YOU CAN’T JUST LEAVE THOSE WHO CREATED THE PROBLEM IN CHARGE OF THE SOLUTION is titled GFOA Best Practices Budget on Achieving a Structurally Balanced Budget

Adopt rigorous policies for all operating funds aimed at achieving and maintaining a structurally balanced budget

According to the Government Finance Officers Association (GFOA), “Most state and local governments are subject to a requirement to pass a balanced budget. However, a budget that may fit the statutory definition of a “balanced budget” may not be financially sustainable. For example, a budget balanced by such standards could include using non-recurring resources, such as asset sales or reserves, to fund ongoing expenditures and thus not be in structural balance. A true structurally balanced budget supports financial sustainability for multiple years into the future. A government must ensure that it knows the distinction between satisfying the statutory definition and achieving a true structurally balanced budget.”

For El Cerrito, it means adding all planned expenditures to the budget, including one-time expenditures and expenses related to employee benefits like unfunded liabilities.

The City falls afield of this standard. The City established a long-awaited Emergency Disaster Relief Fund (EDRF) of $9 million and set aside $1 million for a Section 115 Trust. However, the funding for both efforts left the City with $5 million in unrestricted reserves. The GFOA recommends a minimum of two months of unrestricted general fund reserves. The City General Fund Budget is shy of $60 million; therefore, the General Fund Balance recommended amount is shy of $10 million, yet the City Manager and City Council have depleted reserves to half of the recommended level of unrestricted funds. That means the City could have more expenses than funding fairly soon. Why are City leaders patting themselves on the back?

Moreover, these set-asides were not generated from surpluses created by fiscal prowess. The funding for these efforts was compliments of the Federal bailout – which will not occur again in the foreseeable future.

For those of you who care, the City is in big trouble. Following the State Auditor’s report indicating that El Cerrito was on the brink of bankruptcy, City leaders elected NOT to adopt rigorous policies for all operating funds, and the City has not developed long-term sustainable expenditure reductions. In addition, considerable expenses and revenue shortfalls have yet to be addressed.

Unfunded Pension Liability

For fiscal year 2020-21, the City’s $70 million pension liability accounted for 123% of the City’s $57 million in revenues. El Cerrito missed another opportunity to address a significant liability. As early as 2021, El Cerrito was advised to adopt a plan to address the $70 million pension fund liability. The City was advised to either a) prepay the unfunded liability or b) set up Section 115 Trust – A separate trust solely dedicated to pension/OPEB, including Lump Sum Direct Pay Down of UAL to reduce UAL with PERS and annual payment.

Unfortunately, City leadership ignores the elephant in the room by carefully avoiding an open discussion of the $70 million in arrears. City leaders characterize the Section of 115 Trust as a means to prepay future expenses. This characterization signals to everyone that City Leadership will take care of employees who plan to retire soon.

The unfunded liability negatively impacts less tenured and prospective employees primarily because of the $70 million in funding that has not been set aside for their pensions. But those approaching retirement are secure. By their actions (and inactions), City leaders have indicated they only care about themselves, their pension benefits, and their public image.  

Real Property Transfer Tax

Fiscal Year (FY) 2021 receipts were $4.5 million, FY 22 receipts were $5.3 million, and FY23 was just $3.6 million, a reduction of 20% from 2021 to 2023.   Ignoring the warning signs of declining receipts and increasing interest rates, the City budgeted a Real Property Transfer Tax of $4.3 million for this fiscal year, FY24. However, the City is currently on track for receipts of $2.5 million, creating a $1.8 million shortfall. The City has yet to discuss a plan to address the shortfall openly.

City Council members say they know about the shortfall and expect to cover it with Sales Tax revenue. This explanation is flimsy at best. At worst, the City Council has no idea what’s going on and is blindly and willingly jeopardizing the City’s financial future as there are long-term implications. Any revenue shortfall must be factored into the FY25 budget. City leaders only know three things:  Business as usual, seeking bailouts and more taxes.

Generally, for sales taxes, there are two distribution frequencies:

Monthly: Applicable “monthly distribution” sales tax categories are remitted to the State 30 days after the prior month’s close (unless the business remitter has an arrangement to send quarterly).  The State completes its financial reconciliation and remits to the County 45 days following the close of the tax month (i.e., month ending May 31, sales taxes remitted on June 30 to the State; the State reconciles and distributes to Counties on July 15; each County has an agreement with their cities on date sales tax funds will be deposited through ACH to each City’s bank accounts).  Contra Costa County remits an “advance notice of the amount of tax deposit” to each City (received before the ACH funds transfer occurs and includes the date the funds will be deposited in the City account).

Quarterly: Applicable “quarterly distribution” sales tax categories are remitted to the State 30 days after the prior quarter’s close.

Either way, FY24 began July 1.   How can just two months – July and August – of sales tax receipts provide confidence that the City knows enough to rest on its laurels? The fact is, they cannot realistically trust that all is well.

The City manager said she briefed the Council on financial and current affairs.

ICYMI, all communications to the Council are subject to the Brown Act. The Brown Act specifies that meetings must be noticed in advance, include only business described in the agenda, take place within agency boundaries, and be utterly accessible to the public. Notice and agenda for regular meetings must be Posted 72 hours in advance, posted in an accessible location, and mailed to persons who request information.

If the City Manager’s account is accurate, the City Manager briefed the Council privately; she and the Council violated the Brown Act. Either way, the City is not publicly discussing the massive RPTT shortfall. Otherwise, the City Manager neither advised the Council nor the residents.

Quarterly Financial Reporting

The City Manager agreed to provide quarterly updates on the City’s financials, and this practice was made policy. Has anyone else noticed that it’s been several quarters since the last update? The previous update was verbal – no documentation, handouts, quarter-over-quarter comparisons, trend analysis or helpful information.   Again, the City Manager says she briefed the Council on the financials.   Is it just EECRG, or has anyone else wondered why the public has not been privy to these private conversations – further violations of the Brown Act?

City leaders tout transparency yet have not routinely disclosed financial information. The policy the Council adopted requires quarterly reports at minimum. When they inform the Council, according to the Brown Act, they must inform the public simultaneously. Not doing so is also the opposite of transparency.

Financial Advisory Board

Speaking of the lack of transparency, two of the five positions on the FAB are vacant. If just one person goes on vacation, becomes sick or otherwise cannot attend, there will not be sufficient members to conduct a meeting.   Although the City Council has had at least one viable candidate for a while, they have not interviewed them.   Traditionally, non-hand-picked candidates must wait an unreasonable time for an interview, which means the City Manager does not believe this person will rubber stamp their requests. 

City leaders are clearly out of touch and have behaved irresponsibly for so long that they think it is a Commonplace practice.

The City plans a ballot measure requesting more taxes. Before El Cerrito gets another taxpayer bailout, reforms need to be implemented to make the agency more accountable to taxpayers.

Here’s how you can help:

• Share this post with other residents.
• Comment on the blog.
• Attend the monthly Financial Advisory Board meetings in person.
• Council meetings are both remote and in-person. The City Council meeting will be on September 19. The schedule is here.  
• The next FAB meeting will be on September 26 at City Hall. The schedule is here.