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The Numbers Game

Deportations of illegal immigrants has been in the news quite a bit since Donald Trump took office.

Possession of stolen Social Security numbers by the those detained or deported have played a role in some of the cases. A recent, well-publicized, deportation involved Guadalupe Garcia de Rayos. She was arrested in Arizona and returned to Mexico for a 2009 felony conviction stemming from a stolen SSA number she used.  Her case was reviewed by ICE seven times after the conviction. A removal order was issued in 2013.

One source reported the actual owner of the number was a young man in Tucson.  While I cannot confirm that, even if Garcia de Rayos had created one from randomly selected digits there would have been at least a 50% chance of it belonging to a citizen, living or deceased. As of 2014, approximately 450 million numbers had been issued out of one-billion  possible  numeric combinations.

The remaining 50% will be issued over the next several decades. The current rate is 5.5 million per year (there are blocks of numbers which are unavailable). Eventually, all illicitly used random numbers will, in effect, be stolen.

That begs the question: if you are aware that an action you have taken has a 50% chance of amounting to theft, are you guilty of a felony? There is no easy answer, but it at least can be considered some form of fraud or misrepresentation. It would be enough for me to lose my CPA license (or worse) if I filed a tax return for a client who I knew was using a W2 with an unauthorized SSA number.

SSA numbers are stolen for two purposes: financial gain, as in taking out a fraudulent loan in the name of the person to whom it is legally assigned, or for purposes of obtaining employment.  The former can create significant harm to a person’s credit and reputation; the latter can create other problems, such as impeding a background check or delaying the payment of a federal entitlement. The most vulnerable victims in either case are children. Until they are old enough to enter the job market or apply for certain federal benefits, they will not be aware of the theft.

Thefts for financial gains will always be a problem.  Nothing short of persistent, proactive measures by the government and other institutions who possess SSA numbers will make a dent in this form of criminal activity. Even then, sophisticated hacking will occasionally breach any firewall. It is ultimately up to individuals to prevent or limit damage by practicing relentless vigilance.  Take any seemingly legitimate communication you receive from a financial institution  with a grain of salt. Carefully scrutinize all requests for information appearing to originate from a government body.

Preventing the use of SSA numbers for employment purposes is difficult to stop, too, maybe even more so because theft can be accomplished using low tech resources. Illegal immigrants normally use their own names for the stolen numbers. Creating authentic-looking documents is fairly easy.  However, they will not accrue benefits if the number is fictitious or has already been assigned.  The Social Security Administration screens employer W2 filings for mismatches or no evidence of issuance. Employee contributions will be held in the Earnings Suspense File.

In 2010, it was estimated that these suspense dollars provided around $12 billion to the Social Security and Medicare trust funds.  While that is a windfall, it is a pittance compared to the funding needs of the two programs.  The contributions are likely more than offset by the uncompensated services provided by emergency rooms across the nation to those who are not authorized to be here.  That’s according to the American College of Emergency Physicians. 

I would not rule out future benefit claims against previously unmatched contributions by those who may one day attain legal status, or through a class action. If that occurs, the windfall effect could be greatly diminished. The United States could be facing a growing contingent liability that could bite a large chunk from the Retirement and Medicare trust funds when we least expect it, and when less prepared to deal with the fallout. The Suspense File has accumulated $1.2 Trillion through 2012 from 333 Million unmatched W2s.  Claims against a fraction of that could easily exceed $100 Billion.

Except through a small pilot program, neither the IRS nor SSA will notify you if your Social Security number pops up as a mismatch.  It is important for you to compare your earnings against those shown on your annual Social Security Statement. Do not depend on the SSA to catch all fraudulent W2s and assign them to the Suspense File.

The most sensible line of defense against illicit use of SSA numbers for employment purposes would be to increase the use of the E-Verify system.  There must be penalties for employers who do not perform reasonable due diligence in screening hires.

