The cities are ranked in order of their financial strength for the year 2018 in the graph provided. Cities with a strong balance sheet, with more assets than liabilities, are in the top 35.
The 88 cities are listed on a per capita basis by taking the unrestricted net position (UNP) from the financial reports and dividing it by the city’s population. This provides a simple range and is a temperature check of a city’s financial status to use as a management tool.
Once you’ve found the city in which you live, you can determine if your residence is in a well-managed city—which means you can discontinue reading this commentary. If you find that you reside in a city with a negative UNP per capita, marked in red, then you may need to take some action.
By comparing 2018 to 2017, you can see if your city held its ground, improved its standing, or dropped in the ranking.
With all the talk about the shortage of housing in Los Angeles County, it’s interesting to note that the population within its 88 cities only grew by 41,320 between 2017 and 2018. That’s only 0.45 percent.
You will also notice in the bottom right corner that the overall debt—also called the unrestricted net deficit (UND)—for these 88 cities went up $2.9 billion, or 30 percent, in one year.
The city of Los Angeles explains nearly half of the deficit increase, as its UND grew by $1.44 billion, or 49.5 percent. Such are the reverberations of implementing a new requirement by the Governmental Accounting Standards Board (GASB) to report unfunded pension plans and retiree medical promises in the liability section of the municipality’s balance sheet.
For decades longer than the private sector and publicly traded companies, municipalities did not have to report these unfunded liabilities. With no required transparency, all kinds of mischief occurred. The problem with collective bargaining is that the public employee unions could negotiate for retiree benefit enhancements from their beholden elected officials, whose campaigns they financed, and receive overly generous demands. And the public would not be any wiser about it. Until 2018.
This “operating in the shadows” has now ceased, thanks to long overdue GASB promulgations, as the required audited financial statements now show the actuarially calculated amounts due to retired employees. The liabilities are the difference between what has been set aside versus what is actuarially owed.
With every city having to add their unfunded liabilities at the same time, one can see which cities were generous with the promise to pay in the future and which cities can handle such a negotiated obligation.
In the case of the city of Los Angeles, this explains $1.2 billion of the increase to its UND. And this city contains 10 percent of California’s population. Statewide, the newly implemented GASB requirement increased the combined UND by 39 percent, or $8.8 billion, for the Golden State’s 482 cities in 2018.
In Los Angeles County, only 18 cities found their UNP improve, meaning 70 cities lost ground.
Since we’re just now receiving Annual Comprehensive Financial Reports from some of the laggard cities, we can now provide more accurate details of the financial rankings of the 88 cities. For instance, the city of Artesia only recently released its June 30, 2019, ACFR at the end of last summer.
The GASB implementation is a broad-brush explanation for the 2018 fiscal year’s results. Giving one anecdotal story may help. The city of Beverly Hills only dropped two positions and found its UNP being cut in half. At least it could absorb the $129 million hit because it had built a healthy UNP over previous years.
One would think that all cities would report their similar unfunded liabilities and not necessarily change their positions in the rankings. However, this depends on how successful a city’s bargaining units were with obtaining lifetime retiree medical benefits for their members. Some city councils were more aware of the fiscal consequences than others.
While an Orange County supervisor-elect in 2006, I helped negotiate a modification to the county’s retiree medical plan. It received the approval of most of the bargaining units and reduced a $1.4 billion liability to $420 million, a roughly 70 percent reduction. The annual required contribution was reduced by some $100 million per year. It is a model that many cities should consider pursuing.
The curtain was removed, and 2018 was the first look at the damage. Los Angeles County cities that took the biggest hits were Commerce, Avalon, Bell Gardens, Baldwin Park, and Gardena. Residents in the 53 cities that have upside down balance sheets may want to get more involved in their local politics and elect council candidates that can do math and are focused on moving up in the rankings.
