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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

Controller Ron Galperin has uncovered a gap in the City’s cash management controls.

The audit report, covering the issuance of Proposition O bonds, makes a case for the city to hire a real Chief Financial Officer instead of parsing out finance responsibilities to a mishmash of  executives who appear to have trouble communicating with each other.

Bonds to fund various projects were issued way in advance of the commencement of actual work on projects dealing with water quality.  This finding raised a red flag and called into question the management of projects authorized under other propositions.

The net result was an average balance of $171 million in idle cash from 2010 through 2015 – idle meaning sitting in the treasury earning very little. All the while debt was serviced at higher rates. The negative margin was 1.9 points, which amounts to an average loss of $3.2 million per year. The actual loss was pegged at $54 million.

This is a loss of real dollars; the payments were unnecessary.

There is plenty of blame to go around.  CAO Miguel Santana either failed to perform basic analysis of the cash flows or did not understand the magnitude of the timing.

The Bureau of Engineering regularly failed to reasonably estimate project schedules, which led to the too-early issuance of bonds.

But there is one department that should share accountability – the Office of Finance.

According to the Office’s website:

The Cash and Debt Management Division manages the City’s cash handling policies and practices as well as the City’s relationship with our banking partner Wells Fargo Bank. This Division manages Street Improvement Bonds and coordinates other debt issuance in the City.

Antoinette Christovale served as Director of Finance/Treasurer for 16 years, which happens to span the entire time the bonds were issued. I do not know what her specific duties were, but a treasurer would ordinarily stay on top of debt service and be involved in analyzing the need and timing of bond issues.

It appears that Christovale’s department failed to identify another problem.

In an audit report issued  June 2015, Galperin discovered $500,000 in payments to Wells Fargo Bank for check printing from February 2012 to March 2015.  The City prints its own checks.

Christovale retired in early 2016. She was replaced by Galperin’s Deputy Controller, Claire Bartels.

While the players may change, the organizational structure that led to this embarrassing lack of due diligence is still in place.

Let’s hope Bartels and Santana ride herd on the departments charged with managing debt.

Better yet, let’s fold the Office of Finance and the CAO under an independent CFO with solid credentials. The City is an $8 Billion entity.  Only the most able executive should be trusted with its finances.

 

 

Some popular media outlets have hyped the BREXIT as either the end of western civilization or the dawn of the golden age for the UK.

But that’s how the media operates. The more sensational the spin, the greater the following.

What counts is how it all plays out in the long-run.

No one is disputing the turbulence in the short-run: what happens to trade agreements, ease of travel among the 28 member states, immigration policies. It is no different from a divorce. Life goes on, only differently, with some friendships extinguished and new ones formed. Some will always remain unchanged. And like a divorce, there will be alimony – but flowing in two directions, in various forms. It will be difficult to project who will pay more.

Even with the UK as a member, the EU has an Achilles Heel owing to the sovereignty and nationalistic bent of its member nations, combined with a common monetary unit used by the nineteen members who comprise the Eurozone. The propping up of weaker economies in the union by the healthier ones, without the power to effectively influence legislation in the former, is like supporting your ne’re-do-well cousin Eddy.

Unemployment is pervasive: 8.9% in the EU and 10.3% in the Eurozone.

Overall, the EU is not only an unhappy family, but a somewhat dysfunctional one.

So one cannot blame the UK for wanting to leave, especially since it has been on its own for over a thousand years.

The patriotic lyrics of “There Will Always be an England” come to mind.

Well, there might only be England. Scotland and Northern Ireland voted heavily against BREXIT and could consider secession. The Jacobites might finally get their wish! Mel Gibson may apply blue paint to his face once more.

But they should be careful what they wish for. Just as the UK is taking a risk by bailing, Scotland and Northern Ireland would be well-advised to consider the health of the EU. In the next few years, other major players may part company with the EU. The remaining members, aside from Germany, will not be powerhouses. The EU could become a German-centric body. Maybe the Fourth Reich? A German hegemony is what some Europeans have suggested is developing, with or without the UK, certainly more likely without the UK and France.

Despite the urge by BREXIT’s most ardent supporters to break as quickly as possible, it will not be that easy. 52% support for the measure is not exactly a mandate. There will be a donnybrook in Parliament that will make our Congressional battles look like spats.

In the end, we need to respect the UK’s process.

Regardless, there will always be a Europe.

It is no surprise that Assembly Member Patty Lopez advanced to the finals in the 39th AD. More on that later in the article.

Henry Stern’s path to the general election in the 27th Senate District was less certain.

