Orange County Cities’ Financial Rankings for 2022 Are Here

The Laguna Beach City Hall area in Laguna Beach, Calif., on Oct. 15, 2020. John Fredricks/The Epoch Times

Commentary

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.

When asked for an explanation for the four-month delay, the reasons provided included a new Government Accounting Standards Board promulgation, GASB 87, which deals with leases. This new statement requires management to re-characterize leases from annual expenditures to principal and interest payments on a loan. Leases have always been a financing technique, and the accounting profession in the governmental space must now acknowledge that something was acquired using a form of debt, requiring the recognition of an asset and the related liability.

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.

One strategy used by cities to get their ACFRs completed in a timely manner is to delay the inclusion of the defined benefit pension liability reported by the California Public Employees’ Retirement System (CalPERS) by one year. The CalPERS results for the fiscal year ending June 30, 2021 were very good, earning 21.3 percent. So, the pension news in the June 30, 2022 ACFRs is also positive and reflected by many of the cities in the deferred outflows and inflows on the Statement of Net Position (Balance Sheet). But, it’s a sugar high, with the June 30, 2022 CalPERS returns in negative territory, so expect some 2023 ACFRs to come back down to earth due to 7.5 percent losses.

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.

The city of Brea, a perennial bottom-dweller, saw its unrestricted net deficit drop by an astounding $56.4 million thanks to the CalPERS returns. Note 10 in its ACFR is ten pages long, and the word “pension” is used 178 times throughout the entire report. The sugar high bumped Brea up eight places for 2022 but may be followed by a sugar crash with next year’s ACFR.

Newport Beach, which prides itself on an aggressive policy to address pension liabilities (just read page 17 of its ACFR), continues this prudent posture. It also has a similar story to Brea and the deferred outflows and inflows concerning pensions. Note 10 is eight pages in length, and the entire report mentions the word “pension” 167 times. But this magic reduced the unrestricted net deficit by $64.1 million and kept the city on its upward climb, this year by five places.

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.

Overall, it was a very good year, with the combined per capita amounts moving up as a whole. Unfortunately, the rising tide did not help the city of Costa Mesa move out of the cellar.

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.

The sad news about the big jumps by Tustin and Laguna Beach is that they bumped the city of Cypress down two notches, a city where I spent some of my younger days while growing up in Orange County.

The Cypress ACFR paid me a very nice compliment this year, showing that the annual rankings are being reviewed by the impacted municipalities, with a fun observation in its “management’s discussion and analysis” section:

“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.

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