08-03-10, Bruce Philpott Comments on Glendale’s Policy of Labeling “Borrowed Money” as “Income”

In late 2008, while deciding whether to run for Glendale city council, I met with three former mayors. I showed them city data revealing the fact that the city had taken out nearly a half-billion dollars in long term bond debt since 2002. These former mayors, who had a combined 32 years experience on the city council, were visibly shocked and surprised. They all said that when they were serving on the city council, they would meet with their colleagues around the state and were often told how envious they were of Glendale for having such a strong conservative approach to its finances which was a “Pay as you go” policy. The city had such strong reserves and short term financing capability, it never had to resort to long term bond debt. All that changed in 2002 when the city started spending more than it brought in. Rather than make the unpleasant but prudent reductions in expenditures, it started borrowing with 30 year bond obligations.

The reason the city changed its policy on finances is that by 2002, the expenditure picture – due to excessive growth of employees and their benefits -- began to exceed revenues and it has continued every year since then.  The only way the city has been able to show a "balanced" budget is by labeling the borrowed bond money as "income", thereby offsetting the ballooning deficits. To date, the amount of deficit spending is about equal to the amount of long term bonds, each about half a billion dollars. But now the city is reaching its limits on borrowing and will be forced to once again “Live within Its Means” and not by credit card alone.

Although crediting the borrowed money as “revenue” seems as a smoke and mirror tactic, it is actually an approved accounting method as set forth by the Government Accounting Standards Board. GASB is presently under pressure to rescind that policy as it is considered by many to be misleading.

While I was campaigning for city council, I spoke with then Asst. City Manger, Bob McFall, about how difficult it was for the public to understand city finances and especially the city's annual budget. I told him that it would be in the public’s best interest if the city restructured the annual budget in terms that the average lay person could understand. About a week later he said he was committed to doing just that and would work with city staff to accomplish it. Later in the campaign he told me he had had several meetings with staff and they were working on structuring a simple budget format for public consumption.  I spoke with him after the election and he informed me that it had not been done. This was not the best effort to help convince the public the city is moving toward greater transparency.

Over the next several years, the city will become even more desperate for new revenues because the expenditure side of the budget will continue to outpace the revenue side. Glendale has taken out about as much long term bond debt as it can afford. The City’s Water Credit Rating according to Fitch last month was classified as “Negative”. The report also said the city intends to take out another $50 million in water bonds next year and will increase the water rates to the consumer accordingly to guarantee service on the impending bonds.

When the city is no longer able to claim borrowed money as revenue because it has reached its borrowing limits, it will be forced to once again “live within its means” and spend only the money that comes from traditional revenue sources. That will be the moment when the citizens of Glendale experience the Bell effect. It should occur in about another two years.

Bruce Philpott