Despite a strong Bay Area economy, the City of Richmond, California continues to struggle with its finances. The city’s latest Comprehensive Annual Financial Report, for the fiscal year ended June 30, 2018, raises multiple red flags.
The audited financial statements were filed 50 days after the March 31st reporting deadline and contain a disclaimer from the city’s independent auditor, arising from the failure of the city’s Housing Authority to complete a financial audit. Because the Richmond Housing Authority is consolidated into the city’s financial statements, the auditor cannot attest to totals in the financial report.
The audit opinion also includes “going concern” language, which is a vehicle by which independent auditors can signal their concerns about a potential bankruptcy. The auditor’s comment is as follows:
“[A]s of June 30, 2018, the General Fund’s unrestricted cash balance represented approximately thirty-five days of General Fund expenditures, unassigned fund balance represents available fund balance and equates to approximately forty days of General Fund expenditures. In addition, the Richmond Housing Authority Enterprise Fund, Port of Richmond Enterprise Fund, other Non-Major Enterprise Funds and Non-Major Governmental Funds had borrowed $32.9 million from the General Fund and other funds. As a result of the interfund borrowing, City-wide, the City has a total of only $36.6 million of unrestricted cash as of June 30, 2018. If deficit spending continues in the funds that continue to borrow from the General Fund and other funds, it reduces the likelihood that the City will be able to continue as a going concern.”
Richmond’s unrestricted general fund balance of $18 million is small relative to general fund expenditures of $157 million. The ratio of 9% compares unfavorably to the 17% level recommended by the Government Finance Officers’ Association. Worse, the general fund may ultimately have to cover almost $9 million in negative balances in “Other Governmental Funds”.
The city’s weak cash position leaves it less able to address contingencies, like those that might arise from a recession. Further increasing the city’s vulnerability is the passage of Measure E last June, which mandates that the city spend a fixed portion of its revenue on programs for young people. The Kid’s First Initiative will ultimately divert 3% of the General Fund to such programs. Voters also approved an increased documentary transfer tax on real estate sales, but it will only affect properties selling for more than $1 million and thus may not generate enough revenue to offset added costs of this initiative.
Also straining the city’s cash position are increased payments to CalPERS, which is increasing contributions required from all participating California agencies. According to the most recent CalPERS actuarial reports, contributions are projected to rise from $31 million in the current 2018-2019 fiscal year to almost $50 million in 2024-2025, a more than 60% increase in six years.
These increased contributions may improve the city’s balance sheet, which is currently in dire straits. Governmentwide liabilities of $1.1 billion dwarf Richmond’s $711 million is assets. Liabilities include $421 million of bonds and loans, $341 million in unfunded pensions and $188 million in unfunded retiree healthcare benefits.
The city’s unrestricted net position—a measure used by Senator John Moorlach in his comparative fiscal analysis—is deeply in the red. For governmental activities, Richmond’s unrestricted net position of negative $625 million amounts to $5,675 per resident. The city’s business-type activities, including its unaudited housing authority, are also under water.
All too often CAFRs receive little or no attention from elected officials and voters. This is unfortunate because they contain many clues about a government’s financial sustainability absent from cash budgets. Rather than ignore their city’s latest CAFR, Richmond stakeholders might wish to use its release as an opportunity to re-evaluate their municipal government’s footprint and the benefits it offers current and retired staffers.