Feeds:
Posts
Comments

The Times Are Right

Both the New York Times and LA times have recently published informative articles about the status of public pensions, particularly Calpers. LA Times’ Jack Dolan and James Koren have provided sober analysis in recent weeks.

The reporters have echoed the same concerns I, Jack Humphreville, respected members of academia and many in other publications have been sounding for years – concerns over the diminishing sustainability of the defined benefit plans that almost every politician at the state and local government levels have ignored. A few, including Governor Brown and former Governor Schwarzenegger, have attempted modest reforms and failed, because of the death-grip public unions have on our elected officials.

The NY Times article, by Mary Williams Walsh, is particularly interesting because it reads like a case study. For all intents and purposes, it is one. It deals with a small fund managed by Calpers. Since this particular fund is so small, it is easier for readers to wrap their heads around the math. But it is the same math behind every other defined benefit plan, large and small. Just as a lab experiment on a single cancerous cell can speak volumes about the greater disease, so can this case shed light on the cancer of public pensions.

Basically, the problem boils down to using aggressive favorable assumptions to gauge the financial health of plans, plans which are required to fully guarantee the promises made to their members. The assumptions have masked the weakness of the underlying numbers.

The important difference between a market vs actuarial approach to funding defined benefit plans is critical, as the article suggests. As the small pension unit in the article learned, Calpers charged them the market rate to liquidate the plan, which was a sum far greater than the actuarial value Calpers uses to assess the health of any plan.

Quite a shock to the participants who assumed things were just peachy.

Calpers wants it both ways: use the blue-sky view for public disclosure, but penalize participants based on reality. It’s called “having your cake and eating it too” (a few of my colleagues at Citywatch know how much I detest that expression, but it applies here).

The truth is, Calpers should not be hanging its hat on one approach vs the other. A range of values needs to be shared with the public, and funding should be based on at least a blend of outcomes.

That means either taxpayers fork over more money, or the participating employees contribute more. The taxpayers are already covering too much, not to mention bearing the risk if there are insufficient funds to pay participants.

How much more participants should pay is arguable, but it would cause some degree of pain in any event – manageable pain.

In the private sector, typical employees pay 6.2% for SSA retirement and contribute at least 6% into a 401K. State employees contribute anywhere from 5% to 11.5% of their salaries. Pretty good compared to the 12.2% absorbed by their counterparts. Safety workers are at the higher end, but can retire much earlier and collect up to 90% of their salaries.

A private-sector worker would pay $1 million to purchase an annuity comparable to an average CalPERS’ benefit starting at age 60. A state employee earning an average of $100,000 and contributing 10% would pay in $300,000 over 30 years in gross terms. Obviously, discounting the amount would lower it considerably.

That’s a pretty large gap. In any event, Calpers would still be a good deal for employees if their contribution rates doubled.

And why not?

Investors pay more, in the form of a lower yield, for less exposure to risk. Why shouldn’t public employees pay a premium for what is a risk-free, lifetime benefit?

The system is not going to collapse tomorrow. It’s similar to a sinking ship, which takes on water but stays afloat….that is until buoyancy is lost.

When that happens, it goes down faster than the Edmond Fitzgerald.

Time to start pumping and sealing the leak.

Field of Dreams

Through the efforts of Valley Village Homeowners Association and Neighborhood Council Valley Village, a homeless encampment along the 170 embankment, adjacent to Valley Village Park, was cleared.

Since the camp was on Cal Trans property, we asked for and received support from our State Assembly Member. The CHP posted warnings before arranging for the removal of the personal items and trash – there was a considerable amount of the latter.

I was not around to witness the intervention, but there is every reason to believe it was handled as responsibly as possible. No complaints were filed; no reports of violence or excessive force.

The North Hollywood side of the 170 has a homeless problem of its own, too, especially along Tujunga Avenue, where a dozen or so RVs and vans have become permanent fixtures, and homeless prowl the grounds of the Amelia Earhart Regional Library.

