So we’ve had our nose buried in city audits, trying to see who might plunge off the fiscal cliff and into the bankruptcy abyss.
This involves assessing the short-term fiscal health of O.C.’s 34 cities, and we’ve told you that Placentia and Stanton are uncomfortably close to the edge. Both cities say they are buckling down, trying to live within their means, and are optimistic they’ll be able to do so without going officially bust.
What of the rest of our fair metropolises?
Gaze into our Municipal Bankruptcy Crystal Ball (or at least, our list, which you’ll find below) and ponder what the future may hold.
City manager-types are not in universal awe of the method we’ve been using to assess the short-term fiscal health of their cities: We’ve been comparing general fund unassigned balance — something akin to “mad money,” if you will — to general fund expenses to get a snapshot of a city’s ability to pay its bills in the short term. (Remember, going bankrupt doesn’t mean you’re not worth a lot; it means that you don’t have enough liquid cash on hand to meet your immediate obligations, and your credit situation is in the toilet, so no one will lend you money to get over the hump.)
Very important: Some cities have much more stashed away than one can see by this measure. They’ve put rainy-day money into separate “assigned” funds — which can easily be “unassigned” or “reassigned” by the city council if need be. (Several cities go into great detail about this, and you’ll find those details below. We expect to hear from more cities after this publishes, and will update.)
So this crystal ball is not perfect. It is in many ways a worst-casescenario, as harsh a picture as can be painted, and thus a rather conservative measure of fiscal health.
If they’re looking good on this list, they’re looking good. If they’re not, well, citizens might want to ask their elected representatives a few more questions.
First, let’s note those who have managed to stash away the most for a rainy day by this measure:
Yorba Linda (where reserves are 159 percent of the general fund budget), Lake Forest (144 percent); Laguna Woods (131 percent); Fountain Valley (98 percent); and La Palma (97 percent).
LOOKING, YOU KNOW, MAYBE NOT SO GOOD?
And then, let’s look at the ones who have the least by this measure. We’ve talked at some length aboutPlacentia already. Officials say Santa Ana was close to the brink, but is on the mend.
So let’s talk about Cypress, which comes in just behind Placentia on our list, which is not a place one wants to be. By our unassigned general fund balance measure, Cypress had mad money of less than 1 percent of its annual spending. But that, its mayor said, is because of the aforementioned emergency–money-placed-elsewhere thing.
“Cypress remains financially strong and we are not on the brink of insolvency,” Mayor Douglas A. Bailey wrote in a response to our measure, which we’ve been circulating among city-types for weeks.
To wit: Cypress puts 25 percent of its operating expenses into an assigned emergency fund, and has another 5 percent stashed in assigned funds elsewhere, for a reserve of about 30 percent. The most important points, the mayor said, are that Cypress’ general fund revenues were $30 million and it spent some $25 million, leaving a healthy “balance available for assignment” of more than $4 million. “The City of Cypress has traditionally been a fiscally conservative and prudently managed organization, and it is no different when the economy is booming, or during lean times as we are currently experiencing,” he said. (See more detail from Cypress below.)
OTHERS HAVE MORE TOO
Consider Newport Beach, which has a comfy 35 percent cushion by our measure. It also has many millions more set aside. “For instance, we have assigned funds to our IT strategic plan and for additional facilities, but these are cash and liquid,” City Manager Dave Kiff told us by email. “If I need them in the event of a crisis, I just don’t buy the IT nor build another facility. And they immediately become unassigned and available reserves. So Newport’s number, using my math, is $88.3 M” — or 138 percent.
- Laguna Beach has an 8.3 percent cushion by our measure; but city officials say it’s more like 22 percent when other funds are taken into consideration.
- San Clemente, which has a 9 percent cushion by our measure, has a separate ‘sustainability fund balance reserve’ of $10 million, which takes it firmly into the comfort zone of 32 percent.
- Dana Point, which has a comfy 22 percent cushion by our measure, had many millions more in other accounts — with “on-hand available cash resources” totaling 68 percent of annual expenditures.
- Laguna Niguel, which has a comfy 50 percent by our measure, would be more like 160 percent.
See detailed explanations below the chart.
