Even before COVID began body-slamming the economy, California’s counties were slipping deeper into debt.
An analysis by former state Sen. John Moorlach — a certified public accountant who lost his seat in Sacramento in November but is aiming to return to the Orange County Board of Supervisors next year — found that the twin burdens of pension promises and health benefits for retired workers has vastly increased the financial strain on county governments over the past decade and, by extension, on taxpayers as well.
When Moorlach first crunched these numbers back in 2010, the overwhelming majority of counties — 45 of 58 — were healthily in the black. Assets were greater than liabilities.
A decade later, fortunes had dramatically reversed. Moorlach’s latest number-crunching finds only three counties in the black. The overwhelming majority — 55 of 58 — owe far more than they have.
How did such a startling downturn happen? Rules have changed, requiring public agencies to honestly report their liabilities. And it isn’t pretty.
Numbers that were once relegated to small-print footnotes in obscure financial reports are now factored into agencies’ bottom lines, revealing a sea of red ink.
Consider Riverside County. In 2010, it ranked No. 9 for its fiscal health, with a $652 per-resident surplus. A decade later, it had sunk to No. 19, with a $857 deficit per resident.
Orange County improved in the county-by-county ranking over the decade, going from No. 46 (with a $3 deficit per resident, one of the few in the red back then) to No. 24 (with a $1,112 deficit per resident).
San Bernardino also improved rank-wise, from No. 39 (with an $87 per-person surplus) to No. 6 (with a $326 per-person deficit). And Los Angeles County improved its rank as well, rising from No. 52 (with a $204 deficit per person) to No. 49 (with a $2,864 deficit per-person).
That so many counties could improve in their relative rankings even as per-person debt rose illustrates the depth of the problems they face. And it’s not just counties — it’s cities, school districts, special districts and the state itself as well, all grappling with the cost of promises they made to workers that are far more expensive than they ever imagined.
“Finally revealing the true financial positions of municipalities in this last decade has had a profound impact,” Moorlach writes. “It’s unfortunate GASB (the Governmental Accounting Standards Board) took this long to require governments to report what the private sector has been doing for decades.”
Moorlach’s analysis, dire as it may be, reflects the time before COVID-19 hit.
Yet despite the pandemic, three of the four large Southern California counties plan to spend millions more this year than they did last year.
The shortfalls many officials warn about are not so much pandemic-inspired as due to the regular, increasing costs of doing business: salary increases for workers, ballooning payments into retirement systems, retiree health care.
At the state level, tax collections are healthier than expected considering the effects of stay-at-home orders on the economy. Personal income and corporate taxes are running billions of dollars ahead of pandemic-inspired projections, according to the state Legislative Analyst’s Office.
At the local level, property tax revenues are largely coming in as expected as well. Taxable sales, though, are down, translating into sales tax collections about 3.4% lower than last year. That’s real money, but not as crippling as many have feared.
“I do see some reports on sales tax decreases, but these declines appear relatively modest,” said Joe Nation, professor of public policy at Stanford University and a former Democratic assemblyman, by email.
David Crane, lecturer in public policy at Stanford, president of the nonprofit Govern For California and Democrat who was an adviser to then-Republican Gov. Arnold Schwarzenegger, noted that a recent bulletin from the state Department of Finance found that California’s tax revenues in September were 43 percent greater than forecast in June.
“Revenues for the first three months of the current fiscal year are now $8.7 billion greater than forecast,” he wrote. “That’s good news for programs worried about funding cuts.”
And everyone is worried about funding cuts — even when revenue rises.
In L.A. County, expected revenue is up some $1.8 billion over the prior fiscal year, to $38.2 billion.
In Orange County, expected revenue is up $306 million, to $7.5 billion.
In Riverside County, revenue is slated to rise by some $700 million, to $6.5 billion.
But those increases aren’t enough. “It’s critical to note that while revenue has increased, the county’s current costs have risen at a much faster rate than revenue projections,” Riverside County officials said in a budget primer.
Billions from CARES
All four counties have received federal CARES Act funding to help curb the pandemic’s sting. Los Angeles County got $1.22 billion; Orange County, $627 million; Riverside, $483.7 million; and San Bernardino, $430.6 million.
“These monies fund the County’s response to the COVID-19 public health emergency, including medical costs, public health expenses, public health measures, and $111 million allocated to cities and small businesses for COVID-19-related economic recovery and costs,” Orange County explained in a statement.
Still, Orange County pulled $30 million from its Catastrophic Event Reserve to cover “pandemic-related County revenue losses,” and it projects that revenues may drop more than $145 million in this fiscal year. That’s less than 2 percent of the county’s total budget.
Counties are arms of state government, providing services like public safety, justice, social services and health care to those in most need. Federal lawmakers are negotiating over a new pandemic aid package that could include another $160 billion for state and local governments. Meantime, they’re freezing positions, transferring funds and dipping into reserves to make ends meet.
Crane, of Stanford, has long studied how governments are often loathe to lay out the root causes of their financial strains. “See if you can find anything that discloses that rapidly growing spending on unfunded pension promises is crowding out other expenditures,” he said in a critique of the Pasadena Unified School District in 2018. “Executives of corporations and nonprofits would get in serious trouble if they issued statements with similar misleading non-disclosures.”
The Southern California News Group recently reported that there were at least 99 local sales tax measures on the ballot in California as local governments tried to find a way to make ends meet. None of them said, “We need more money, in part, to pay for spiking public pension costs,” but they did say things like “for municipal services, including emergency response, public safety” and “for general city services.” More than 70 of the proposed sales tax hikes passed.
Pandemic or not, counties — and all levels of government — must make ends meet, one way or another, Moorlach said.
There’s not much give on soaring pension obligations — courts have ruled that pension benefits are set in stone the day workers are hired, and benefits can only be adjusted up, not down — but there is wiggle room on the growing burden of health care for retirees. The courts have ruled that retiree health benefits are not a promise set in stone, and they can be negotiated down.
That’s what Orange County did back in 2006 — and partly why O.C. shot up from No. 46 on the financial soundness ranking list a decade ago to No. 24 today.
“That made a big difference but still — everyone is facing this crowding-out,” Moorlach said. “Counties are slowly slipping in the wrong direction en masse.”
Source: Orange County Register