There are concerns about  mandatory use and the cost of the system to businesses. My suggestion would be to use it as an audit tool – not everyone would be required to use it.  Employers submitting too many W2s with mismatched SSA numbers would have to as long as the problem persists…..and suffer consequences for their carelessness if it did not cease.  In time, it may be practical to require widespread use as efficiency is improved through experience.

Ultimately, we need to come to grips with the primary cause of employment-purposed SSA number theft.  There are some jobs Americans will not do at current levels of compensation, in some cases kept artificially low by the availability of cheap labor. Rooting out unauthorized SSA number use could open up some labor segments to American citizens. Then there are those jobs most citizens will shun at almost any rate of pay.  Do not expect to find more than a few Americans picking crops or working in a poultry processing plant. That was not the case in days gone by, but that train left the station many decades ago, and it is not returning.

There should be regulated guest worker programs, subject to the protection of labor laws, for certain industries and jobs when needs are proven. Employees will not get rich, but could earn a path to citizenship and all the opportunities that has to offer.  Costs of certain products would rise, but the use of unauthorized SSA numbers could significantly diminish.

If  the integrity of the SSA database is compromised by a steady inflow of bogus information, the ramifications will be painful to the economy and greatly diminish trust in the institutions responsible for our financial and physical well being. That pain will be far worse than what would be felt by taking steps to deal with the problem now.

 

 

 

 

I yearn for the days when I covered the CD2 special election back in 2009, one that pitted three insiders against seven average citizens.  I attended almost every forum (there were at least a dozen) and provided the most comprehensive coverage of any outlet.

The seven grassroots candidates were instrumental in forcing a runoff; unfortunately, the top two finishers were insiders.  At least the two had to dig deep in their pockets in what was one of the most expensive council races in the city’s history.

In recent years, I have traveled extensively for business reasons.  I miss attending the forums; I miss writing about them even more.

Measure S is the headliner of this year’s ballot; the citywide races offer little drama, although it would be worthwhile for voters to consider an alternative to Eric Garcetti, whose promises of DWP reform and fiscal responsibility have fallen well short of what is needed to support sustainable services.

Measure S pits democracy against plutocracy.  Either we have a city where the residents have a say in the shape and structure of development, or planning is left in the hands of wealthy developers and their proxies in City Hall – a plutocracy only Vladimir Putin could embrace. Their funding of the opposition to S amounts to the financial equivalent of hacking the election.

If you want planning that facilitates community-wide needs and desires, vote Yes on S. We must stop straining our already over-burdened infrastructure any further, curtail the growing traffic on our streets and prevent mini-Manhattans from dominating the landscape. We want growth to be the result of smart planning – within our capacity to manage and control its effects.

The one council race I have watched from afar is  CD7’s.

With 20 candidates vying for an open seat, voters – at least the few who bother to cast a ballot – are certain to find someone to their liking.  I am at least somewhat personally acquainted with, or have followed the postings in social media of a few: Terrence Gomes, Bonnie Corwin, David Barron and Krystee Clark.  I can say, with confidence, they are true activists whose motives are not political, but rooted in the best interests of their community. I am sure there are others as well.

On the other end of the spectrum is Karo Torrossian.  He is Councilman Krekorian’s  land use deputy who, if elected,  will be certain to do the bidding of developers at the expense of residents.  He has done a poor job of advocating for the residents in my part of the Valley.

You have important choices in other races as well, but these two are the most competitive and offer the best chances for a positive change in how the city operates.

 

The Government Accounting Standards Board (GASB) is pretty clear about how it wants state or local governments to report Net Pension Liability. As stipulated by its Statement 68,  on the face of the financial statements, not buried in the morass of footnotes.

But the City of Los Angeles did not read the memo.

A quick survey of the Comprehensive  Annual Financial Reports (CAFR) of a few major cities – New York, Seattle and San Francisco – show compliance.

There are probably a few, besides Los Angeles, who have failed to do so, but weak oversight by GASB is a prescription for sloppiness.

