Trash Windfall

Much has been written and said about the City of Los Angeles’ implementation of the ill-conceived exclusive trash franchise arrangement.

The news has focused on the unreliable service, excessive customer bills and lack of response by the haulers who have been granted monopolies.  Most certainly, more will be said.

But there has also been criticism of the mayor and city council for not owning up to their part in this costly fiasco.

Just not enough, and also missing a major point.

Yes, the trash monopolies are costly, but only to the residents,  The haulers are making money…..and so is the city; about $35 million per year in franchise fees.

As I mentioned in a previous article, at a recent meeting of the Valley Village Homeowners Association, the RecycLA representative told us that the fees were needed to administer the program.  I found that extremely difficult to believe and followed up with the City Controller’s office.  You can count on getting a straight answer from Ron Galperin and his staff, and I learned that the fees were going to the general fund, where there are no restrictions.

It really amounts to a virtual windfall to the city as the management of the solid waste program is already funded from the Citywide Recycling Fund, the revenue for which is provided under AB 939, the California Integrated Waste Management Act of 1989. It was the first recycling legislation in the country to mandate recycling diversion goals.

Basically, then, this makes the franchise fee a windfall for the city, if not a backdoor tax.  Even though it is paid by the haulers, common sense dictates it is baked into their pricing structures. $35 million is too much for them not to recoup from their captive audience. It is an incentive to bill the customers for anything related to trash, maybe even the rodents who most certainly dine on accumulated uncollected waste. So the city is skimming off the top at the expense of the already beleaguered commercial property occupants.

At last week’s hearings at City Hall, only Councilman Mike Bonin dared to suggest that the fees be returned to those complexes and businesses hard hit by the price gouging.

To add insult to injury, the haulers reap the cash from the sale of recycled materials, while customers face the prospect of having to pay fines for over-filling blue bins because of missed pickups.  Talk about double-dipping.

Unfortunately, the brunt of the effort to push back falls on the customers. They are the ones who must document the unacceptable level of service, along with erroneous and inaccurate billings, not the city.  They do not get paid for their efforts, unlike our council members for doing little more than threatening the haulers.

Contract law will make undoing the damage a potentially costly affair in itself, especially considering the 10-year duration of the deal.  All the more reason for reserving the windfall and returning it to those who have suffered because of it.



I don’t like surprises that adversely affect personal finances……anyone’s.

The recently approved tax bill had a few, particularly the elimination of personal exemptions and capping state and local taxes.

It’s not as if I am against such measures, but it is thoughtless and reckless to spring them suddenly.  Turning individuals’ finances upside down overnight complicates lives.  Fundamental changes of this nature should be transitioned over years, allowing people time to adjust.  That’s not much to ask for from our government.

It’s not just Congress.

Exclusive franchises for trash hauling were approved by the City of Los Angeles in 2014. The contracts were awarded in late 2016,  (activated in mid 2017), effectively pulling the rug out from under average citizens much in the same way the tax bill did.

While HOAs and commercial owners expected problems, the magnitude caught many off guard. Budgets had to be adjusted and costs passed on to residents already saddled with high housing costs.

If you have followed the news, there were 28,000 complaints filed by residents concerning poor service, and costs double or triple those under their previous contracts. That’s what happens when you replace competition with monopolies.

Seven companies each have pieces of eleven zones.  On a positive note, that is not as restrictive as the five crime families that controlled the rackets in New York City, as depicted in the Godfather. Could there be a little muscle in play as time goes on? Any offers anyone can’t refuse? Tony Soprano, the fictional waste disposal mobster of the former hit HBO series, would be proud.

For the scheduled January 17th  meeting of the Valley Village Homeowners Association, I asked Councilman Paul Krekorian’s office to send representatives from RecycLA and Waste Management, the exclusive hauler for the community. I was pleased to see them there, however, no one from Mr. Krekorian’s own staff attended. It’s worth noting that the Councilman voted for the franchise arrangement, along with twelve of his colleagues.

Please note that the Valley Village Homeowners Association is a community organization, not a condo HOA. Membership is available to all residents.  The Association works closely with Neighborhood Council Valley Village.

