State Auditor lists Modesto among dozen high-risk cities for fiscal distress
Modesto is among the dozen California cities that potentially are at “significant risk of experiencing fiscal distress,” according to the latest rankings released this week from the California State Auditor.
This is the state agency’s fourth annual assessment of the fiscal health of California’s cities. The state auditor looked at 10 indicators — including a city’s general fund reserves, revenue trends, debt burden, liquidity and pension costs — to assess a city’s ability to pay its bills in the short and long term.
Cities were graded on a scale from zero to 100 points, the higher the score the better a city’s fiscal health. The auditor’s office ranked 423 cities in its latest assessment, assigning them one of three ratings:
High risk for fiscal distress for cities scoring up to 41.76 points, moderate risk for cities scoring 41.77 to 71.23 points and low risk for cities scoring 71.24 to 100 points. The rankings are for cities’ 2019-20 fiscal year, which ended June 2020. This is the fiscal year with the most recent available audited financial statements.
Modesto scored 40.79 points, placing it 10th worst among the 423 cities. No other San Joaquin Valley cities were ranked in the high-risk category. The closest high-risk cities were El Cerrito (No. 6) and Richmond (No. 9) in the Bay Area.
The state auditor has a dashboard on its website that residents can use to look at their and other cities’ financial health. It is at www.auditor.ca.gov/local_high_risk/dashboard-csa.
Modesto issued a statement saying “it is aware that the State Auditor issues an annual report on the fiscal health of California cities. However, the methodology used for the ranking is not clear.
“City staff needs additional time to review the data and to understand the factors impacting Modesto’s position on the list. We expect to have additional comments sometime in the next week or so, after a more in-depth examination of the report.”
Margarita Fernández — the state auditor’s public affairs chief — said in an interview that Modesto residents should not panic. “This tells you there is the potential for a city (to find itself in fiscal distress),” she said. “It doesn’t say there is one.”
Fernández said the state auditor’s office hopes cities use the annual assessments to have conversations with their residents about their cities’ financial health. And if those conversations already have started, she said the assessments can be part of that dialogue.
Modesto officials have spoken often in recent years about the city’s fiscal challenges.
Fernández said residents also need to consider the pandemic’s effects on a city’s finances. That includes both the drop and rebound in tax revenues as well as the effect of one-time stimulus money. For instance, the federal American Rescue Plan from March is providing Modesto with nearly $46 million in one-time money.
Trend line not good
Modesto has received half of the nearly $46 million (and will get the balance next year) and is using it to help the community as well as address some of its needs, including its budget.
The trend line has not been good for Modesto in these annual assessments.
Modesto was the 40th worst city in the 2016-17 fiscal year. It was 23rd worst in 2017-18 and then 13th worst in 2018-19. The city was ranked at a moderate risk in each of those years.
Modesto has struggled for many years to balance its general fund budget. The general fund makes up about a third of the city’s operating budget — which is nearly $478 million in the current 2021-22 fiscal year, which started July 1 — and primarily pays for public safety.
Sales, property and other taxes are the primary revenue source for the general fund so the fund is a good indicator of the local economy. City officials have said revenues are growing but have not kept pace with expenses.
The city released last year a consultant’s long-range forecast that showed the general fund faced increasing annual shortfalls primarily because of rising pension costs and unsustainable staffing levels. (Modesto is one of the many local agencies throughout the state that belong to the California Public Employees’ Retirement System.)
The forecast said Modesto — which is budgeted about 1,200 employees — had about 120 more employees than it could afford. The city has pursued a strategy of attrition to slowly reduce its staffing.
Audits for high-risk cities?
The state auditor could decide to conduct audits of the cities it has ranked high risk. It would need legislative approval to do so. A city would have to come up with a plan to fix weaknesses identified in the audit and provide updates every six months to the state auditor on its progress in implementing the plan.
Fernández said her agency will continue to watch high-risk cities before determining whether to request audits. She said one factor the state auditor’s office wants to look at is the effect of pandemic stimulus funding on city budgets.
Stanislaus County’s other cities fared better in the rankings.
Turlock is ranked No. 91, Patterson is No. 119, Ceres is No. 157 and Oakdale is No. 203. All are in the moderate risk category. The small cities of Waterford, Hughson and Newman are all ranked in the 300s and are in the low risk category.
Riverbank is not ranked. It was among the roughly 60 cities that Fernandez said have not yet published “audited financial reports that were prepared in accordance with generally accepted accounting principles.” She said the state auditors office will add cities to its list as they provide audited financial reports.
A better measure of Modesto’s financial health may be to compare it with the cities it often judges itself against. They include San Bernardino, Riverside, Stockton, Fresno and Bakersfield.
All are in the moderate risk category with San Bernardino faring the worst with a ranking of No. 32 and Bakersfield faring the best with a ranking of No. 150.
This story was originally published August 22, 2021 at 5:48 AM.
