Contents

About

Dashboard

Audits

The California State Auditor’s Office is a state entity that is independent of the executive branch and legislative control. The purpose of the California State Auditor is to improve California government by assuring the performance, accountability, and transparency that its citizens deserve. For more information on the California State Auditor, please visit www.auditor.ca.gov.






About

California Government Code section 8546.10, authorizes the State Auditor to establish a high-risk local government agency audit program (local high-risk program) to identify local government agencies that are at high risk for the potential of waste, fraud, abuse, or mismanagement, or that have major challenges associated with their economy, efficiency, or effectiveness. We have focused our efforts on evaluating the risks facing California cities.

The local high-risk program consists of two elements:

  • Interactive Dashboard: Each year we collect and analyze key financial data about California cities and use it to develop an interactive dashboard that identifies those cities that could be facing fiscal challenges. Through this transparent interface, California residents, state and local policymakers, and interested parties have a data driven view of each city’s fiscal health. This year we performed additional analysis to evaluate financial risks associated with the Coronavirus Disease 2019 (COVID-19) pandemic.
  • Go to the Dashboard Learn More about the Dashboard Get the Raw Data

  • Audits: After establishing our list of cities facing fiscal challenges, we conduct initial assessments to further evaluate the risks those cities face. These initial assessments inform whether we will seek approval from the Joint Legislative Audit Committee to conduct an audit of the city. If a city is designated as high risk as a result of an audit, it must submit a corrective action plan and provide updates every six months regarding its progress in implementing the corrective action plan. We will remove the high risk designation when the city has taken satisfactory corrective action.
  • See the Audits We’ve Completed See Our Work in Progress Learn More about Local High-Risk Audits

Regulations that define high risk and describe the workings of the local high-risk program became effective July 1, 2015.





Back to top



Dashboard

Overview

“This transparent interface for the public, state and local policy makers, and other interested parties is intended to identify cities that could be facing significant fiscal challenges.”

State Auditor Elaine M. Howle, CPA

In October 2019, the California State Auditor launched a new tool—an online dashboard—that ranks more than 470 California cities based on detailed information about their fiscal health. The ranking is part of our process for determining whether a city is at risk of fiscal distress.

We used various financial indicators to assess the fiscal health of cities as summarized in Figure 1. The dashboard allows users to view individual city rankings and ratings, which are scored using a stop-light indicator rating system. This system rates cities based on their risk of experiencing fiscal distress with red being high risk, yellow being moderate risk, and green being low risk.

Figure 1

Could Your City Be In Fiscal Distress?

To ensure the development of the list included third-party municipal fiscal health expert input, we established and consulted with an advisory panel made up of experts in municipal fiscal health including representatives from the Public Policy Institute of California, the California Public Employees’ Retirement System (CalPERS), California Policy Center, S&P Global Rating Services as well as an advisor to the California Society of Municipal Finance Officers and the League of California Cities, and a professor at the Daniel J. Evans School of Public Policy and Governance at the University of Washington.

Go to the Dashboard Get the Raw Data Here





Back to top



Detailed Methodology by Financial Indicator

Overall Risk

“We are confident that our assessment will help distressed cities get in front of impending challenges.”

State Auditor Elaine M. Howle, CPA

To identify cities that may be at risk for fiscal distress, we analyzed financial information for over 470 California cities. We assessed risk by performing various financial comparisons and calculations that we refer to as financial indicators, as discussed in more detail below. We analyzed the finances related to each city’s governmental and business-type activities, including the general fund—the main operating fund.

Our analysis relied on information from audited financial statements prepared in accordance with generally accepted accounting principles (GAAP) that we obtained through various sources such as city websites, the Federal Audit Clearinghouse, the Electronic Municipal Market Access website, and the California State Controller’s Office (State Controller). We also analyzed unaudited pension related information from CalPERS.

Financial Indicators

We selected a set of 10 indicators that enabled us to assess each city’s ability to pay its bills in both the short and long term. Specifically, the indicators measure each city’s financial reserves, debt burden, cash position or liquidity, revenue trends, and ability to pay for employee retirement benefits. In most instances, the financial indicators rely on information for fiscal years 2014–15 through 2018–19.

