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Archive for April, 2011

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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I like baseball, but it’s a sport I tend to follow in the newspaper rather than watch.  Besides, the season is too long.  I can’t get excited about early season games.

I’m already thinking ahead to the late summer when football cranks up, especially after spring football practice for college teams culminates in a full dress exhibition game.

The Richmond Spiders held their scrimmage on April 9.  Aaron Corp did not play but is on schedule for full participation on June 1.  He has been taking part in 7-on-7 drills.

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Beck Alley Dump

The Beck Street alley between Otsego and Hesby in Valley Village is becoming a dumping ground.

It was only two months ago that old sofas were left there.  Now, there is assorted trash and some smaller pieces of furniture.

The recent trash has been there for at least a week.

Dumping is becoming a routine problem on isolated section of Beck Street alley

The problem is that there is almost no visibility of the alley from the adjacent houses.  That makes it easy for someone to dump items undetected.

The dumping is occurring by the garage of a home that has been abandoned for a long time.  The front of the house faces Westpark Drive.  The front yard actually looks worse.

I am asking Council Member Krekorian’s office to look into this.

Residents in the area need to get on top of reporting these situations.  I realize that 311 does not always answer, but neighbors should then call the LAPD or Council Member Krekorian’s office.  I fear we are becoming to lax in looking after our neighborhood.

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As I stated in an earlier article, I did not think Governor Brown and the small band of Republicans capable of independent thinking would come to an agreement on tax extensions.

The talks only proved how impossibly wide the gulf is between their respective positions.  Brown serves at the convenience of the public unions and the Republicans didn’t want to recognize their role as a minority party - the GOP lost a great opportunity to raise awareness of the need for massive pension reform.  They cluttered up the discussions with too many issues rather than focusing on the single most danger to the state’s ability to endure financially in the long run.  By doing so, they handed Governor Brown a ready-made platform to roll out an insipid proposal for dealing with the growing, unsustainable cost of pensions.

The Governor’s message is “look what I am doing that the Republicans would not agree with.”  He knows that way too many people will not realize his proposal lacks substance. It’s like stating that murder is terrible and should remain outlawed.  Who wouldn’t buy that?

Here’s what he is offering:

End the purchase of additional retirement credits.

No more pension holidays.

Prohibit employers from covering employee pension contributions.

End retroactive pension increases.

End pension spiking.

Ending pension benefits to felons  – that would worry the Grim Sleeper murderer if such a provision could be made retroactive.  However, he’s covered under LACERS, so terminating pension payments for convicted state retirees is moot in his case. This “reform” might be the lamest of all since even incarcerated felons are prohibited from receiving Social Security benefits (see my interview on this subject).  This measure should have been in place from the start, but it appears that public union employees are, in Orwellian terms,  “more equal”  than those receiving SSA benefits.

Mind you, Brown’s recommendations are positive steps, but they don’t begin to address the most critical problem: the inherent instability of the defined benefit plan.  There is no proposal for greatly increasing employee contributions to protect the citizens from market risk associated with plan assets – the citizens bear the entire risk of the unfunded pension liability estimated to be as high as a half-trillion dollars and growing. 

To illustrate the impact of these proposals,  pension spiking is estimated to cost the taxpayers $100 million per year - nothing to sneeze at.  By contrast, a slight one-percent increase in the unfunded liability is equal to $5 billion.  Even a lesser estimate of the liability would make the elimination of pension spiking a mere blip (the state’s Legislative Analyst estimated the liability as $136 million, but that did not include a provision for public school teachers or the UC system).  People are living longer and longer.  Just that reason alone will continue to increase the stress on pension funding.  Don’t get me going on the unsustainable earnings rate assumptions used to assess the health of the plans.

The liability can only be reduced through much higher employee contributions.  It would be fair to ask participants to cover at least half the cost for the risk-free guarantee they possess.  We all accept lower yields for risk-free returns on personal investments.  The same should be true for the return on contributions to a risk-free plan. So far, there is only talk of introducing  a hybrid plan with a 401K-type feature as a supplement to a less generous defined benefit plan.

Even Brown’s meager recommendations drew criticism from labor leaders who claimed they could only be negotiated though collective bargaining.  Guess who he will acquiesce to?  This only proves the need to force the debate in the light of day.

This brings me back to the Republicans.

They could have rolled out a specific proposal for a measure that deals with all of the above and put the ball in Brown’s court.  Instead, they simply took the ball and went home.

Brown would have been forced to publicly refute or defend their ideas – and he would have caught a lot of flak from the public and pension experts had he dismissed such a plan.

The Republicans could have insisted that a tax extension would have to be conditional on the passage of a substantive pension reform measure.  Once again, Brown would have had to categorically debate it in the court of public opinion.

The Governor got off the hook.  The details of the behind closed doors discussions with the Republicans got lost behind the doors.

Very sad.  An opportunity lost.

Some other group will have to carry the banner.

