An annual look at the financial health of American cities has a bad prognosis for two in the Valley.

The non-partisan, nonprofit group Truth in Accounting gives both Phoenix and Mesa a ‘D’ in their newest Financial State of the Cities report.

It looks at the 75 most populous cities in the country and gives them a grade, based on whether those cities have enough money to pay their bills.

Sheila Weinberg is founder and CEO of Truth in Accounting.

We reached out to both Phoenix and Mesa for their reactions to the report.

In a statement, Phoenix said:

"Phoenix’s entire budget process and financial documentation is transparent and accessible to the public at phoenix.gov/finance. This includes regular updates to the City Council, the posting of financial reports online, and the use of a budgeting process that includes more than 15 public hearings annually to gather feedback and to provide open and accessible information to our residents, investors and others.

"The report appears to focus on pension liabilities in particular.  This is a topic that cities across the country are working to address, and Phoenix has been working publicly on this issue over the past six years.  The city council and the voters have implemented pension reform to reduce the city’s ongoing pension costs.  This has resulted in saving over $1 billion over the next two decades in the City’s pension plan.

"Every year, as required by law, Phoenix has a balanced budget.  The city pays 100% of its calculated annual pension obligation each year. Currently, the city has nearly $4.2 billion available to pay retiree pension and healthcare benefits. This plus the city’s requirement to fully fund the annual actuarially required contribution provides assurance that the city will be able to meet its retiree benefit obligations.

"In 2016, for the 32nd consecutive time, the city’s Comprehensive Annual Financial Report (CAFR) received a Certificate of Excellence in Financial Reporting from the Government Finance Officers Association.   Plus, Phoenix’s CAFR is audited by an independent CPA firm and has only received clean audit opinions."

In a statement, Mesa said:

"While we applaud the Truth in Accounting group’s effort to provide ‘easy-to-understand’ financial information about local governments, we don’t agree with the methodology used or with several of the subjective assumptions made and don’t really understand the purpose of this report.  Furthermore, at the City of Mesa we continue to account for and manage responsibly all of our expenses including our pension and retiree healthcare costs. 

"The report comes to the conclusion that ‘sixty-four of the 75 most populous U.S. cities do not have enough money to pay all their bills.”  The problem is that the methodology doesn’t match up the same time frames between the assets and liabilities.  Their methodology starts from the total assets and removes the capital assets to get to a liquid or current asset.  To calculate the ‘bills’ portion the group takes total debt and removes debt related to capital assets.  Then, total unfunded pension and unfunded retiree healthcare costs are added.  Thus, the methodology subtracts the total value of debt (short and long term) from liquid or current assets.  The more appropriate comparison may be to use just the current portion of the total unfunded liabilities.

"In order to compare the local governments, the study had to normalize the data.  In order to do this, the report divides the ‘taxpayer surplus/deficit’ by the ‘number of taxpayers with a positive federal income tax liability.’  We don’t understand why the group uses the taxpayer number in the denominator versus the total population which is the number that cities have to provide services to.  Because most of the cities in this report have deficits, a larger number in the denominator would provide a benefit by lowering the per taxpayer deficit number.  So a family of six with one tax filling would be counted the same as a household of one.  This would put a city with a larger proportion of families at a disadvantage to another city with a smaller proportion of families.

"Similarly, cities with a greater population with a negative federal income tax liability would be at a disadvantage to those cities with a lower proportion.  Lastly, why was the ‘C’ grade determined to be from $0 to $4,900 and a ‘D’ grade between $5,000 to $20,000?  If you move the ‘C’ grade only $1,100 from $0 to $6,000 you would have 11 cities move from a ‘D’ grade to a ‘C’ grade and maybe not as much of a headline catching report.

"Finally, we are not sure what is the purpose of this report.  Is it trying to make a link from a City that scores well in the report to a City that is well run with effective management?  One of the top three cities in this report, just went through bankruptcy within the last five years.  But because they wiped out a lot of debt through the bankruptcy process and scored well on this report doesn’t necessarily mean they are a well-run city or have the best financial processes and policies in place."