By late April, five of Orange County’s 34 cities had not posted their Annual Comprehensive Financial Reports (ACFRs) for the year ending June 30, 2022, on their websites. They are usually completed by December of the same year. By the end of May, the last one was finally posted. The city of Laguna Beach’s auditor’s report was dated May 25, 2023. But, the last shall be first, based on the results.
As if governmental liabilities weren’t excessively high already, many municipalities that have used leasing as a creative way to finance an asset acquisition, without having to report the indirect debt, will have to come clean. And reviewing lease documents and calculating implied loans does take a little bit of time, especially if leases are long-term, like a decade or more.
Other reasons for the delays include limited staffing, staff turnover with the resulting recruitment challenges, staff on medical leave, inability of appointed city council members serving on the Audit Committee to hold a meeting with a quorum, and one city is converting to new accounting software.
What can we observe from the fiscal year that saw the ongoing impacts of the coronavirus pandemic, Federal funding, pension euphoria and GASB 87? The results are provided in the graph below. The UNP stands for the Unrestricted Net Position, which represents a city’s net assets or net debt, with positive numbers in black and negative in red.
Three cities—Brea, Newport Beach, and San Juan Capistrano—made significant upward movement in 2022, climbing by five or more places. Three more cities—Seal Beach, La Habra, and Orange—went in the opposite direction, dropping three or more places. The other 28 cities pretty much stayed in place.
San Juan Capistrano had a major adjustment to its capital assets with the transfer of sewer and water utility infrastructure to the Santa Margarita Water District, including governmental activity asset reductions of $6.4 million. This explains a portion of the city’s increase in its unrestricted net assets of $11.9 million.
Tustin almost regained first place this year with the use of the 21.3 percent return at CalPERS from two years ago, but also enjoyed a $56 million gain from the sale of 25.44 acres on the Tustin Legacy property. The sale, a rare opportunity for any municipality, explains nearly 80 percent of the $71.1 million increase in the city’s unrestricted net assets.
Laguna Beach was able to report a decline in pension liabilities of $33.2 million, allowing it to jump into first place.
“Our financial management practices are also a justifiable source of community pride and industry leadership. Cypress is the only city to be recognized twice by former State Senator (and Certified Public Accountant) John Moorlach for having the largest unrestricted net position per capita of Orange County’s 34 cities.”
The 2023 ACFRs for Orange County’s 34 cities may have a completely different story to tell as the pension realities are reported. The trend could continue if the California Public Employees’ Retirement System (CalPERS) does not meet its investment return target of nearly 7.5 percent by June 30. And if a recession kicks in later this year, we may look at 2022 as one of the high-water marks. The bottom 15 cities would be wise to hunker down and do what any credit counselor would advise: Pay down your debts aggressively, especially those with a high interest rate, like CalPERS.