California Mayors Need to Take Strong Fiscal Action Quickly

An aerial image taken shows the 110 Freeway and buildings in the financial district in Downtown Los Angeles on July 3, 2024. Patrick T. Fallon/AFP via Getty Images

Commentary

California’s major cities, especially the seat of its major counties, are falling apart at the seams.

The city and county of San Francisco announced that its newly elected mayor is facing an $840 million budget deficit over the next two years.

San Diego’s Mayor is stressing over a $250 million budget deficit.

And the controller for the city of Los Angeles, Kenneth Mejia, recently announced that the city of the Angels is on the brink of declaring a “fiscal emergency.” I’m sure the recent devastation from the wildfires is not helping this situation.

San Francisco has long been on the edge of a fiscal cliff. With its 2021 annual comprehensive financial report, in comparison to its 100 neighboring cities in the Bay Area, it ranked 98th. It had an unrestricted net deficit of $3.1 billion! At least it has improved in the subsequent three years by reducing this nut by one-third, to $2.1 billion, for the year ending June 30, 2024.

The County of San Diego only has 18 cities. But, in 2022 the city of San Diego was in last place. Its unrestricted net deficit was $2.3 billion. For 2024, this nut was reduced slightly, remaining at $1.9 billion.

The city of Los Angeles, in a county with 88 cities, ranked 65th in 2022, with an unrestricted net deficit of $5.2 billion. For 2024, its fiscal status worsened to a $5.8 billion unrestricted net deficit—the only city of the three moving in the wrong direction. No wonder its controller is ringing alarm bells and its fire department is short-staffed, as the fiscal cupboards are literally empty.

The city of Oakland is in similar shape and recalled its mayor in November. It ranked lower than San Francisco in 2021, at 100th place, with an unrestricted net deficit of $2 billion.

That these cities are struggling and in desperate need of fiscal reform should not be a surprise to readers of The Epoch Times, as it publishes rankings of California cities in various regions. And the rankings are provided as soon as all the financial reports are finally released. Sadly, too many of the Golden State’s audited financial statements are delinquent, not by weeks or months, but by years.

Which brings up the first critical recommendation for California’s cities: providing taxpayers more timely reports of the financial status of cities. If it can’t operate like a normal city, then the city council should vote to disincorporate and let the county leadership, through its board of supervisors, take over the job. Consequently, California State Senator Steven Choi (R-Irvine) has introduced Senate Bill 595 to encourage cities to get on the ball and make fiscal reporting a high priority.

Step two cuts to the core of the problem. The common thread with California’s major cities is that they are run by public employee unions, who fund the campaigns of those campaigning for the city councils and then receive higher salaries and benefits in return. The status of “union towns” is the biggest conflict of interest in this liberal and Democratic-controlled state. And these costly quid pro quos are coming home to roost.

Voters need to elect brave leaders who will bring fiscal discipline to their cities. A simple idea like developing a ten-year strategic financial plan should be initiated. This was implemented by the County of Orange after it filed for Chapter 9 bankruptcy.

The city of Newport Beach established fiscal priorities that have been followed for many years. It created a 30-year facilities plan, established a finance committee, implemented the requirement for a 25 percent general fund reserve, and set an achievable date for when its unfunded actuarial accrued defined benefit pension liabilities would be paid off.

These simple strategies are what a financial planner would advise. Be transparent and timely with the finances. Set up an emergency fund. Pay off debts. Pay cash for capital assets (thus saving the interest costs created by financing with bonds). And have qualified individuals keep the agency accountable.

Strong city council members can then tell the representatives of the public employee unions at the bargaining table what is really available for pay raises. The unions created an awkward dilemma by improving defined benefit pension formulas, which increase pension contribution amounts commensurate with pay raises. It’s a nasty vice grip that they need to manage with the governing body of the city. Why do you think there are such massive unrestricted net deficits? The unfunded liabilities for pensions and other post-employment benefits.

There are three key options these four significant cities need to consider. The first is what everyone in debt must do, cut the credit cards and cut expenditures. Consider a local form of a Department of Government Efficiency (DOGE). Start making the necessary staffing reductions and the sooner the better. I know this is not easy, as I was chair of the Orange County Board of Supervisors in 2008 during the Great Recession and had to lay off 1,000 employees.

A city can only go to its taxpayers so many times with requests for tax increases. City leadership needs to show that it can and will run the show more diligently, like half of their neighboring cities that have positive unrestricted net positions.

Next, take a very hard look at whether filing for Chapter 9 bankruptcy is the necessary tool to implement. I’ve been in bankruptcy court while serving as the successor Treasurer for Orange County in 1995 and forward. Please go into Federal Bankruptcy Court with a serious plan to address pension and other unfunded liabilities. The city of Stockton eliminated its retiree medical plan and removed $500 million in liabilities from its balance sheet. Transitioning to a shared risk defined benefit plan going forward must be pursued. The state of Wisconsin implemented this concept decades ago and its pension always seems to be fully funded year after year.

Finally, except for San Francisco, which is already a county, consider disincorporating. Dissolve the city, dismiss its elected leadership, and let the county’s board of supervisors take over.

Most people run into financial difficulties due to mismanagement, misjudgment, or misfortune. For too long, there has been mismanagement in running many of California’s 482 cities. There are so many cities that are managed properly that the others have got to stop making excuses and get serious about addressing their self-inflicted deficits.

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