We used a points-based system to rank and categorize cities as either high, moderate, or low risk for fiscal distress. We weighted the results of the indicators by assigning varying numbers of points to each indicator based on our judgment of each indicator’s relative importance. Table 1 shows the maximum points assigned to each indicator.

Table 1: Points Possible By Financial Indicators

Financial Indicators Points Possible
1. General Fund Reserves 30
2. Debt Burden 15
3. Liquidity 10
4. Revenue Trends 5
5. Pension Obligations 10
6. Pension Funding 5
7. Pension Costs 5
8. Future Pension Costs 5
9. OPEB Obligations 10
10. OPEB Funding 5
Maximum Score Possible 100

We assigned points to cities based on the calculated result of each indicator, and then ranked cities based upon their cumulative scores. Cities could score anywhere from zero points up to the maximum available points for each indicator. A perfect score across all indicators would equal 100 points with lower scores representing higher degrees of fiscal risk.

Fiscal Risk Designations

We assigned risk designations to cities based on their cumulative score for all 10 indicators as shown in Table 2.

Table 2: Methodology for Determining Which Cities Are High Risk

Risk Designation Range of Points Assigned Description
High Risk 0 to 41.76 This designation means that a city has significant risk of experiencing fiscal distress.
Moderate Risk 41.77 to 71.23 This designation means that a city has some risk of experiencing fiscal distress.
Low Risk 71.24 to 100 This designation indicates that a city has low risk of experiencing fiscal distress.

Our dashboard ranks cities from highest to lowest risk for fiscal distress based on indicators that rely primarily on financial information as of June 30, 2017; June 30, 2018; and June 30, 2019, which may not represent cities’ current financial status. In addition, these rankings do not reflect environmental factors such as population trends, unemployment rates, or levels of household income.

We performed an additional analysis that projects the impact that COVID-19 will have on city revenues.

Check out our COVID-19 Analysis Learn More about the COVID-19 Analysis Methodology

As explained below, we determined that the city of Compton has high fiscal risk because of the lack of transparency over its finances. In addition, for purposes of our dashboard, we analyzed the city of Lincoln’s finances using our financial indicators which rely on the city’s audited financial statements. Although our dashboard categorizes the city of Lincoln as low risk based on those calculations, we do have concerns with the city’s finances, as described below. Finally, we excluded certain cities from our dashboard, generally because they did not publish audited financial statements that were prepared in accordance with GAAP.

See Which Cities Did Not Publish Financial Reports

City of Compton

Because the city of Compton did not publish required audited financial statements, or published significantly incomplete financial statements, for fiscal years 2014-15 through 2018-19 we ranked this city as having high fiscal risk due to the lack of transparency over its finances. Federal regulations require cities that spend $750,000 or more in federal awards in a fiscal year to have an audit performed. In accordance with state law, cities subject to this requirement must submit this information to the State Controller or notify the State Controller of their exempt status. The State Controller did not report the city of Compton as exempt from this reporting requirement.

City of Lincoln

As requested by the Joint Legislative Audit Committee, we issued a report on March 21, 2019, pertaining to the city of Lincoln and its administration of public funds and assets. That report concluded that Lincoln’s mismanagement of public funds, insufficient accountability, and inadequate oversight threatens its financial stability. Our report titled City of Lincoln: Financial Mismanagement, Insufficient Accountability, and Lax Oversight Threaten the City’s Stability is available by clicking here: www.auditor.ca.gov/reports/2018-110/index.html





Back to top



General Fund Reserves

This indicator evaluates whether a city has sufficient financial reserves to cover its expenditures during times of declining revenues or increasing costs. A city with insufficient reserves may have difficulty responding to revenue shortfalls or expenditure overruns while maintaining service levels. Essentially, this indicator measures the extent to which a city's unrestricted reserves could be used in times of fiscal distress.

Methodology

We calculated the general fund reserves indicator using information on general fund unrestricted fund balances (committed, assigned, and unassigned fund balances), as well as expenditures and transfers out (transfers from the general fund to another city fund) from a city’s audited financial statements. We then determined whether the unrestricted fund balances were trending in a positive or negative direction using historical financial statements.

