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Dec. 3, 2023 - Epoch Times
11:46
How California's Counties Are Performing Financially, and Why It Matters | John Moorlach
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Based on what you found, 55 out of 58 counties are right now upside down.
You have close to $200 billion in unrestricted net deficit.
Some cities and counties have been really delinquent in releasing their financial statements.
My guest today is John Moorlach, former state senator and county supervisor in Orange County.
He's been ranking California's cities and counties on how they are doing financially for the Epoch Times newspaper.
Today he is here to discuss with us his rankings of the cities and counties in California.
Also, he's going to tell us the challenges he's faced in collecting this information.
My own profession as a CPA, I'm really disappointed with the Government Accounting Standards Board for not requiring these things earlier, because what it did is it allowed unions, who pretty much work on a philosophy of getting more benefits, they could do it in the shadow.
Because all the elected leaders that were voting for this, they wouldn't see it, the accountant wouldn't come by and say, hey, did you realize you just added six billion dollars to your balance sheet and debt?
I'm CMI Karami.
Welcome to California Insider.
John, it's great to have you back on.
Welcome back.
It is an honor to be back with you.
Thank you, CMI. John, you have been doing this accounting work, serious accounting work, going and analyzing all of the counties in California and a lot of the cities in California and ranking them for us, for our newspaper Epoch Times.
You've been publishing these articles telling us how each county is doing and you've found some really interesting examples and things that are going on that we would love our audience to know.
Can you tell us which counties are doing well and which counties are not doing well?
And what you have found?
We have 58 counties in California.
We look at the basic financial statements, which usually comes right after the auditor's opinion as you go through the pages.
And then we look for the unrestricted net position of the county or city or state.
So you divide the population into the unrestricted net position.
And you get a per capita.
And that allows you to kind of rank.
You should all be within a range.
And it's supposed to be a positive number.
You're running a business.
If you have Assets that are lower than your liabilities, then you're a bankruptcy candidate.
When you look at the counties, the majority, I think almost 55 of the 58, have unrestricted net deficits as opposed to unrestricted net assets.
Somehow, the county or the municipality agency has run up debts that are greater than the assets that they Actually have on hand.
So they have less money than what they owe.
Correct.
So essentially they're upside down.
They're upside down.
They could go under any time.
You know, you've been really good about having Jim Doty in your shows.
He's predicting a recession.
So a good recession will really, as I say, kind of blow the sand off of everything and you'll start to see that cities will have a difficult time paying their liabilities.
Especially because a good portion of those liabilities are the defined benefit pension plan.
That they're in with, say, California public employee retirement system, call it CalPERS.
If the economy is down, then their investment returns will be down, which means that in the future, the municipalities will have to make larger contributions to catch up for the losses that were generated in their overall diversified population.
So then things get really, really interesting.
We've already had three cities in California that have filed for Chapter 9 bankruptcy, which is how municipalities file for bankruptcy.
A private sector would file Chapter 11, and that gives them a chance to go into a federal court and Work with a federal judge who says, hey, welcome.
Contracts at the state level don't matter here.
So you can re-evaluate your retiree medical plan, which we call other post-employment benefits, and you can re-evaluate your defined benefit pension plan structure.
We can change all of that going forward if you want to.
And so that's what the city of, say, Stockton did.
It filed for Chapter 9, San Bernardino and Vallejo, also for the same reasons.
But Stockton, what they did is they actually eliminated The retiree medical plan, altogether, it had a liability of $500 million, and they just canceled it.
So all the employees that were anticipating lifetime medical benefits, gone.
Just gone.
But Stockton went from the bottom of the list to near the top by just going through chapter nine and removing that one liability.
So, John, based on what you found, 55 out of 58 counties are right now upside down.
Correct.
Correct.
And let's say Orange County school districts, we have 28.
They're all upside down.
You know, the cities, we have 34.
About half are upside down.
So we have to start being concerned.
You know, what's going on?
What's the debt?
