California has 482 incorporated cities. Providing a financial ranking of these cities makes for a large graph. So, establishing areas is a good first start. And using a comparison from 2019 to 2018 gives a foundational beginning, as many cities have been very delinquent in obtaining and releasing their annual comprehensive financial reports (ACFRs).
Hopefully, the fiscal years ending June 30, 2020, 2021, and 2022 will follow behind quickly. Once all these audited financial statements have been released, we’ll be able to see the impact of the COVID-19 pandemic over this three-year period.
The graph below covers the two California counties along the Mexican border, San Diego and Imperial. Combined, they hold 25 cities, representing around 7.5 percent of the state’s population.
As the graph bears out, the city of San Diego is in last place, while its adjacent neighbor, Coronado, is in first. Let’s start with this namesake county seat for a county that only recently exceeded Orange County in population, taking the fifth spot in the nation’s most populated counties. The city of San Diego has endured a recent financial history that was so sordid, the The New York Times gave this city the moniker “Enron-By-The-Sea,” linking it to a scandalous business failure in 2002.
Enron, a publicly traded corporation, made national headline news with its demise that even led to the collapse of Arthur Anderson, the Certified Public Accounting firm that assisted Orange County during its efforts to exit from Chapter 9 bankruptcy in 1995. It also brought up other Orange County bankruptcy memories, as four former Merrill Lynch executives were convicted in a case stemming from Enron investigations.
San Diego’s cover-up extended to large amounts of debt the city issued to build infrastructure, including the city’s new baseball stadium. Municipal debt issuances require an official statement that accurately discloses the financial condition of the issuer. San Diego’s officials decided to not disclose their defined benefit pension plan enhancements, bringing in the Securities and Exchange Commission, which issued a sanction on the city.
In August 10, 2006, a Long Beach Press-Telegram editorial addressed a special audit of the city that was very stern in its observations, with these opening three paragraphs:
“The all-but-bankrupt city of San Diego has earned the comparison with such financial failures as Enron, WorldCom and Orange County, according to Arthur Levitt Jr., and he ought to know. He is the former chairman of the Security and Exchange Commission and a respected figure in the field of finance.
“Levitt also headed a months-long investigation by Kroll Inc., a New York risk management firm that issued its findings Tuesday. The bottom line: San Diego city officials for many years recklessly mismanaged finances; they owe taxpayers the truth about a bloated and underfunded pension system, and they must face up to the fact the city needs more revenue (tax increases, in other words).
“The Kroll report said city officials deliberately broke the law, disregarded fiscal responsibility, disregarded the financial welfare of residents and, oh by the way, cheated residents on their monthly sewage fees to benefit large industrial users.”
You might expect that would be enough to get some politicians in trouble, and it was. The mayor, Dick Murphy, resigned, along with several other officials, and a federal grand jury has indicted five city pension board members for approving a pension mess that now is sinking many California cities.
There would be a remedy to the nondisclosure of true pension liabilities. The Government Accounting Standards Board, which sets the guidelines for financial reporting, finally required the inclusion of this debt on municipal balance sheets in 2015. In 2017, it required the inclusion of Other Post-Employment Benefits (OPEBs). The ability to see the true fiscal shape of cities is a recent phenomenon.
Since fiscal mismanagement causes media risk, and both San Diego and Orange Counties have had their share, it’s time to watch this city improve its financial affairs. Unfortunately, 2019 was not a year for doing so, as it joined 14 of the 25 cities in worsening their UNPs.
One city that found its UNP drop by $880 is the city of Calipatria, which dropped 9 places, going from a positive unrestricted net position to a negative one. It did so by reclassifying $6.7 million from unrestricted to restricted net position with no explanation within its disclosures as to the reasoning. However, the following note from its ACFR is cause for alarm:
“[Cash flow] factors create uncertain conditions regarding the City meeting its future operating costs, which result in an uncertainty about the City’s ability to continue as a going concern. Management is making every effort to live within its means to build a reserve for the future. The City began receiving Sales Tax Revenues during fiscal year 2019 and expects this will reduce the deficit fund balance.”
While Calipatria is in the middle of the bunch, it is still having difficulties and is an example of why the rankings are so critical for readers to understand. Poor fiscal decisions made from improper motives have severe consequences. This was especially true for number 25 on this list. It was well put at the time in a December 27, 2006, op ed, written by Jon Coupal, President of the Howard Jarvis Taxpayers Association:
“San Diego is the poster child for local elected officials’ eagerness to give public-employee unions everything they want – even if they have to bend the law – to advance their own political security. Unrealistic promises to San Diego employees have put the city ... on the verge of financial collapse.”
