Southern California’s Cities Are Spending Big Instead of Preparing for the Next Economic Downturn
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Commentary

Southern California’s Cities Are Spending Big Instead of Preparing for the Next Economic Downturn

As the stock market continues to set records, it’s easy to forget the fiscal trauma cities and the state were feeling a decade ago.

A decade ago, California’s state budget was in shambles and facing a $40 billion shortfall. At the local level, cities and counties were going under. In 2012, for example, the San Bernardino City Council voted to file for bankruptcy protection. But with a booming stock market and an economy that’s been growing for years, many cities and states have been lulled into a false sense of financial security. Rising revenues have allowed state and local governments to increase spending but have not saved them from the greater issue of funding the pensions that have been promised to government employees.

Consider the city of Inglewood, which is experiencing somewhat of a boom. During Mayor James Butts’ tenure, crime has fallen, deficits have declined, and a new stadium for the NFL’s Los Angeles Rams is under construction—with mostly private funding. Given that the city is in a stronger fiscal position than it was a decade ago, now would be a good time to pay down its debt and prepare for any future downturns. Instead, the city continues to kick the can down the road.

In 2017, Inglewood borrowed $53 million in the form of a pension obligation bond (POB). Unfortunately, rather than using most of the money to pay down its $197 million unfunded liability in the California Public Employees’ Retirement System (CalPERS) or address long-term fiscal issues, the city put $36 million of it into the general fund.

Pension obligation bonds bring long-term risks that can worsen a government’s fiscal health by shifting the responsibility of managing debt from pension funds to local municipalities. With these bonds, the government is typically making a bet that it can invest the money in assets that will earn higher rates of return than the cost of paying interest on the bonds. However, oftentimes the bonds serve as a short-term band-aid for pension problems rather than genuine reforms. Pension obligation bonds actually create a more rigid financial environment by turning a somewhat flexible long-term pension obligation into a hard and fast annual debt payment. By sending its pension obligation bond money to the general fund, Inglewood is borrowing money to pay its short-term bills and avoiding the necessity of paying its long-term debt.

For example, city salaries are paid from the general fund. In 2017, City Manager Artie Fields had his total compensation rise to $472,676. Police Chief Mark Fronterotta had his compensation increase to $524,057, which includes $166,201 in various benefits. Inglewood isn’t the biggest or one of the cash-rich cities in Los Angeles County, yet the Southern California News Group reports Fronterotta is “the highest-salaried law enforcement chief in Southern California” and the city is paying executive salaries that are commensurate with what the highest-paid local government officials nationally receive.

Instead of shelling out excessive salaries, Inglewood needs to make pension reforms. As of 2016, for every active Inglewood employee contributing to the retirement plan, there were already two retired workers receiving benefits. The system’s costs are going to rise further as the workforce continues to age and retire so it’s important to make sure Inglewood can keep its promises to its pensioners.

But Inglewood isn’t alone. The city is one piece of a pattern of financial mismanagement in smaller Los Angeles County cities. The California State Auditor says the cities of Cudahy, Huntington Park, Lynwood, Maywood, Montebello, and Monrovia are ”high-risk local governments”  that show signs of fiscal stress. Meanwhile, the state controller called out Compton for “reckless overspending, pervasive internal control deficiencies, and a lack of city council oversight” and found the City of Industry “failed to exercise sufficient oversight of the city’s finances and operations.”

As the stock market continues to set records, it’s easy to forget the fiscal trauma cities and the state were feeling a decade ago. Inglewood’s shifting of pension obligation bonds to the general fund is an example of what should not be done. Rather than borrowing and adding unsustainable debt, Inglewood and other local governments should focus on reducing unfunded liabilities and making sure they’re ready for the next economic downturn.

This column first appeared in the Orange County Register.

Alix Ollivier

Alix Ollivier is a policy analyst at Reason Foundation, where he primarily works on pension reform.