auditor assigned points to cities based on the calculated result of each indicator, and then ranked cities based on their accumulated scores. Cities could score anywhere from zero points up to the maximum available points for each indicator. A perfect score across all indicators would equal 100 points with lower scores representing higher degrees of fiscal risk. By clicking through the various categories you can see each city’s rating and rank: Let’s take a quick snapshot of Santa Cruz. Overall ranking 82 (Moderate), Liquidity 91 (Low), Debt Burden 188 (Moderate), General Fund Reserves 71 (Moderate), Revenue Trends 281 (Moderate), Pension Obligation 115 (Moderate), Pension Funding 266 (Moderate), Pension Cost 75 (Moderate), Future Pension Cost 75 (High), OPEB Obligations 110 (Low), OPEB Funding 1 (High). Two categories jump out: future pension costs and other post-employment benefits funding which are in the high-risk level according to the State Auditor. Should Santa Cruz residents be overly concerned about the city’s financial health? Short answer, yes. Even though the county’s unadjusted unemployment rate hit a record low 3.1% in September, down from 3.5% a year ago, according to the Employment Development Department, we should not lose sight on what the city plans to do to address its financial shortfall as we head into the 2020 election cycle.
California and the US economy has been on high octane for more than a decade. According to the new forecast, when exactly the next recession will hit is unknown but for the foreseeable future, U.S. GDP growth is expected to continue at a steady 2.5% pace.
At the state level, California’s economy has performed solidly so far in 2019 and is forecast to stay on track into next year. Overall, there appears to be no immediate concern about a slow down on the horizon.
I like to search out information on financial reports that can provide a lens to the future. One such report was recently produced by the California State Auditor’s office, “The Fiscal Health of California Cities.”
This online dashboard is part of a high-risk local government agency audit program to identify cities that could be facing fiscal challenges by assessing their levels of risk using various financial indicators. Through this transparent interface, California residents, state and local policymakers, and interested parties will have a data driven view of each city’s risk assessment. You can jump to the Auditor’s report here: https://www.auditor.ca.gov/bsa/cities_risk_index.
The report identifies several data criteria to evaluate the high risk of each city from cash position/liquidity, debt burden, financial reserves, revenue trends and retirement obligations. They rank each city in each category and determine their overall ranking. The good news from the report, no city in Santa Cruz County is on the top of the list and according to the Auditor’s calculator, overall Capitola, Santa Cruz, Scotts Valley, and Watsonville are in the yellow zone (moderate risk).
Methodology The California State Auditor (State Auditor) analyzed financial information for 471 California cities to identify cities that may be at risk for fiscal distress. They assessed risk by performing various financial comparisons and calculations that they refer to as financial indicators. They analyzed the finances related to each city’s governmental and business-type activities, including the general fund or main operating fund. Their analysis relied upon information from audited financial statements prepared in accordance with generally accepted accounting principles (GAAP) that they obtained through various sources such as city websites, the Federal Audit Clearinghouse, the Electronic Municipal Market Access website, and the California State Controller’s Office (State Controller). They also analyzed unaudited pension related information from the California Public Employees’ Retirement System (CalPERS) and the State Controller. Of course, with any financial analysis the methodology can be questioned by cities.
Financial Indicators The Auditor selected a set of 10 indicators that enabled them to assess each city’s ability to pay its bills in both the short and long term. Specifically, the indicators measure each city’s cash position or liquidity, debt burden, financial reserves, revenue trends, and ability to pay for employee retirement benefits. In most instances, the financial indicators rely on information for fiscal year 2016-17, with certain limited information dating back to fiscal year 2014-15.
Note: Many cities have experienced an uptick in their financial positions through revenue bonds, tax increases and an assortment of benefits associated with a strong economy during the last three years that are not included in this analysis. Nonetheless, let’s review the report’s findings.
Liquidity This indicator measures a city's ability to pay its bills in the coming fiscal year by comparing the amount of cash and investments at year-end in the general fund to the fund's obligations.
Debt Burden This indicator measures the extent to which a city is burdened by debt by comparing its long-term obligations, including bonds and notes payable but excluding retirement obligations to the revenues the city collects.
General Fund Reserves This indicator evaluates whether a city has sufficient financial reserves to cover its expenditures during times of declining revenues or increasing costs.
Revenue Trends This indicator measures the extent to which a city's general fund revenues are increasing or declining over time.
Pension Obligations This indicator assesses the magnitude of a city's pension obligations by comparing its unfunded pension liability and any other pension-related debt to the revenues the city collects.
Pension Funding This indicator measures the extent to which a city has set aside assets to pay for the pension benefits earned by its employees.
Pension Costs This indicator measures the current financial burden of a city's pension costs by comparing its annual required contributions to its pension plan(s) to its annual revenues.
Future Pension Costs This indicator measures the future financial burden of a city's pension costs by comparing its projected annual required contributions to its pension plan(s) to its present level of annual revenues.
OPEB Obligations This indicator assesses the magnitude of a city's other post-employment benefits (OPEB), such as health and dental benefits, obligations by comparing its unfunded OPEB liability to the revenues the city collects.
OPEB Funding This indicator measures the extent to which a city has set aside assets to pay for the other post-employment benefits (OPEB), such as health and dental benefits, earned by its employees.
The Auditor used a points-based system to rank and categorize cities as either high, moderate, or low risk for fiscal distress. The Auditor weighted the results of the indicators by assigning varying numbers of points to each indicator based on our judgment of each indicator’s relative importance.
How our cities ranked: Capitola 216, Santa Cruz 82, Scotts Valley 157, Watsonville 84
The auditor assigned points to cities based on the calculated result of each indicator, and then ranked cities based on their accumulated scores. Cities could score anywhere from zero points up to the maximum available points for each indicator. A perfect score across all indicators would equal 100 points with lower scores representing higher degrees of fiscal risk.
By clicking through the various categories you can see each city’s rating and rank:
Let’s take a quick snapshot of Santa Cruz.
Overall ranking 82 (Moderate), Liquidity 91 (Low), Debt Burden 188 (Moderate), General Fund Reserves 71 (Moderate), Revenue Trends 281 (Moderate), Pension Obligation 115 (Moderate), Pension Funding 266 (Moderate), Pension Cost 75 (Moderate), Future Pension Cost 75 (High), OPEB Obligations 110 (Low), OPEB Funding 1 (High).
Two categories jump out: future pension costs and other post-employment benefits funding which are in the high-risk level according to the State Auditor. Should Santa Cruz residents be overly concerned about the city’s financial health? Short answer, yes. Even though the county’s unadjusted unemployment rate hit a record low 3.1% in September, down from 3.5% a year ago, according to the Employment Development Department, we should not lose sight on what the city plans to do to address its financial shortfall as we head into the 2020 election cycle.