While I am pleased by the removal of the Valley Village Park camp, I acknowledge society’s failure in dealing with the underlying problem.

The knee-jerk reaction would be to cast a vote for the city’s proposed $1.2B bond measure, the objective of which is to acquire land and construct housing. It is certainly preferable over a parcel tax, but the cost ultimately still flows through our property tax bills.

But I am not ready to support handing the City Council (or the County Supervisors, for that matter) massive amounts of money when there is no outline or plan to organize, manage and, most importantly, perform timely audits of effectiveness. I would feel a little optimistic if the activities were supervised by financially responsible officials – competent individuals, say someone comparable to City Controller Ron Galperin. Unfortunately, there isn’t enough of Ron to go around.

Whatever the plan, if it does not recognize the distinct challenges posed by the two major component groups of the homeless population – economic victims and those afflicted by mental illness or substance abuse – it is doomed to fail. The plan must allow for triage: the chances of helping the former group are far greater than the latter. $1.2 Billion may sound like a lot, but is is less than $50K for each of the estimated 26,000 homeless. How much housing and services can $50K buy?

We need to focus, then, on making the maximum impact and accept the fact there will be many who are beyond assistance. I am referring to the persons who require institutionalization. Sadly, our laws prevent involuntary medical intervention.

Progress has its own issues, too. There is truth to the line from the film Field of Dreams, “Build it and they will come.” Even if we achieve a degree of success, there is a risk: we will create a magnet for new waves of homeless persons from other regions, which would offset, if not overwhelm, our capacity to deal with the problem.

Triage is the practical approach, then. Help the homeless in manageable increments. Also, a one-size-fits-all style of housing will not work. Everything from dormitories to well-organized, military-type camps must be considered. Experimentation will be required. We should not hand over a billion dollars until officials can provide evidence of success on a limited scale first.

Lastly, we must not dig ourselves a deeper hole. It is absolute insanity to encourage the destruction of serviceable, affordable housing units, as the city presently does. I was heartened to hear the news that the Neighborhood Integrity Initiative received many more signatures than necessary to qualify for the March 2017 ballot. Without it, our elected officials would be content to create the next generation of homeless in exchange for campaign contributions from developers.

And you are unlikely to find a homeless politician in this city or any other.

The Rio Olympics is history.

The green water of the diving and water polo pools has been emptied into Guanabara Bay. The Brazilian Army’s deployment helped keep a lid on crime, but it could not prevent Ryan Lochte from creating an international incident.

In all fairness, Rio did pull off a mostly controversy-free Games, but there are lessons for Los Angeles. If we win the bid for 2024, our dirty laundry will be aired to the world.

No matter how hard a host city tries, it will be under the microscope.

Let me say, I believe LA can stage a financially successful Olympics. As skeptical as I can be about our city’s finances, remember: the mayor and city council will not be pulling the strings. Look for a Mitt Romney or Peter Ueberroth to run the show. Mitt should be available.

First, we have to secure the bid.

So, talk of who should light the cauldron at the Coliseum is way too premature.

But according to TMZ, Mayor Garcetti has expressed a preference for Caitlyn Jenner to do the honors.

While Jenner has garnered both Olympic and social preeminence, the highly publicized transgender personality wins, at best, a fourth-place medal as a candidate for this once-in-a-lifetime opportunity.

While I hesitate to speculate who would best represent the nation and the region, since the mayor has prematurely opened the door, I’ll weigh in.

The gold medal winner in the race to light the flame belongs to someone who represents the best in America and a symbol of our Southern California lifestyle. Who better for that role than Kerry Walsh-Jennings.

When you think of LA, the beach…and beach volleyball…emerge as one of several symbols of our culture.

Walsh-Jennings is a model of sportsmanship, competitiveness and triumph. In a span that transcended five Olympiads (including one as a member of the indoor team at the Sydney 2000 Games), she won three golds and a bronze. She also had a sensational career as a player at Stanford. She earned her degree there, as well. Not too shabby.

