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Archive for April, 2011

KCET broadcast a program produced by Inside E Street, which is affiliated with AARP.

Some of the points covered were what I discussed earlier this week.

Opposing points of view were presented. Elizabeth McNichol, Senior Fellow at the Center on Budget and Policy Priorities believes unfunded pension liabilities are overstated and pointed out that governments (taxpayers) pay only twenty-five percent on pension costs.  She touted investment earnings as the key source of contributions.  Her opinion seems to favor more taxes to cover the gap when earnings lag.  She did not address the risk associated with earnings rate estimates.

The opposing point of view was argued by Ryan Ellis, Tax Policy Director of Americans for Tax Reform.  He did emphasize risk and the unfair burden on the taxpayers to cover it.

Please click on the link below.

http://bcove.me/rlsj9ggs

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In the wake of Major League Baseball’s decision to take control of the Dodgers, AEG announced a similar plan to intercede in the city’s financial crisis.

Effective at midnight tonight, an AEG appointed trustee will assume responsibility for managing the City of Los Angeles.

According to a company spokesperson, “We have to save the city from itself and protect AEG’s traditional stake in development.”

Pointing to Mayor Villaraigosa’s shortsighted budget plan as the reason, he added, “How can we be expected to deal with a partner who does not have the financial resources to assist us in our master plan? You can’t get blood from a turnip; quite frankly, there are turnips with more intelligence than the elected officials in this town.”

Effective at midnight, the AEG trustee will become the Mayor Pro Tem.  Villaraigosa will still carry out all the ceremonial duties of the office; therefore, there should be no detectable change in his schedule.

AEG strongly believes in the importance of separation of powers as democracy’s firewall against tyranny.  Accordingly, the Mayor Pro Tem will not have veto power over the actions of the City Council.  That responsibility will fall to the head of the Community Redevelopment Agency.

The spokesperson emphasized, “We must have our stadium!”

Then, borrowing a slogan from the California Teachers’ Association, he concluded by saying, “After all, it’s for the children.”

Editorial note:  Any similarities with actual people (living, deceased or clueless) or events are purely coincidental and unintentional, although not entirely out of the realm of possibility.

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The LA Times reported the Mayor’s official unveiling of his budget plan.

I use the term “plan” loosely.

It was nice to see the paper quote union steward Dan Mariscal in the article.

Dan is a frequent commenter on this blog.  Although we have differences over pension issues, I appreciate his insight and the rapport we have built.

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I was on a panel yesterday discussing the pension problems facing the City of Los Angeles.

The event was the BudgetLA Forum.  The overall short-term budgetary challenges the city faces were also discussed.  That segment of the program was not a debate  – the panelists, who included Deputy Mayor Larry Frank, did not present contrasting views and focused instead on their respective areas of interest.  Opposing points of views did not surface until the audience Q&A immediately following the formal presentation.

Regardless, that portion of the program confirmed what many already know – the city’s focus is on this year, not the future.  Few of the mayor’s proposed budget remedies have any impact on the structural deficiencies threatening our long-term viability.  The aggregate impact of those that do are hardly worth mentioning.  If it is budget propaganda you want, send a request to Mr. Frank.

The truth is, without a complete overhaul of the city’s employee benefit programs, we will always be existing from year to year until we cannot defer the costs any longer – please, no one say, “kick the can down the road.” 

Joining me on the pension panel were the mayor’s Deputy Chief of Staff Matt Szabo and the SEIU’s Julie Butcher.

While this was not a debate, the differences of opinion between Butcher and me were clearly evident and only confirm how out of touch with reality the leaders of the public unions are. 

Or maybe they know the reality but do not dare risk sharing it with their members for fear of the outcry that would follow.

Matt Szabo did not weigh in on how to deal with costly benefit programs beyond mentioning the proposal before the Coalition of City Unions – one that falls way short of correcting the city’s disastrous course.  Instead, he accepted the status quo as a fait accompli.  That’s understandable in the short-run; however, without committing to overhaul inherent funding deficiencies of government employee defined benefit plans, his position is nothing more than acquiescence to the public unions.

Each presenter had fifteen minutes.  Unless you can talk as fast at the guy from the old Fedex commercial, you can’t possible scratch the surface of an issue as complex as funding defined benefit plans.  If you had more than fifteen minutes, you would risk losing your audience.  The subject can be as entertaining as a root canal for those not hopelessly engrossed in the minutia of the underlying calculations. If you ever have dinner guests who have overstayed to the point where you want to get rid of them, just start discussing pension accounting.  They will not only be out the door in short order, they will burn rubber pulling out of your driveway.

I chose to focus on the most important variable used in determining the size of the unfunded pension liability – the  investment return assumption. For Los Angeles and most public pension plans it is set an aggressive rate of 8%.