There is no shortage of other professional or authoritative materials on the subject, for example, articles published by the AICPA, such as this government brief.

This is also the second year in a row where the liability was not reported on the face of the financial statements. … and the pronouncement has only been in effect for two years! Although the required footnote disclosures were included, footnotes amplify the contents of the standard accounting reports; they are not a substitute.

Before I go any further, why is this even important?

Analysts, accountants and numbers geeks will know to dive into the footnotes, so who cares if it is not staring at the users on the face of the balance sheet, or statement of net position, as it is also called?

As GASB and others have clearly stated, it is about transparency.

As residents, we are the most important recipients of the city’s financial statements.  We live here and bear the consequences of our elected officials’ decision-making; the financial effects of which are imparted in the CAFR. Even though only a fraction of the residents bother cracking open the CAFR, and those that do rarely get into the footnotes, there is an obligation to provide complete disclosure.  Anything less is implicitly misleading and a disservice.

I would not be as irritated or concerned if this had not occurred before, but suspect political pressure is behind not reporting the NPL as evidently as it should. And that rankles me more…as it should you!

Most of our officials depend on the support of the public unions to fund their campaigns. In return, they receive generous retirement benefits that come at a high cost to the residents of the city.  Shining the light on the $7 billion net liability that has been incurred to support these plans is not in their best interests. It’s much safer to bury it in a line with other long-term liabilities. Doing so does not invite questions.

The NPL is over 50% of the total long-term liability in the governmental activities segment.  It cries out for the specific recognition GASB 68 mandates.

To make matters worse, the footnotes downplay its significance by stating it is not, by itself, evidence of economic or financial difficulties.

Tell that to the city of Richmond, CA, which faces the prospects of bankruptcy.  Its residents are already feeling the impact of diminished services, the result of diverting more of the budget to pay for pensions. Add San Bernardino, Stockton and Vallejo to the list, too.  Others will follow.

In Los Angeles, we cannot afford to increase the police budget to deal with the rising crime rate.

So while our officials avoid the subject, we will pay more for less service.  That’s the city’s plan to deal with the problem.

The City Controller is in a position to educate the public about the dangers of ignoring this bleak prospect. Ron Galperin has the wherewithal and the standing to heighten awareness, but if he is not willing to at least give it the basic recognition it warrants on the face of the balance sheet, where it is more visible, then it is unlikely to get any attention at City Hall.

Galperin has not shied away from auditing waste and abuse, however unpopular that has been among some powerful forces. He is still the most effective City Controller we’ve had, but he must lead the charge to fight the pension cancer, which is consuming our city from the inside.

The NPL is the tip of an iceberg.  Pretending it is not there will only run the city into the rest of it.

Commander-in-Tweet

By the time this article is published,  either the most awaited or unawaited presidency, depending on your point of view, will have begun.

Trump’s loyal supporters believe he will initiate sweeping, long-overdue changes; his most ardent detractors fear he will take us down the road to fascism.

For certain, we are in for a wild ride, but I do not believe President Trump (can’t believe I am typing those two words together) will be able to wave a magic wand and have his way across the board. This is a guy who did not have a majority of his own party behind him.  His victory was more about the other candidate’s problems.

A Washington Post/ABC poll showed his favorability rating on the eve of taking office as 40%.  That does not signal a honeymoon; an impending divorce is more like it, a nasty one at that.

Without a broad consensus behind him, Congress will not rubber-stamp much of Trump’s agenda, assuming he really has one other than poorly defined tweeting points.

So one should not expect broad support for any of his plans beyond the selection of a new Supreme Court judge. That’s a big one, but the High Court has always ebbed and flowed between conservative and liberal influence.  It’s been that way for a few decades. There’s always a wild card, too, like Justice Kennedy. Let’s not forget that Chief Justice Roberts saved Obamacare. You just never know.

