If West Covina cannot address ongoing structural budget deficits, the city of about 100,000 could go bankrupt, a report from the California State Auditor’s Office warns.
West Covina has used its reserves to support itself for years, decimating its rainy day fund from a high of $ 20.5 million in fiscal 2014-15 to less than $ 10 million in 2018 -19, according to the report published on Tuesday, December 1. Now, with cities across the state suffering heavy losses from the coronavirus pandemic, West Covina has put itself in a dangerous position.
“Our audit revealed that West Covina faces several significant risks related to its financial and operational management,” State Auditor Elaine Howle wrote. “In particular, its financial situation is deteriorating rapidly, as evidenced by the city’s continued dependence on its general fund reserves to support its operations, its questionable uses of city resources and its lack of sufficient analysis. to support its financial decisions. ”
In November, the state auditor’s office ranked West Covina the ninth most-at-risk city in the state based on its fiscal health. He placed 17th in 2019.
“Ineffective budget management”
City council declared a tax emergency in May following a forecast deficit of $ 7.2 million. The auditor’s office attributed West Covina’s risky state to “inefficient budget management” and criticized the city for failing to take action earlier to cut costs, especially unfunded pension liabilities and overtime for public safety.
The city did not use a multi-year financial forecast before the audit began and did not have a financial recovery plan despite years of deficits, according to the report.
The audit also found that the city is losing revenue by not charging enough to cover its costs for building permits, inspections and other fees.
The mayor confident in the recovery
Mayor Tony Wu blamed the financial turmoil described in the report, which is largely based on budgets for fiscal year 2018-19 and earlier, on “the previous administration and the previous majority of the council,” both of which have changed. recently.
Wu doesn’t think West Covina is headed for bankruptcy. “I am convinced that we can change everything and West Covina has a bright future,” he said.
The new leadership is committed to consolidating the city’s finances and working with its unions to find common ground on possible savings, he said.
West Covina issued pension bonds earlier this year that refinanced $ 204.1 million of its unfunded pension debt. The city has almost halved its interest rates and will make lower annual debt payments. It is expected to save the city about $ 53 million over 25 years.
The report says bonds always come with risk and the city could suffer a loss if the rate of return on California’s public employee pension system ends up being lower than the interest rate on bonds.
Wu said the city and its unions have also agreed to cut employee benefits by around 10 percent. The auditor’s report found that West Covina paid 95% of its employees’ health care premiums in 2019-2020, compared to a regional average of 86% for state and local governments on the West Coast.
Public safety swallows up funds
An expensive elephant still in the room is that of the city’s public safety spending. West Covina is one of the few towns in the county that has both a police and fire department. Today, the two departments consume nearly 77 percent of the city’s total spending.
Wu attributed the high spending to the fact that, unlike other cities, West Covina does not have a tax specifically designated to fund public safety. He said he hopes management can work with the unions on a solution.
“The two sides need to find common ground and understand that we just don’t have the money to keep paying for this,” Wu said.
One of the common criticisms in the auditor’s report is that West Covina executives often made decisions without properly assessing the potential impacts.
Despite its dire financial situation, city council approved 12% increases for its police and fire personnel that went into effect in January. It is estimated that the salary increases will cost the city an additional $ 2 million per year. The increases were to help reduce overtime costs, as the fire department, in particular, exceeded its budget by an average of $ 1.6 million over a four-year period. Yet despite being fully staffed for half the year, the fire department again exceeded its budget in 2019-20 by $ 2.1 million, auditors found.
West Covina is exploring potential alternatives, including a contract with Los Angeles County for fire services or an ambulance company for medical calls. Residents have campaigned against such outsourcing for years.
The city was unable to provide “specific analyzes comparing the long-term costs of the two alternatives,” according to the auditors. If the city cannot find a cost-effective way to provide these services at the same level, it could lead to staff cuts or temporary closures at fire stations, according to the report.
Underestimated pandemic stroke
Listeners also warned that the city may underestimate the blow it will take from the pandemic in the current fiscal year. For example, the city budgeted $ 1.9 million in revenue from the transit occupancy tax imposed on hotels – the same amount as last year – despite the expectation that the pandemic will have an impact again. most important on tourism during the current year. Likewise, West Covina has budgeted for increased revenue from recreation programs and rental of facilities, although it is likely that both will see reduced use due to social distancing requirements, auditors said.
“If the city’s actual incomes fall below expectations due to the pandemic, city leaders will be forced to cut city spending or further deplete its general fund reserves,” the auditors wrote.
The auditor’s recommendations to West Covina include: increasing fees and cost sharing, preparing financial analyzes that correctly describe the short and long term impacts of its decisions, developing a financial recovery plan and improving its internal processes to reduce waste and the potential risk of fraud.
If the city has one-time funds, such as a plan to sell land that could bring in $ 13.5 million, the city should put money aside to cover any shortfall and then use the rest. to repay bond debts and replenish its reserves, according to auditors. .