Will Katrina Foley Bankrupt Orange County?

UPDATED: Call it dueling budget analyses.

As the race for Orange County supervisor in the 2^nd District runs through its last week, voters were given a unique contrast between the two top candidates: Costa Mesa Mayor Katrina Foley, a Democrat backed by the über-powerful public-employee unions; and John Moorlach, the former supervisor and, most recently, state senator. He’s called California’s Fiscal Conscience.

On Sunday, the Orange County Register ran op-eds by each candidate largely focusing on their views of government budgets, most prominently Foley’s faltering Costa Mesa. In the print paper, the op-eds fan next to each other for contrast. The authors focused on what the budgets mean for future county budgets, in particular in light of the hit to budgets from COVID-19 and Gov. Gavin Newsom’s prison-like lockdowns.

Foley’s position was presented in “Katrina Foley can lead OC through this crisis,” by Ada Briceño, a Democratic National Committee member and chairwoman of the Democratic Party of Orange County. “At the start of the pandemic, Costa Mesa anticipated the pandemic would lead to a $30 million revenue shortfall for the city,” Briceño wrote. “Under Mayor Foley’s leadership the city acted quickly, and ended 2020 with a budget surplus of more than $53 million in reserves. They prevented the shortfall by cutting discretionary spending in every department,” etc.

Sounds good. But it’s like telling your spouse, “Honey, great news. I improved our family finances by getting a credit card with a $20,000 limit and only spending $10,000 of it on a new QN900A Samsung Neo QLED 8K Smart TV for the Super Bowl! Our budget has a surplus of $10,000!”

Moorlach’s piece, “COVID is slamming Orange County city budgets,” looked at the annual financial reviews he has done of the county’s 34 cities. He also has produced similar analyses of all the state’s 482 cities, 58 counties, 944 school districts, 72 community colleges, the UC and Cal State systems and, as lagniappe, the 50 U.S. state budgets. Across the country, no official of any kind has done anything like this.

In 34^th and last place: Costa Mesa. Amazing. The city enjoys the tax bounty of mammoth South Coast Plaza as well as numerous car dealerships. It’s a rich city. Yes, COVID hit. It also hit the other 33 cities in the county. Yet the City of the Arts maintained its unenvious reputation of again winning the booby prize.

Instead of looking at city budgets, which reflect only current spending, Moorlach looks at audits, which reveal underlying stresses, in particular pension obligations. This is revealed in each city’s Comprehensive Annual Financial Report, or CAFR. Costa Mesa’s recent CAFRs are here.

Moorlach explained: “The metric I use is the Unrestricted Net Position, or UNP, in the Statement of Net Position, but only for Governmental Activities. I then divide that number by the city’s population to get a per capita number.

“For example, Costa Mesa’s 2020 CAFR yields a negative UNP of -$251 million. This city has a quarter-billion-dollar deficit. For uniformity, I use the 2019 population number on Google, based on U.S. Census data, which is 113,159. So the City of the Arts’ per capita UNP is -$2,222. That’s the worst of all 34 OC cities. Put another way, the city has run up debt on each resident of that amount, or -$8,888 per family of four.”

Quite a different picture from Briceño’s Wizard of Oz depiction, isn’t it? Don’t look behind that curtain! Might see the pension debt!

Moorlach also quotes the Costa Mesa CAFR itself, which warned, “Fiscal year 2019-2020 was the beginning of an unprecedented time in our nation. … The economic impact of COVID-19 is unparalleled in its scale and scope of damage…. The City expects the local economy to continue to be negatively impacted by the COVID-19 pandemic in the next several years.”

The CAFR for 2021 will reflect the fiscal year beginning July 1, 2020, the brunt of the COVID onslaught.

Moorlach dryly commented, “Cities should have prepared better for possible disasters. After all, the Great Recession struck a little over a decade ago. Some cities did prepare wisely.” He then listed the Top 10 O.C. city finances, the gold medal going to Cypress, with a positive UNP of $1,758.

I thought I might expand Moorlach’s analysis a little with a graph of Costa Mesa’s UNP for the past 18 years of CAFRs listed on the city’s website. According to the city bio, “In November of 2018, Costa Mesa voters chose Katrina Foley to be the city’s first directly elected Mayor. Katrina also served as Mayor in 2016-2017, and has been on Council for 10 years, (2004-2010; 2014-2018).”

Remember those years as you examine the graph:

The huge spike downward in 2015 hit because the Governmental Accounting Standards Board, at the long-time urging of Moorlach, a CPA, and others, finally required the inclusion of retiree medical liabilities. Yet other cities adjusted their finances, in particular through pension reform, to rebalance their balance sheets. Costa Mesa, under Mayor Foley since 2016, did not, only making matters worse.

If Foley is elected on March 9, she will bring her disastrous, bankrupting policies to the OC Board of Supervisors. As Moorlach warned in his Register piece, “The next supervisor immediately will face Orange County’s own negative UNP of nearly -$3.5 billion. That’s -$1,128 per capita; or -$4,512 of debt for each family of four.”

Soon, the voters will get their choice: Red Ink Foley, who well could produce a twofer: bankrupting Orange County even as she leaves behind a Costa Mesa heading into the same bog.

Or John Moorlach, who warned a previous time, in 1994, OC was headed for bankruptcy. When his prediction came true, the Board of Supervisors appointed him treasurer-tax collector to save the county, which he did.

(The article was updated to include the graph)