We calculated the indicator as follows:

  • General fund unrestricted fund balances divided by general fund expenditures and transfers out
  • Correlated with the average annual change in general fund unrestricted fund balances during the past three fiscal years

This indicator reflects a city’s general fund unrestricted fund balances as a percentage of its general fund expenditures and transfers out, and whether a city’s unrestricted fund balances are trending in a positive or negative direction. Cities that do not have enough reserves to pay for at least two months of expenditures may have trouble maintaining service levels in times of declining revenues or increasing costs. Similarly, even cities with sufficient reserves to cover several months of expenditures could have a difficult time responding to future revenue shortfalls or expenditure overruns if their reserves are declining.

We calculated the average annual change in unrestricted fund balances over a three-year period. For a few cities, we were only able to obtain audited financial statements for two years, and we therefore calculated the change based on those two years. We were unable to calculate these changes for cities when audited financial statements were only available for one year, and therefore for scoring purposes, we assumed that these cities had no growth in their unrestricted fund balances.

We awarded points for this indicator using a two-part scoring system. First, we assigned a range of possible points by comparing a city's unrestricted fund balance in its general fund (fund balance reserve) to its annual expenditures, including transfers out. We assigned cities with higher reserves compared to their expenditures a higher range of possible points than cities with relatively lower reserves. For example, if a city's fund balance reserve was large enough to pay expenditures for eight months, then the range of points it could earn was higher. However, if a city's fund balance reserve was only large enough to pay expenditures for one month, then the range of possible points was much lower.

Second, we determined whether a city's fund balance reserve increased or declined on an annual basis during the past three years. We awarded relatively more points to cities with increasing fund balances and fewer points to cities with declining fund balances. Specifically, if a city’s fund balance on average grew by more than 20 percent annually, that city scored at the top of the range of available points. If a city’s fund balance on average declined by 20 percent or more annually, that city scored at the bottom of the range. Fund balance trends in between these two boundaries were scored based upon a linear scale.

Because we used a two-part scoring system, a city could have a larger fund balance reserve relative to its expenditures, but it could receive fewer points than another city if its fund balance was declining significantly. For example, a city with a fund balance reserve large enough to cover expenditures for six months but whose reserves declined on average by 20 percent annually would earn 15.78 points. However, a city with a fund balance reserve that was only large enough to pay expenditures for five months, but whose reserves grew on average by 21 percent annually would earn 16.58 points. We assigned points and corresponding risk designations for this indicator based on the calculated percentages, as shown in Table 3 and Table 4.

Table 3: Methodology for Calculating General Fund Reserve Indicator Points

Number of Months That Reserves Could Be Used to Pay Expenditures (calculation result) Range of Points Assigned
0 months (less than or equal to 0%) 0.00
> 0 to 1 months (greater than than 0% but less than or equal to 8%) 0.31–3.16
> 1 to 2 months (greater than than 8% but less than or equal to 17%) 2.84–6.71
> 2 to 3 months (greater than than 17% but less than or equal to 25%) 5.68–9.87
> 3 to 4 months (greater than than 25% but less than or equal to 33%) 8.21–13.03
> 4 to 5 months (greater than than 33% but less than or equal to 42%) 10.74–16.58
> 5 to 6 months (greater than than 42% but less than or equal to 50%) 13.58–19.73
> 6 to 7 months (greater than than 50% but less than or equal to 58%) 16.1–22.89
> 7 to 8 months (greater than than 58% but less than or equal to 67%) 18.63–26.44
> 8 to 9 months (greater than than 67% but less than or equal to 75%) 21.47–29.60
> More than 9 months (greater than 75%) 30.00

Table 4: Methodology for Measuring Risks Related to General Fund Reserves.

Risk Designation Description
High Risk The high risk designation has a range of possible points from 0.00 to 6.50 and indicates that a city's general fund has insufficient reserves to cover its expenditures in the event of a fiscal emergency.
Moderate Risk The moderate risk designation has a range of possible points from 6.51 to 16.00 and indicates that a city's general fund may have sufficient reserves to cover its expenditures in the event of a fiscal emergency.
Low Risk The low risk designation has a range of possible points from 16.01 to 30.00 and indicates that a city's general fund has substantial reserves to cover its expenditures in the event of a fiscal emergency.




Back to top



Debt Burden

This indicator measures the extent to which a city is burdened by debt by comparing its long-term obligations (excluding retirement obligations) to the revenues the city collects. High amounts of debt can strain a city’s ability to provide essential services to its residents, especially if its revenues decline.

