Most people I know, including many in the Neighborhood Council system, would support an increase to the minimum wage.

But $13.25 or $15.00 per hour?


They, as I, realize it is not quite what the politicians make it out to be.
Increasing the minimum wage that dramatically will not be the beginning of the end to poverty, much less the end.

The effect will not be uniform; there will be winners and losers for both employers and employees. This will be very evident on the extremes – large firms who do not rely heavily on unskilled or low-skill labor will most likely absorb the additional costs with little effect on margins and employment.

Small businesses with modest margins will certainly reduce staff or perhaps go out of business. Not a good prospect for anyone.

Even those businesses who can handle the increased costs may gradually alter their hiring criteria. At $13 to $15 they will expect employees who can add to productivity, are flexible and have potential to advance and handle more complex duties. You may find some college grads who have heretofore been underemployed taking jobs they would have otherwise ignored, thereby displacing the most unskilled workers.

The effects will vary considerably by company and industry, but it is a certainty that a measurable number of unskilled workers will join the ranks of the unemployed.

The big question is the twilight zone of employers who will be able to cover most of the additional costs, but will not be able to remain as competitive. Fast food franchises come to mind, but any small business will face a challenge. Some will not have the option to raise prices, or even if they did, the increase will be limited by market forces.

In effect, we will see zombie firms staggering through an apocalypse of near failure – one that will ultimately lead to their final demise as sure as a bullet in the brain kills the undead in The Walking Dead.

One of the ways a profitable firm can meet its end is by technical default on its bank loans.

Lower margins can cause a company to miss making certain key financial ratios as required under lending covenants – this is an example of a common technical default.

Several years ago, I spent many months modeling debt workout scenarios for troubled fast food franchises whose profit margins were declining due to a problem with suppliers. Working closely with the franchisor, our team was able to formulate viable solutions for most franchises, but there was a cost. The least profitable locations were eliminated (along with the respective jobs), losses would usually result on the sale of stores or select assets. Everyone took cuts in pay. More restrictions were placed on the owners.

Refinancing terms would stretch payments out over a longer term, improving cash flow, but making the prospects for future expansion more difficult.

The alternatives were not good. Failure to eliminate the technical defaults would almost always lead to the dissolution of the franchise…… and there were those beyond any form of assistance.

So, while some minimum wage employees will enjoy a better life, many will have trouble scraping up money to buy a higher-priced burger and will be edged out of the employment market by more qualified candidates.

Anatomy of a deal

The Tesla gigafactory deal negotiated by Nevada and Elon Musk, as it turned out, amounted to gigabucks. About $1.25 billion…..or was it really that much?

Trying to interpret the true value of incentive packages offered by governments is anything but a science.

Tesla's factory will be off of I-80, just east of Sparks.

Tesla’s factory will be off of I-80, just east of Sparks.

The truth is, the costs and benefits of these deals range between hard reality and hypothesis.

On the debit side of the ledger, it comes down to how opportunity costs are viewed. Opportunity cost can best be defined as the benefit of the next best alternative when one is deciding among multiple uses for a limited resource.

In the case of Tesla’s selected site for its factory – the Reno-Tahoe Industrial Center, just nine miles from Reno, is a diamond in the rough. Actually, it is much less than rough with infrastructure in place to handle any sizable operation. It is ready to go. All it needs is business worthy of its capacity.

The Economic Development Authority of Western Nevada claims the center has already produced 1,000 jobs. I always take numbers provided by governments and trade associations with a grain of salt, but it is evident that jobs are being created there and many are coming at the expense of California.

So what is the opportunity cost associated with the Tesla deal?

Sales and property tax relief are by far the largest components of the $1.25 billion incentive package.

Undoubtedly, other firms will be interested in relocating an existing line of business or establishing a whole new operation at TRIC or other locations in Nevada, but what are the chances of one moving in with the potential of creating over 6,000 jobs and several billion dollars worth of improvements sometime in, say, the next ten years?

Pretty slim for any state, I’d guess.

So the potential next best alternative would be relatively low compared to Tesla as far as generating new property and sales tax revenues. Therefore, Nevada is not sacrificing as much revenue as the tax abatement offered Tesla suggests. Let’s say the combined taxes of other possible ventures could potentially reach $500 million, that might amount to a more reasonable estimate of what the state is sacrificing.

Allow me to digress – Sierra Nevada Corporation, which is headquartered in Sparks, is one of three finalists for the space shuttle’s replacement vehicle. However, that contract is not subject to incentive packages. It would be another feather in Nevada’s cap, though, if SNC were selected by NASA.