I anticipate we will have a balanced court, unless one of the liberal judges retires during Trump’s term. It is unlikely any of them will retire during a first term.  It would take a Scalia-type departure for another vacancy on the left side of the bench.

What about a wall across our southern border?

I think you might see some segments constructed in strategic locations, but funding will be a problem for any lengthy stretch.  It will be more show than substance. The repercussions will give Republican lawmakers pause.

But there will be some extensive changes to immigration policy, some of which will be embraced. Take for example tightened restrictions on H-1B visas.  Even there, Trump will learn that this abused program can only be throttled back so far, because our schools are not turning out enough STEM talent to meet the demands of science and industry.

A beefed-up Border Patrol is one practical objective many will support.  The members of the USBP save lives and interdict dangerous criminals. Unlike a wall, they offer a flexible response for dealing with illegal immigration. Walls cannot make arrests or render assistance to those challenging the hostile terrain which exists over a vast swath of the border.

Government environmental regulations will be reduced, but to what degree depends on popular support. A majority of our citizens do care deeply about the environment.  People depend on it for recreation, comfort, health and a safe food and water supply. If they feel the environment is significantly threatened, they will push back in noticeable numbers, enough to turn up the political heat in Congress.

A reduction in corporate taxes is almost a certainty.  However, it will be a balancing act between what it will take to bring offshore earnings back home and avoiding the appearance of catering to Wall Street. And no politician wants the Wall Street label to stick. This could be the biggest battle Congress faces, one in which Trump will have the least influence for fear of alienating blue collar workers, the very constituency that helped push him over the top in the election.

The greatest uncertainty involves international relations.  A president has wide leeway in deploying or redeploying troops. Some would argue he has the power to terminate a treaty without the consent of Congress. The Constitution is not specific on this subject.

Most certainly, Trump could effectively undermine NATO by pulling resources from it, turning the alliance into a mere shell.

How about a trade agreement such as NAFTA?

NAFTA is a congressional-executive agreement, not a real treaty. There are no rules as to who can terminate one, so it would appear Trump could pull out over the objections of Congress.

In the end, for Trump’s policies to prevail, he needs broad support from both Congress and the public.

You do not earn broad support with provocative remarks in social media.  Think of the number of people who are unfriended on Facebook because of their relentless partisan posts and memes.

The Tweeter-in-Chief will have more to lose than gain in his use of the internet. People just might unvote him.

Prop 47 crime wave

I had a firsthand look of the chaos bestowed on the population by the passage of Prop 47. As almost all of you know, the measure raised the threshold of a felony and led to the early release of many career criminals.

A neighbor’s house was ransacked and robbed last night.  The family was on an errand for a period of less than two hours, not a long time by most measures, but far more than enough time for criminals to do their deed.

I talked with the LAPD officers who were investigating.  When I mentioned there has been a steady increase of property crimes in the community since the passage of Prop 47, the officer piped right up, “We are seeing an influx of thieves from other states. They know the odds of going to jail are slim.”

There have been steady reports posted to Nextdoor about burglaries in Valley Village.  As president of the homeowners’ association, I am acutely aware of this growing problem, which effects many communities in Los Angeles.  I have lived here since 1986 and have never before seen such a spike in crimes.

Many of the crimes are brazen – carried out in broad daylight.  Thieves have walked all the way up driveways to break into cars, not simply satisfied to target those parked on the street. That takes some cajones…and desperation, a combination that is dangerously explosive and could indicate a propensity for violence by the perpetrators.

It is bad enough that thousands of professional burglars have flooded the streets after early release; we have also become a magnet for out-of-state talent, as the LAPD officer related.

The people of California voted for Prop 47. It was supported by the top elected officials in the state.  It even had the support of New Gingrich!

It is time for the state’s voters to reverse this truly misguided policy.  It will require a new ballot measure, and, in the short run, legislation mitigating the impact of 47.