Now, the crystal ball is funky: Stanton, which is widely considered one of the cities closest to the edge of the financial abyss here in O.C., had an unassigned general fund balance of $12.5 million. With a general fund of only $15.6 million, that appears to be a very comfortable cushion of 80 percent.
But Stanton is spending way more than it takes in each year. It has eaten into that money to cover that overspending, and officials say that if costs continue unabated, Stanton will be broke in four years.
We’ll be gazing through that particular lens for you very soon.
From City Manager Tim Casey:
Interesting numbers. I suspect that some of the variations are due to GASB 54 which replaced former fund balance designations (Reserved, Unreserved/Designated and Unreserved/Undesignated) with the new terms (Nonspendable, Restricted, Committed, Assigned and Unassigned). In Laguna Niguel, using the June 30, 2011 CAFR, we consider our General Fund reserves to consist of:
Capital Asset Replacement Reserve (Committed per GASB 54) $25,238,030
Streets and Roads Reserve (Assigned per GASB 54) $4,442,315
Reserve for Economic Uncertainty (Unassigned per GASB 54) $13,383,939
That obviously paints a different picture. All of these reserves were established by Laguna Niguel City Council actions, but GASB 54 requires them to be assigned to different buckets.
From Assistant City Manager/City Treasurer Pall Gudgeirsson:
San Clemente should also reflect our ‘sustainability fund balance reserve’ of $10 million dollars in addition to unassigned fund balance. This is much like an emergency reserve and enhances our liquidity position and is a similar adjustment you made to other cities.
From Director of Finance and Information Technology Gavin Curran:
First, it is important to point out that the City’s General Fund, as reported in the CAFR, includes expenditures for the City Sewer Service Fund, Capital Improvement Fund, and the Parking Fund. Please understand that other cities may show these expenditures as separate funds, in which case the expenditures apparently would not be included in the expenditure number the OC Register is using to calculate the “unassigned” fund balance percentage.
Second, the “assigned” amount of $19.5 million is comprised of a cash set-aside of $12.6 million for specifically identified and approved capital improvement projects, $4.8 million for future parking improvements, and $2.1 million set aside for specified operational expenditures such as the City’s Fuel Modification program and department-requested capital equipment purchases. While the City Council arguably could consider moving a portion of the “assigned” fund balance to the “unassigned” fund balance, there would need to be legal review on a case-by-case basis, consideration for delaying or eliminating capital improvement projects, deciding not to move forward with future parking projects, or not approving departmental funding requests.
Third, it should be noted that in Fiscal Year 2009-10, the City paid off a $10 million pension liability to CalPERS. This was a payoff of the City’s so-called “Side Fund,” which represents the unfunded liability for past service credit of safety employees. CalPERS had been charging the City 7.75% interest on a balance of $10 million over a remaining repayment period of about 15 years. To make the $10 million payment, the General Fund had to “borrow” $8 million in available cash from other funds – including the Parking Fund, the Insurance Fund, the Vehicle Replacement Fund and the Street Lighting Fund – which borrowed funds would be repaid over 15 years through the required allocation of future revenues. The payment, or expenditure, was recorded in the General Fund, thereby reducing the “unassigned” fund balance, although cash was borrowed from the other funds so that the General Fund cash balance itself would not be impacted. The Governmental Fund Types Balance Sheet shows this $8 million advance to the General Fund. By borrowing internally and paying off the debt, the City is expecting to save approximately $4.2 million over 15 years.
We consider the $8 million as available cash in the General Fund, with less cash available in the other funds that were impacted by the borrowing. By adding that figure to the “unassigned” fund balance and dividing by the General Fund expenditures, the fund balance percentage is 22%.
From Assistant City Manager Mike Killebrew:
…(W)e think it important for you to point out some unique elements that make Dana Point a very financially sound City as well as reflects the historically fiscally-conservative nature of the current and past City Councils. DanaPoint has never had a Redevelopment Agency and has no outstanding debt or long-term financial commitments. As such, we think it important that you list the liquid assets of the City that the City Council has available to it should they need to draw upon them for some unforeseen financial situation. For the past year, the City has had on average approximately $33.5 million of cash and secure investments on hand each month. The City Council has the ability to designate and/or re-designate the vast majority of these funds as necessary to cover City expenditures.