There was no doubt that Republican Steve Fazio would make it, but most figured a Democrat would come in second due to the large field of Democratic candidates carving up the vote. He finished with 26.5% of the ballots cast, behind Fazio’s 37.5%, but well ahead of his chief Democratic challenger, Janice Kamenir-Reznik.

Reznik held an advantage over Stern early in the evening when absentee ballots weighed heavily.

Two key endorsements abandoned Stern for Kamenir-Reznik: former County Supervisor Zev Yaroslavsky and current Supervisor Sheila Kuehl. Despite those two big name defections, Stern prevailed and appears to have a lock on winning the general. Fazio’s support is unlikely to grow significantly to where he can give Stern a run for his money. Supporters of the other candidates are likely to line up behind Stern, who is a senior staff member of Fran Pavley, the termed-out, current office holder.

The race makes you wonder about the value of endorsements from individuals

I had the pleasure of discussing a number of issues with Stern a few weeks ago. He is someone who appears to be receptive, especially on issues with a direct impact locally.

Patty Lopez, the Rocky of local politicians, appears to face a similar challenge to the one which confronted her back in 2014. Her opponent, Raul Bocanegra, a favorite of the establishment, with the backing of the State Democratic Party, and who outspent Lopez 10 to 1, finished the night with 45% of the vote. Lopez garnered 27%.

With that kind of spending and structural advantage, earning measurably less than a majority is unimpressive and points to vulnerability in the general for Bocanegra. He had almost 63% of the vote in the 2014 primary before falling to the Lopez’ indomitable grassroots push in the general, when he ran as the incumbent. He starts off in a weaker position this time around.

If Lopez can attract support from the pool of voters who supported other fine candidates in the primary, then Bocanegra could be in for a long night on November 8. A loss would all but destroy his aspirations to regain a seat anywhere. It is hard to raise money from deep pockets when you have burned through a small fortune in back-to-back losing efforts.

Trust status report

A long-awaited report on the status of reforms at the Joint Institutes for Safety and Training, the two non profits who have eaten through over $40M of DWP ratepayer money, was released on May 12th. Go to the link at the bottom of the article.

As with her first report last September, DWP GM Marcie Edwards failed to provide any substantiation of reported progress. This is in direct contradiction of promoting “the purposes of transparency and follow-up,” as she claimed in her cover memo of this latest report.

It only remains to be seen if Edwards, who openly criticized City Controller Ron Galperin’s audit of the trusts, legally changes her name to Marcie D’Arcy.

Before I dive into the report, “Let’s do the numbers,” as Kai Rysdall of American Public Media’s popular Marketplace broadcast says.

Unfortunately, the Trusts have not published their audited financial statements since the end of fiscal year 2013, compelling me to rely on the IRS 990 filings for 2014 data. The 990s are short on detail, but there is enough to point to an increase in cash accumulation of $500K over the previous year.

That brings the total cash for the two trusts to $11.3M, pushing three times the annual contribution they receive from us, the ratepayers. Still no explanation is forthcoming as to what plans there are for this excess funding.

It is worth noting that the trusts are 501(c)(6) corporations.

IRC 501(c)(4), (c)(5), and (c)(6) organizations may engage in political campaigns on behalf of or in opposition to candidates for public office provided that such intervention does not constitute the organization’s primary activity.

It would appear, then, that some of the $11.3M could work its way into political action. The Trusts previously reported they wanted the money for a “rainy day fund.” Not a bad idea, since it would help offset the $4M IBEW Local 18 poured into Wendy Greuel’s failed campaign for mayor.

The rapid growth in prepaid expenses from $75K to $991K over three years in the Joint Safety Institute raises questions. Is it an advance for a major program – or perhaps junkets for the next few years? A reconciliation of the account is in order. Ordinarily, prepaid expenditures tend to level out in most organizations owing to timing (as appears to be the case at the Joint Training Institute).

Edwards’ report pointed to accomplishments, but offered no evidence of what the specific steps were, not even a hint. It alludes to the establishment of formal spending and contracting policies, without sharing so much as a summary; the same for assurances that there would be adequate segregation of duties – a vital safeguard against fraud.

Perhaps the most pathetic admission is the failure to identify duplication of services between the two trusts. At the same time a dedicated manager has been engaged to invest the Trusts’ cash even though the city is capable of handling the role.

No justification was given for the $220K salaries paid to each of the administrators beyond being linked to the DWP pay scale. You would think the jobs could be consolidated.

Edwards did not question any of the assertions.

It is time to authorize another audit of the Trusts by the City Controller. This time, the audit should focus on the reform process and the so-called accomplishments. Otherwise, the report is nothing more than a “trust me” statement.

Would you trust an unaudited report from an organization with an unscrupulous track record?

Trust status report

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