California Budget Issues: West Covina

While watching Bloomberg TV, I noticed a news crawl about the city of West Covina and their budget woes. I decided to go search for the article. 

Bloomberg (Dec 1) reports:

West Covina, California, which sold $204 million of pension bonds in July, is at the fiscal brink because of its ineffective management and raiding of reserves, according to a report Tuesday by State Auditor Elaine Howle.

The southern Californian city of about 105,000 residents helped cover salary and benefit costs for its public safety workers by siphoning from reserves, halving its year-end balance in fiscal 2019 to about $10 million over four years, the report said.

. . . West Covina plans to sell land and use the proceeds to pay down its debt obligations, according to the report. But, such “large one‑time revenue sources will be insufficient on their own to reverse the city’s negative financial trend and rebuild its reserves,” it said.

The San Gabriel Valley Tribune (Dec 2) adds:

West Covina has used reserves to prop itself up for years, decimating its rainy day fund from a high of $20.5 million in fiscal year 2014-15 to less than $10 million in 2018-19, according to the report released Tuesday, Dec. 1. Now, with cities across the state taking heavy losses from the coronavirus pandemic, West Covina has put itself in a dangerous position.

. . . The city did not use multiyear financial forecasts before the audit began and did not have a financial recovery plan despite years of deficits, according to the report.

. . . One expensive elephant still in the room is the city’s spending on public safety. West Covina is one of the few remaining cities in the county to staff both a police and fire department. Today, the two departments eat up nearly 77 percent of the city’s total spending.

. . . Despite its existing dire financial state, the City Council approved 12% raises for its police and fire personnel that went into effect in January . . . The raises were expected to help reduce overtime costs as the Fire Department, in particular . . . Yet, despite having full staffing for half the year, the Fire Department again went over its budget in 2019-20 by $2.1 million, auditors found.

The articles throw out a lot of numbers so who knows if what the City Council is doing will properly address the crisis, but there has to be some faith that the State Auditor had a reason for saying the city is at the fiscal brink.

Just to highlight certain items. First, the city issued a pension obligation bond in July 2020. Back in July 2019, I posted a blog post that noted that 2/3rds of such pension obligation bonds end up losing money. So let's just say that the city really was just taking on extreme risk to try and save itself from bankruptcy.

Second, really, no long-term financial planning? That's a level of financial incompetency. 

Third, I seriously don't get the argument that raising salaries for police and fire personnel would reduce overtime costs. The San Gabriel Valley Tribune article also seems to throw cold water on that one by pointing out that they were fully staffed for half of the 2019-2020 FY. The argument must have been that the higher pay would result in a fully staffed department. Yet, they were fully staffed and still went over-budget. And really, is there that big of a supply vs demand issue for fire personnel? I get it, you need certain physical skill sets to be a fire personnel. What about ex-military? What about former college / professional athletes?  

Fourth, like many cities, COVID-19 is going to make the situation worse.