Archive for February, 2010

It is an understatement to say that up until the last few weeks there has been no sense of urgency to resolve the structural deficit of the city.  The City Council has been content to trim around the fringe.  The suggested layoffs are no where near as draconian as some have claimed – many of the reductions are nothing more than transfers to proprietary departments.

Housing general fund employees in DWP, airports and harbors does not seem to bother the Council or the Mayor, after all, someone else pays for those services.  That’s us.

Either directly or indirectly, through fees, taxes or debt service we are covering the diversion of internal capital generated by these employee transfers.

It does not get more direct than when it is the DWP absorbing  displaced general fund heads.  We pay for them through higher utility rates, such as what is being proposed now.  In other words Plan B, the bastard son of Measure B (SOB). 

Why do I connect the two?  It is the Mayor’s passion to meet the state’s mandated 20% renewable energy target by the end of 2010 regardless of the cost.  He’d rather cave to the state than push back.  This is the same state government that keeps as much property tax revenue as possible to the detriment of counties and cities. 

So what will the hit be to our wallets? A 20% increase in our rates will occur within a year if a recommendation by the DWP is approved.

Approximately 20% of our bills flow into the general fund through the annual transfer by DWP.  The more the utility collects, the more money goes to the city, the smaller the deficit.  In other words, it is a tax.

Does anyone still want to bother answering the questions on  the Mayor’s Budget Survey?

The Mayor had the real survey completed and finalized long before he rolled out the ersatz version to the public.  The only respondents worked for City Hall.

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CalPERS continues to be plagued by losses in the private equity investment sector, but that is not the whole story.

Aside from investing in companies doing business in Iran, the San Francisco Chronicle reported CalPERS’ involvement in real estate projects have not only lost money for the fund, but have had adverse consequences as well for residents of rent-stabilized apartments.

Residents in a Palo Alto complex face eviction in a CalPERS deal.  I have to wonder if this situation is more fallout from SB1818, legislation designed to protect affordable housing but which could have just the opposite effect if thoughtlessly implemented.

A private equity investment in New York City real estate may cost CalPERS  $500 million.

According to the Chronicle, a CalPERS spokesman defends the fund’s long-term performance:

…the fund has earned more than 7.8 percent on its investments over the past 20 years (up until June 30), more than enough to cover its members’ benefits. “For the long term, we’re still well managed.”

I compared that return to the S&P 500: the average annual return for the broad-based index from 1950-2008 was 10.8%, a good three points better than CalPERS (see http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm for complete stats or go here for a summary).

The nation’s largest retirement fund seems to have trouble with private deals.  CalPERS suffered a $1 billion loss in late 2008 on a project in Santa Clarita.

An annual rate of return assumption of 7.75% is the gospel for CalPERS, but even at that the long-term benefit funding level projection is anemic – in the mid 60% range.  That is far below the 80% benchmark considered to be conservative.

The fund’s Chief Investment Officer should be mindful of the boilerplate warning investors find on any proposal: past performance is no guarantee of future returns.

I am concerned that CalPERS will be driven to take higher risks in the private equity market in an effort to prop up returns.  What would be the motivation for such folly?  Simply put, politics.

The state does not want to deal with the reality of higher pension contributions when already facing a deficit of over $20 billion.  Not to mention, the legislature lacks the guts to approach the unions about contributing a greater share of the cost.

As long as CalPERS can get away with the smoke and mirrors of a 7.75% assumption, the long-term weakness of the pension fund can be hidden from the public.

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A bill that could delay state payments to schools and local governments should be on our radar scope.  I don’t know if the City Council or the LAUSD are considering the impact.

The State Senate passed the bill overwhelmingly, but the Assembly Republicans want to take a harder look at it.  I have to say, I agree with them.  There could be ramifications for LA’s and LAUSD’s solvency.

According to an article in the Sacramento Bee:

AB X8 5 would give authority to the treasurer, controller and Department of Finance to delay payments to schools and local governments as needed over the next 16 months. Fiscal leaders already have said they need to delay payments to higher education, trial courts and the State Teachers’ Retirement System in March and April to ensure California has enough cash to pay its bills in early April.

Various education advocates, particularly those from community colleges, testified Wednesday that the payment delays could hurt schools’ abilities to meet their own financial obligations. Democratic legislators said they would try to address those concerns with subsequent legislation.

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I came across this article about the demise of GM’s Hummer.  An attempt to sell the line to China failed; GM has decided to end its production.

The article contains a very notable quote:

“It looks like the start of an age when we need to measure ourselves afresh — and maybe start to resize America.”

The same advice can be applied to Los Angeles, not to mention California.

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The City Council is still grasping at straws, perhaps grasping at smoke, trying to avoid the reality of major reductions in compensation and benefits costs – either layoffs, concessions or some combination of the two.

Instead, they are considering cuts to vendor contracts as yet another means of pushing the problem on the private sector.  However, even if the electeds pursue that course, it will not come close to closing the budget gap because over 80% of the general fund is related to employee compensation.

Perhaps a math lesson is in order:  100% of a small amount is still small.

They can cut all of the vendor contracts to the bone and we will not come close to solving this year’s deficit, much less subsequent years.

The denial goes deeper.  The enablers of this budget crisis (particularly Parks, Smith and Perry) tried to blow smoke at Paul Krekorian when he questioned how the 4,000 in proposed layoffs were derived.

Keep in mind, I am not questioning the need to propose massive layoffs.  That is the only way we will get the attention of the unions.  We can only hope the threat will lead to meaningful contract renegotiations.  However for the established Council Members to suggest that there was a real plan to lay off 4,000 workers is wishful thinking at best, and an outright lie at worst.

A real plan would have strategically pinpointed the services to be cut and the types of positions to be eliminated.  Had there been a real plan, it would have been on the table months ago for discussion and not a nebulous target thrust upon the public and the employees at the last-minute.

Ron Kaye covers this in-depth.

He correctly points out that the 4,000 figure was not a plan.  It was merely presented to frame the depth of the financial hole in job equivalents.  It would be similar to planning a weight loss program based on how many calories you can cut by not eating a slice of southern pecan pie instead of mapping out a healthy diet.

What do the City Council and the Mayor know about dieting?  They are prime candidates for The Biggest Loser – except for Krekorian.

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The Sacramento Bee is reporting that both Schwarzenegger and Whitman are backing away from the ballot measure designed to cut state pension costs.

According to the article, “… political consultants from both major parties said Republicans were worried such a measure simply would mobilize public employee unions and bring more liberal voters to the polls in November, when Whitman hopes to be her party’s nominee for governor.”

So, as always, it gets down to the unions.

Politicians are afraid to take reasonable positions to control rising pension costs.

That will be the death of California.

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The games have really changed.  This video takes you through 1968 – and Peggy Flemming.

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