Jenner, whose achievements are noteworthy and has shown personal courage, unfortunately brings to mind the Kardashian clan. I do not believe we want Kim, Kanye and company leveraging off the publicity – as if they need any.

Regardless, this is about selecting a role model all can admire; one who sets a standard for achievement with humility and grace.

Let the mayor know Walsh-Jennings can best represent us before the world.

Hertzberganary

State Senator Bob Hertzberg is a smart man; smart enough to know the power of language. According to his bio, as an undergraduate English major, he wrote a 400-page handbook titled A Commonsense Approach to English.

To paraphrase a quote attributed to the late US Senator Everett Dirksen: A deft turn of a definition here, and a subtle re-characterization there, the next thing you know, we are dealing with some serious money!

And that has been Hertzberg’s game plan since he returned to the legislature in December 2014.

He introduced SB 8, a bill cloaked by a seemingly harmless name – the Upward Mobility Act. The senator described it as a tool to “modernize” the state’s tax structure. He admitted it would be designed to yield another $10B in tax revenue.

The bill died, but that did not stop Bob from reintroducing a replacement: SB 1445.

As SB 8 proposed, this new bill would extend the application of sales tax to services, a direct hit to all segments of society – the middle class, most notably. As he did with SB 8, he is characterizing it as “modernization.”

The only thing being modernized is the state’s access to our wallets.

But the “serial hugger” is not stopping there.  He again whipped out his English to Taxation dictionary to conjure up SB 1298.

His objective is to do an end run around Prop 218’s requirement for voter approval of tax increases by redefining “sewer service” to include stormwater projects. Perhaps “serial wordsmith” would serve as a better moniker for him. Please read the excellent editorial concerning 1298 in the Daily News. 

The bill has a worthwhile objective.  It is designed to encourage recovery of stormwater. No one is arguing with the benefits it offers to our drought-stricken state.

But it is dangerous to override the benefits of government transparency and the legislative process.

Californians are being asked to pony up more cash to fund a growing list of expensive projects.  In Los Angeles alone, we are being asked to pass a permanent increase in the sales tax for the MTA.  The city and county are considering spending over a billion dollars to provide housing to the homeless.  There is also the trainwreck of HSR absorbing funds that could be used to enhance the state’s water capacity.

Our state and local governments have no grasp of prioritization.  Capital budgeting is completely absent in the minds of Hertzberg, his colleagues in Sacramento and counterparts at the local level.

Taxpayers have a right to weigh in on what needs attention and the means of paying.  To do so requires presenting the big picture of competing needs. Let the people decide what is most important and authorize appropriate funding levels.

We do not have unlimited funds; we can only afford what can be sustained without breaking the bank.

Sneaking around the voters and playing word games, as Hertzberg has been doing, is disrespectful to all of us.

 

 

 

Growing up, novels and films about political intrigue and international conflicts were my favorites.

To an extent, they still are. There just haven’t been enough of them; the last notable one was Bridge of Spies, about the real-life negotiations to free downed U-2 pilot Francis Gary Powers during the height of the Cold War. Coincidentally, the hero, James Donovan, graduated from the same school I attended in the Bronx – way more than a few years before I entered its doors.

Ian Fleming, who created James Bond, sparked my interest in the espionage genre. I binge read all twelve Bond novels before freshman year in high school.

My all time favorite thriller, though, was The Manchurian Candidate, a novel by Richard Condon, and released as a film in 1962. Frank Sinatra and Laurence Harvey were the leads, but Angela Lansbury stole the show with her portrayal of a conniving, cold-blooded conspirator – a far cry from Jessica in Murder, She Wrote. The 2004 version was disappointing, but that is usually the case with a remake of a classic.

In the novel and the film, a seemingly ultra-conservative demagogue and his wife are part of a communist plot to win the presidency.

My memories of the story have been reawakened by the potential subterfuge involving Vladimir Putin, Donald Trump and Julian Assange. I can’t help but to project those three against the fictional plot: Trump as the blabbering demagogue serving as a front for the communists, Putin as the Soviet handler responsible for enabling the conspiracy and Assange as the one who pulls the strings (Lansbury’s role). The plan entails playing on the emotions of the nation in order to achieve the sinister objective.