On the credit side of the ledger, not all the benefits will accrue at once. The 6,000 plus new jobs will acrete over a number of years, but construction jobs and materials purchases would ratchet up quickly, then decrease as the time draws closer to the commencement of operations. So there should be a stream of new employment and investment at a decreasing rate for several years, followed by a period of robust growth as production steps up.

Besides the increased spending activity from construction activities and employment, there will certainly be a boost to the real estate market in the region. I would expect most of the initial housing needs could be absorbed by existing stock between Carson City and Reno/Sparks. This will increase property values and, obviously, bump up property tax collections.

Once Tesla becomes entrenched and production approaches a sustainable level, new housing tracts will be constructed in Washoe and Storey Counties. Here again, how many will depend on the actual direct or ancillary jobs created.

Overall, there is adequate infrastructure in the region to support Tesla. Reno-Tahoe International Airport and the freeways have the capacity to absorb growth. No need for the state to spend any great sums for upgrades.

I have only provided a rough sketch of the impact. It is difficult to envision the ripple effect.

Only time will tell if the pros outweigh the cons, but the prospects are better than fair in the short run and even better over the lifespan of the product – the electric car will play an increasingly important role in our society. Musk might very well be in the position Henry Ford was in when the Model T rolled out in 1908.

And Nevada might be in on the ground floor.

But the ground floor is pretty large; there is room for more players.

Will California reconsider its comparatively unfriendly business climate, or will it risk losing future opportunities to other states?

Governor Brown and the legislative leadership in Sacramento are a day late and many dollars short….again.

If I were them, I would not indulge in any gaming activities in Nevada or they may lose the clothes off their backs.

Today’s leak that Tesla has awarded Reno, Nevada the lucrative battery manufacturing facility still needs to be confirmed. The deal is subject to review by the Nevada legislature. Governor Sandoval has arranged for a short special session starting next week to review the terms of the deal.

Some critics think it is too big a price to pay. Incentives are estimated around $400 million.

That’s a lot of dough, but the construction of a $5 billion gigafactory and 6,500 good, permanent jobs has its benefits. The payroll alone could be worth $325 million per year – we are not talking minimum wage jobs here, even at $15 per hour. That’s a lot of potential spending along with property and sales tax revenue, even more when you consider the ripple effect throughout the state’s economy.

The payback may take several years, but Tesla has plans to market more affordable versions of its electric vehicles, which will certainly increase sales dramatically. The long-term prospects for employment and tax revenue, then, are good.

While Nevada and a few other states were busily preparing to win Tesla’s business, Governor Brown and company puttered around, perhaps more interested in spending a fortune on high-speed rail, a system that will require heavy subsidies.

This is not the first time Reno has trumped California. In 2012, Reno offered $89 million to Apple to build a $1 billion data and purchasing center in the metro area. Hundreds of well-paying jobs will result. The project is well underway.

Apple, as Tesla, is headquartered in California. Who knows if those companies might pull a Toyota and move home office operations as well.

So why was Jerry and the Sacramento clan dickering when Nevada, Arizona and New Mexico were aggressively courting Tesla? The legislature adjourned without addressing a bill that would have attempted to quicken the environmental review.

It would be unfortunate if environmental issues caused a roadblock. Granted, producing batteries is not exactly the greenest of processes, but if you consider the carbon footprint of the vehicle’s end-to-end production and useful life, it still would be an environmentally friendly product.

Once again, unless the Nevada legislature nixes the deal, it appears that our leaders have misplaced priorities, yet again.

A sensible organization or individual would engage in an arm’s length negotiation where assets or services are exchanged.

Here’s a succinct definition of an arm’s length transaction according to Investopedia: A transaction in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm’s length transaction is to ensure that both parties in the deal are acting in their own self-interest and are not subject to any pressure or duress from the other party.

Only fools would knowingly appoint a person whose interests conflicted with their’s to represent them in an important transaction.

Not so, as far as the City Council’s standard operating procedure.

Just recently, the brain trust a majority of the voters elected to the council made a proposal to settle the dispute between the city and the IBEW over the right to audit the secretive non-profit trusts – the Joint Safety and Training Institutes. Part of the proposal would allow the IBEW to veto the appointments of the mayor to serve on the boards of the trusts.

That makes as much sense as allowing Vladimir Putin to select a committee to deal with the crisis in Ukraine.

On the heels of this proposal, Councilman Paul Koretz, with the cooperation of his colleague, Paul Krekorian, is giving away a marketable city asset to an organization with political ties to the mayor. That’s the city’s idea of horse trading.