There were around 60 people in attendance that night, about a dozen of whom  represented condos, landlords or other affected stakeholders. They did not pull punches with their questions, but did keep them civil.

I was amused by how the RecycLA rep responded when an individual made a reference  to “30,000 complaints” filed.

She quickly responded, “There are only 28,000!”

She added that many of the complaints overlapped as some were received from the same complexes.

I reminded her that for every complaint – on any subject – there are usually several more that do not surface. Also, many renters may not have felt the impact yet, but will when their leases are up for renewal. I fear, though, that renters will not be as organized in their opposition. I think the city is counting on that.

Nevertheless, the fact that 28,000 people made the effort to complain is impressive, especially in a city known for  its apathy on local issues.

It was pointed out that the city did not consider the structural limitations many commercial properties face.  Most were constructed many years ago before landfills and the general environment became issues. For example, there are buildings which use trash chutes and do not have the physical capacity to separate recyclables. Timing of pickups also causes a problem.  The franchisees cannot be counted on to arrive within a reasonable range of time.  Building managers are thus compelled to leave their bins near the streets for hours.  Trash continues to fly down the chutes.  Other bins are now necessary to prevent an unsanitary pile up on the ground, an added cost on top of the higher fees.

I take pride in recycling, but I live in a single-family home, so it’s easy.  By contrast, not enough apartment and condo dwellers are likely to make special trips to dispose of  recyclables.  For all the talk about reducing the need for landfills, the exclusive franchise system does too little to encourage individuals to make the extra effort and use the blue bins. Having once served as a condo HOA board member for a 250-unit complex, I can assure you that effecting change among individual owners is as difficult as herding cats.

When asked who will keep the proceeds from the sale of the recyclables, neither the RecycLA nor Waste Management representative could answer, but promised to get back to us.

No response as of today.  It was not a difficult question.

When asked about how the $35-million franchise fee earned by the city would be used, we were told it was needed to administer the program. I suspect an inordinate share of it will go towards staffing – it is difficult to imagine the program requiring much in the way of new equipment or costly software. If this is true, there must be some well-paid positions.

I followed up with an e-mail asking for a breakout of how the franchise fees would be spent. I received a reply stating RecycLA LA would get back to me. You would think at least a budget would be readily available. After all, $35 million is a lot of money. One would assume there was a detailed plan in mind when the fee was established. I copied City Controller Ron Galperin and Councilman Krekorian on my request.

Others expressed dismay that the city nixed a non-exclusive alternative which would have created a citywide pool of haulers.  This plan was supported by former City Administrative Officer Miguel Santana.  It would have facilitated competition and created environmental benefits, a real win-win.

Awarding the franchises for 10 years under an exclusive arrangement was perceived as a slap in the face, especially given the mercurial nature of the fees charged by the haulers, many of which are in dispute. Who wants to deal with that for the long-term?

Competition would have forced the market to sift through various pricing structures, assuring that the fairest and most sensible ones would rise to the top.  Instead, residents have no leverage, and the 10-year duration will effectively crowd out any new players.

Perhaps the response that rolled eyes more than any other was when we were told the exclusive franchise system was, after all, no different than DWP’s role in managing the city’s utilities.

So, what’s the final score?

The city skims $35-million per year.

The haulers rake in more fees.

The residents pay much more.

A viable alternative was rejected.

What could be wrong with that?

We trust the mayor and City Council know what’s best for us…..don’t we?





Chaos in 2018

Whatever Kim Jong-un does in 2018, it will likely not impact Americans as much as the new tax reform bill, the Tax Cuts and Jobs Act. That’s not to understate the potential for disorder the Rocket Man might be capable of unleashing, but most experts would agree he has not reached the point where he can blackmail the United States and his neighbors in Asia.

But the IRS can make the transition to the new tax rules a painful exercise for many. You see, as with all tax legislation, Congress writes the rules, but the IRS has to interpret and implement them through what are known as Treasury Regulations. Of course, the courts are the ultimate arbiters in disputes between taxpayers and the government; so, what we see now, may not be quite what we get.