Am I allowing my imagination run wild?

You bet, but I just can’t pass this stuff up. It has all the components of the film: deceit, conspiracy and reprehensible characters.

Can life imitate art?

Yes, but with limits.

Although it is true that Putin and Assange would dearly love to embarrass the United States by exploiting the DNC and Clinton e-mail fiascoes, it is far less likely that Trump possesses the planning skills to make it work in his favor. His campaign, after all, is a series of spontaneous outbursts. Encouraging Putin to continue hacking the Clinton campaign e-mails, while disgusting, is not a crime. It is more like irrational bombast. If he did go as far as to conspire with them, his next reality show would be broadcast from inside his cell at a federal prison.

That’s not to say Trump will not benefit from Putin’s caginess and Assange’s willingness to release potentially embarrassing e-mails about Clinton, but any gains will be offset by his ongoing diatribes against any person or group who possess any sense of moderation. More than 20 Republican senators, not to mention a fair handful of Members of Congress and governors, as well as key party figures, did not attend the RNC. They have followers who will sit this election out, if not cross over and vote for Clinton.

But this nation has never before experienced such an asymmetrical campaign strategy. No one can reasonably estimate the degree of emotion, especially among voters who have stayed on the sidelines in other presidential elections, doing so out of disgust with the establishment.

Last December, I wrote an article describing Trump as America’s Putin, emphasizing the destructive synergy that could result if both men were in power. However, I concluded that Trump would not win the Republican nomination.

Boy, was I wrong. The Manchurian Candidate still has a chance.

The Los Angeles Times reported that CALPERS incurred its worst rate of return since 2009.

One year does not make or break the pension fund. Two years of low returns in a row hurt, but alone are not enough to register as a crisis.

What is telling is the average rate over the last 10-20 years has fallen well below the assumed rate of return of 7.5%, which is a major factor in determining the long-term funding of the retirement plan.

The rates reported were as follows:
7.03% over the last 20 years
Less than 6% over 10-15 years (Bloomberg reported 5.1% over the last 10 years).

LACERS has not published its updated rates yet, but almost all would expect a similar set of results. The fund was in negative territory for the year as of March 2016, which will drag down the average rates over the 10-20 year period. LACERS’ 20 year return will probably be treading close to the 7.5% earnings assumption, while those for the 10-15 year range will miss the mark by a significant margin.That range was already well below the assumed rate as of last fiscal year.

What’s so special about the 10-20 year range?

It is what I refer to as the relevant range.

Think of it like comparing baseball players from different eras. Hard to decide who was the greater slugger – Babe Ruth or Hank Aaron – because they played under markedly different conditions and levels of competition.

Comparing investment returns rooted in the years prior to 20-30 years ago is like going through a time warp. The world economy has changed drastically since then due to globalization. As I pointed out in an article several years go, the United States is no longer the lone 800-pound gorilla in the market. As competition has increased, so has investment risk.

Relying on more recent returns as a predictive gauge has even greater risk, since one extraordinary year will skew the results.

Assuming a rate much beyond a very conservative level is playing with fire in an age where markets whipsaw in response to both rational and irrational reasons. Public employee pension managers are under pressure to hit artificially high rate assumptions that they willfully incur more pronounced risks.

Bad timing can kill you. It could also deliver one-off major gains, but who wants to take a Las Vegas approach to investing funds underlying a guaranteed payout?

Public retirement funds are probably not going to collapse. Instead, they will require higher contributions to assure retiree benefits are covered.

The additional cash will have to come from either greater employee contributions and/or the taxpayers. In case you haven’t noticed, the ballots are always filled with tax measures, utility rates are tracking upwards and the costs of government services has steadily increased. We do not need another bill to pay.

In a city like Los Angeles, where the taxpayer contributions have grown from 10% of the general fund to 20% in ten years, the ability to provide basic services will diminish.

It’s what I have repeatedly referred to as virtual bankruptcy, a slow and painful path for the public.

