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Archive for January, 2010

Not quite the accumulation you’d find at Tahoe or Mammoth, but it must have felt as if a blizzard rolled in.  I’m sure the city had the snowplows out in record time.

It was just over sixty-one years ago on January 11, 1949.

The view below is at what is now Valley Village Park.  Note that the 170 Freeway did not cut through yet.

The next view is on Hesby Street.  The house belonged to the late George and Alice White.  They knew the whole history of the neighborhood.

The pictures are from scans I made of Alice’s collection.

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I attended the BudgetLA.org Forum today at Hollywood City Hall.  Alex Rubalcava was the guest speaker.  Mr. Rubalcava is President of Rubalcava Capital Management.  He spoke about the pension crisis and the prospects of municipal bankruptcy.

Alex’s concerns go back a few years as evidenced by a 2006 article in the Daily News.  He sparred with city and LACERS officials over the assumptions driving the civilian pension plan.

The concerns he raised then are still valid today.  Is the earnings rate assumption of 8% sustainable?  If it is not, then the unfunded liability is higher.  I have written about this before.  No one knows for sure, but in a world filled with both economic and social uncertainties and volatility, conservative assumptions seem to be in order.  8% is not conservative.

In his presentation, he stated that city contributions to benefit plans will grow to $3 billion within five years, barring a further downturn  (Note: that’s the equivalent of over half the current General Fund budget).

Alex walked the group through the Los Angeles County Business Federation’s recommendations to the Mayor regarding needed pension reform. He emphasized the employee contribution rate to the pension must be increased.  Every 1% increase in the rate saves taxpayers $40 million per year.  Raising the retirement age by five years will reduce the unfunded liability by half.

Employees need to kick in to cover health benefits.  Alex stated that the city currently spends $350 million each year on plan subsidies- with no contribution from employees.

It is interesting that the Mayor is now suggesting higher contributions from union members. “This year, we can avoid layoffs if they will step forward and take a little cut and agree to an increase in the pension contributions,” Villaraigosa said, according to the Los Angeles Daily News.

All well and good, but if he thinks he can squeeze meaningful concessions from the civilian unions after he went on record as saying absolutely no to bankruptcy, he should have listened to SEIU’s regional director Julie Butcher, who was also present today (she will have a chance to speak at an upcoming meeting). 

Julie broke into Alex’s presentation twice, but Alex held his ground. In her view, city employees have sacrificed enough.  Compensation and benefits are a one-way street; a one-way street with a barricade.

What may be fair in the minds of LA city employees may not be fair to the taxpayers.  Compensation is not just about fairness to the employee, it is also about affordability to the taxpayers.  It is a two-way street.

Julie’s mantra is “the average city employee pension is $36,000 per year, with no social security.”

What Julie neglects to tell the public is there is nothing stopping employees from contributing to an IRA, just as most people in the private sector do to supplement a much lower social security benefit.

What I hope Julie is telling her members is what could happen to their contracts in the event of Chapter 9.

On that point, the most sobering note delivered by Alex concerned bankruptcy.  He predicts the city will have to file Chapter 9 within three years.  That’s assuming no further decline in the economy.

If his prediction is in the ballpark, the Mayor must engage bankruptcy attorneys for general advice as soon as possible.  The possibility of bankruptcy is not something you can ignore until the last minute.  For a city the size of Los Angeles, prep time will be vital.

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Today’s LA Times contained very disturbing news – it appears the city is ready to pull the trigger on privatizing parking. 

The Mayor’s desperation to save his political reputation is driving our financial planning.

No matter how CAO Miguel Santana runs the numbers, the privatization of parking facilities and meters to close the current or near-term budget gap defies not only sound financial logic, but common sense as well.

Would you mortgage your home to buy an expensive car or a year-long vacation in Europe?  Well, plenty of people did to some extent, and you see where that has gotten us.

It is foolhardy to use proceeds from the sale of long-term assets or revenue rights to for short-term benefits.  Even with a reduction of the debt service associated with the parking structures, the proposed deal still amounts to diminished future net revenues.