Methodology

We calculated the debt burden indicator using information on long-term obligations such as bonds, notes payable, and leases, as well as revenues, from a city’s audited financial statements. We calculated the indicator as follows:

Long-term obligations (excluding retirement obligations) divided by governmentwide revenue

This indicator reflects a city’s long-term obligations (excluding retirement obligations) as a percentage of its governmentwide revenue. A result greater than or equal to 100 percent indicates that a city may have excessive debt, which can strain its ability to pay its long-term obligations without cutting costs for other city services. We assigned points and corresponding risk designations for this indicator based on the calculated percentages, as shown in Table 5.

Table 5: Methodology for Measuring Risks Related to Debt Burden

Risk Designation Calculation Result Range of Points Assigned Description
High Risk greater than or equal to 100% 0 to 8.33 This designation indicates that a city's revenues are substantially burdened by debt, and it may have difficulty paying those debts without reducing city services to lower expenses.
Moderate Risk less than 100%, but greater than or equal to 40% 8.34 to 13.33 This designation indicates that a city likely has sufficient revenues to pay its debts without reducing city services to lower expenses.
Low Risk less than 40% 13.34 to 15 This designation indicates that a city has substantial capacity to pay its debts and greater flexibility to respond to economic changes.




Back to top



Liquidity

This indicator measures a city’s ability to pay its bills in the coming fiscal year by comparing the amount of cash and investments at year-end in the general fund to the fund’s obligations (or liabilities). A city with insufficient cash and investments may have difficulty paying the costs of providing services to residents.

Methodology

We calculated the liquidity indicator using information on general fund cash and investments and general fund liabilities from a city’s audited financial statements. We calculated the indicator as follows:

General fund cash and investments divided by general fund liabilities

This indicator reflects a city’s general fund cash and investments as a percentage of its general fund liabilities. A result of less than 100 percent indicates a city’s cash and investments may not be sufficient to cover its short-term obligations. We assigned points and corresponding risk designations for this indicator based on the calculated percentages, as shown in Table 6.

Table 6: Methodology for Measuring Risks Related to Liquidity

Risk Designation Calculation Result Range of Points Assigned Description
High Risk less than 100% 0 to 4.99 This designation indicates that a city's general fund may not have sufficient cash and investments at fiscal year-end to pay its short-term liabilities.
Moderate Risk 100% or greater, but less than 150% 5.00 to 7.49 This designation indicates that a city's general fund likely has sufficient cash and investments at fiscal year-end to pay its short-term liabilities.
Low Risk 150% or greater 7.50 to 10 This designation indicates that a city's general fund has cash and investments at fiscal year-end in an amount that substantially exceeds its short-term liabilities.




Back to top



Revenue Trends

This indicator measures the extent to which a city's general fund revenues are increasing or declining over time. A city with relatively flat or declining revenues may have difficulty maintaining service levels, especially in times of rising costs.

Methodology

We calculated the revenue trends indicator using information on general fund revenues from a city’s audited financial statements. We calculated the indicator as follows:

Average annual change in general fund revenues during the past three fiscal years

The revenue trends indicator measures the extent to which a city's general fund revenues increased or declined over a three-year period. A city with relatively flat or declining revenues may have difficulty paying for rising costs, such as rising pension costs, while also maintaining service levels. For a few cities, we were only able to obtain audited financial statements for two years, and therefore we calculated the trend based on those two years. We were unable to calculate trends for those cities when audited financial statements were only available for one year, and therefore such cities received a score of 0 points for this indicator. We assigned points and corresponding risk designations for the revenue trends indicator based on the calculated percentages, as shown in Table 7.

Table 7: Methodology for Measuring Risks Related to Revenue Trends

Risk Designation Calculation Result Range of Points Assigned Description
High Risk less than or equal to 0% 0 to 2.50 This designation indicates that a city's general fund revenues are flat or declining, which could strain its ability to maintain service levels, especially in times of rising costs.
Moderate Risk greater than 0%, but less than or equal to 10% 2.51 to 3.75 This designation indicates that a city's general fund revenues are increasing modestly and may be sufficient to pay rising costs without reducing service levels.
Low Risk greater than 10% 3.76 to 5 This designation indicates that a city's general fund revenues are increasing substantially.