I will focus on two of the most pervasive changes affecting Californians: the state and local tax deduction and mortgage interest.

Already, confusion is endemic regarding the $10,000 cap on deductions for state and local taxes, which covers property tax as well as state income tax.

As of the day I am writing this article, the IRS has not definitively ruled on whether prepayments of property taxes will be deductible on the upcoming 2017 tax returns. Taxpayers who ordinarily incur state and local taxes measurably higher than $10,000 are beating a path to the local tax collector’s office to pay next year’s installments – a use it or lose it strategy.

It is reasonably safe to assume that if the 2018 installments represent taxes assessed for 2017, the prepayments will be deductible, but no absolute guarantees. It might be less clear for those whose property taxes are impounded by a loan servicer.

Some have contemplated even significantly withholding more state income tax from their final paychecks this year, but those incremental payments will clearly not be ruled deductible, I can think of ways the IRS might audit for that, but having the resources to do so is another issue.

What about any state tax refunds? These are normally taxable if you itemize deductions under the 2017 rules.

Recoveries of state income tax overpayments may or may not be taxable, at least to some degree.  Let’s say you are preparing your 2019 Federal return (in 2020). The state and local tax deduction  was reduced by $9,000 in 2018 because of the cap and you received a $3,000 refund in 2019 for an overpayment on 2018 state income tax, none of it should be taxed because you had received no benefit for it.  But if the refund were $9,100, $100 would be taxable.

However, a refund of a 2017 overpayment would probably be fully taxable on your 2018 return because you were able to fully deduct the tax from your 2017 federal return.

The mortgage interest deduction is even muddier. The deduction is now limited to the interest paid on up to $750,000 in principal balances related to the acquisition, building or improvement of  primary and second homes. No longer will you be able to deduct the interest on $100,000 on borrowings related to non real estate purchases secured by your home, known as home equity debt.

To the extent you had acquisition/building/improvement balances prior to December 16, 2017, they are grandfathered under the current $1 million cap, but there is no such protection for  home equity.  That deduction is lost starting with your 2018 return.

Many people were probably claiming too large an interest deduction under the old rules because they failed to accurately track the use of their borrowed funds.  However, the IRS lacked the resources to aggressively audit for this.  The lower cap makes the job of the IRS even more demanding. Whether they ramp up and extend the reach of their audits remains to be seen. My guess is that it will not be a priority for 2018, but mortgage data will be accumulated and analyzed with the goal of developing an audit plan for subsequent years.

If you are currently engaged in a  home acquisition,  the change doesn’t affect mortgages taken out under binding contracts in effect before Dec. 16, 2017 as long as the home purchase closes before April 1, 2018. So keep your eye on the calendar and make sure your contract is in order.

As I pointed out in an earlier article, this bill does not represent tax reform  Until we have a system that makes compliance and enforcement much easier, then  all Congress is doing is reshuffling the same old deck of worn out cards.


As much as the California High Speed Rail Authority would like to hold its own version of the Golden Spike ceremony that marked the completion of the first transcontinental railroad, it is more likely to experience rusty nails driven into its already beleaguered and overly-optimistic business plan.

The latest derailment affecting the timeline – and undoubtedly the cost – is a two-year delay in completing environmental reviews of the project.

This news comes on top of growing concerns about tunneling, not just in the San Gabriel Mountains,  but the Pacheco Pass connecting San Jose with the San Joaquin Valley. Even if the almost 14 miles of tunnel is bored, it could be a budget-buster and throw the project even further behind. In view of this challenge, attracting bond investors will be difficult for this segment; yields would have to be enhanced to generate investment, diminishing the already slim prospects of the system operating in the black.

When voters approved $9 billion in bonds in 2008 to start the project, the measure stated that operating subsidies from public funds would not be permitted.  But we are on the fast track to just such support.  The costs, which will most certainly blow through the current estimate of $64 billion, could easily triple.  Although large overruns are common on major projects (i.e., Boston’s Big Dig was over five-times the original estimate), the public was misled as to this possibility with HSR.

