ARTICLE
As we move into the last quarter of 2022, cities in California are faced with economic decisions based on their Fiscal Health and High- or Low-Risk characteristics. The California State Auditor's Office is a state entity that is independent of the executive branch and legislative control. The purpose of the California State Auditor is to improve California government by assuring the performance, accountability, and transparency that its citizens deserve. California Government Code section 8546.10 authorizes the State Auditor to establish a high-risk local government agency audit program (local high-risk program) to identify local government agencies that are at high risk for the potential of waste, fraud, abuse, or mismanagement, or that have major challenges associated with their economy, efficiency, or effectiveness. You can read more about the State Auditor: https://www.auditor.ca.gov/local_high_risk/process_methodology. The yearly report of up to 420 California cities provides a snapshot of each city’s financial health and the potential high-risk communities based on the Auditor's risk indicator tool, which includes: general fund reserves, debt burden, liquidity, revenue trends, pension obligations and funding, pension costs, or OPEB (other post-employment benefits) obligations and funding. By reviewing the Auditor’s dashboard, we can see the “worst” (top) and “best” (bottom), with several cities considered “High Risk.” The Dashboard's latest indicators are from the 2020-21 year. As you might imagine, cities with a strong and broad-based economy usually rank in the low-risk level, whereas cities with uncertain economic output rank in the high-risk category. In reviewing the Central Coast cities by comparison for Santa Cruz and north Monterey County, all of our local cities are listed in the moderate or low-risk level. Here are the rankings: Santa Cruz (43), Monterey (44), Salinas (49), Pacific Grove (51), Watsonville (125), Scotts Valley (128) ranked at the moderate-risk level. Carmel (204), Capitola (223), Seaside (225), Marina (242), and Sand City (340) are at the low-risk level. https://www.auditor.ca.gov/local_high_risk/dashboard-csa The audit tool provides you the ability to break down each city using the 10 categories or select one or more categories for comparison. Here is an example comparing the City of Santa Cruz to the City of Monterey in a few categories: > General Fund Reserves: Santa Cruz (36) and Monterey (98) > Debt Burden: Santa Cruz (114) and Monterey (137) > Liquidity: Monterey (57) and Santa Cruz (57) > Revenue Trends: Monterey (15) [high risk] and Santa Cruz (100) > Pension Obligations: Monterey (26) [high risk] and Santa Cruz (134) > Pension Costs: Monterey (14) [high risk] and Santa Cruz (103) > Future Pension Costs: Monterey (1) [high risk] and Santa Cruz (56) [high risk] Should we be concerned that of the 11 cities included in our review list for North Monterey and Santa Cruz County 10 of the cities are facing Future Pension Cost high-risk concerns? Here is why. Compensation packages for active workers may include pensions as well as healthcare and other similar benefits for those employees after they have completed their active service. In general, health-care and other benefits are described as “other post-employment benefits” (OPEB) to distinguish them from pensions. Employers are required to recognize the cost of pension benefits as employees earn them, and the Governmental Accounting Standards Board (GASB) extends this same requirement to OPEB. While pensions have long been funded on an actuarial basis, OPEB plans have not. The change in accounting standards has focused attention on the costs of OPEB, including concerns about rising healthcare costs and an aging public-sector workforce. The real issue is not the change in accounting standards for such a funding policy and OPEB, as such, but rather the underlying budgetary and funding challenges that those accounting standards highlight. Meeting this challenge requires governments to ensure that both pension and OPEB are sustainable over the long term — that they are affordable to stakeholders, competitive, and sufficient to meet employee needs, and that they may be reasonably expected to remain so. The Government Finance Officers Association (GFOA), founded in 1906, represents public finance officials throughout the United States and Canada with more than 20,000 members from federal, state/provincial and local finance officials who are involved in planning, financing and implementing thousands of governmental operations. The GFOA recommends that governments adopt a funding policy that provides reasonable assurance that the cost of those benefits will be funded in an equitable and sustainable manner. This link to the GFOA site provides clarity on this financial reporting matter: https://www.gfoa.org/materials/core-elements-of-a-funding-policy Now, the tricky part is that as pension and other post-employment benefits increase the government employer is faced with the decision to seek funding sources to offset those rising costs. In most cases, the employer contribution and employee contribution to the funds are addressed in contractual negotiations between the employer and the employee representative (union). In most instances, the governing body of the public agency avoids taxation as the sole solution. We’ve seen this play out in past negotiations with many of our government entities and most recently the division between the county and its employee union representatives who negotiated a contract avoiding a strike. Again we are seeing it in real time between the City of Santa Cruz and the SEIU which initially negotiated a deal that the rank-and-file union members rejected. Of course, we know and understand that there are other underlying issues between the government employer and employees that are a part of those negotiations — it is never an easy one-size-fits-all discussion. However, it should not go unnoticed that the California State Auditor’s report can provide a summary overview of each community’s financial obligations and take appropriate steps to avoid fiscal high-risk matters.