Back to top



Pension Obligations

This indicator assesses the magnitude of a city’s pension obligations by comparing its unfunded pension liability and any other pension-related debt to the revenues the city collects. A city with large unfunded pension obligations will have to pay higher pension contributions over time, which may strain its ability to provide services to its residents, especially if its revenues decline.

Methodology

We calculated the pension obligations indicator using amounts on the net pension liability, pension-related debt outstanding, and revenues from a city’s audited financial statements. We calculated the indicator as follows:

Sum of net pension liability and pension-related debt outstanding divided by governmentwide revenues

The pension obligations indicator assesses the magnitude of a city’s pension obligations by comparing its unfunded pension liability (net pension liability) and other outstanding pension-related debt to its governmentwide revenues. Some cities elect to issue pension obligation bonds and use the proceeds to fund their unfunded pension obligations, or to pay the annual required contribution(s) to the pension plan, on the assumption that the interest paid on the bonds will be lower than the earnings from investments in the pension fund.

We assigned points and corresponding risk designations for the pension obligations indicator based on the calculated percentages, as shown in Table 8.

Table 8: Methodology for Measuring Risks Related to Pension Obligations

Risk Designation Calculation Result Range of Points Assigned Description
High Risk greater than or equal to 100% 0 to 4.00 This designation indicates that a city's unfunded pension obligations exceed its annual revenues; therefore, making required contributions to the plan(s) will likely strain the city's financial resources.
Moderate Risk less than 100% but greater than or equal to 50% 4.01 to 8.00 This designation indicates that a city's unfunded pension obligations represent a substantial portion of its annual revenues; therefore, making required contributions to the plan(s) may strain the city's financial resources.
Low Risk less than 50% 8.01 to 10.00 This designation indicates that a city's unfunded pension obligations represent a relatively smaller portion of its annual revenues; therefore, making required contributions to the plan(s) may not strain the city's financial resources. This designation was also used for cities that do not offer defined benefit pension plans.
No Defined Benefit Pension Plan Reported* 10

* Defined benefit pension plans provide income or other benefits to employees at or after separation from employment as defined by the benefit terms. These pension benefits may be expressed as a specific dollar amount or an amount that is based on one or more factors such as an employee’s age, years of service, and compensation.





Back to top



Pension Funding

This indicator measures the extent to which a city has set aside assets to pay for the pension benefits earned by its employees. Specifically, it assesses the soundness of a city’s pension plan by comparing the amount of accumulated pension plan assets to pension liabilities. A city with a pension plan that does not have sufficient assets will likely have to make higher contributions to its plan in the future, potentially supplanting other spending priorities.

Methodology

We calculated the pension funding indicator for those cities participating in CalPERS using unaudited information provided by CalPERS on the value of pension plan assets and accrued pension liabilities from actuarial valuations. An actuarial valuation is a type of appraisal of a pension fund’s assets versus liabilities, that uses investment, economic, and demographic assumptions to determine the funded status of a pension plan. For pension plans outside of CalPERS, we obtained similar information from cities’ audited financial statements. For cities with both CalPERS plans and plans outside of CalPERS, we combined both data sets to calculate the pension funding indicator.

We calculated the pension funding indicator as follows:

Value of pension assets divided by accrued pension liabilities

A funding ratio of 70 percent or less indicates that a city’s pension plan(s) does not have sufficient assets to fund a substantial portion of the cost of pension benefits already earned by its employees. We assigned points and corresponding risk designations for the pension funding indicator based on the calculated percentages, as shown in Table 9.

Table 9: Methodology for Measuring Risks Related to Pension Funding

Risk Designation Calculation Result Range of Points Assigned Description
High Risk less than or equal to 70% 0 to 3.50 This designation indicates that a city's pension plan(s) does not have sufficient assets to fund a substantial portion of the pension benefits earned by its employees.
Moderate Risk greater than 70%, but less than or equal to 80% 3.51 to 4.00 This designation indicates that a city's pension plan(s) is not fully funded but has enough assets to fund a moderate portion of the pension benefits earned by its employees.
Low Risk greater than 80% 4.01 to 5.00 This designation indicates that a city's pension plan(s) has enough assets to fund all or a substantial portion of the pension benefits earned by its employees. This designation was also used for cities that do not offer defined benefit pension plans.
No Defined Benefit Pension Plan Reported* 5.00

* Defined benefit pension plans provide income or other benefits to employees at or after separation from employment as defined by the benefit terms. These pension benefits may be expressed as a specific dollar amount or an amount that is based on one or more factors such as an employee’s age, years of service, and compensation.





