EL CERRITO — Back in October, California State Auditor Elaine Howle singled out 18 cities in financial distress — and El Cerrito ranked No. 7. And that was before the coronavirus pandemic began taking its toll on the state’s economy.
Because of the quickly developing financial fallout from the shelter-in-place order, El Cerrito must act immediately to make cuts or risk insolvency and filing for Chapter 9 bankruptcy, city leaders were told at a virtual El Cerrito City Council meeting on April 7.
At the meeting, El Cerrito City Manager Karen Pinkos said the city would have to come up with a “scorched earth” post-COVID-19 budget. And, at the same meeting, El Cerrito Mayor Greg Lyman spoke about the need to come up with $4 million in cuts or a 10 percent reduction in services, with action set as soon as the next council meeting on April 21.
The city faces a deficit of up to $7 million for the next fiscal year in 2020-21 — and should brace itself for a $10 million deficit through fiscal year 2022, according to a consultant hired by the city. El Cerrito was already proposing cuts of $2 million, or a 5 percent reduction in services, before the pandemic.
“In light of the current fiscal situation and in light of COVID-19, I was heartened by the pre-COVID-19 chart that showed that this $2 million would have made a significant difference,” Pinkos said during the council meeting. “But we’re in a different world now, so we recognized that this is not enough.”
“We don’t really have a choice anymore,” she continued.
In the next fiscal year, sales tax revenues in El Cerrito could decline 25 percent, or $2 million. Property transfer taxes could fall $1 million, and revenues from city recreation programs could end up with a $2 million shortfall. Property tax revenues would likely also go down, with reassessments, according to Steve Toler of Management Partners.
“The City Council and staff must take proactive steps now to avert insolvency,” Toler said.
Even before the pandemic, El Cerrito was being pressured to make budget cuts in light of the report from California State Auditor Elaine Howle. The State Auditor’s Office plans to audit the city’s finances sometime this year.
In her Jan. 13 letter to the Legislature requesting an audit of El Cerrito, Howle said El Cerrito had “inadequate general fund reserves, cash flow and liquidity challenges, and escalating pension costs” and had “not developed a long-term approach to improve its financial condition and has not addressed its increasing pension costs.”
During the recession, Howle said, the city used its general fund reserve to maintain service levels “rather than scaling back on costs of services and, by fiscal year 2016-17, the city depleted this reserve entirely.” In fiscal year 2017-18, the city was operating with a deficit of $2.2 million, she said.
“El Cerrito has significant cash flow problems and has relied on short-term loans to cover its expenses since fiscal year 2012-13 to $9 million in fiscal year 2019-20,” Howle wrote. “Further, the city’s annual pension costs are expected to rise from $5.7 million in fiscal year 2017-18 to $9 million by fiscal year 2024-25.”
As of June 30, 2018, El Cerrito had “a $2.8 million liability for other post-employment benefits such as retiree health care, but it had no current plans for funding this liability,” Howle said in her letter.
In response to Howle, Pinkos said that “we know that El Cerrito has fiscal challenges” in an Oct. 31, 2019, letter.
“Even with the challenges we have faced, the city has been prudent with our funds, and has worked hard to ensure financial stability,” she said in the letter. “The city has never once missed an employee payroll, debt service payment, retirement contribution, or been in default of any contractual obligation.”
Pinkos mentioned at the council meeting the following planned actions: furloughing 90 part-time employees; cuts to police, including a school resource officer; a reduction in benefits for management staff, including car allowances; a freeze on hiring, travel and training; eliminating vacant positions; negotiating with unions over contracts, including no raises and cuts in health and retirement benefits; and not holding major city events — such as the July Fourth parade, which the council canceled April 7.
Pinkos also proposed reducing library hours, “as much as it kills me to say that, as much as I’m an advocate of the library, that’s a significant amount of money.” She estimated the city funds the library $129,000 each year to provide library service for 50 hours, seven days a week. The cuts would reduce that to the county’s base of 35 hours, five days a week.
“We would not be closing the library,” Pinkos said. “I am trying to let the council understand that we need to cut services. I would need to find $129,000 in our staff.”
The city needs to notify the Contra Costa County Library System about any possible cuts by May 1. But the city faces a fight over the popular library. The El Cerrito Foundation has already launched a campaign, urging supporters to email city officials to argue against any reduction in library hours.
Many residents, officials and policymakers have criticized and raised alarms over El Cerrito’s handling of its finances. El Cerrito, which has a population of about 25,000 residents, has a current budget of about $40.5 million for 2020-21.
Mike Cunningham, an El Cerrito resident, raised several concerns in his April 6 letter to the council.
“Because city leaders failed to competently and responsibly manage the budget over many years and failed to build and maintain even a modest reserve, the cuts ahead of us will require pain,” Cunningham said. He urged the city to slash city payroll “before cutting services to residents or raising taxes yet again.”
“These aren’t happy times in El Cerrito,” said El Cerrito Mayor Pro Tem Paul Fadelli in an email. “My city was facing significant financial issues before the coronavirus hit our shores. Bad past decisions from a dozen years ago and certain recent events now make it necessary to rigorously cut our budget and seek greater revenue streams. When there are fewer options, the tough actions we must take become easier.”
Cathy Hanville, a resident and contributor to the El Cerrito Committee for Responsible Government website, raised concerns about the city’s priorities.
“It is really important that we both get to the bottom of the issues that brought us here and take quick decisive action to prevent bankruptcy,” Hanville said in an email.
At the council meeting, Lyman asked Pinkos and the consultants about finding new sources of revenue. Pinkos said city staff was examining a variety of things, including establishing parking fees. Revenues from the city’s current development projects won’t be realized at least for a year to up to 10 years, according to consultant Toler.
During the presentation, Chapter 9 bankruptcy was discussed. Toler gave an overview of AB 506, which requires cities to hire a third-party mediator to negotiate with creditors before filing for bankruptcy.
Pinkos said the city is negotiating with a bank for a short-term loan and said she may know the results of those negotiations in a week. Last July, the city borrowed $9 million from Westamerica Bank for a one-year loan. The city’s quest for a loan may be made more difficult in light of Standard and Poor’s downgrading its rating on the city’s bonds from AA- to A- and its certificates of participation from A- to BBB.
If the city gets another short-term loan, it would avoid declaring bankruptcy — for now.
At the April 7 meeting, the council, at the request of Pinkos, cancelled its July Fourth parade, but delayed making other hard decisions until the next council meeting on April 21.
