Five years ago, the California State Auditor identified El Cerrito as one of the 18 cities in California most at risk of bankruptcy due to fiscal mismanagement. Among nearly 500 cities, El Cerrito ranked seventh from the bottom in financial health and was placed in the state’s “Local Government High Risk Program.” Despite some progress, the city remains in a precarious financial position. Here’s a look at the ongoing challenges and what’s at stake for the community.
A Stark Warning from the State Auditor
In 2021, the state auditor issued a report with the ominous title: “Excessive Spending and Insufficient Efforts to Address Its Perilous Financial Condition Jeopardize the City’s Ongoing Fiscal Viability.”
State Auditor Elaine Howle addressed Gov. Gavin Newsom directly in an open letter, emphasizing the gravity of the situation:
“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.”
The report highlighted persistent overspending and poor fiscal management, which had drained reserves and left the city teetering on the brink of insolvency.
At that time, Karen Pinkos berated the state auditor’s assessment claiming it was wrong and later exclaiming that it had no teeth.
Then the bottom fell out. The bond rating tanked, they depleted reserves and needed municipal payday loans, the unfunded liability exploded while residents experienced service reductions including library hours and a senior center .
Over 3 long years of denial created unnecessary hardship and increased taxes for residents.
Chronic Budget Deficits
El Cerrito’s financial struggles date back to 2003, when the city began experiencing budget shortfalls. For years, it relied on emergency reserves and short-term loans to stay afloat. By 2017, these reserves were entirely depleted. Between 2003 and 2024, the city’s general fund ran deficits in 12 of 19 years.
While El Cerrito has made some strides in balancing its budget since 2020, a $3.9 million overspend in fiscal year 2024—with expenses 20% higher than the previous year—underscores the ongoing challenges.
Unfunded Pension Liabilities
El Cerrito’s unfunded accrued pension liabilities, currently nearing $89 million, represent a significant long-term risk. These liabilities—funds owed to retirees that are not yet covered by the city’s pension plan—have a cascading effect:
- They lower the city’s credit rating, increasing borrowing costs for critical projects like a new library or senior center.
- They divert funds from essential services such as public safety and infrastructure.
- They create an equity issue by shifting financial burdens to future generations, who will face higher taxes and reduced services.
Even though the state auditor recently lifted El Cerrito’s high-risk status, this was largely due to the general fund balance. The auditor cautioned:
“We conclude that El Cerrito has partially addressed this risk area by making an effort to reduce personnel costs and completing a citywide salary study. Nonetheless, the city will need to be attentive to costs in the future because the recent salary study could generate pressure to increase personnel costs.”
Although the City’s Newsletter release was entirely celebratory, this statement highlights the dual risks of upward pressure on periodic payroll and the potential for the PERS retirement liability to continue increasing. With the unfunded liability already at $89 million, unchecked growth in these obligations could significantly worsen the city’s financial outlook. There’s more:
The “Fund Balance” Controversy
Council-members Tessa Rudnick Paul Fadelli and Lisa Motoyama, have claimed an impressive turnaround: the city’s fund balance improving from -$110,000 in 2020 to $16 million in 2024. However, transparency issues and conflicting information make it difficult to verify this claim.
A public records request to substantiate the $16 million figure was denied, citing contradictory reasons:
- “No records responsive to this request”
- “The public interest served by not disclosing the record clearly outweighs the public interest by disclosure of the record.”
If the $16 million figure includes restricted funds and already-spent liabilities, the city’s unrestricted fund balance may still be zero.
Declining Credit Rating
El Cerrito’s credit rating dropped from A- in 2013 to BBB-, the lowest investment-grade rating, before slightly improving to BBB in 2023. This matters because poor credit increases borrowing costs for essential projects. For example:
- Borrowing $21 million for a new library with a 5% interest rate over 30 years would cost $41 million.
- At 10% interest, the cost would balloon to $66 million.
In both cases, taxpayers bear the burden. Fiscal responsibility and transparency are essential to avoid such heavy costs.
Property Tax Missteps
The Real Property Transfer Tax, a key revenue source for El Cerrito, has also been mishandled. In 2022, rising interest rates and a cooling real estate market were projected to reduce tax revenue from $4.9 million to $3.5 million. Despite warnings from the city’s Financial Advisory Board (FAB) and the state auditor, city officials dismissed these concerns. Predictably, revenue fell to the $3.5 million level—a shortfall the city could have planned for had it listened to expert advice.
The Path Forward
El Cerrito has made progress in addressing its financial issues, but challenges remain. The city must:
- Prioritize transparency and accountability, especially regarding its fund balance and financial reporting.
- Address unfunded pension liabilities to ensure long-term stability.
- Avoid overly optimistic revenue projections and plan for contingencies.
- Improve its credit rating to reduce borrowing costs for essential projects.
A Call for Leadership and Fiscal Responsibility
El Cerrito’s financial health affects everyone in the community, from the quality of public services to the tax burden on residents. While the city has taken steps in the right direction, sustained effort and strong leadership are needed to ensure a stable and prosperous future. It’s time for city officials to embrace fiscal responsibility and work collaboratively with residents and advisory boards to build a stronger El Cerrito.
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El Cerrito Committee for Responsible Government (ECCRG) 