Back to top



Pension Costs

This indicator measures the current financial burden of a city’s pension costs by comparing its actuarially determined contributions to its pension plan(s) to its annual revenue. High pension costs can supplant other spending priorities and even cause cities to curtail critical services when facing revenue shortfalls or expenditure overruns.

Methodology

We calculated the pension costs indicator using information on actuarially determined contributions and governmentwide revenue from a city’s audited financial statements. The actuarially determined contribution is the amount an employer must contribute to adequately fund its pension plan. This indicator evaluates the current financial burden of each city’s pension costs by comparing actuarially determined pension contributions to governmentwide revenue. We calculated the indicator as follows:

Actuarially determined pension contributions divided by governmentwide revenue

We assigned points and corresponding risk designations for the pension costs indicator based on the calculated percentages, as shown in Table 10.

Table 10: Methodology for Measuring Risks Related to Pension Costs

Risk Designation Calculation Result Range of Points Assigned Description
High Risk greater than or equal to 10% 0 to 2.22 This designation indicates that a city's actuarially determined pension contributions constitute a significant portion of its revenues and will likely strain its financial resources.
Moderate Risk less than 10%, but greater than or equal to 6% 2.23 to 3.33 This designation indicates that a city's actuarially determined pension contributions constitute a moderate portion of its revenues and may strain its financial resources.
Low Risk less than 6% 3.34 to 5.00 This designation indicates that a city's actuarially determined pension contributions constitute a relatively small portion of its revenues. This designation is also used for cities that do not offer defined benefit pension plans and, thus, are not required to make pension contributions.
No Defined Benefit Pension Plan Reported* 5

* Defined benefit pension plans provide income or other benefits to employees at or after separation from employment as defined by the benefit terms. These pension benefits may be expressed as a specific dollar amount or an amount that is based on one or more factors such as an employee’s age, years of service, and compensation.





Back to top



Future Pension Costs

This indicator measures the future financial burden of a city’s pension costs by comparing its projected actuarially determined contributions to its pension plan(s) to its present level of annual revenue. The actuarially determined contribution is the amount an employer needs to contribute to adequately fund its pension plan. Increasing pension costs may supplant a city’s other spending priorities and potentially cause it to curtail critical services, unless it is able to generate additional revenues to offset these increasing costs.

Methodology

We calculated the future pension costs indicator for cities participating in CalPERS using unaudited information provided by CalPERS on projected required contributions and governmentwide revenue from a city’s audited financial statements. According to CalPERS, projected contributions for fiscal year 2026-27 reflect the actual investment return for fiscal year 2019-20, which differs from the 7 percent assumed return used in the annual actuarial valuations prepared for cities. Therefore, the projected required contributions used in this analysis are likely to differ somewhat from those provided in the actuarial valuation reports issued by CalPERS. An actuarial valuation is a type of appraisal of a pension fund’s assets versus liabilities, that uses investment, economic, and demographic assumptions to determine the funded status of a pension plan.

For cities that only have plans outside of CalPERS we allocated the same proportional share of points to this indicator as those cities earned for the pension obligations indicator. For example, if a city earned half of the available points for the pension obligations indicator, then that city also earned half of the available points for the future pension costs indicator.

For cities with both CalPERS and non-CalPERS plans, we determined which of the plans was larger based upon the size of the net pension liability. If the non-CalPERS plan was larger, we allocated the same proportional share of points to this indicator as those cities earned for the pension obligations indicator. If the CalPERS plan was larger, we used the same approach as if it was the city’s only plan. Therefore, we calculated the indicator for those cities participating in CalPERS or whose CalPERS plan was larger than an outside plan, as follows:

  • Fiscal Year 2016–17: Projected required pension contributions for fiscal year 2024–25 divided by governmentwide revenue
  • Fiscal Year 2017–18: Projected required pension contributions for fiscal year 2025–26 divided by governmentwide revenue
  • Fiscal Year 2018–19: Projected required pension contributions for fiscal year 2026–27 divided by governmentwide revenue

We assigned points and corresponding risk designations for the future pension costs indicator based on the calculated percentages, as shown in the Table 11.

