El Cerrito's Financial Troubles

The state auditor's warning

I first became concerned about El Cerrito five years ago when the California State Auditor identified 18 cities in California at greatest risk of bankruptcy due to fiscal mismanagement. Out of California's nearly 500 cities, El Cerrito ranked 7th from the bottom in financial health and was placed in the state’s “Local Government High Risk Program.” (After a drop to 6th, with the last update El Cerrito was 13th from the bottom among California's 483 incorporated cities.) 

The state auditor's 2021 report on El Cerrito was titled with a stark warning:

"Excessive Spending and Insufficient Efforts to Address Its Perilous Financial Condition Jeopardize the City's Ongoing Fiscal Viability."

In an open letter to Gov. Gavin Newsom, State Auditor Elaine Howle (CPA) wrote

"The city is at high risk of financial instability because of its continual overspending, poor budgeting practices, and lack of a comprehensive plan to address its financial challenges, all of which threaten the future provision of city services."

• California State Auditor's Report on El Cerrito (Public Letter to Gov. Newsom)
• California State Auditor's Report on El Cerrito (Summary)
• California State Auditor's Report on El Cerrito (PDF of Complete Report)

The East Bay Times described El Cerrito as the "Bay Area's worst-managed city" with city officials "negligently sending the city to the brink of bankruptcy."

Budget deficits

Based on the city's audited Annual Comprehensive Financial Reports, or ACFRs (formerly called Comprehensive Annual Financial Report, or CAFRs), El Cerrito has faced general fund budget deficits in 12 of the last 19 years. Starting in 2003, the city began experiencing financial shortfalls and relying on emergency reserves and short-term loans (known as "TRANS," or tax revenue anticipation notes) to stay afloat. By 2017, its reserves were fully depleted.

Our city finances are getting better, but…

After the release of a state auditor's report and under significant public pressure, El Cerrito made notable progress between 2020-2023 by successfully balancing its budget and slowly replenishing its reserves.

Unfortunately, while there certainly has been very significant improvement, El Cerrito was still designated as “high risk” as of September 2024. In a troubling sign, El Cerrito overspent its original fiscal year 2024 budget by $3.9 million, with expenses 20% higher than in 2023.

Unfunded accrued pension liabilities

Unfunded pension liabilities occur when a city's pension fund lacks sufficient assets to cover the future pension benefits owed to retirees. This gap represents the difference between the amount a pension plan is obligated to pay based on benefits accrued to date and the current funds available to meet these obligations. If a city does not set aside enough resources now, it risks not having sufficient funds to pay the pensions of retired police officers, firefighters, engineers, maintenance workers, and other employees.

El Cerrito's unfunded accrued pension liabilities are nearly $90 million and steadily growing. 

These unfunded liabilities negatively impact the city's credit rating and make borrowing more expensive for a new library, senior center, police station and capital improvements. They also strain the city's budget, diverting funds from essential services such as public safety and infrastructure. Additionally, unfunded pension liabilities create an equity issue, shifting the financial burden to future generations who will likely face higher taxes and reduced services to pay for today's fiscal mismanagement.

General fund balance

The city's beginning year goal of unrestricted reserves equaling 30% of general fund expenditures have been revised down to 10%, well below the Government Finance Officers Association’s (GFOA) minimum recommendation of 17%. (The GFOA, which publishes best practices for governments, recommends that cities maintain a reserve balance equivalent to at least two months of expenditures.)

Former mayor and current councilmember Lisa Motoyama, who is seeking reelection to the City Council—and I credit for doing an excellent job—wrote in her ballot statement that the city’s “fund balance” has increased “from (negative) -$110,000 in 2020 to (positive) $16 million in 2024.” That’s an impressive turnaround. I certainly hope it's true.

I know, respect and appreciate Councilmember Motoyama. She knows numbers and has been a refreshingly critical, questioning voice on the city council. She's been outstanding, and I fully support and will vote for her. Still, I’d like to see evidence of what the city has proudly claimed is a $16 million unrestricted fund balance. Given the opaqueness of city finances, it's hard to know if it's real.

“Fund balance” is not a particularly precise term, as cities typically include classifications to indicate various constraints placed on funds. It generally refers to the unrestricted portion of funds accumulated after subtracting expenditures from revenues. Since the city holds and shuffles funds among different accounts, it can be a difficult snapshot to take.

In an attempt to identify the balances in accounts holding unrestricted general funds, add up the totals and verify the claim, a request was sent to the city clerk for a snapshot of various account balances making up the $16 million “fund balance” total. The public information request was denied with the following (contradictory) explanations:

1. “Please note that there are no records responsive to this request” 
2. “Records that contain information that is exempt under California Government Code Section 7922, as the public interest served by not disclosing the record clearly outweighs the public interest by disclosure of the record.”

As best as I can determine from limited public information, the $16 million number comes from adding $9 million in an emergency fund—the formerly depleted Emergency Disaster Relief Fund (EDRF), a restricted fund which is not part of an unrestricted fund balance—and a $7 million unfunded accrued liability payment made to CalPERS, money paid and already out the door. If this is correct, then the City’s unrestricted fund balance is actually zero. Of course, I could be wrong. Unfortunately, without greater transparency, there’s no way to know.

Worsening credit rating

Just as poor credit makes it more difficult and more expensive for us to borrow money for a new car or house, a low credit rating makes it more difficult and more expensive for a city to borrow money to fund vital projects such as a new library, new senior center, new police station, new fire trucks , infrastructure upgrades, and deferred maintenance.