It is also time to build new prisons.  Instead of selling bonds to construct an extraordinarily expensive  high-speed train, let’s invest in state-of-the-art prisons which have the facilities for addressing and correcting the causes of recidivism. There will always be those who do not respond to intervention – they will ultimately require a lifetime of incarceration, so the capacity must be in place to deal with them as well.

Opponents to this would claim we cannot incarcerate ourselves out of a growing, statewide crime wave.  The converse for that argument is more grounded in reality – we cannot reduce crime by rapidly increasing the supply of criminals, as Prop 47 has done.

 

Costly Accounting

Accounting topics usually do not show up on the radar, especially in times when other news topics are red hot. There is, however, a conceptual transition worth noting with wide ramifications.

Good accounting is not just desirable; it is vital. Business and the general public require the best possible financial information in order to transact and invest in confidence.

Regardless, it makes sense for the cost of accounting changes to favorably correlate with the benefits.  For example, spending a fortune to analyze or report on an obscure, immaterial activity is hardly a sound course of action.  A cost vs. benefits standard should be applied when a widespread accounting change is entertained.

The largest accounting change in the last 10 years (perhaps one of the largest ever) is underway. It’s ASC 606. ASC stands for Accounting Standards Codification and is the source for what is commonly known as Generally Accepted Accounting Principles (GAAP).  666 might be a more appropriate code number.

The key objective of 606 is to create consistency for reporting revenue across all industries for customer contracts. Current GAAP is more industry specific. This amounts to a transition to  a one-size-fits-all approach from one which recognizes unique business practices.

There is much to say about the benefits of consistency, but plain vanilla does not necessarily deliver the disclosure the public needs in an increasingly complex world.

If anything, ASC 606 increases the complexity of evaluating customer contracts by requiring revenue determination at various points in time. Basically, the economic substance of the affected contracts remains the same, so it is mainly a matter of timing of when the revenue hits the books.

OK, not so bad, but the current method has been working well for a long time. (A side note: the Enron-type disasters of the past were due to lax compliance with internal controls.  No change in revenue recognition principles will prevent a recurrence. The objectives of ASC 606, as well as any other accounting change, are not intended to address fraud, abuse or lack of due diligence).

Is 606 worth it? The benefits are arguable. And for all the talk about consistency, some industries are exempt from the scope! Eventually, it is likely other exemptions will be made.  After all, industries and products are not static.

Companies have and will incur significant costs to implement it.  The sad part is no one really knows how much. There is no national tracking tool in place.

My guesstimate of the price tag is based on the ratio of accounting, IT and auditing costs to revenue, roughly 5%.  The aggregate revenue for S&P 1500 companies is $13 Trillion, so it works out to around $65 Billion, or about $43 Million per company, if you figure that major conversion efforts require an equivalent of around 10% of the  5%.  The cost will be disproportionately worse for smaller companies, and probably even worse for nonpublic firms.

Companies can make substantial improvements to reporting and control systems for that kind of money, improvements which can provide greater protection and quality of information to the shareholders and stakeholders than playing with the timeline for revenue recognition.

The Financial Accounting Standards Board (FASB) purports to consider the cost to the private sector of its decisions, but it missed the boat here. One author even suggested that ASC 606 was pushed forward to justify FASB’s efforts in the wake of its failed attempt to converge US GAAP with International Financial Reporting Standards – an objective that grew out of the Norwalk Agreement of 2002, the inspiration for 606.

Fourteen years of futility comes at a pretty high price…and difficult to explain when you have little to show for it!  Reminds me of DWP’s decision to implement its new billing system rather than man up to the public and admit it would be a disaster.

The conversion, which for the largest companies started ramping up in earnest a couple of years ago,  will run through 2017.  The implementation date is in 2018 (2019 for nonpublic companies).  Afterwards, addressing post-implementation glitches will undoubtedly cost a bundle. As cousin Eddy told Clark Griswald in Christmas Vacation about the Jelly-of-the-Month Club,”Clark, it’s the gift that keeps on giving the whole year through.”

In this case, years to come…and as useful a gift as fruit cake.