As reported by the Los Angeles Times, PricewaterhouseCoopers (PwC) faces allegations of billing fraud. Unlike the earlier version of the complaint filed by the City where it accused the firm of botching the implementation of the DWP’s new billing system, this latest motion has the potential for criminal charges if there is compelling evidence of a deliberate attempt to deceive.

Most of you have probably read the article. It was reported that a number of contractors involved in the project inflated billable hours to cover the cost of some serious partying in Las Vegas, with the knowledge and approval of the billing project’s PwC partner and managers. See the DWP press release at the bottom of this post.

I am assuming it was a whistleblower who disclosed the alleged fraud, although other means of discovery could have been in play.

The outcome of the lawsuit could go any number of ways, but one needs to bifurcate the overall case. The initial complaint was mainly over performance, although DWP also claimed PwC misrepresented its expertise in implementing comparable billing systems. Overall, this aspect of the case is civil.

So let’s focus on the latest motion.

Knowingly presenting falsified invoices to a government entity is serious business, more so when done by a firm required to serve the interests of the public. There could be an element of criminal intent.

The AICPA defines the accounting profession’s public as consisting of clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of CPAs to maintain the orderly function of commerce. Every action taken by the CPA should work towards serving the public interest.

If this latest claim arose from whistleblowers’ information, it will get down to their credibility. I would think there would have to be corroborating evidence to justify a criminal action.

The most difficult challenge for the City will be proving that the cost of the extra-curricular activities in Las Vegas were actually billed. It is one thing for a manager to suggest an unethical action (perhaps under the influence of alcohol), and quite another to actually pull the trigger. Regardless, at a minimum it would probably be viewed as unprofessional conduct by the State Board of Accountancy even if the expenses were not passed through.

The original contract for the system was for $57 Million and grew to $69 Million. Is there at least a tenuous trail that could connect the specific hours spent partying as a very small piece of the $12 Million increase? That would be like looking for a needle in a haystack.

Are there progress billings with hours traceable to the dates and times of the activities in question? Hard to conceive that would be the case.

There may be no smoking gun with fingerprints.

A civil decision in favor of the City or a settlement would make it a reportable event to the Board of Accountancy. PwC would be sanctioned in a manner which could make it difficult for the firm to engage in consulting services with governments in California, and maybe even Nevada.

Clouding the prospects for a favorable outcome for the City would be the DWP’s role in the system’s disastrous rollout.

According to Daniel J. Thomasch, PwC’s outside counsel, “the DWP acknowledged in writing …that PwC fulfilled each one of its contractual obligations and paid PwC in full.”

An audit conducted by the State of California concluded, “The department’s executive management was well aware of the significant problems associated with (the system) and yet made the questionable decision to launch.”

PwC was awarded the contract in the summer of 2010, the go-live date for the project was September 2013. There was plenty of time in between for DWP to smoke out potential trouble and cause PwC to modify its approach. All major system projects involve a constant flow of information and feedback between the developer and the client. Did DWP consistently approve the results of tests? Did its employees even bother to look?

If it was the intent of DWP to place 100% confidence in PwC – or any contractor – to develop a critical system, that is the essence of naivete, not to mention dereliction.

There was a contract with a division of Ernst and Young for quality assurance. The State Auditor reported: DWP was “warned that no aspect of the project was ready; in fact, the quality assurance expert reported that the project’s scope, quality, and schedule were all at the lowest possible rating and needed immediate attention.”

It would appear, then, that regardless of PwC’s actions or errors, DWP was equally reckless and incompetent throughout the duration of the project, as well as in its decision to go live.

With so much at stake for both sides, the case will be lengthy and expensive.

One nagging question: what action has been taken against any DWP employees whose responsibilities included oversight?

