State auditor says Pasadena at ‘moderate’ risk of financial distress – Pasadena now
According to an assessment of California cities’ financial health, Pasadena remains at moderate risk of financial distress.
However, future pension costs and funding for health insurance, dental care and other post-employment benefits are considered high risk.
“This city’s projected annual payments to its CalPERS pension plan in fiscal 2028-29 are significant compared to its current total state revenues,” the state auditor said. “This indicator forecasts the future annual amount the city must contribute to its pension plan to ensure the plan can afford to pay retirees. For a city’s pension costs to be at low risk, annual pension contributions should not exceed 5 percent of the city’s total government revenue.”
In 2020, then-Pasadena City manager Steve Mermell made national headlines when he expressed concerns about CalPERS’ investment strategy.
Section 8546.10 of the California Government Code authorizes the state auditor to establish a high-risk local government agency audit program (local high-risk program) to identify local government agencies that are at high risk of waste, fraud, abuse or mismanagement. or that have major challenges related to their economy, efficiency or effectiveness.
Cities identified as high risk as a result of a completed audit are required to submit a corrective action plan and report on the progress of implementing the corrective action plan every six months.
Pasadena has been considered a moderate risk since 2016.
“Pasadena has a long history of fully and transparently discussing its pension obligations for both current and former employees,” said City Manager Miguel Marquez Pasadena now.
“The city funds both the closed fire and police pension scheme for security workers that existed before CalPERS and the current CalPERS pension scheme. Over the years, the CalPERS pension scheme has accumulated a significant unfunded accrued liability related to employee pensions that the city is obligated to pay over time. Fortunately, the city plans for these obligations and accounts for future required payments in financial projections. These budgeted payments are significant and are labeled as “high risk” by formula measures used by the Office of the State Controller. The far more important measure, however, is that the City of Pasadena’s overall financial position remains healthy and solvent, with strong reserves and a balanced budget, even when these pension payments are factored in.”
The city’s cash and investments (liquidity) and health and dental obligations (other post-employment benefit obligations) are considered low-risk.
“This city’s retirement plan has enough assets to fund 87 percent of employees’ retirement costs,” the report said.
For a city’s retirement funding to be low risk, the city should have enough assets in its retirement plan to fund more than 80 percent of the cost of the retirement benefits already earned by its employees.
The city has enough cash and investments to cover 186 percent of its year-end unpaid bills.
Similar to a checking account balance, this indicator measures the cash and investments a city has at the end of the fiscal year to pay its bills. To be low-risk, a city should have enough cash and investments to be able to pay 150 percent of its bills in the near future.
The city’s general fund and debt burden are also considered moderate risks.
“This city has enough reserves to cover its expenses for about three months in the event of a financial emergency such as an economic recession, and its reserves have declined at an average annual rate of 9 percent,” the report said.
The city has successfully tapped into its reserves during the Covid pandemic, using the funds to stave off layoffs and continue to provide services.
“Residents can experience the continuation of essential services such as fire, police, road maintenance and parks. However, the city may need to increase revenue or reduce services or other spending to deal with a major economic event such as a recession,” the report said. “This city should carefully review its financial position to ensure it is prepared for unforeseen challenges and does not face distress in the future.”