Cities generally borrow money for larger projects by issuing and selling bonds. The money received up front when the bonds are sold to investors is what cities borrow. The principal and interest cities pay back over time is what investors receive in return for having lent the city money by buying the bonds. Investors rely on credit and bond rating agencies to help them decide where to lend their money and whether the risk of not being paid back is worth the promised return. In general, the higher the risk of not being paid back, the higher the interest rate required to entice investors. If your hardworking, financially-responsible sibling wants to borrow $100, you might ask that they pay you back $100 plus a cup of coffee. If you deadbeat financially-irresponsible sibling want to borrow $100, you ask that they pay you back $200, knowing you'll taking the risk that they never pay you back.  

Three independent credit agencies analyze the finances and fiscal management of cities, counties and even countries. As with consumer credit bureaus, their aim is to determine creditworthiness and the likelihood of default. AAA is the highest (best) score and lowest risk. Below AAA are progressively worse ratings with more risk: AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB- and on down.

As El Cerrito ran budget deficits and depleted its emergency reserves, the city's credit rating dropped from AA- in 2013 to BBB- in 2020, and then up a notch to BBB this year.

Credit ratings matter. For an individual or city, good credit results in lower interest rates and cost savings. Bad credit results in higher interest rates and borrowing costs. With poor credit, if the city issues bonds to fund a new library, senior center or police station, it will have do so at a higher interest rate and pay back more for money borrowed. 

Tax increases typically provide the funds to pay back what's borrowed. To build a new library at the El Cerrito Plaza BART development, for example, the city has proposed borrowing $21 million which would be paid back with a $300 annual property tax increase. $21 million borrowed over thirty years with a 5% interest rate means paying back approximately $41 million; with a 10% interest rate, it means paying back $66 million. Whether high or low, taxpayers foot the bill.

Fiscal responsibility and accountability means getting your finances in order before borrowing more money and increasing taxes.

Real property transfer tax missteps

An important source of funds for El Cerrito is the 1.2% the Real Property Transfer Tax collected from purchasers during the sale of real estate. In summer 2022, as a volunteer on the City of El Cerrito's Financial Advisory Board (FAB), I became concerned that rising interest rates would result in a downturn in real estate transactions and, even if El Cerrito home prices remained steady, fewer transactions would reduce the total tax revenue collected.

I spoke with three local real estate professionals to get a sense of how El Cerrito's market was evolving, gathered data, crunched numbers, and projected a revenue decline from $4.9 million in fiscal year 2022 to $3.5 million in 2023. My methodology and estimates were presented by FAB to city management and the council, and quickly dismissed as “wrong.”

In their September 2023 "Corrective Action Plan and Assessment" for El Cerrito, the state auditor expressed concern about the City's reliance on "real estate transfer taxes resulting from an unexpectedly robust real estate market" and questioned revenue projections in the 2022-23 budget that assumed “real property transfer tax (revenue) will remain unchanged.”

In July, city management attributed budget shortfalls in part to an “unexpected decline” in property transfer tax revenue to $3.5 million.

It was only “unexpected” because they didn’t listen to their own Financial Advisory Board, volunteers with financial expertise who serve because they care deeply about El Cerrito. The city was warned by both FAB and the state auditor that their rosy projections were too optimistic. They should have had the vision to plan accordingly. 

COVID-19 relief: Did El Cerrito misuse federal funds?

During the three COVID years of 2021, 2022 and 2023, under intense public scrutiny El Cerrito made financial progress by balancing their budget and beginning to slowly replenish reserves that had been entirely depleted. The improvements were largely facilitated by reductions in staff and a $6.1 million one-time infusion of American Rescue Plan Act (ARPA) federal funds intended for COVID relief. The federal government allotted over $100 billion to cities and counties across the country to help defray the cost of public health initiatives, to support those who were negatively impacted by COVID, and to stimulate economic recovery from the pandemic.

Most cities used their ARPA funds to rescue small businesses and provide rent relief to service workers and low-income tenants impacted by COVID. Others, citing upticks in crime that they attributed to the pandemic, used the money to fund public safety. El Cerrito largely used their ARPA funds to bail out the city from budget deficits that long preceded COVID. Disbelievingly, I watched the shuffling of funds to create the appearance that the ARPA money was going to COVID relief.

Interestingly, the state auditor unleashed a series of blistering reports on California’s pandemic response and the mismanagement of federal relief funds. She criticized statewide delays in getting rent relief to struggling tenants, failures to provide assistance to people who had become homeless, insufficient oversight over the use of relief funds, delays in delivering food assistance to vulnerable families, and the ineffective use of federal funds for COVID-19 testing and contact tracing. While El Cerrito's budget balancing shenanigans may have technically met the letter of the law, they certainly did not meet the intended spirit of COVID relief.

If there's one take away from the finance ethics courses I teach, it's that being legal doesn't make it right. Lots of ethical breaches are completely legal.

"Structural problems" or weak leadership?

What city management has attributed to “structural problems,” I attribute to weak oversight and leadership from the City Council.

The current finance director has stated “We do not have the capability to do any analytics.” She's stated that she has neither the staff nor resources to produce complete monthly financial reports. I will prioritize providing the finance director with the tools and staff necessary "to do analytics" and best manage the city's finances.

At the August 2024 Financial Advisory Board (FAB) meeting, members expressed dismay that El Cerrito "secretly" purchased for $1.5 million the Assemblies of God Church on San Pablo Avenue (for its land next to the El Cerrito main fire station). It was done quietly, presumably to help the El Cerrito negotiate a lower price. While it's good that the city now owns the land, particularly since there are hopes of one day building a new, modern public safety building, I also think the city council should have made certain the purchase was first subject to community input and review.

I will not approve any major expenditure without full transparency, community input and review from the community member and resident-staffed Financial Advisory Board.

My pledge to you

My pledge and commitment to you is that as councilmember I will serve El Cerrito by being fiscally responsible, accountable and transparent; genuinely engaging the community; and providing fiscal oversight and direction.