The outcome of the presidential election was a surprise to me as much as it was to anyone.

What is not a surprise is the reaction to it.

There have been some extreme events and outbursts, including rioting by some Clinton supporters and some nasty displays of neo-Nazism by the loosely organized Alt-right group. Fortunately, these reactions are not acceptable to the population as a whole. Most of us are moving forward and dealing with change in a rational manner. The checks and balances embedded in the Constitution will prevent significant, or even sudden, permanent changes to our government.

However, one proposed remedy to Trump’s victory resurrects an issue this nation has faced before…..secession from the United States.

As a practical matter, according to an opinion piece in the Washington Post, it is virtually impossible, short of an apocalyptic disaster which throws our nation into dysfunctional chaos. Although there are many who believe we have been dysfunctional for a long time, I have news for you – the national government has not only survived, it has expanded its influence.

The Post article states: Article IV, Section 3 of the Constitution specifies how a state can gain admission to the United States. There is no stipulation, though, for the reverse. Even if Obama wanted to let Texas go — a thought that probably appealed to him for at least a second — there’s no mechanism for him to do so. There’s no mechanism for Congress to simply say, Sure, off you go. Once you’re in, you’re in. The United States was born an expansionist enterprise, and the idea of contraction, it seems, never really came up.

To those proposing a Cal-exit , don’t waste your time, or those of the state’s voters, with a referendum to seek secession.

Having said that, the topic is worthy of an interesting hypothetical discussion.

Did the Civil War really resolve whether secession is constitutional? I touched on this subject in an article I wrote for Citywatch in connection with the Civil War Sesquicentennial.

As I pointed out, the seven states that seceded prior to Lincoln’s inauguration could have gotten away with it had Fort Sumter had not been fired upon by Confederate batteries. Absent the catalyst the attack provided, the nation had no stomach for war, much less a civil war. Had Lincoln raised troops to forcibly end secession, it is likely the entire Upper South would have joined the Lower South, including the critical border states of Kentucky and Maryland. Washington would have been isolated; Lincoln’s administration would have been dead on arrival.

A southern-leaning Supreme Court, led by Chief Justice Roger Taney, a slaveholder himself, may have ruled in favor of the break.

What the Civil War did make certain was the illegality of forceful secession.

Does that mean peaceful or passive secession is permissible?

As mentioned earlier, there is no process for separation via legislation. There is nothing in the Constitution to guide Congress; nothing even stipulating a voting margin for such an action. Any request by a state to secede would simply die.

But let’s just say it did occur.

Just like divorce, there would be a property settlement…..and would that be costly to California! Do you think the rest of the states would transfer control of Yosemite and other national parks for a song? How about military installations and other federal government real estate?

The financial obligations California would incur for buying out its share of the unfunded liability of Social Security and Medicare of its citizens would be worse.

California claims to receive less monies from the federal government than it sends. That is so much BS. The benefits to the state from physical protection and security provided by the federal government is incalculable. In terms of economic trade, California’s primary trading partners are part of the Pacific Rim. Without the leverage of the federal government behind us, we would be at a disadvantage in negotiations with China and Japan, whose economies dwarf those of the Golden State.

Then there are details of establishing a monetary unit and a central bank.

How about supporting embassies throughout the world?

The nation of California would be bankrupt from the get-go.

One other thing. There are regions within California which will not go along with the plan. Much of California’s agriculture and water is attributable to the Central Valley and Sierra Nevada, respectively. Those regions would balk at the plan. They would form their own state, or possibly request to join Nevada. Sacramento would find itself isolated from the rest of its subjects. California would be totally dependent on a foreign government for food, water and energy.

The secession movement is laughable until you realize its proponents really believe it is plausible. For their sake, I sure hope they do not receive Nigerian e-mail solicitations.

But just the talk of secession further alienates California from the rest of the nation.

One of our top attractions is Wine Country. We do not want to be labeled Whine Country.