Los Alamitos City Council confronts fiscal sustainability crisis

At the regular August meeting of the Los Alamitos City Council, a report was presented by staff on options available to the City to manage the City’s fiscal sustainability.

Without action, the City is expected to go broke soon.

City staff and elected officials have been warning about the City’s fiscal sustainability problems for a while. Staff members presented hair-raising charts at a recent well-attended Los Alamitos Chamber of Commerce meeting. The Council has repeatedly discussed the problem, and commissioned a two-member ad hoc committee to come up with possible actions to stave off the structural budget shortfall, also known as “we don’t have enough money to pay the bills.”

The ad hoc committee was made up of Councilwoman Shelley Hasselbrink and Councilman Mark Chirco. They spent a lot of time and sweat coming up with twenty-one possible actions accompanied by pros and cons for each possible action.

When the item came up for discussion at the Council meeting on Monday, August 19, their hard work was not praised initially. Both Mayor Warren Kusumoto (gently) and Councilman Dean Grose (forcefully) said that he was “disappointed” with the report. Mayor Pro Tem Richard Murphy was absent.

When Councilwoman Hasselbrink pushed back on their stated reasons, they backtracked somewhat.

The report was received and filed. The Council will take up the contents again when Mayor Pro Tem Murphy can attend.

Questions raised included ranking the twenty-one items by priority, and determining effective methods to gain the participation of the residents of Los Alamitos in the fiscal sustainability discussion.

Lest anyone think that the fiscal sustainability crisis is overblown, Mayor Kusumoto seriously brought up the possibility of disincorporation or bankruptcy. Those possibilities were shot down by David D. Cain, who was hired by the City to address the fiscal sustainability crisis. He stated that the County of Orange would have to approve the disincorporation and the County is not interested in doing so. Regarding bankruptcy, he listed the small number of cities that have tried that route, and explained that those cities found the attempt expensive and unsuccessful.

Mayor Kusumoto repeatedly tried to get someone to explain the stress applied to the City budget by the 20-year amortization of payments to cure unfunded public employee pensions. He was particularly interested in when the extremely painful pension payments would level off. Nobody would say.

Independently, I found this graph while looking over a presentation to the Long Beach City Council:

Long Beach pension costs as presented to the Long Beach City Council on August 20, 2019. Graphic courtesy of the City of Long Beach.
Long Beach pension costs as presented to the Long Beach City Council on August 20, 2019. Graphic courtesy of the City of Long Beach.

Note that the increase in pension costs (represented by the slope of the lines in the graph above) levels off around fiscal year 2031 — but Long Beach has also pre-paid required unfunded pension payments. Still, fiscal year 2031 is reasonable given a 20-year amortization schedule starting in 2013, the year that the 20-year amortization schedule was mandated by the State of California. I will go out on a limb and forecast that a similar leveling will occur for Los Alamitos starting in fiscal year 2033.

Of course, the City forecasts that it will go bankrupt by fiscal year 2024-25 or earlier.

In order to enhance the visibility of the fiscal sustainability crisis in Los Alamitos, Orange County Breeze will publish a series of articles on the twenty-one possible actions and urge reader response. This article initiates that series.

The role of the State of California

Something nobody brought up was the role of the State of California in the widespread budget calamities facing cities statewide. (The State’s past actions are briefly explained in the fiscal sustainability report.) In response to the Great Recession, the State forcibly removed funding from cities and raised taxes, promising at least in the case of sales tax to let it expire after its own budget crisis was past.

The State is now rolling in money but State legislators and the Governor look only for new ways to spend the money rather than unwind the funding theft from cities or lower the tax burden. Indeed, a recent effort to create a split property tax roll, taxing business property differently from residential property under Proposition 13, has been modified and may be presented to voters next year. Supporters will again say that the extra funding will go to schools — one of the oldest cons in Sacramento.

Why hasn’t anyone let our local State-level elected officials know that we want the State of California to cough up what the State of California “borrowed” to fill its budget gap?

The likely answer is that those local State-level elected officials won’t listen — and if they did try, the effort would go nowhere.

Nothing will get done unless voters start punishing State-level elected officials by voting them out of office. Voters will get their next whack at Sacramento moles in the California State primary on March 3, 2020.

15 Comments

  1. Beware the unintended consequences.

    The California Rule is questionable at best, and will likely be weakened. That doesn’t mean pension costs will automatically be reduced. Nor should they, necessarily. Pensions are deferred compensation, a long term commitment to the employee. Reduced pay now for the guarantee of a secure retirement. They should not be lowered (or raised) capriciously based on temporary budget deficits or surpluses.

    It’s not just “the unions” you should be concerned with. Material reductions (50 percent? Be serious!) Even if it gets by The Unions, is not “sustainable”, unless you “materially” lower your standards also. Again, you are assuming the employees are overpaid now. There are better paying jobs, not just in neighboring cities, but in the private sector.

    “The budget problems faced by California cities are, to large extent, created by the State of California,”

    Not just in the borrowed taxes you describe, but in CalPERS management. Many current “reformers” want either large reductions in pensions, or converting to Defined Contribution systems. But other experts recommend a properly “reformed” DB plan. Years ago (mid nineties) they should have reduced discount rates, and/or used more conservative assumptions.