So far, nothing has been delivered according to promises made in selling the concept to the voters – not even close.  Even the train speed has been downgraded.

I happen to be a fan of rail travel.  I used Amtrak and Metrolink to commute from LA to Irvine.  I often thought how much more comfortable and reliable the trip could have been had the trains been able to run on dedicated tracks, free from freight traffic delays.  The current engines can run at 100 miles per hour.  While not high speed, there would be no reason why most commuters from the far suburbs of Los Angeles couldn’t reach downtown in about an hour.

Instead of pouring billions into HSR, a system which will serve a relatively very thin segment of the traveling public, we can relieve much traffic from our clogged freeways in Southern California by investing in the region’s rail infrastructure – far more than could be reduced on I-5 through the San Joaquin Valley by the bullet train.

A similar investment could be made in the Bay Area with the same results.

There would be no costly tunneling in either market.

Our next governor should kill this vanity project.  Candidate Newsom was once on record as opposing  the project.…maybe he will come back to his senses.  His key opponent, former mayor Villaraigosa, has always been for it.

The voters should demand that both candidates explain just how they plan to fund it.






Tax Reform Illusion

There is no such thing as tax reform, at least when it is framed within the same Byzantine template that has bedeviled taxpayers for generations.

The primary objectives of any tax system should be to raise revenue, allow for efficient enforcement and encourage public compliance through simplicity. These goals have alluded the government at least since the passage of the Internal Revenue Code of 1954 and its 24 brackets.

If you are counting on Congress to get it right this time around, start recounting.

In my view, the only true reform would be something resembling a flat tax system.  See this earlier article of mine on the subject.

However, there are two chances of a flat tax system becoming law:  slim and none; I won’t waste time, then, on discussing it again.

As one would expect, the current package under consideration has become a partisan battle, with both sides playing to their loyal bases…. and too little weight given to economic and practical considerations.

There are many moving parts in play, but I will focus on just one – the mortgage interest deduction since it is the most complex of any.  It is as American as apple pie, but some developed countries have dropped it, including Canada, UK and France. There are limitations in others.  There has been no sustained impact on the real estate prices where it is not allowed.  Hey, just watch HGTV’s Househunters International for anecdotal evidence, assuming you can overlook the naivety of the buyers featured on the program!

We already have a limitation (also a topic I’ve covered in the past). It allows for the deduction of interest on $1M in mortgage debt used to construct, purchase or improve your home, and $100K for general purposes – basically cash draws to cover vacations, cars, boats or just plain, everyday self-indulgences.

The new proposal cuts the $1M in half to $500K and does not allow any interest deduction on second homes.  All existing mortgages would be grandfathered in at the $1.1M cap.

Presently, there are many people who are probably unaware of the current limitation, and many of them are equally unaware they are over the limit because they have not kept track of what their cash-out refinances or HELOC advances were for.

Don’t lose any sleep, unless your overall mortgage debt is high enough to appear on the IRS’s radar screen. It is at least as difficult to audit as it is for taxpayers to keep records and make the necessary adjustments.  The calculations are not a fun exercise, especially if there have been multiple borrowings.

One thing is for certain, by halving the cap more new borrowers, along with those who subsequently refinance, will fall under the new limitation. The IRS will be challenged to adequately deal with the increased load.  Taxpayer compliance will likely fall short of targets; accordingly, the projected deficit will be higher than expected, all other things being equal.

I would gladly trade all the deductions in the world for a much lower tax rate and an uncomplicated tax return. But the rate cuts for this package are no where near an incentive enough for me to get on board, especially if the loss of the state income tax deduction is also part of the deal.

Until there is real tax reform, America will continue to spend 6 billion hours per year on preparing their tax returns. I believe our personal time is worth more than a few dollars per hour, not to mention $2 billion we pay for individual tax software.

I think we have better things to do.







Equifax SOX

Equifax  suffered one of the most significant data breaches ever, exposing confidential information stored within its network.  What’s more, three executives sold a fair slice of their personal shares in the company after the event was discovered and before it was communicated to authorities and the public.  Oh, and the sales were not part of a 10b5-1 arrangement through the SEC.  The purpose of this arrangement is to minimize the risk of insider training by scheduling sales in advance.

