Chula Vista's path to financial recover, using the GFOA's 12-step process.

• Author: Kachadoorian, Maria

The City of Chula Vista, California, grew by 47 percent (approximately 75,600 people) between 1998 and 2008, but everything changed with the recent downturn in the housing market. Since 2008, the city has experienced minimal increases in population and little demand for new development, creating a significant decline in development-related revenues and a decline in assessed values citywide (see Exhibit 1). At the same time, the city experienced additional fiscal stress from several sources: expenditure increases and revenue losses when a local power plant closed, State of California revenue takeaways, rising pension costs, and generous long-term labor contracts. In addition, a class action lawsuit challenged the city's ability to collect the tax from wireless customers, creating uncertainty about the future of the city's telecommunications utility tax revenues. On the bright side, the dam did not break and wash away the town--but Chula Vista has experienced significant fiscal stress in recent years, and it needed to find a path to recovery.

After the economic downturn started in December 2007, the city implemented several budget balancing plans in an effort to keep expenditures in line with revenues. The incremental economic declines necessitated mid-year budget reductions to avoid deficit spending, and in all, the city's general fund operating budget went from $170 million to $125 million, a 26 percent reduction over five years.

By 2011, the city had already cut 330 permanent positions, representing 36 percent of its workforce, but more cuts were needed to achieve a structurally balanced budget. The time was right to assess the damage and to implement fiscal reforms based on lessons learned--in other words, the city wasn't going to let a good crisis go to waste. But in this era of economic uncertainty, Chula Vista had to proceed with caution.

ONE STEP AT A TIME

In 2010, the Government Finance Officers Association developed a 12-step financial recovery process, including a road map that outlines each step, providing guidance to organizations going through financial distress and explaining methods for moving beyond financial sustainability to financial resiliency. The City of Chula Vista used this process to guide it through some of the most difficult financial challenges in its 100-year history.

The 12-step financial recovery process identifies three major stages:

* The bridge stage covers short-term retrenchment (fiscal first aid) tactics that jurisdictions can use to stabilize their financial condition. The bridge stage concludes with the development of a short-term recovery plan.

* In the reform stage, a jurisdiction carries out the recovery plan and further develops and implements long-term recovery strategies.

* The transformation stage institutionalizes long-term financial planning, with the goal of becoming more adaptable to changing conditions, more resistant to financial distress, and better able to regenerate in the face of setbacks. (1) (A full discussion on the GFOA 12- step model can be found on the GFOA's website at www.gfoa.org.)

Step 1: Recognition. The first step in moving toward resolving any problem is acknowledging that a problem exists. In 2007, Chula Vista fell into fiscal crisis denial, even though its quarterly financial reports identified significant issues with development-related permit revenues, which had dropped by 68 percent. Other economic indicators were also telling the city that there was a problem. Unfortunately, after years of healthy revenue increases and a booming building environment, the city was not ready to accept that it was entering a period of significant slowdowns in development. The disconnect between the reality of the financial indicators and development projections resulted in general fund operating reserves falling to $10.3 million, from $14.9 million, by the end of 2007. Reserves fell to 6.1 percent, less than the 8 percent reserve policy, and as a result, Standard & Poor's downgraded the city's credit rating from A to A-. The time to take action in a timely manner had passed.

Step 2: Mobilize. Once the city got past the denial and finger pointing stage, it focused on avoiding further deterioration in the...