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Kevin James recently announced he has received pledges amounting to a half-million dollars for his campaign for mayor.

I am fiscally conservative, so I don’t count my money until the checks clear.

But let’s just say that about half of the pledges are realizable.  That amounts to a respectable calling card by a candidate not aligned with the usual contributor base.

Depending on where James takes his campaign from here, it could affect the strategy of the political in crowd darlings with designs on the office of mayor.

If James is successful at raising money, do they go on the attack against him in the primary, or do they wait and see if he makes the runoff?  If James secures the votes Walter Moore and others did in the 2009 campaign, he is almost a sure shot for making it to the runoff.

So let’s say you are a Greuel, Perry or Garcetti and you fear that you may not make the cut because you are trailing in the polls showing Yaroslavsky with thirty percent of the likely vote and James with twenty or so.  Do you run attack ads against James rather than Zev?

It could get complicated and wreck some friendships.

But it will be worth watching,

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In the last mayoral election, Antonio Villaraigosa garnered fifty-six percent of the vote in an election with a paltry fifteen-percent turnout.  Many experts agree that his victory against a little known and poorly financed field was underwhelming and was indicative of simmering dissatisfaction with the state of the city.

I wish it were true.

The problem is the pool of likely voters – a group that is by and large predisposed to voting based on name recognition, partisan endorsements or as directed by union leaders.  As long as challengers keep fighting for a share of the same pie, they are destined to lose.

It is possible that an alternative candidate, say Kevin James, could make the runoff against a field of elected officials who carve up their share of the pie into small pieces.  James could easily earn about twenty to twenty-five percent of the vote in the primary, but the likelihood of carving a measurable segment of the other seventy-five percent in the runoff is slim.

No political consultant in the world working with existing likely voters is going to change the overall split by more than a few points no matter how much money is spent.

To have a chance for success, candidates like James have to break away from conventional strategies and recognize that political consultants can only take you so far.  What is needed is a Madison Avenue type  – not a Don Draper, although he would fit in the setting of a smoke-filled room, but someone with the savvy to reach new people.

The same skills necessary to sell consumer products, services and television programming could be the solution to tapping otherwise responsible citizens who lack the fire in their bellies to vote.

Think about what attracts people to watch a new TV show, especially one where the performers are relatively unknown.  The hook is a provocative or compelling concept.  Once the initial audience tunes in, it is up to the producers and writers to keep their attention.  The plot alone cannot do that; the viewers have to identify with the characters.

Shows like Lost, Big Love, the Sopranos and Mad Men had characters, brilliantly portrayed, who breathed life into the plot and kept the audience.

Local politics needs to be marketed as if it were a new show. 

In a city where even the incumbents are not well-known outside of the dedicated voters who comprise the usual suspects in our poor turnouts, you need an issue – a concept, so to speak – to pull people into the process. Once you identify the issue, then you can develop the characters – the politicians.  The new voters can then decide who are the good guys versus the bad guys.

The entrenched politicians want the tried and true voter pool who respond like automatons.  God forbid there should be voters who dwell on the issues and assess where each candidate stands on them.

But what are the issues that can attract another five to ten percent participation in local elections?  Just as important, how do you convert the issues into an interesting saga?

I would like to think that the city’s financial crisis would be a draw, but unless it is conveyed with the same drama as a meltdown at a nuclear plant, it will be hard to develop traction.  Most people have a tough enough time managing their own accounts to pay attention to possible municipal bankruptcy.

Whatever the issue, it must come across as a story.  It’s worth noting that one of the most interesting accounts of the American Civil War was not written by a historian. Shelby Foote, whose three-volume series The Civil War, a Narrative is considered a landmark work, was a novelist.  His prose  added color to the subject and the conflict’s contemporaries without compromising authenticity.

I’m not suggesting something on the scale of a novel, but a source that is easy to access and offers compelling content.

Think of 60 Minutes and Nightline (the Ted Koppel years, that is).  Locally, we have SoCal Connected on KCET, an excellent program that could use more publicity.  All of these shows present the issues with a pace and style that can be riveting.  What’s more, they can convert mundane subject matter into a plot that rivals any episode of Law and Order. We need more of this approach in the local media in concert with the internet.

Political consultants are not equipped to produce the ongoing story lines that attract regular interest.  They are focused on individual missions – that of getting their clients elected, not expanding the base of knowledgeable voters.

Knowledge of local issues will foster involvement.  Without it, the citizens can’t evaluate the candidates in the overall context and will not be motivated to vote for change.

Maybe a good starting place is through a grant from a research firm or a PAC, enough to fund the creation of programming designed to educate the public on local matters.  As I mentioned earlier, SoCal Connected is an excellent program and could serve as a model. 

Realistically, this would be a long-term project.  The internet may have to serve as a platform for a few years, but every journey starts with a single step.

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Aaron Corp, who suffered a season ending injury in the fifth game of last season, is performing limited drills with the Richmond Spiders.  He will participate in summer practice and start next season.

Corp on track to be back next year

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