Can the municipalities actually maintain their debt payment structure and still provide public safety, good roads, good personnel?
And out of the counties that you ranked, which ones are the worst and which ones are the best?
Well, Little Alpine County is in last place, which is unfortunate.
I just remember asking for Modoc County's financial statements back in 2012, and their auditor controller wasn't available, but I had to give The secretary a toll-free number back then because they couldn't afford to make long-distance phone calls.
So you can kind of see that there's something going on.
But San Mateo is at the top.
It's a pretty wealthy county with a healthy assessed value for their property.
And for Orange County, 92% of the revenue that Orange County gets is property tax-based.
So you want the real estate market to do well, which it is right now.
When it starts to slow down for multiple years, it'll start having some difficulty.
And out of the big cities and bigger counties, the more pronounced ones like San Francisco and Los Angeles and San Diego, Sacramento, how are these counties doing?
Well, Alameda, which is ironic, is one of the top two counties.
So San Mateo and Alameda are the top two.
And then Napa.
But the city of Oakland is in Alameda County.
And Oakland, out of 482 cities, is near the bottom.
So when you land in Oakland and you rent a car, the rental agent will tell you to not go to 7-Eleven or not leave anything in your car.
Don't leave any valuables that are visible through your window.
Now we're seeing so many cars being Popped open, and then they check the back window, and then they pull the seat over to see if you have luggage inside your trunk, and then they pop that open.
And San Francisco, too, also near the bottom of the list for county and cities.
And so you can see that they don't have as robust a police force.
And so so much is happening because these entities are spending so much money to pay for pensions and for retiree medicals.
And in terms of what you found, so these financials that you were able to get were old, right?
They were like a few years old, right?
Well, they're behind because some cities and counties have been really delinquent in releasing their financial statements.
We received Imperial's 2021 Annual Comprehensive Financial Report in May of this year because the predecessor auditor-controller, who's responsible for issuing county financial reports, actually was convicted who's responsible for issuing county financial reports, actually was convicted of embezzling money from the county.
And so we lost that auditor-controller...
They fell behind.
Humboldt County was the last.
Humboldt's at the very top of the state with the city of Eureka on the coast.
Beautiful, beautiful county.
But their auditor controller just sort of just didn't do her job.
So it's kind of hard to believe that some accountant types, because I am a certified public accountant by background, that they would just not be focused on the deadlines and the rest.
So we just finally issued the 2021 report.
We hope to get the 2022 for you in January, which Humboldt will try and get their 22 done.
But 22 should have been done in December of 22, not...
Here, we're almost December of 23.
So it's been very lax.
States are a little late.
Arizona, Nevada, New Mexico.
I just got New Mexico's.
But California has been dramatically late every year.
It's a national joke.
How late is California?
We won't probably see their 22 financial report until April of 24.
So in two years almost.
Almost.
A year and a half.
And yet the legislature and the governor are signing budgets without even having solid financial data on how their state is running.
And California is 41st place out of 50, so it's in the bottom 20% of states.
It's sort of a sad, sad story when you have close to $200 billion in unfunded or unrestricted net deficit.
And now, based on what you saw, was there some strange cases of fraud or embezzlement and things like that as you were looking at these?
Sometimes I call and they go, who are you?
Why do you even want to know?
And it's sort of like, really?
You have to ask me who I am.
You should have this stuff on your websites so your residents can figure it out.
And you say, okay, do I want to buy a commercial building?
Or do I want to buy a home?
And And you look at the price and you say, okay, if I buy a $1.2 million home, you're going to pay $1,000 a month just in Prop 13 property taxes, right?
1%.
And if the city's not functioning properly, you buy an expensive home but don't get police backup.
No one's watching Chilean gangs or whatever could be affecting a neighborhood situation.
You're not going to feel comfortable going to the shopping center because there's homeless people kind of harassing you or whatever it could be.
That doesn't seem to make sense.
This is only the 10-minute version of this interview.
If you'd like to watch the whole episode, you can go to CaliforniaInsider.com.
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