After an extended period of calm, fiscal distress is returning to California cities. Los Angeles, San Diego, San Francisco, and Oakland are all grappling with large budget deficits. In Oakland, the situation became so bad in late 2024 that staff publicly contemplated the “zero option”: a Chapter 9 bankruptcy filing.
While the financial tribulations of large cities make headlines, troubles in smaller cities and in special purpose governments like hospital and transit districts often develop below the radar.
Like many states, California monitors financial conditions of its local governments. Since 1911, cities and counties have been required to file “Financial Transaction Reports” (FTRs) with the state controller. It should be possible for analysts to review these reports to identify signs of impending trouble and consider interventions.
But a key limitation of FTRs is timeliness. Current state law requires cities to file them seven months after the end of their fiscal year. Most cities in California have a June 30th fiscal year end and thus an FTR reporting deadline of January 31 the following year.
Many cities and other local governments miss this deadline. Current law allows the state controller to send a delinquency notice to late filers, and then impose a small fine twenty days later, but there is no record of the controller collecting any late reporting fines.
Although the controller doesn’t sanction late filers, she does list them on her “ByTheNumbers” website, which shows a sharp rise in late filings. In the 2019 fiscal year, 80 California cities missed their seven-month deadline, but by 2023 that number more than doubled to 170. Counties, transit operators, and other special purpose governments also experienced significant increases in their late-filing rates over the same period.
New legislation from Sen. Steven Choi, Senate Bill 595, would make the fines mandatory for local governments that fail to file within ten months of the end of their fiscal year. This is three months after the current FTR filing deadline, and one month after most cities are required to provide audited financial statements to the federal government.
Because the fines are small, ranging from $1,000 to $5,000 depending on the local government’s revenue, making them mandatory would only have a limited impact on the finances of entities filing late. But imposition of the fine could force staff to explain to officials why their agency is being required to remit funds to the state.
One consideration that may limit the impact of SB 595 is the fact that many analysts pass over FTRs for monitoring purposes, opting instead for audited financial statements. This was the choice the State Auditor’s office made when it inaugurated its Local Government High-Risk Dashboard, which was unfortunately decommissioned in 2023 before the new wave of local distress became evident. During the 2017 Dashboard implementation, a senior audit staffer told me that the FTRs often did not match audited financial data and were thus unreliable.
SB 595 offers a long-term solution to the usability of FTRs. It requires the state controller to investigate the possibility of integrating FTRs and audited financials, once standards for machine-readable local government audited financials are implemented at the national level later this decade.
Last year, the Government Accounting Standards Board (GASB) kicked off a project to develop a reporting taxonomy, or standardized list of concepts, for public sector financial reporting. The Securities and Exchange Commission (SEC) may instruct governments that have outstanding municipal bonds to start using this taxonomy to produce machine-readable audits as early as 2027.
By combining the GASB taxonomy with its own reporting requirements, the controller could create standards for a single electronic report that would satisfy federal, state, and municipal bond market requirements. The result could be less effort for local governments freed from the burden of creating redundant reports, while they provide more useful data more quickly for those of us tracking local government fiscal health.
Marc Joffe is a Fellow at California Policy Center