    PEPRA, in 2013, made some important changes, but they may have been too little, too late. The huge increases happening now are because of shorted payments in the past. Normal costs for today’s employees are quite affordable. I don’t know the solution to these rising costs, but it’s not the current employees fault, and they shouldn’t bear the brunt of the crisis. Due to exigent circumstances, they will probably see some reductions, but let’s allow common sense and good actuarial practices to solve the problem, not baseless claims and emotions.

    1. All stated in self-interest from a California Public Sector retiree. Not at all surprising that he ignores Dr. Andrew Biggs 2014 Study (source below) that concluded (in Study Figure 6 on Study page 67) that for all CA Public Sector workers taken together in one group (which IS in fact what financially impacts the Taxpayers), CA Public Sector workers have a 23%-of-pay Total Compensation (wages + pensions + benefits) ADVANTAGE. Clearly, the VERY VERY generous Public Sector DB pension & benefits far outweigh any lesser wages. Taxpayers……. how much MORE would YOU have for YOUR retirement needs if YOU had an additional 23%-of-pay to save and invest in every year of YOUR career? An extra $500K, $1 Million, perhaps $2 Million for some ?

  2. If it’s possible to tease it out, what are the differences between Los Alamitos and its neighborinjg cities that causes Los Al to have this fiscal issue while our surrounding neighbor cities do not?

    Also forgive my ignorance if they also do – I just haven’t heard about fiscal problems from Seal Beach/Cypress/Garden Grove etc.

    1. Author

      Rob,

      Thank you for reading Orange County Breeze, and for taking the time to comment on the fiscal sustainability crisis in the City of Los Alamitos.

      Truth be told, Los Alamitos is not alone.

      Seal Beach residents approved a 1% sales tax increase in November 2018 to beat back budget problems. The Seal Beach City government framed their goal as ensuring adequate funding for public safety, but they were facing the same problems as Los Alamitos. Paying for the police department takes up a huge chunk of the City’s budget. The City hopes to reap $5 million in additional revenue annually. See:

      https://www.sealbeachca.gov/Departments/City-Clerk/Voter-Election-Info/Information-on-Measure-BB

      So far, Cypress is coping with budget constraints by such methods as eliminating open employment slots and delaying capital improvement projects. City Council members and City management have stated repeatedly that they do not want to have to raise taxes. Because Cypress has been extraordinarily conservative in its fiscal management, it has some more leeway. It remains to be seen whether that leeway will get them all the way through.

      Garden Grove has struggled with budget deficits since at least 2016. The response was similar to that taken by Seal Beach. Garden Grove residents approved a 1% sales tax. The most current financial statements available online actually cover two fiscal years, 2019-2020 and 2020-2021. See:

      https://ggcity.org/finance/budget-and-financial-reports

      As with Seal Beach, only time will prove whether the sales tax increase will be enough to keep Garden Grove afloat.

      The budget problems faced by California cities are, to large extent, created by the State of California, the State judiciary, and public employee unions. Some cities have more options than others. Los Alamitos, being small and land-constrained, has fewer options than larger cities and would be in even more grave condition (if that can be imagined) had Richard Murphy not stepped in after his first election to bring sanity to the budget process. Credit should also go to fellow Los Alamitos Council members who cooperated with Mr. Murphy.

      Again, thank you for reading Orange County Breeze and joining in the discussion of municipal fiscal sustainability.

      Shelley Henderson
      editor, Orange County Breeze

      PS: I want to recommend this article on San Francisco, which does not have the same budget constraints as other California cities but still seems to have mucked up municipal governance:

      https://www.city-journal.org/san-franciscos-municipal-budget

  3. Come-on, be REALISTIC. There are ZERO (yes ZERO) “solutions” to this financial crisis (that assuredly will in short order include many other CA Cities) that does not include a VERY (think 50+%) reduction in the “value*” of future service DB pension plan (and retiree healthcare benefit) accruals for ALL (yes ALL) CURRENT Public Sector workers.

    * via both “formula-factor” reductions and “provisions” changes such as an increase in retirement ages, use of actuarially correct early-retirement adjustment factors, COLA elimination and/or reduction, etc.

    1. Author

      Tough Love,

      Thank you for reading Orange County Breeze and for taking the time to comment on the initial article on Los Alamitos fiscal sustainability.

      You and Mr. Churchill (and I, for that matter) agree that public employee pension reform is sorely needed.

      Public employee union opposition is the rub, even should the California Supreme Court dismantle or modify the California Rule that prevents changes to current-employee pension benefits.

      While someone altogether smarter than myself is coming up with a plan to convince union leadership and membership that the alternative to reforming their current pension plans is lose their job, we must sift through what little can be done to stave off municipal insolvency. As bankruptcy and disincorporation seem to be off the table, we must consider such distasteful actions within our control as laying off employees, closing down programs, and raising taxes.

      It goes without saying which alternative union leadership and other progressives prefer, but I will say it anyway — they would raise taxes.

