The California State Auditor (State Auditor) created the Local Government High-Risk Dashboard to report the ranking of California cities from highest to lowest risk of fiscal distress based on our analysis of certain financial data.
Overall Fiscal Risk by Risk Category:
The chart shows the distribution of cities based on overall fiscal risk.
Methodology for Ranking California Cities
To identify cities that may be at risk for fiscal distress, we analyzed financial information for 471 California cities. We assessed risk by performing various financial comparisons and calculations that we refer to as financial indicators, as discussed in more detail below. We analyzed the finances related to each city’s governmental and business-type activities, including the general fund or main operating fund. Our analysis relied on information from audited financial statements prepared in accordance with generally accepted accounting principles (GAAP) that we obtained through various sources such as city websites, the Federal Audit Clearinghouse, the Electronic Municipal Market Access website, and the California State Controller’s Office (State Controller). We also analyzed unaudited pension related information from the California Public Employees’ Retirement System (CalPERS) and the State Controller.
We selected a set of 10 indicators that enabled us to assess each city’s ability to pay its bills in both the short and long term. Specifically, the indicators measure each city’s cash position or liquidity, debt burden, financial reserves, revenue trends, and ability to pay for employee retirement benefits. In most instances, the financial indicators rely on information for fiscal year 2016–17, with certain limited information dating back to fiscal year 2014–15.
We used a points-based system to rank and categorize cities as either high, moderate, or low risk for fiscal distress. We weighted the results of the indicators by assigning varying numbers of points to each indicator based on our judgment of each indicator’s relative importance. The table below summarizes the financial indicators and maximum points assigned to each indicator.
We assigned points to cities based on the calculated result of each indicator, and then ranked cities based upon their accumulated scores. Cities could score anywhere from zero points up to the maximum available points for each indicator. A perfect score across all indicators would equal 100 points with lower scores representing higher degrees of fiscal risk. See the “learn more” link within the description of each indicator for further details on how we calculated each indicator.
Fiscal Risk Designations
We assigned risk designations to cities based on their cumulative score for all 10 indicators as shown in the table below:
Our Local Government High-Risk Dashboard ranks cities from highest to lowest risk for fiscal distress based on indicators that rely primarily on financial information as of June 30, 2017, which may not represent cities’ current financial status. In addition, these rankings do not reflect environmental factors such as population trends, unemployment rates, or levels of household income. Consequently, a high fiscal risk designation does not indicate that a city will default on its debt or file for bankruptcy. Similarly, a low-risk designation does not mean that a city is free of financial risk.
As explained below, we determined that the city of Compton has high fiscal risk because of the lack of transparency over its finances. In addition, for purposes of our dashboard, we analyzed the city of Lincoln’s finances using our financial indicators which rely on the city’s audited financial statements. Although our dashboard categorizes the city of Lincoln as low risk based on those calculations, we do have concerns with the city’s finances, as described below. Finally, we excluded 11 cities from our dashboard because they did not publish audited financial statements that were prepared in accordance with GAAP.
City of Compton
Because the city of Compton did not publish required audited financial statements, we ranked this city as having high fiscal risk due to the lack of transparency over its finances. Federal regulations require cities that spend $750,000 or more in federal awards in a fiscal year to have an audit performed. In accordance with state law, cities subject to this requirement must submit this information to the State Controller or notify the State Controller of their exempt status. The State Controller did not report the city of Compton as exempt from this reporting requirement.
City of Lincoln
As requested by the Joint Legislative Audit Committee, the State Auditor issued a report on March 21, 2019, pertaining to the city of Lincoln and its administration of public funds and assets. That report concluded that Lincoln’s mismanagement of public funds, insufficient accountability, and inadequate oversight threatens its financial stability. Our report titled City of Lincoln: Financial Mismanagement, Insufficient Accountability, and Lax Oversight Threaten the City’s Stability is available by clicking here: https://www.auditor.ca.gov/pdfs/reports/2018-110.pdf
Cities That Are Excluded from our Local Government High-Risk Dashboard
The 11 cities listed below did not publish audited financial statements that were prepared in accordance with GAAP. The State Controller reports that nine of these cities were exempt from the federal reporting requirements (as described above) for fiscal year 2016-17, and therefore these cities are not included in our analysis. The remaining two cities (Holtville and Ripon) issued audited financial statements prepared on a basis other than GAAP. We do not believe these financial statements are comparable to statements prepared in accordance with GAAP, so we therefore also excluded those two cities from our analysis.
- Fort Jones
We derived overall risk using data in the table below.