The reserve fund is not an asset to be used frivolously.  It is designed for use in emergencies – earthquakes, terrorism, etc.  The city has already misappropriated it by using it as a band-aid to cover the wounds of irresponsible fiscal policy – self inflicted wounds. Phil Willon of the Times writes:

“If approved by the council and mayor, the transaction would allow the city to use a portion of its $189-million reserve fund to close this year’s budget shortfall and later replenish the reserve fund with the proceeds from the privatization of the garages.”

At least Santana is somewhat transparent in his admission that the deal would enable the city to use (or misappropriate) a portion of the remaining reserve fund to cover the current year’s deficit. 

Negotiating a major capital transaction under duress is asking to get hosed.  The effect would be the same from selling your house to fend off foreclosure.  The seller is not going to get a good deal in a down market – and once it is done, it’s done.

I am forwarding this post to my Council Member (Paul Krekorian), along with a resolution opposing such deals passed by NC Valley Village last night (Jan 27th). I will ask him to oppose the deal and urge Bernard Parks to do so as well.

Let me leave you with this thought.  I ran across it in a white paper prepared by the Collaboratory for Research on Global Projects at Stanford University (Working Paper #53, Sept 2009, by Brian Chase):

“…most of the upfront proceeds received from those P3 deals will likely be spent long before the 75- or 99-year concession terms expire, and public pressure to renegotiate these deals or even terminate them will grow—especially as higher user fees begin to kick in over the next several years and memories fade as to the initial benefits that were received.”

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Earlier today we  were asked why the issues with the 11933 Magnolia project were important to people throughout Los Angeles?  There is a great deal to consider. There are assorted arguments in all directions. The most concise and comprehensive overview we found comes from a letter we are reprinting with permission. It was sent by North West San Pedro Neighborhood Council Member, Pat Nave to Los Angeles City Council Person, Janice Hahn.

Dear Janice

I have been following the valley village case for some time.  Diana and I and a few others even met with some of the residents there early on to see if we could provide any thoughts to them.

They are a wholesome bunch.  They are concerned about their neighborhoods in much the same way as your constituents are about their neighborhoods.

We noticed early on that the issues in Valley Village are the same everywhere in the City – how the City counts traffic, how to deal with automatic density bonuses, how sometimes well intentioned low income housing plans actually reduces the number of affordable units.

I think we will never get the City to provide adequate planning until and unless the council just says no.  No to bad planning, no to EIR’s written by developers, no to bad statistics and bad methodology.

Please support the appeal from the Plum committee.  Vote not to certify the EIR and deny the developer’s application.

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While we are all concerned about what is going on with state and local finances, let’s not forget we are in tax season.

I am disturbed about the recent wave of IRS letters to tax practitioners.  If you read between the lines, it appears the Feds may want tax professionals to do less advocacy for their clients. 

Tax preparers have strict standards: they cannot advise clients to take any unreasonable position on their returns or any other filing.  However, they are also bound to consider the best interests of their clients.  For example, if the preparer believes there is a sound basis to support a deduction in a gray area, then it is perfectly fine to recommend taking it. The client should also be advised of the potential for disputes.

It is not clear to me what standards the IRS is applying in its “outreach” to preparers.  Pressuring a careless preparer is one thing; one who is reasonably aggressive and uses professional judgment is quite another.  After all, the IRS is not always right. If it were, there wouldn’t be a Tax Court.

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Whether the City Controller should have the right to conduct performance audits of other elected officials has resulted in a bitter fight between the Controller and the City Attorney.  Wendy and Carmen jumped into the ring right after Rocky and Laura climbed out.  It’s a perfect script for a WWF tag team event.  I’m just waiting for the body slams.

It is not easy trying to sort the issues out. Performance audits by their very nature can involve much subjectivity. They tend to work very well when there are established standards in place.

I asked Carmen if there were any standards by which the City Attorney’s Office can be measured.

He replied, “There have never been standards (in the City Attorney’s Office). There is no comparable office for which standards can be derived. We are the largest prosecutorial department in the nation.”

I can’t help but feel that standards are nonexistent for elected officials’ offices throughout City Hall.

So that’s problem one in my book.  The last thing I want to see is money going towards an aimless and possibly futile exercise in feigning accountability.  That is what you will get out of a performance audit when no one knows how a job is to be performed in the first place – anywhere.