As we move into the last quarter of 2022, cities in California are faced with economic decisions based on their Fiscal Health and High- or Low-Risk characteristics. The California State Auditor's Office is a state entity that is independent of the executive branch and legislative control. The purpose of the California State Auditor is to improve California government by assuring the performance, accountability, and transparency that its citizens deserve.
California Government Code section 8546.10 authorizes the State Auditor to establish a high-risk local government agency audit program (local high-risk program) to identify local government agencies that are at high risk for the potential of waste, fraud, abuse, or mismanagement, or that have major challenges associated with their economy, efficiency, or effectiveness. You can read more about the State Auditor: https://www.auditor.ca.gov/local_high_risk/process_methodology.
The yearly report of up to 420 California cities provides a snapshot of each city’s financial health and the potential high-risk communities based on the Auditor's risk indicator tool, which includes: general fund reserves, debt burden, liquidity, revenue trends, pension obligations and funding, pension costs, or OPEB (other post-employment benefits) obligations and funding. By reviewing the Auditor’s dashboard, we can see the “worst” (top) and “best” (bottom), with several cities considered “High Risk.” The Dashboard's latest indicators are from the 2020-21 year. As you might imagine, cities with a strong and broad-based economy usually rank in the low-risk level, whereas cities with uncertain economic output rank in the high-risk category.
In reviewing the Central Coast cities by comparison for Santa Cruz and north Monterey County, all of our local cities are listed in the moderate or low-risk level. Here are the rankings: Santa Cruz (43), Monterey (44), Salinas (49), Pacific Grove (51), Watsonville (125), Scotts Valley (128) ranked at the moderate-risk level. Carmel (204), Capitola (223), Seaside (225), Marina (242), and Sand City (340) are at the low-risk level. https://www.auditor.ca.gov/local_high_risk/dashboard-csa
The audit tool provides you the ability to break down each city using the 10 categories or select one or more categories for comparison. Here is an example comparing the City of Santa Cruz to the City of Monterey in a few categories:
Should we be concerned that of the 11 cities included in our review list for North Monterey and Santa Cruz County 10 of the cities are facing Future Pension Cost high-risk concerns? Here is why. Compensation packages for active workers may include pensions as well as healthcare and other similar benefits for those employees after they have completed their active service. In general, health-care and other benefits are described as “other post-employment benefits” (OPEB) to distinguish them from pensions. Employers are required to recognize the cost of pension benefits as employees earn them, and the Governmental Accounting Standards Board (GASB) extends this same requirement to OPEB. While pensions have long been funded on an actuarial basis, OPEB plans have not. The change in accounting standards has focused attention on the costs of OPEB, including concerns about rising healthcare costs and an aging public-sector workforce. The real issue is not the change in accounting standards for such a funding policy and OPEB, as such, but rather the underlying budgetary and funding challenges that those accounting standards highlight. Meeting this challenge requires governments to ensure that both pension and OPEB are sustainable over the long term — that they are affordable to stakeholders, competitive, and sufficient to meet employee needs, and that they may be reasonably expected to remain so.
The Government Finance Officers Association (GFOA), founded in 1906, represents public finance officials throughout the United States and Canada with more than 20,000 members from federal, state/provincial and local finance officials who are involved in planning, financing and implementing thousands of governmental operations. The GFOA recommends that governments adopt a funding policy that provides reasonable assurance that the cost of those benefits will be funded in an equitable and sustainable manner. This link to the GFOA site provides clarity on this financial reporting matter: https://www.gfoa.org/materials/core-elements-of-a-funding-policy
Now, the tricky part is that as pension and other post-employment benefits increase the government employer is faced with the decision to seek funding sources to offset those rising costs. In most cases, the employer contribution and employee contribution to the funds are addressed in contractual negotiations between the employer and the employee representative (union). In most instances, the governing body of the public agency avoids taxation as the sole solution.
We’ve seen this play out in past negotiations with many of our government entities and most recently the division between the county and its employee union representatives who negotiated a contract avoiding a strike. Again we are seeing it in real time between the City of Santa Cruz and the SEIU which initially negotiated a deal that the rank-and-file union members rejected. Of course, we know and understand that there are other underlying issues between the government employer and employees that are a part of those negotiations — it is never an easy one-size-fits-all discussion.
However, it should not go unnoticed that the California State Auditor’s report can provide a summary overview of each community’s financial obligations and take appropriate steps to avoid fiscal high-risk matters.