Table 11: Methodology for Measuring Risks Related to Future Pension Costs

Risk Designation Calculation Result Range of Points Assigned Description
High Risk greater than or equal to 10% 0 to 2.22 This designation indicates that a city's future projected pension costs constitute a significant portion of its current revenues, and will likely strain its financial resources.
Moderate Risk less than 10%, but greater than or equal to 6% 2.23 to 3.33 This designation indicates that a city's future projected pension costs constitute a moderate portion of its current revenues and may strain its financial resources.
Low Risk less than 6% 3.34 to 5.00 This designation indicates that a city's future projected pension costs constitute a relatively small portion of its current revenues. This designation is also used for cities that do not offer defined benefit pension plans and, thus, are not required to make pension contributions.
No Defined Benefit Pension Plan Reported* 5

* Defined benefit pension plans provide income or other benefits to employees at or after separation from employment as defined by the benefit terms. These pension benefits may be expressed as a specific dollar amount or an amount that is based on one or more factors such as an employee’s age, years of service, and compensation.





Back to top



OPEB Obligations

This indicator assesses the magnitude of a city’s other post-employment benefits (OPEB), such as health and dental benefits, obligations by comparing its unfunded OPEB liability to the revenues the city collects. Specifically, this indicator assesses a city's OPEB burden by comparing its unfunded OPEB obligations to its revenues. A city with significant unfunded OPEB obligations will have to make larger payments in the future to fund these obligations, which may strain its ability to provide services to its residents, especially if its revenues decline.

Methodology

We calculated the OPEB obligations indicator using information on the OPEB unfunded liability (or the net OPEB liability for those cities that have implemented the Governmental Accounting Standards Board's Statement Number 75) and governmentwide revenue from a city’s audited financial statements. We calculated the indicator as follows:

OPEB unfunded actuarial accrued liability (or net OPEB liability) divided by governmentwide revenue

We assigned points and corresponding risk designations for the OPEB obligations indicator based on the calculated percentages, as shown in Table 12.

Table 12: Methodology for Measuring Risks Related to OPEB Obligations

Risk Designation Calculation Result Range of Points Assigned Description
High Risk greater than or equal to 100% 0 to 4.00 This designation indicates that a city's unfunded OPEB obligations exceed its annual revenues; therefore, making contributions to the plan(s) will likely strain the city's financial resources.
Moderate Risk less than 100%, but greater than or equal to 50% 4.01 to 8.00 This designation indicates that a city's unfunded OPEB obligations represent a substantial portion of its annual revenues; therefore, making contributions to the plan(s) may strain the city's financial resources.
Low Risk less than 50% 8.01 to 10.00 This designation indicates that a city's unfunded OPEB obligations represent a relatively smaller portion of its annual revenues; therefore making contributions to the plan(s) may not strain the city's financial resources. This designation is also used for cities that do not offer defined benefit OPEB plan(s).
No Defined Benefit OPEB Plan Reported* 10

* Defined benefit OPEB plans provide benefits to employees at or after separation from employment as defined by the benefit terms. These OPEB benefits may be expressed as a specific dollar amount; an amount that is based on one or more factors such as an employee’s age, years of service, and compensation; or a type or level of coverage such as prescription drug coverage or a percentage of the cost of health insurance premiums.





Back to top



OPEB Funding

This indicator measures the extent to which a city has set aside assets to pay for OPEB, such as health and dental benefits, earned by its employees. Specifically, this indicator assesses the soundness of a city’s OPEB plan(s) by comparing the amount of accumulated plan assets to related obligations. A city with OPEB plans that do not have sufficient assets will likely have to make higher contributions to those plans in the future, thus potentially supplanting other spending priorities. Funding levels for OPEB plans are generally much lower than for pension plans.

Methodology

We derived the OPEB Funding indicator for cities offering these benefits to employees, generally by using the funded ratio reported within each city’s audited financial statements. The OPEB funded ratio is calculated as follows:

Actuarial value of assets divided by the actuarial accrued liability

For cities that have implemented the Governmental Accounting Standards Board's Statement Number 75, the OPEB funded ratio is calculated as follows:

Fiduciary net position divided by total OPEB liability

A funding ratio of 70 percent or less indicates that a city’s OPEB plan(s) does not have sufficient assets to fund a substantial portion of the cost of the post-employment benefits already earned by employees. We assigned points and corresponding risk designations for the OPEB funding indicator based on the calculated percentages, as shown in Table 13.

