Five out of the top 10 cities at high financial risk are located in Southern California, according to the office of the California State Auditor, and COVID-19 is only partly to blame.
“Across the board, just about every city in California is suffering financially because of the pandemic,” said Mike Tilden, the deputy state auditor. “Their revenues are declining.”
Southern California cities on the auditor’s local government high-risk dashboard include Compton, Calexico, San Fernando, West Covina, and Torrance.
“We did an analysis and hired an economist who did some projections on the extent to which city revenues are going to decline over the next two years through the fiscal year 2022 and we found a number of cities where their projected revenues are expected to drop by more than 20% relative to their expenditures,” Tilden told the Southern California Record. “A number of those cities are in Southern California."
Indicator categories include general fund reserves, debt burden, liquidity, revenue trends, pension obligations, pension funding, pension costs, and future pension costs
Compton, for example, has not provided financial statements for multiple years and, as a result, was deemed to be high risk in all indicator categories except for when it comes to employment. Only 6% of a population of 95,605 are unemployed.
“Compton is a special case,” Tilden said in an interview. “The reason Compton ranks number one is because of a lack of financial transparency.”
Calexico has a 31% unemployment rate among a population of 39,825. General fund reserves, debt burden, and liquidity are all ranked at high risk, according to the Fiscal Health of California Cities ranking.
"For all of these cities that are fiscally stressed, if you don't have enough cash to pay your bills, then at some point you have to reduce services,” Tilden said. “Residents in these cities are potentially facing reductions in the police, the fire department, road maintenance, and sewer service.”
San Fernando has an unemployment rate of 4% among a population of 24,322. Its debt burden is low but general fund reserve and liquidity are at high risk compared to West Covina, which has a 4% unemployment rate among a population of 105,101 with good liquidity but a general fund reserve that’s at high risk.
“San Fernando and West Covina haven't set aside enough funds to pay the pension benefits that their employees have already earned,” Tilden said. “Because they haven't done that, what's happening is their annual required payments to the pension plans are rising yearly to try and catch up. Also, none of these cities have anywhere near sufficient funding to pay for the post-employment health and dental benefits of their employees. I believe a number of these cities have nothing set aside to pay for those benefits at all.”
Finally, Torrance has an unemployment rate of 4% among a population of 143,592 with their general fund reserve at high risk.
“In terms of having a savings account for economic downturns, Torrance is going backward,” Tilden said. “They are below that minimum threshold of enough reserves to pay bills for two months. They got worse in terms of their reserves in the last two years.”