Now the latest war on checks and balances is being waged by the city’s other public unions. They want to block Mayor Garcetti’s appointments to the Labor Relations Board and, instead, have him select from a pool of candidates screened by the unions.

Compensation and benefits amount to over 80% of the city’s general fund. If we expect the mayor to effectively manage operations while handcuffing his ability to negotiate personnel costs, then we are delusional.

The prognosis is for a severe case of delusion given the officials we elect.

Until we rid ourselves of them, labor negotiations will be conducted at finger’s-length.

It will be the middle finger, and it will be aimed at us.

The Los Angeles City Council’s plan to resolve its dispute over auditing the controversial non-profit trusts gives away the most important element of accountability – independence.

The foundation of good government and good management is a system of checks and balances.

Among other things, the Council’s proposed settlement, which stills needs to be reviewed by IBEW Local 18 (God knows what modifications they will suggest), will force Mayor Garcetti to withdraw his appointments to the boards of the Joint Institutes of Training and Safety and allow the union to have a say in the selection of external auditors to perform future audits.

The mayor’s board appointees are Michael Fleming, who serves on the DWP Commission, and Richard Llewellyn, the mayor’s chief legal adviser. The IBEW has refused to seat them; as a result, the trust boards have not held a meeting since Garcetti announced the appointments last February.

Union boss Brian D’Arcy claims the two would have a conflict of interest owing to their relationship with the mayor – as if the union board appointees are independent?

Los Angeles Superior Court Judge Michael Linfield backed Garcetti in a court ruling in July. He denied the union’s request for arbitration and issued a preliminary injunction allowing Fleming and Llewellyn to be seated. Basically, the mayor and his allies’ interests were compatible with the responsibilities of the non-profit boards.

Now the City Council appears to be willing to give D’Arcy veto power over board appointments. That does not foster independence and transparency.

But wait! D’Arcy will allow the new General Manager of the DWP and another executive of the utility to serve instead.

Well, that’s been a winning combination over the last ten years.

A succession of DWP managers have sat on the boards since the trusts were created.

How much disclosure was provided in that time span?

Virtually zero.

DWP managers are too involved in ongoing affairs with the IBEW to be truly independent. They have to look at D’Arcy’s mug regularly and endure his power-hungry ambitions. They will simply be worn down and cowed into acquiescing with the Boss.

Allowing the union to have a say in the selection of an external auditor also runs counter to independence and transparency. It will mean D’Arcy will influence the scope of the examinations. Unlike publicly traded corporations who must undergo rigorous audits, more so in the post-Enron era, in the case of the DWP non profits the objectives of an external examination may be more of a review and less of an audit. It is a matter of negotiation. D’Arcy will want it to cover the bare minimum…..and he just might be able to get his way, as he does in many negotiations.

If the City Council caves and pushes this dubious plan forward, a plan that will undoubtedly be watered down in its final version, they will set up the proverbial fox guarding the hen-house scenario.

For D’Arcy, it will taste like chicken.

“What I said and stand behind is, war is hell and unfortunately civilians are victims of political conflicts.”

Those words were from the mouth of none other than commedienne Joan Rivers as she made her way through LAX the other day. She was referring to the tragedy unfolding in the Gaza Strip.

That’s right, the same Joan whose is best known for her commentary about red carpet events in Hollywood. I would scarcely pay attention to her on any subject, but she caught my attention this time.

Her words were harsh, but ring truth if you filter out the emotional elements of the subject.

“War is hell” was first spoken by General William T. Sherman, who was best known for his controversial, but effective, tactics in the American Civil War. He also said he would “make Georgia howl” before he embarked on his destructive march to the sea. He understood the concept of total war and its importance in vanquishing a dangerous enemy.

He spoke often about war. “War is hell” happens to be the most remembered of his statements. However, another is more meaningful: “War is cruelty. You can’t refine it.”

I believe we here in the United States and the industrialized world in general developed unrealistic expectations regarding the effects of war. You can partly blame that on the First Gulf War fought in 1991.

We became accustomed to smart bombs and laser-guided ordnance. The large Iraqi army was dispatched quickly, with very light casualties incurred by the Allies.

Events moved rapidly for a conflict of that scale – ground operations lasted only 100 days. The world was so mesmerized by the effectiveness of the General Schwarzkoph’s strategy that there was little time to dwell on the pain suffered by the civilian population of the region.

No official tally of civilian losses was ever released. To my knowledge, there was no serious tabulation attempted. One estimate claims about 13,000 civilian deaths as a direct result of Allied attacks, mostly attributed to the bombing of select facilities in Baghdad and other cities.

