Implications of the Grand Jury Report on Glendale

A Gloomy Picture for Glendale’s Finances:Implications of the Grand Jury Final Report 2012-13

By Frank Gallo, MBA, Finance Planner

The Final Grand Jury Report was prepared in compliance with California Penal Code §933(a), and represents the efforts of twenty-three Civil Grand Jury members who spent the 2011-2012 fiscal year dedicated to fulfilling their mission to safeguard citizens’ interests by performing as a “watchdog” over the operations of public agencies within Los Angeles County. The final yearly report for 2012-2013 for Los Angeles County Civil places the city at the bottom quarter of 87 cities evaluated in the County.

To evaluate the financial health of the cities the Grand Jury obtained and reviewed the Comprehensive Annual Financial Report (CAFR) or Basic Financial Statements for each city for Fiscal Years 2010-11 and 2011-12, the most recent years of audited financial reports available. These reports are prepared by independent auditing firms. Six financial key components of the CAFR were evaluated by the Grand Jury: In five of those components the city of Glendale had a less than desirable performance. Here is the list of the six components evaluated by the Grand Jury, though each one of them is defined in a separate paragraph: Change in General Fund Balance, Ratio of Assets to Liabilities, Unassigned General Fund Balance, Change in Net Assets, Net Revenue Percent, and General Fund Net Revenue.

Change in the General Fund Balance indicates the extent to which a city’s general funds are increasing or decreasing. Ideally, city net general fund balance would be stable or increasing. A declining general fund balance indicates cities are spending down their general fund in order to meet current financial obligations[1]. In Glendale’s particular case the General Fund Balance suffered a huge decline going from 11.3% to (55.6%) an almost 67% drop over a one year period, placing the city in the # 70 position in the Grand Jury Report a drastic drop from # 19 position it had in 2011.

Unfortunately, this dramatic drop in the general fund balance does reflect directly on the City’s Net Assets. When you expend more than you earn you end up expending your savings, not different from what happens to a city. A change in net assets indicates the extent to which total city assets are increasing or decreasing. Ideally, city net assets would be stable or increasing. Declining net assets indicate cities are spending down their assets in order to meet current financial obligations[2]. The Net Assets of the city decreased from $1,316,056 to $1,160,278 for the previous year; exposing a large 30% one year decrease in current assets.

One might say that the average person would rather get into debt than expend his/her assets to cover excessive expenses. Such a situation can happen with a city and there is a way to measure it. Such measurement is called the Ratio of Assets to Liabilities. This ratio is an indicator of a city’s solvency and ability to meet long-term obligations, including financial obligations to creditors, employees, taxpayers, and suppliers; as well as its service obligations to its residents[3]. The higher the ratio the better the city’s financial position. In Glendale’s case it went from 3.9 in 2011 to 4.89 in 2012 a 25% one year increase in the ratio, yet in spite of this ratio improvement the city’s overall position declined from # 27 in 2011 to # 42 in 2012 and public debt increased 5.2% or $19 Million in that period. While public debt was kept under control a major effort was placed in covering the extra expenses through the use of the Unassigned General Fund an equivalent for a person of expending the emergency savings.

This course of action placed the city residents in an untenable position if an emergency were to happen. The Unassigned General Fund Balance (a fund kept for unexpected situations such emergencies) suffered a 40% reduction from 2011 to 2012, placing the city in the # 40 position from the # 36 position that it had the previous year. Unassigned General Fund Balance is the portion of a city’s general fund balance that is not assigned for a specific use and, therefore, available for appropriation[4]. “These are funds that have been formally set aside for use in emergencies, revenue shortages, or budget imbalances, as well as provide stable fees, tax rates, and maintain government services, and to facilitate long-term financial planning.” The Unassigned General Fund is the equivalent of an individual’s emergency fund; these funds are only touched in case of dire need. In simple terms the city is in a dire financial situation.

When an individual gets into serious financial trouble the first thing to do is determine why he/she got into it, stop the financial bleeding and find ways to get out of it. To do that the financial history of the individual must be analyzed. The last four years financial statements for Glendale show a continuous negative trend as indicated in the Net Revenue Percent. . If a city spends more than received in revenues the Net Revenues Percent, which is the percent of all revenues remaining after all city expenditures[5], would be negative. The Net Revenue Percent show the following negative “()” results (12.7%) in 2009, (16.1%) in 2010, (9.1%) in 2011 and (11.2%) in 2012. Most of us would not survive four year of negative income, private companies would sell divisions, lay off employees, outsource services or merge with others within the first two years of negative net revenues, yet Glendale has remained with negative net revenues for over four years.

Some might say that what is happened in Glendale is just the reflection of what took place in most cities in America during the same period; ironically, that was not the case. The city did not suffer a large decline in tax revenues as many cities did between 2009 and 2012. Glendale’s property tax and sale revenues increased throughout this period with a very minor dip in property taxes in 2010. The only major revenue lost was the cut on federal funds for redevelopment that was approved by the California Governor in 2011 and became effective in 2012; a $20 million cut. Yet, these funds were earmarked for a very specific purpose, though the city accounted them together with property taxes.

The Grand Jury report compared 87 cities in the County and some of them were under extremely stressful economic conditions, but many of the remaining cities did better than Glendale. A large number of the cities that were affected by the economic downturn responded with substantial cuts to expenditures, consistent with reduced revenues. These efforts included hiring and pay freezes for employees, furlough days for existing employees, increased cost to employees for benefits (health care and retirement), and in some cases significant employee layoffs. In extreme cases cities have also reduced the level of service provided to the community, with reduced hours of operations and other reductions for some services.

In Glendale’s case, according to the 2012 CARF five employees were laid off and a total of 120 full-time “equivalents” accepted early retirement incentives, parks and recreation funding was reduced, general government was reduced by 2.58% only in 2012 and public work funding was kept almost unchanged. Also, an additional “48.2 full time equivalent positions” were removed from the budget via the elimination of vacant positions. But, over the four year period 2009-12 two major city expenditures continued a steady increase; Police 10.9% and Fire 13.5%.  These two expenditure increases from 2009-12 represent 44.5% of the budgetary deficit for 2012.

The city’s own financial analyst admits that “…it is uncertain that these (cost) increases will be sustainable over the foreseeable future. Costs continue to outpace any growth seen in major revenues such as property and sales tax and while these categories may not be declining and even increase as was the case this past fiscal year, increases in pension costs and other employee benefits continued to exceed revenue gains[6].” Even though the City declares that “…will continue to address the Internal Service Fund deficits through gradual rate increases to the General Fund and other Funds” its own record shows that it is not possible to balance the budget by increasing revenues while keeping costs out of control. In simple terms an individual can not balance his personal budget by generating more income when he/she keep on expending more than he/she is making.

The Grand Jury’s report highlighted a major pitfall in Glendale’s management; the city’s general funds decline would continue and the city emergency fund would drop further or the city would get into untenable debt (bonds) as long as the city maintains negative net revenues. Drastic desicion must be taken to curtail out of control costs or Glendale might become the next Detroit.