The City’s financial condition is very strong and our budget is constructed in a manner which allows for much flexibility should revenues the City relies on dramatically change. I would like to point out that the number you use from a year ago for the unassigned fund balance (i.e. $6,093,837) does not include other Council-designated reserves that are available at any time by Council action. City Council policy dictates that in addition to the unassigned fund balance, that the City maintain reserves of 30%, and at June 30, 2011 those reserves were fully funded (and continue to be to this day) and amounted to $8,211,000; of that amount, $2,737,000 is set aside for cash flow (e.g. to cover payments until the semi-annual property tax revenue is received from the County AND assuming that there is no unassigned fund balance, which as you report there is unassigned fund balance), and an additional $5,474,000 is set-aside for emergencies.
In addition to those two reserves, the City has also set-aside cash of $648,856 just in case the State decides to use more of their budget gimmicks and take additional City revenue; plus, another $3,169,000 in cash for future capital asset replacements. All of these cash reserves are available and could be utilized, if needed, simply by action of the City Council. When one speaks of solvency, one must consider all liquid resources that are not restricted for specific purposes. Even using your more limited perspective of short-term fiscal health, which of course shows the City to be in good shape having an unassigned fund balance of 21.9%, we know the City is in exceptional fiscal shape. This is the case for both the short-term and the long-term, and with that the City has on-hand available cash resources of 68% of expenditures.
From Mayor Douglas A. Bailey:
…the City of Cypress “assigns/commits” a portion of its fund balance (25% of its operating expenses) for a contingency/unforeseen situations/stabilization agreement.
As mandated by government accounting procedures, the City reports its fund balance by self-imposed constraints to demonstrate how fund balance amounts will ultimately be expended. Since the City Council formally approved the 25% contingency it is recorded under committed fund balance, not unassigned.
It appears that the goal of the Orange County Register’s article was to determine the liquidity of the City. To determine liquidity, a better measure would have been to analyze the General Fund cash ($27,304,783) as compared to accounts payable ($2,433,809). By using the “unassigned” fund balance, it appears that the City was being criticized for having a financial plan which commits, assigns and restricts funds for specific purposes.
The facts of the City’s financial picture are as follows:
- The General Fund maintains a Contingency (Stabilization Agreement) of 25% ($6.0 million)
- The General Fund also has assigned $1.6 million in cash to a Business Relocation Stabilization Account
- These two designations of the General Fund’s fund balance would equal an over 30% reserve
- The City also maintains general fund monies in the capital projects fund (a 30% emergency contingency of $7.2 million)
- In addition, the City’s infrastructure fund is an assignment of general fund monies and includes over $8 million.
Finally, the most important points for FY 2010-1 1:
- Cypress’ General Fund revenues/sources were $30 million
- Cypress’ General Fund operating expenses and basic capital expenses were over $25 million, leaving the balance available for assignment annually of over $4 million
The City of Cypress has traditionally been a fiscally conservative and prudently managed organization, and it is no different when the economy is booming, or during lean times as we are currently experiencing.
The City maintains internal service funds with accumulated balances to cover equipment replacement, employee benefits (including fully funding retiree health benefits), and insurance reserves. These funds are funded at levels greater than actuarial requirements.
Furthermore, the City Council and the City’s workforce continuously work together to identify opportunities to realize cost savings. In this effort, the City has:
- Reduced the number of full-time positions through attrition, reorganization, and hiring freeze
- Contracted out certain City services such as landscaping
- Optimized use of equipment and replaced only when absolutely necessary
- Sought competitive bids for the lowest pricing on goods and services
- In partnership with employee associations, future employees will pay a portion of pension costs
- Police Department commitment to core services and reducing overtime expenditures
The City Council of the City of Cypress is committed to maintaining the fiscal health of the City and continuing the quality services that our residents have come to expect. On behalf of my colleagues on the City Council, we would like to assure our residents again that the City is in good financial health, and we expect the City to remain fiscally strong and prosperous for many years to come.
For more information regarding the City’s finances, the City’s financial documents are readily available on the City’s website. The Comprehensive Annual Financial Report (CAFR) can be accessed at
http:/lwww.ci.cvpress.ca.uslfinancell011 cafrll011 cafr.pdf.
The City’s annual budget can be accessed at http://www.ci.cvpress.ca.us/financelbudqet table contentshtm