      With even higher taxes in prospect, any sane person would be considering moving out of California, even without the cap on deductibility that came with the federal tax cut. Such tax refugees are readily apparent in New York, New Jersey, Connecticut, and Illinois:

      https://www.foxnews.com/media/economist-reacts-to-high-numbers-of-new-yorkers-fleeing-to-florida-because-of-high-state-taxes

      Again, thank you for reading Orange County Breeze, and for joining the conversation about fiscal sustainability.

      Shelley Henderson
      editor, Orange County Breeze

      1. Consider this proposal………

        The City should spend-down ALL of it’s cash-resources on permanent City infrastructure projects (ones whose work-product cannot be “undone”), for example improving roads, parks, etc. Declare Bankruptcy as soon thereafter as possible (w/o risking legal tie-in issues), and STAND FIRM that all of the DB pensions and retiree healthcare benefits (to the extent not ALREADY funded) are disavowed. Not doing so was the BIG mistake that San Bernardino, Stockton, and Vallejo made

        1. Quoting:
          “…a VERY (think 50+%) reduction in the “value*” of future service DB pension plan (and retiree healthcare benefit) accruals for ALL (yes ALL) CURRENT Public Sector workers.”

          Presumes that said public workers are OVERPAID now, and reducing pensions will not result in the loss of some current employees, and/or the inability to to hire qualified employees in the future.

          Past evidence is strong that many city employees, even considering the value of those unfunded pensions, already earn less than, or equal to, equivalent private sector workers.

          It’s not just a question of “fairness” for current employees, it’s a pragmatic Human Resources problem.

          1. Public Sector workers very clearly ARE materially overcompensated NOW (and ESPECIALLY in California). See my earlier detailed response (above) to another comment from this commentator Step[hen Douglas.

  4. The idea that anyone can predict when the pension costs will level off is ludicrous because it all depends on whether CalPERS can provide a 7.25% annual return, net of fees. Their average returns over the past 20 years have been 5.5%. If that continues, pension costs would double from where they are now.

    And if 40% of the investments are in fixed income currently earning about 4% then stocks have to return 11% meaning they need to double in value every 6 or so years.

    What has to happen is the California Supreme Court needs to eliminate the California Rule that is tying the hands of local governments and not allowing them to lower pension formulas for current workers. That is what city officials should be clamoring for.

    1. Author

      Mr. Churchill,

      Thank you for reading Orange County Breeze, and for taking the time to comment on the initial article on Los Alamitos fiscal sustainability.

      You are correct that accurate forecasting when leveling off will occur is impossible, but forecast we must and in order to forecast we must simplify.

      As a first stab, guessing at 2033 as a possible leveling-off date is reasonable. Reality is often cruel to reasonable assumptions.

      Even this admittedly rosy-hued guess is beyond the reach of Los Alamitos, and many other similarly situated California cities.

      I would also like to thank you for bringing up the so-called California Rule, which I had utterly forgotten about. More about it can be read at law.com: https://www.law.com/therecorder/2019/03/22/calif-high-court-avoids-the-california-rule-in-pension-benefits-change-decision/?slreturn=20190721114324

      That article mentions two cases now being considered by the California State Supreme Court that relate to public pension spiking and vested benefits.

      Here is another article discussing the California rule and further cases related to it:

      https://calpensions.com/category/california-rule/

      Again, thank you for reading Orange County Breeze.

      Shelley Henderson
      editor, Orange County Breeze

    2. Quoting the commentator ……….. “the idea that anyone can predict when the pension costs will level off is ludicrous because it all depends on whether CalPERS can provide a 7.25% annual return, net of fees. ”

      Wrong……… just for the situation not to worsen CalPERS needs to earn 7.25% on its LIABILITIES, not it’s ASSETS, which are now a great deal lower than it’s liabilities.

      The above it a VERY common misunderstanding.

  5. The red light camera program is wasting the city money!

    1. Author

      Felix,

      Thank you for reading Orange County Breeze and taking the time to comment on the initial article on the fiscal sustainability crisis faced by the City of Los Alamitos.

      I had no idea at all about whether the red light camera program paid for itself or not. In response to your comment, I began poking around.

      According to the 2019-2020 Budget for the City of Los Alamitos, the City is projecting $720,500 in revenues from traffic, vehicle code violations, and other fines and forfeiture collections. If you dig further, you find on page 20 that red light camera fines by themselves brought in $584,451 in FY 2016-2017 and $609,370 in FY 2017-2018. They are projected to bring in $530,000 in FY 2019-2020.

      According to a page on the City’s website that gives history, facts, and figures on the red light camera program, the cost of the program is about $215,200. See: https://cityoflosalamitos.org/police/home/services/red-light-camera/

      If projections are correct, the City of Los Alamitos will net about $315,000 from the red light camera program in FY 2019-2020. Eliminating the program would actually worsen the City’s fiscal sustainability at this time.

      (All adopted budgets from FY 2009-2010 through FY 2019-2020 are published at https://cityoflosalamitos.org/your-government/finance/ and readily available for anyone to review.)

      Again, thank you for reading Orange County Breeze.

      Shelley Henderson
      editor, Orange County Breeze

Comments are closed.