Table 13: Methodology for Measuring Risks Related to OPEB Funding

Risk Designation Calculation Result Range of Points Assigned Description
High Risk less than or equal to 70% 0 to 3.50 This designation indicates that a city's OPEB plan(s) does not have sufficient assets to fund a substantial portion of the other post-employment benefits, such as health and dental benefits, earned by its employees.
Moderate Risk greater than 70%, but less than or equal to 80% 3.51 to 4.00 This designation indicates that a city's OPEB plan(s) is not fully funded but has enough assets to fund a moderate portion of the other post-employment benefits, such as health and dental benefits, earned by its employees.
Low Risk greater than 80% 4.01 to 5 This designation indicates that a city's OPEB plan(s) is fully funded or has enough assets to fund a substantial portion of the cost of the other post-employment benefits, such as health and dental benefits, earned by its employees. This designation is also used for cities that do not offer defined benefit OPEB plans.
No Defined Benefit OPEB Plan Reported* 5

* Defined benefit OPEB plans provide benefits to employees at or after separation from employment as defined by the benefit terms. These OPEB benefits may be expressed as a specific dollar amount; an amount that is based on one or more factors such as an employee’s age, years of service, and compensation; or a type or level of coverage such as prescription drug coverage or a percentage of the cost of health insurance premiums.





Back to top



Cities That Are Excluded From Our Interactive Dashboard

We excluded the following cities from our interactive dashboard, generally because they did not publish audited financial statements that were prepared in accordance with generally accepted accounting principles (GAAP).

Fiscal Year 2016–17 2017–18 2018–19
Cities Amador**
Compton
Fort Jones***
Holtville*
Ripon*
Westmorland**
Albany***
Amador**
Artesia**
Compton
Fort Jones***
Holtville*
McFarland
Ripon*
Riverbank
Westmorland**
Adelanto
Amador**
Arcata
Artesia
Blue Lake**
California City
Clearlake
Coalinga**
Compton
Fort Jones**
Fowler**
Holtville*
Huntington Park
Ione
Isleton**
Loyalton**
Manteca
McFarland
Novato
Orange Cove**
Ripon*
Riverbank
Sonoma
South El Monte**
South Pasadena**
Taft**
Union City
Westmorland**
Windsor
Woodland

* These cities issued audited financial statements prepared on a basis other than GAAP. We do not believe these financial statements are comparable to statements prepared in accordance with GAAP, so we excluded these cities from our analysis.

** These cities did not issue audited financial statements and are not included in our analysis. The State Controller reports that these cities were exempt from federal reporting requirements (as described above).

*** These cities’ auditors disclaimed opinions on the cities’ financial statements, citing issues that would affect our analysis. Therefore, we excluded these cities from our analysis. The State Controller also reported that these cities were exempt from federal reporting requirements.





Back to top



Audits

Overview

After completing the dashboard, we perform an independent, data-driven analysis to determine which cities to send audit teams into to get local officials’ perspective regarding the areas of concern. If the assessment determines it would be beneficial to conduct an official audit of the respective city to determine the extent of the fiscal challenges and to recommend corrective actions, the State Auditor will request approval to do so from the Joint Legislate Audit Committee.

If a city is designated as high risk as a result of an audit, it must submit a corrective action plan and provide updates every six months regarding its progress in implementing the corrective action plan. Corrective action plans must outline the specific actions the city will take to address the conditions causing us to designate it as high risk, and the proposed timing for undertaking those actions. We will remove the high risk designation when the city has taken satisfactory corrective action.

See the Audits We’ve Completed See Our Work in Progress





Back to top



Process

Figure 2 outlines the process for identifying and seeking approval to audit high-risk cities as well as information about our local high-risk audit process.

Figure 2: High-Risk Local Government Audit Process

Could Your City Be In Fiscal Distress?



Back to top



© 2013, California State Auditor | Privacy Policy | Social Media Policy | Conditions of Use | Download Adobe PDF Reader