It seems standards should be established before we spend time on a charter amendment authorizing the Controller to conduct these audits.  Establishing standards would be a worthy project and require collaboration among the Controller and the Electeds.  Nevertheless, it would be easier said than done.  After all, standards can be very subjective and change drastically as conditions fluctuate.  For example, separation of duties is essential to handling valuables or controlling monetary transactions.  What would happen if a department lost half of its staff?  That could happen in the Controller’s Office soon.  Separation of duties could get compromised due to a lack of heads.

He mentioned there is also a general fear among other elected officials about granting power to another elected to audit their performance. The Charter Amendment being proposed amounts to “mutually assured destruction,”  according to Carmen.  Everyone in office could audit anyone. It would ensure that no one elected official could use a performance audit for political advantage without being subject to retaliation. 

In other words, the result will be a stalemate.  I am not sure if the Charter Amendment is worth pursuing under those conditions.

The city will be losing thousands of employees, including those already approved for ERIP.  Seems like it might be time for all departments to reengineer their procedures, whether they had good ones in place or not. To commence full blown performance audits when the city is on the edge of a financial precipice will not be productive.  The focus should be on assisting critical departments with revamping internal controls and making the best out of an intolerable situation.

The first real hurdle in the inter-office feud between the two is the workers compensation audit. According to Trutanich, the field work is just now getting underway.  There appears to be sharp differences between Greuel and the City Attorney regarding confidentiality of case files.  When I talked to Wendy back in December, she indicated meeting resistance over access to the files.  Carmen all but confirmed that.  He said she has “no (legal) right to look at the files.” He added, “She does not need to look at them to determine effectiveness (of the process).”

Carmen’s major concern is about the quality of the firm Greuel is using to conduct the audit.  He claims it is not certified to handle workers comp audits.

I plan on discussing the subject of workers comp audits with a friend who has been an insurance auditor for many years; so more on this subject at a later date.

Speaking of insurance auditors, Trutanich said he plans on having a few provide training for his attorneys.  He wants to be certain his staff is fully prepared to determine what to pay and how much.  He does not want to rely as much on outside counsel as Delgadillo did.

Aside from access to confidential files, Trutanich has no problem with Greuel’s review of the handling procedures.  He firmly believes that all components of the workers comp process should be consolidated in the City Attorney’s Office (the Personnel department handles all matters up until it becomes a case). This may be a good idea given the dire financial straits of the city.  There could be potential for synergy.

As I mentioned in Part 1, there is only so much ground you can cover in a limited amount of time, especially when discussing very technical issues.

I look forward to further meetings with both Carmen and Wendy.  Whether you approve of them or not, they both occupy critical positions at the most challenging time in our city’s history. They will both play an important role in the months and years ahead.  Potentially, they represent the only checks and balances on the Mayor.

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Before meeting with Carmen, I made a point of reviewing the Estimated Claims and Judgments Payable Footnote of the city’s last complete set of financial statements posted on the Controller’s website.  The statements were for the Fiscal Year Ended 6/30/08, so the information is stale.

At that point in time, the potential liability was $518 million, broken down into two categories:

Probable liability…………$376M

Reasonable possibility …$142M

Note:  comparable disclosures were not included in 2007.  I will ask the Controller’s Office if it is available from the workpapers.

I asked Carmen what the current prognosis was.   He did not have the number available but did mention his Office’s successful trend of defeating suits brought against the city – some 27 straight victories.   He claimed his aggressive approach represents a change in strategy over his predecessor’s, a shift that may discourage some new litigation. 

Still, $518M is a huge nut to crack.  Tru has a reputation as a tough advocate, but no one is Perry Mason.  What’s more, these cases were inherited from his predecessor. There will probably be losses. This will be worth following up in a later discussion with Carmen.  I would also like to discuss this with Wendy at our next opportunity.

So how much of a contingent liability are we facing and has the Mayor’s team included an estimation for it in the budget projection?  CAO Miguel Santana did not mention litigation contingencies in his budget presentation on Monday night.

Curt Livesay, Tru’s Chief Legal Advisor, mentioned that a major loss would be bonded and paid over time.  However, he agreed that it would add to the city’s debt service.

Even if 25% of 2008’s potential liability resulted in losses, it would inhibit our ability to re-establish the nearly depleted reserves.

I will post the third part – performance audits – tomorrow.

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