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“The city reduced its year-end general fund reserve balance by $10.6 million, more than half, during the past several fiscal years, primarily due to its inability to address substantial increases in citywide expenditures and its significant pension liability,” Howle wrote in an introductory letter to the governor and Legislature. “The city has also likely underestimated the financial impact of the COVID-19 pandemic during this current fiscal year.”
Howle’s report drew ire from West Covina Mayor Tony Wu, who has served on the city council since 2015 and was named mayor in November. The city council members select a mayor from their ranks.
The audit was based on the city’s fiscal numbers from 2018-19 and doesn’t take into account steps city officials have already taken to improve the city’s financial situation, Wu said.
The city declared a fiscal emergency in May pointing to financial pressures created by the COVID-19 pandemic.
West Covina is also among dozens of California cities that have issued bonds to deal with rising pension costs. It issued $204.1 million in taxable lease revenue bonds July 23 in order to alleviate pressure from the city’s pension liability. S&P Global Ratings assigned the bonds an A-plus rating and stable outlook.
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Immediately following the deal, City Manager David Carmany said in a release that the lease revenue bond sale was enthusiastically received by investors and the city achieved $44 million in net present value savings.
The finance team included City Attorney Jones & Mayer, co-municipal advisors NHA Advisors and Wolf & Co., Underwriter Hilltop Securities and Norton Rose Fulbright as bond counsel.
In a formal response to Howle's audit, Carmany wrote in a letter dated Nov. 1 and attached to the report that West Covina plans to prepare a corrective action plan to address the risks identified. Howle’s report gives the city 60 days to respond back with a plan and requires twice-yearly updates until the city’s actions have resolved the issues outlined in Howle’s audit.
Howle asked the Legislature during a Feb. 26 hearing for authorization to conduct in-depth audits on the financial health of five California cities: Blythe, El Cerrito, Lindsay, San Gabriel and West Covina. Consistent across all five cities are concerns about pension liabilities.
Howle released reviews last year that her office had done on 470 cities based on legislation approved in 2015 to track which California cities might be in danger of insolvency.
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West Covina’s unfunded pension liability is very high compared to its annual revenues, Howle wrote, and it has only set aside a portion of the funding it will need to pay for the pension benefits already earned by its employees. Its growing pension costs will also put additional pressure on its finances, she said.
The state auditor analyzed financial data from 470 California cities in 2019 to identify which ones would receive a special audit and identified 17 at high risk.
“West Covina made certain financial decisions that appear questionable or were based on insufficient analyses,” Howle wrote. “Moreover, the city had not developed a formal financial recovery plan with specific timelines, monitoring, and reporting to improve its long-term financial health.”
The state auditor also “identified instances of inadequate management that limit West Covina’s ability to ensure that public funds are used appropriately and that its procurement efforts provide the best value.”
Howle recommended the city pursue opportunities to better manage or reduce spending, prepare multiyear financial forecasts to quantify the impact of its decisions, and establish and follow procurement policies. The auditor also recommended the city develop a formal financial recovery plan to prioritize resources and assign responsibility for monitoring progress in implementing the plan.
The city disclosed in the offering documents for the pension bond deal that Howle had ranked the city as the 17thmost fiscally challenged city among 470 of the state’s cities in a 2019 fiscal ranking. The city was listed as high-risk “primarily because it had declining financial reserves and a compromised ability to pay for employee retirement benefits.”
The city also disclosed in offering documents that it expected written comments from Howle on the city’s fiscal condition to be released after October.
In her audit, Howle said that the city’s ineffective fiscal management threatens its ability to meet its financial obligations and to provide city services. The city has been drawing on its general fund reserves to support operations, rather than pursuing solutions generating additional revenue or reducing expenditures, according to the audit.
As of June 30, 2020, the city had $11.5 million in cash and short-term investments in the general fund, according to the offering documents. But the city also acknowledged it could face liquidity pressures because of challenges presented to city finances from the pandemic. Estimated sales tax revenues for fiscal year 2019-20 are $14.9 million, a 6.6% decrease from fiscal year 2018-19; and estimated sales tax for fiscal year 2020-21 are estimated to be $15.9 million, a 4% decline, according to the offering documents. The city expects to receive $1.3 million from the CARES Act.
The city has $65 million in long-term liabilities including $41 million in outstanding lease revenue debt, according to the city’s audited financial statements for the fiscal year ending June 30, 2019.
The city’s unfunded retiree healthcare liability grew 185% from $20.6 million in June 2015 to the $59 million most recently reported by CalPERS. According to Howle's report, city management has not developed a plan to reduce this obligation.
Wu said the city has been meeting with city employees in the hope of lowering costs, Wu said.
“We have faced lawsuits over the reforms we have tried to adopt,” Wu said. “It’s really hard to take back benefits, once you give them to employees. Those were decisions made by previous administrations that we are trying to fix.”
He also noted that most California cities are currently struggling under the weight of the pandemic.
“If they want to do an audit, they need to look at the current numbers — and consider that business will not come back in the blink of an eye,” Wu said.
“The state should be working to save our city, and other California cities. It’s not just us.”
The timing of the audit came on top of phone calls that Wu said he has been fielding from the city’s restaurants and retailers, who are upset over shutdown orders instigated by the Los Angeles County Health Department as the number of COVID-19 cases spiked ahead of the Thanksgiving holiday.
Wu responded to complaints from local restaurant owners by saying that maybe his financially strapped city should spend money to start its own health department, similar to Pasadena, where restaurant owners were allowed to continue serving diners in outdoor city owners while restaurants in the rest of the county where closed to all but takeout and delivery orders.
As of Tuesday, 75 West Covina residents had already died from COVID-19, according to the Los Angeles County Department of Public Health.
To face its financial challenges, West Covina brought on a more experienced financial staff last year to help the city turn the corner on decades-long financial challenges, Wu said.
Carmany and Finance Director Robbyen Bird were hired last summer.
Carmany also noted in his response letter that it is a difficult time for all California local governments.
“Without question, the COVID-19 pandemic will cause more California cities to consider bankruptcy,” Carmany wrote. “Most California municipalities predominantly depend on sales tax, property tax, and transient occupancy taxes to pay the bills. The pandemic has exacerbated this situation.”