The company claims none of its executives knew anything about the breach when they sold.

Section 302 of the Sarbanes-Oxley Act (SOX) states that the CEO and CFO are directly responsible for the accuracy, documentation and submission of all financial reports as well as the internal control structure.

Every quarter, the CEO, CFO and others certify the effectiveness of the internal controls to the SEC.

One of the executives who sold his stock was the CFO.

Chief Financial Officer John Gamble sold shares worth $946,374 on August 1, two days after the hack was discovered. It is inconceivable that the breach was not escalated to his level within 48 hours, given the responsibility he has under the law. I have seen less significant internal control failures reported internally in that amount of time.

There will be investigations; if there was any cover-up, someone will talk, e-mail trails will exist.

But will anyone be convicted?  After all, no head of a major lending institution was sentenced criminally as a result of the mortgage meltdown.

There is yet a bigger question: how many credit rating services do we need?

Would the nation suffer if Equifax ceased to exist?

Think back to earlier scandals such as Enron and WorldCom.   Unlike Equifax’s, their’s were of a financial nature, but poor internal controls set the stage for the fraud. SOX was passed by Congress in response.

Both of those companies are gone. Are we worse off today without them?








As I wrote in an earlier article, State Senator Bob Hertzberg is a master of the English language.

According to his bio, as an undergraduate English major, he wrote a 400-page handbook titled A Commonsense Approach to English.

Unfortunately,  the senator has embarked on a course of language manipulation as his strategy to significantly raise taxes for all Californians. The people who can least afford it will bear the brunt of Hertzberg’s money-grabbing obsession.

After he was elected to the State Senate in 2014, he did not waste any time in rolling out a new way to relieve residents of their hard-earned cash.  His first crack at it was SB8, which would have taxed most services – from the labor on repairs to haircuts. SB8 died quietly; it’s replacement, SB1445, isn’t going anywhere at the moment.

He had the hutzpah to refer to the bill as “tax modernization,” as blatant a euphemism as, say, calling a mass layoff a “workforce imbalance correction.”  It would “modernize” an additional $10B  per year from the people and businesses in the state, but disproportionately from low- and middle-income earners.

Hertzberg, the serial hugger, perhaps feeling the pain of unrequited love from that attempt, employed his wordsmithing skills again, this time to win passage of SB231. By redefining sewer to include stormwater,  the bill opened the door to flood property owners with expensive parcel taxes.  Since it is already legal to raise taxes to pay for sewer service improvements without a vote, taxes for stormwater mitigation projects will not require voter approval either.

Words have meaning, as Hertzberg knows very well.

They have even more meaning when they are embedded in the constitution. Any new interpretation or redefinition of language affecting state or local governments’ ability to raise taxes should require a formal amendment. The process of changing the state constitution should not be conducted like a game of Scrabble. To do so is disrespectful to the people of California.

Responsible leaders will do their best to mitigate tax increases with spending restraint.

You will not see Hertzberg deal with cost containment, including reining in excessive employee post-retirement benefits.

Neither he nor his colleagues will ever attempt to prioritize capital spending. We cannot afford to pay for every high-end project.

There was a time when Senator Hertzberg was a reasonable politician.  He probably would have made a good mayor, certainly a better one than Antonio Villaraigosa.  But somewhere along the line, his ego probably got the better of him.  He has ceased to be a responsible leader and now resembles the essence of what Thomas Nast depicted in his caricatures lampooning Boss Tweed.

State Sen. Bob Hertzberg, D-Van Nuys, pumps his fist in celebration after his storm water bill was approved by the Assembly, Thursday, Aug. 31, 2017, in Sacramento, Calif. If signed by the governor, Hertzberg's SB231 would let local governments charge residents for storm water management systems without voter approval. Photo: Rich Pedroncelli, AP / Copyright 2017 The Associated Press. All rights reserved.     Thomas Nast (1840-1902). The Power Behind the Throne "He Cannot Call His Soul His Own." 1870. Museum of the City of New York. 99.124.7.