By contrast, about 40,000 Iraqi soldiers lost their lives.

The ratio of military to civilian casualties reflected the nature of the combat. Most of it was over open terrain and away from population centers.

The Gaza Strip, on the other hand, provides a completely different backdrop. It is a conflict where Sherman’s definition particularly holds true – it is cruel and cannot be refined. It has also been going on for decades at varying levels of violence

The high ratio of civilian deaths to combatants in Gaza is a direct result of population density and the determination of Hamas to fight in close proximity to nonmilitary facilities. It is a situation that, to some extent, cannot be avoided. It is similar to what has occurred in countless wars. For example, some 50,000 French civilians perished in the combat activities leading up to and through the Allied invasion of Normandy in World War 2. Undoubtedly, a significant share of the casualties was attributable to Allied bombing and shelling.

Few faulted the Allies from doing what had to be done to eliminate the cancer of Nazism, as painful as it was to innocent civilians.

Hamas is a cancer, too….a cancer that wants to spread beyond its present infestation.

Hamas cannot be ignored, especially by Israel who has endured many thousands of rocket attacks. These attacks would have been more deadly had it not been for Israel’s sophisticated Iron Dome missile defense system and the technologically primitive design of the incoming rockets.

It is a costly way to fight a determined enemy hellbent on delivering unending salvos of rockets that are intended to terrorize and kill Jews. President Obama just recently authorized $225 million to bolster and replenish the Iron Dome.

Israel manages the system to minimize the costs. According to an analysis published by the Christian Science Monitor, “Iron Dome doesn’t target all rockets fired towards Israel. Since each interceptor costs around $60,000 and many of the crude rockets fired by Hamas and others from Gaza cost as little as $1,000, that would be a quick way to go bankrupt. Instead, radar picks up the trajectory of rockets, and only fires at ones headed for population centers.”

Still, the economics of dealing with Hamas terrorists is high. Think of the financial aid that could go to develop the Gaza Strip were it not for the relentless attacks on Israel perpetuated by a terrorist regime, one that was popularly elected by the Palestinians themselves.

If Israel were deliberately targeting civilians, the death count among the general population would be many times higher. Every shell fired or bomb dropped would kill many dozens of civilians.

If Israel does nothing but target incoming rockets, it will resign itself to endure decades of terrorism. A lifting of the embargo against Gaza will guarantee an unimpeded inflow of rockets and even deadlier arms from countries and factions whose goal is to wipe Israel off the map.

I am afraid the only solution to this ongoing crisis is to make the Palestinians howl, as Sherman would have put it; howl loudly enough to throw Hamas out and install a sensible government willing to work with Israel and the West to develop the nation’s resources.

I visited the local hardware store on Saturday to purchase a roll of duct tape.

“Sorry,” the clerk said.

“That stuff just flew off the shelf on Friday.”

Undeterred, I shlepped to Home Depot.

The shelve space for the product was empty.

I managed to flag down an employee (they were about as hard to find as missing duct tape).

He, too, expressed dismay and referred me to the manager.

The manager at least offered a clue: “One customer cleaned us out on Friday. Don’t bother checking the other stores. Same thing happened.”

The manager excused himself before I could ask who the customer was.

By chance, the dots started to connect. A reader of my blog on the Westside called to report unusual truck traffic on Sunset Boulevard.

I didn’t think anything of it because of the repair work to the ruptured water main, but then a light bulb went on. OK, a dim light bulb.

I staked out a discrete location on Sunset just east of the repair crews. What I saw made my jaw drop.

Dozens of trucks from Home Depot, Do-It Center, Lowes and other stores were arriving at a rate of one every five minutes.

My eyes spotted a DWP worker sitting on the side of the road eating lunch. I asked him what all the hardware store deliveries were about.

He ignored me, at least until I pulled a Ben Franklin from my wallet.

“Duct tape,” he replied. “If you want more information, it will cost you.”

Given that my Starbucks money for the month was now gone, I pursued another line.

I called on a friend who is a brilliant chemist. He gave me permission to use his name – Walter White.

Walter did some quick calculations and determined that a triple layer of duct tape would resist pressure and leakage. Even more if it were applied along an extended length of pipe.

“How long would it last?”

Walter replied, “300 years, with a 99.5% certainty. Definitely blue level grade.”

Just long enough to fit the DWP’s strategic plan for water main replacement.

A coincidence?

Maybe, but given the brains running the city, it’s as good a plan as we will get.


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