I highly recommend you view this fifteen minute video produced by the California Legislative Analyst’s Office.  Although it addresses pension costs at the state level, the theory applies to local plans as well.

The unfunded pension liability is the cost of retirement promises the government cannot keep.  It is, for all practical purposes, unrecorded debt.  If you examine the financial statements of the city, you won’t find it.  In other words, the city’s equity is overstated and it could be by as much as billions of dollars.

Even if it were recorded, the size of the liability would be understated because of the aggressive investment return assumption I mentioned earlier. 

The more optimistic the rate, the smaller the liability appears.

But appearance and reality are two different things.  Bernie Madoff’s claims were all appearance and no substance.  It would have been doubtful he would have attracted as many investors had he promised conservative returns. The Ponzi aspect of his scheme notwithstanding, fewer people would have been hurt and for far less damage.

The holy grail of public employee unions in general – not just the city unions – is that past performance is indicative of future returns. That’s just the opposite of the financial advice offered by investment advisors, whether they are employed by large Wall Street firms or independent professionals working from home.

Julie Butcher parroted the naive position of her union and pointed to an 8.8% annual annual return by LACERS over the last twenty-five years.  Of course,  Butcher failed to disclose that the Dotcom Bubble in the late nineties drove Nasdaq from a level of 1,000 to 5,000 between 1995 and 2000.  The Dow was also gripped by exuberance and  increased from 4,000 to 11,500 in the same span. The 8.8% average return was skewed in part by this unsustainable rise.  By contrast, the last ten years returned only 3.7% annually.

You see, you can paint any kind of picture you want from past performance.  Whatever range you choose will be impacted by unique events that are unlikely to reoccur in an average lifespan.

For certain, there will be other booms and busts; irrational or steady growth and decline.  To insist, then, that investment earnings will continue based upon historic rates is pure folly.

We are not living in our parents’ economy.  For that matter, there have been significant changes since most of the Baby Boom generation’s children have been born.  The United States is no longer the sole eight-hundred pound gorilla it was for many years following World War 2.  Other gorillas have climbed in the cage and are growing bigger. 

While there are benefits from increased world competition in the form of lower prices and productivity improvements,  investment risk has increased.  You can no longer count on blue chip stocks to support steady and predictable earnings as in the past.

State and local government pension boards would like you to believe they can achieve 8% growth without risk. This assertion was challenged in a study prepared by esteemed financial scholars from Northwestern University and the University of Rochester.

A study conducted by graduate students at Stanford University made a compelling case for using a risk-free earnings assumption of 4%.  State and local pension board executives, along with many elected officials, dismissed the notion.  These dissenters are the same individuals who have a vested interest in protecting their taxpayer-funded jobs.  Do you think Mayor Villaraigosa is going to want to report a higher unfunded liability and make the already difficult task of balancing the city’s budget more challenging?

Hardly.

It would mean increasing the city’s pension contribution far more than the $1 billion projected by Chief Administrative Officer Miguel Santana.

The mayor prefers to hide under a blanket.  He does not want to raise the delicate issue of just who is going to pay for the shortfall.  Presently, the taxpayers bear the entire market risk of the defined benefit plans.  Ask the unions to cover it?  Fat chance.

You would think the mayor or City Controller Wendy Greuel would insist on sharing with the public different scenarios concerning the consequences of various earnings assumptions. Greuel is as timid as Villaraigosa, especially when she needs union votes to propel her mayoral bid.

They hide behind the reporting requirements of the Government Accounting Standards Board (GASB) whose members include state and local officials.

I have another name for GASB.  I refer to it as the “Generous Accounting Standards Board.”  The members are enablers who wink at the unreasonable assumptions applied by the pension boards.  They have failed – and continue to fail – to assure full disclosure of possible outcomes.

State and local governments may not be able to hide behind non disclosure of the facts for too long.  Moody’s Investor Services is starting to consider pension funding as a factor in determining the creditworthiness of government units.

How can any entity begin to deal with a serious long-term problem when it does not consider a full range of projections?  How does the city know what it needs to derive from collective bargaining while relying on a critical assumption, such as investment returns, made by biased, self-serving boards beholden to politically powerful unions?

I have heard calls for a citizens’ commission to examine the city’s pension accounting.

While I welcome the suggestion, it might amount to too little, too late.

What we need are professionally and independently derived pro forma financial statements and cash forecasts for the city showing  possible outcomes under a variety of conditions.  The approach would be similar in concept to the U S Treasury’s stress tests for banks.

Would you rather trust union officials and their surrogates in City Hall?

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Congratulations to Tony Braswell, President of Neighborhood Council Valley Village, for his appointment to the Los Angeles Disabled Access Appeals Commission (it might take a minute for the video to load).

Tony just finished a five-year term on the HIV Commission.

He is a devoted volunteer who has worked tirelessly in both the health field and his community.

