State Auditor Says Pasadena in ‘Moderate’ Risk of Financial Distress

According to an assessment of the financial status of California cities, Pasadena remains in moderate risk of financial distress.

However, future pension costs and retiree health, dental funding and other post-Employment benefits funding is considered at a high risk level.

“This city’s projected annual payments to its CalPERS pension plan in fiscal year 2028-29 are significant compared to its current total government revenues,” according to the state auditor. “This indicator projects the future annual amount the city will need to contribute to its pension plan to ensure the plan can afford to pay retired employees. For a city’s pension costs to be low risk, annual pension contributions should not exceed 5 percent of the city’s total government revenue.”

In 2020, then-Pasadena City Manager Steve Mermell made headlines across the state when he expressed concerns about CalPERS investment strategy.

California Government Code section 8546.10 authorizes the State Auditor to establish a high-risk local government agency audit program (local high-risk program) to identify local government agencies that are at high risk for the potential of waste, fraud, abuse, or mismanagement, or that have major challenges associated with their economy, efficiency, or effectiveness. 

Cities designated as high risk as a result of a completed audit must submit a corrective action plan and provide updates every six months regarding its progress in implementing the corrective action plan. 

Pasadena has been considered a moderate risk since 2016.

“Pasadena has a long history of fully and transparently discussing its pension obligations for both current and former employees,” City Manager Miguel Márquez told Pasadena Now.

“The City funds both the closed Fire and Police Retirement System for safety employees that was in place prior to CalPERS as well as the current CalPERS pension system. Over the years, the CalPERS pension system has accrued a significant unfunded accrued liability related to employee pensions that the City is obligated to pay over time. Fortunately, the City plans for these obligations and includes future required payments in financial forecasts. Those budgeted payments are significant and are labeled ‘high risk’ by formula measures used by the state controller’s office. The far more important measure, however, is that the City of Pasadena’s financial picture overall remains healthy and solvent with strong reserves and a balanced budget, even when these pension payments are taken into account.”

The City’s cash and investments (liquidity) and retiree health and dental obligations (other post-employment benefits obligations) are considered low risk.

“This city’s pension plan has enough assets to fund 87 percent of employees’ pension costs,” according to the report. 

For a city’s pension funding to be low risk, the city should have enough assets in its pension plan to fund more than 80 percent of the cost of pension benefits already earned by its employees.

The city has enough cash and investments to cover 186 percent of its unpaid bills at year end. 

Similar to a checking account balance, this indicator measures the cash and investments a city has in its general fund at the end of the fiscal year to pay its bills. In order to be low risk, a city should have enough cash and investments to pay 150 percent of its bills in the near future.

The City’s General Fund and debt burden are also considered moderate risks.

“This city has enough funds set aside in reserves to cover its expenses for about three months in the event of a fiscal emergency, such as an economic recession, and its reserves have been declining, on average, by 9 percent annually,” the report said. 

The city successfully tapped into its reserves during the Covid pandemic and used the funds to stave off layoffs and continue providing services.

“Residents may experience the continuation of essential services, such as fire, police, road maintenance, and parks. However, the city may need to increase revenue, or reduce services or other expenses, to deal with a major economic event, such as a recession,” the report said. “This city should carefully evaluate its financial position in order to ensure that it is prepared for unforeseen challenges and does not become distressed in the future.”