FOR IMMEDIATE RELEASE

DATE: June 30, 2016 5:00:33 PM PDT

LADWP Letterhead
Additional Allegation of Fraud by PriceWaterhouse Coopers Filed in Court Motion in Connection with its Role in Customer Information and Billing System Implementation

LOS ANGELES — Earlier today, the Los Angeles City Attorney, on behalf of the City of Los Angeles and the Los Angeles Department of Water and Power (LADWP), filed a motion in LA Superior Court seeking permission to file an Amended Complaint detailing an alleged fraudulent conspiracy operated by PriceWaterhouse Coopers, LLP (PwC) and several of its senior managers. The alleged conspiracy was recently discovered through an ongoing investigation into PwC’s role as the primary contractor implementing LADWP’s Customer Care and Billing System (CC&B). This legal action, which seeks to recover tens of thousands of dollars in ratepayer funds that were illegally obtained by PwC through its fraudulent conspiracy, is in addition to the charges of fraudulent inducement and breach of contract included in litigation initially filed by City Attorney Mike Feuer on behalf of the City and LADWP in March 2015.

The alleged conspiracy detailed in the court papers filed today consisted of PwC and several senior-ranking PwC Managers, including the PwC Partner-in-Charge of the CC&B System implementation project for LADWP, engaging in a three-year long conspiracy to defraud the City of Los Angeles and the LADWP by repeatedly submitting intentionally falsified PwC time records in a manner not able to be detected by LADWP to obtain payments for work that PwC never performed from 2011 through at least 2013. The alleged fraudulent conspiracy is detailed in the court filing and includes payments authorized by PwC and its senior managers to reimburse their subcontractor for payments made for the services of escorts and prostitutes, lavish hotel stays, two bachelor parties and thousands of dollars for “bottle service” liquor at Las Vegas hotels and clubs in July 2011 and May 2013.

After learning of the alleged fraudulent conspiracy, the Board of Water and Power Commissioners directed LADWP Executive Management to pursue all appropriate remedies, up to and including the possibility of debarment, which if initiated could result in PwC being debarred as a government contractor for the LADWP for a maximum period of five (5) years.

LADWP General Manager Marcie Edwards made the following statement regarding today’s court filing:

“PriceWaterhouse Coopers not only misrepresented their qualifications and delivered a disastrously flawed billing system to LADWP, but based on the allegations in the court filing made today, they did so while violating the public trust and engaging in reprehensible and potentially criminal conduct. Even worse is the fact that the alleged fraudulent scheme was carried out by the PwC Partner-In-Charge and PwC’s Senior Managers working on the billing system project. Their alleged conduct is outrageous and our customers deserve to be repaid every dollar that the flawed billing system and fraudulent billings have cost them,” said General Manager Edwards.

Background

In March 2015, the City and LADWP filed a civil lawsuit against PwC. The Complaint in the lawsuit alleges that PwC fraudulently induced the City and LADWP to enter into a contract to replace the LADWP’s Customer Information System (the “CISCON Contract”) and, after having been awarded the CISCON Contract, that PwC breached the terms of the CISCON Contract by failing to successfully perform several of the tasks that PwC was contractually required to perform. As a result, LADWP was unable to properly bill many of its customers, leading to widespread problems experienced by LADWP customers and costs borne by ratepayers to fix the billing system after it went live in September 2013.

In March 2016, the Court ruled in favor of the City and LADWP when it rejected PwC’s attempt to dismiss the City and LADWP’s fraudulent inducement allegations. The Court’s decision was significant because it allows the City and LADWP to attempt to recover all of the damages incurred by the City and the LADWP as a result of PwC’s misconduct.

PwC’s defective implementation of the LADWP’s CC&B Billing System caused a nightmare for hundreds of thousands of LADWP customers and its employees as LADWP managed the fallout from this defective implementation. While LADWP has made tremendous progress in lowering call hold times and in remediating the defectively implemented CC&B Billing System that PwC delivered, the LADWP has also continued its investigation into PwC’s misconduct in connection with the lawsuit.

NOTE: The motion and amended complaint will be posted on http://www.ladwpnews.com under Hot Topics when available from the Court.

# # #

For more information contact:
Joseph Ramallo
Communications Director, LADWP
(213) 367-1361