Walters: Local Governments Are in Distress

California’s economy has been booming for most of this decade and has generated a cornucopia of tax revenues for state and local governments.
The state has benefited most, because it collects income taxes. Californians’ taxable incomes have been soaring, especially for those atop the economic ladder, whose tax rates also have been increased.

The state has shared much of its multibillion-dollar windfall with schools, as required by the California constitution, increasing per-pupil spending about 50% in recent years.
Nevertheless, many school districts are in financial distress due to declining enrollment, unsustainable, irresponsible salary increases and, finally, state-mandated increases in payments to the California State Teachers Retirement System to offset its unfunded pension liabilities.
Last week, state Auditor Elaine Howle reported that audits of three big school districts revealed that state aid meant to enrich the educations of poor and English-learner students has often been diverted to cover budget holes.
Many school districts have asked voters for tax increases to close their budget gaps, most commonly through “parcel taxes,” which are levied on real estate. And the California School Boards Association is sponsoring a 2020 ballot measure that would hike personal and corporate income taxes to raise about $15 billion a year for schools.

The Ratings Are Based on Several Factors

Schools, however, are not the only local governmental agencies in fiscal distress. Cities, which receive almost no state aid and depend largely on local property and sales taxes, are also feeling the pinch for many of the same reasons.
Prior to issuing her report on schools, Howle released another revealing study on the fiscal health of California’s nearly 500 cities, highlighting those in the worst straits.
Generally, most in trouble are small cities, either in rural areas or in urban cores, whose residents have low incomes. No. 1 on the list is Compton, whose travails have been well documented over the years.
However, there are also a few larger cities that Howle highlighted, such as Oakland, No. 13 on the statewide list, and San Diego, deemed to be one of the top three “fiscally challenged” cities in its region.
The ratings are based on several factors, including liquidity, debt burden, financial reserves, revenue trends and retirement obligations. It’s clear that the last one looms very large.
The California Public Employees Retirement System saw its trust fund plummet in value during the Great Recession as its pension obligations mushroomed, leaving it with only slightly more than 70% of the assets needed to fully pay promised pensions and — so far, at least — unable to recover fully from its investment losses.

Cities Have Asked Their Voters for Tax Increases

Therefore, CalPERS has been ramping up mandatory payments from local governments to reduce what it calls its “unfunded actuarial liability.” Cities get hit the hardest because they employ large numbers of police officers and firefighters who have the highest pensions and therefore the highest pension costs.
It’s not unusual for contributions for employees in so-called “safety systems” to reach 50% of payroll, and CalPERS has told city officials they will continue to climb.
Throughout the state, cities have asked their voters for tax increases, usually sales taxes but sometimes parcel taxes, to close their budget gaps with mixed results. But tax increases are particularly difficult to pass in communities with large numbers of low-income residents.
Howle’s report not only shines some much-needed light on municipal finances but includes an Internet portal for Californians to check on their own cities. And sunshine is the best disinfectant for bad management.
CalMatters is a public-interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to calmatters.org/commentary.