I am proud to count him as a friend and colleague.

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April 12, 1861, the date Confederate General Pierre Gustave Toutant Beauregard ordered his batteries to fire on Fort Sumter in Charleston harbor, has long been recognized as the start of the American Civil War.

However, wars do not always begin with a shot – hostile action can take different forms, for example, the occupation of territory or a demand for surrender.

Such actions preceded the bombardment of Fort Sumter.

In late December 1860, Confederate forces occupied federal fortifications around Charleston after the small United States Army garrison abandoned them and moved to the confines of Sumter.

On January 9, 1861, a federal ship attempting to deliver supplies to the fort was fired upon by Confederate batteries.

On April 10, 1861, Jefferson Davis and his cabinet approved a demand for the fort’s surrender.  General Beauregard delivered the ultimatum to the fort’s commander Major Robert Anderson on April 11:

“Sir: the Government of the Confederate States has hitherto foreborne from any hostile demonstration against Fort Sumter, in he hope that the Government of the United States, with a view to the amicable adjustment of all questions between the two Governments, and to avert the calamities of war, would voluntarily evacuate it.

“There was reason at one time to believe that such would be the course pursued by the Government of the United States, and under that impression my Government has refrained from making any demand for the surrender of the fort. But the Confederate States can no longer delay assuming actual possession of a fortification commanding the entrance of one of their harbors, and necessary to its defense and security.

“I am ordered by the Government of the Confederate States to demand the evacuation of Fort Sumter. My aides, Colonel Chesnut and Captain Lee, are authorized to make such demand of you. All proper facilities will be afforded for the removal of yourself and command, together with company arms and property, and all private property, to any post in the United States which you may select. The flag which you have upheld so long and with so much fortitude, under the most trying circumstances, may be saluted by you on taking it down.”‘

Anderson’s Reply

“General, “I have the honor to acknowledge the receipt of your communication demanding the evacuation of this fort, and to say, in reply thereto, that it is a demand with which I regret that my sense of honor, and of my obligations to my Government, prevent my compliance. Thanking you for the fair, manly and courteous terms proposed, and for the high compliment paid me, I am, general, very respectfully, your obedient servant, Robert Anderson, Major, First Artillery, Commanding.”

Major Anderson was Beauregard’s artillery instructor at West Point, which may partly account for the chivalrous nature of the demand. 

Nevertheless, the cordiality of the demand belies the hostile tone.

Does anyone doubt a state of war would have existed between the U S and Japan had the Japanese seized a United States installation without firing a shot rather than launching the violent attack on Pearl Harbor?

An act of war is an action by one country against another with an intention to provoke a war or threaten peace.

The Confederacy clearly committed acts prior to the overt hostilities that fit the definition.

However, debating the start date of America’s most violent conflict one-hundred and fifty years later is like splitting hairs.  I only mention it because the months leading up to hostilities represented the weakest period in our country’s history.  War was not a term to be used loosely by politicians and citizens at the time when the future of the Republic was at stake.

The nation could have disintegrated  without a shot being fired. In a perverse way, Jefferson Davis did all of us a favor.  His decision to attack Fort Sumter set the nation on a course to become the most powerful on earth.

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We have all seen real estate ads that characterize properties as ” (insert name of upscale community) adjacent.”  The Valley could bill itself as “Beverly Hills Adjacent.” 

Perhaps if we ever secede from Los Angeles, we can name our new city North Beverly Hills.   Actually, I would be happy with any name if we could be free of City Hall and the LAUSD.

But I digress from the purpose of this post, so let me zoom down to the street level view.

I previously reported dumping activity taking place in the Beck Street alley between Otsego and Hesby. 

I thought the recent media attention focusing on the graffiti mural conflict in the same alley was irresponsible when there was a glaring problem just fifty feet away on adjacent Westpark Drive.  It would not have involved any effort for the reporters and crew to take a few extra steps and devote some words and a little footage to a festering sore in the community.

This home,which has been unoccupied for at least two years, backs up to the Beck alley.  It’s garage entrance has become a dumping ground. However, the front of the home has become an object lesson in neglect.

Beck Alley Adjacent

According to the Los Angeles County Assessor’s Office, the property is on the defaulted tax roll.  If I am correct, it could be sold by the county if the taxes are not made current after five years.

Surprisingly, it is not in foreclosure.

I am not suggesting that Valley Village deserves more attention than any other community when it comes to blight.  This particular house’s condition is common throughout the city, but you wouldn’t know it from the press coverage.

Owners need to be cited and perhaps arrested if they allow their properties to deteriorate to a point where they become a magnet for illegal activities.  If the property is in REO status, bank officers responsible for the upkeep should be arrested if they fail to maintain foreclosed homes. 

This is our battle and we have a duty to ourselves and our neighbors to pressure elected officials to take action.

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