According to a new website run by California State Auditor Elaine Howle and her staff, the dozen most populated cities in California all have significant fiscal problems and will be forced into major adjustments in coming years.

Eleven of the cities – Los Angeles, San Diego, San Jose, San Francisco, Fresno, Sacramento, Long Beach, Bakersfield, Anaheim, Santa Ana and Riverside – face what Howle classified as moderate risk. One – Oakland – was seen as a high risk.

All 12 of the cities face considerable stress from the rising cost of pensions. Several – especially Los Angeles – also have vast unfunded health care obligations for their retirees. 

Howle’s findings were depicted as surprising in a Sacramento Bee analysis, which focused on the health of the state economy and the low unemployment rate. But government finance experts have long warned that California’s cities – which have seen the cost of post-employment benefits roughly triple over the last 30 years – are in a far worse position to deal with pension bills that the state and counties. That’s because total employee compensation takes up a much bigger chunk of city budgets.

Howle warns cities to prepare for recession

At a news conference introducing the website, Howle said a primary goal was making sure that both local officials and residents of each city would use her office’s analysis to prepare for a possible economic downturn. Even a mild recession is likely to reduce revenue that cities get from sales and hotel taxes and from development permitting.

“If some of these [cities’] costs continue to go up and these cities aren’t prepared for them, they will have to cut services in order to pay pensions, to pay for benefits, to pay for the debts that some of the cities have taken on,” Howle said, according to the Sacramento Bee. She specifically said nearly half the cities will struggle to meet their steadily increasing payments to CalPERS.

Rankings on the website are based on the 2016-17 fiscal year, with a focus on each city’s pension obligations, pension funding, pension costs, anticipated future pension costs, retiree health care expenses, debt burden, liquidity, general fund reserves and revenue trends.

Overall, 18 cities were said to be at high risk overall, 236 at moderate risk and 217 cities at low risk. Compton – which has not produced an audited overview of its finances in five years – was judged to be in the worst shape, followed by Atwater and Blythe. 

The other cities listed at being high-risk: Lindsay, Calexico, San Fernando, El Cerrito, San Gabriel, Maywood, Monrovia, Vernon, Richmond, Ione, Del Ray Oaks, Maryville, West Covina and La Habra.

Among the cities found to be in the best shape: Rancho Cucamonga, Chino Hills, Poway, Indian Wells, Rancho Mirage, La Quinta and Mountain View.

The fact that 2-year-old information was being presented by the auditor as a snapshot of cities’ current fiscal health prompted criticism from the League of California Cities.

“It doesn’t tell the story of now, and so we’re not really clear on how helpful this dashboard is to the public, to the cities or basically anybody,” Jill Oviatt, director of communications and marketing for the league, told the Bee. She likened Howle’s rankings to “a data dump that’s void of context and analysis.”

A new Public Policy Institute of California poll shows the number of state residents worried about the cost of government pensions is at a 14-year low. In recent remarks to the Commonwealth Club in San Francisco, new state Superintendent of Public Instruction Tony Thurmond rejected the idea that pension costs were generally a major problem for school districts around the state.

But a recent comprehensive review by the Bond Buyer painted a starkly different picture. Based on interviews with officials in credit-rating agencies and the state’s Fiscal Crisis Management Action Team (FCMAT), as well as reviews of financial records from large school districts across the state, it forecast a wave of state takeovers of districts under the provisions of a 1991 state law that provides emergency loans to districts that can’t pay bills. But the loans come with the condition that district superintendents and school boards lose considerable autonomy over their budgets, which must have as a first priority repaying the loan to the state.

Nine districts have taken out such loans since 1991, and the Sacramento City Unified School District could become the 10th this fall when it is expected to run out of dwindling cash reserves.

A Fitch Ratings analysts told the Bond Buyer that about 50 of the 124 school districts it tracks have such low reserves that if an economic slowdown froze or reduced state revenue, those districts could quickly lose their capacity to pay bills. The same problems seen by Fitch in the larger districts that it monitors are likely to be seen in the 1,000-plus smaller districts it doesn’t track.

Low birth rate hurts enrollment

Since California’s overall population keeps going up, that’s obscured a key complication in school finances: The fact that school enrollment in much of the state is in the middle of a broad, long-term decline driven by changing demographics and birthrates that in 2017 hit an all-time low for the Golden State. FCMAT CEO Michael Fine estimates that 65 percent of the state’s 1,200 districts have fewer students than they used to. Perhaps the most dramatic decline is in Inglewood Unified, where present enrollment is 8,000 – about 40 percent of what it was in 2004.

Because state funding is based on the Average Daily Attendance formula, the enrollment declines can hammer districts even in a decade in which state funding for education has increased by more than 70 percent. That’s because many school districts don’t reduce their staffs by an amount equal to the lost enrollment. A FCMAT report on Oakland Unified issued last May called this a key factor in the financial strain faced by the district.

Another issue is that retirement benefits in some districts don’t just include pensions from the California State Teachers’ Retirement System. Some districts, including Los Angeles Unified and Sacramento City, offer generous health insurance to retirees for as long as they live.

S&P rating service downgraded LAUSD’s bonds last month. Fitch downgraded some of Sacramento City’s bonds in February, and further downgrades seem certain.

CalSTRS needs booming market

Officials with CalSTRS remain optimistic that healthy investment returns can reduce CalSTRS’ present unfunded liabilities of about $100 billion. Boom markets on Wall Street have at times allowed CalSTRS to keep mandatory pension contributions relatively flat for years at a time.

But the 2007 recession hammered CalSTRS, forcing the Legislature and Gov. Jerry Brown to pass a bailout measure in 2014 that will roughly double annual contributions from districts, the state and teachers by July 2020, when its final increase is phased in.

But hopes that profitable investments will be a big help in reducing liabilities aren’t coming to pass. The Sacramento Bee reported recently that CalSTRS only had a 1.62 percent return on its portfolio for the first eight months of fiscal 2018-19 and was not expected to meet its target of a 7 percent annual return.