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Archive for April, 2010

The Federal Government has the ability to create money.  It can borrow virtually all it needs to fund its operations without being concerned over running up ever-increasing liabilities.  Of course, there are limits, yet untested, and economic consequences, such as inflation and currency devaluation.

State and local governments cannot create money.

Or can they?

The answer is yes, but indirectly and surreptitiously.

Our state and local budget crisis has shined the spotlight on unfunded pension liabilities.  These liabilities will act as an anchor when the overall economy ultimately recovers (the form and extent of the recovery is another matter).  California and all of its city and county governments will have less to spend on services even if tax revenues increase.  We are already being underserved for our tax dollars, so things will only get worse.

Smoothing is a tool used to amortize gains and losses on defined benefit pension plan assets over an extended period of time (be sure to read the article).  In theory, it is sound.  After all, pension plans are composed of assets managed for long-term performance; therefore, contributions to the plans should not fluctuate in concert with every move in the market.

The danger comes when local governments start to play it fast and loose with smoothing, manipulating the amortization periods to artificially deflate the unfunded liability.  They do this in order to defer making required contributions to plans.  In a sense, they are borrowing from the future to cover the present.  They are creating money out of thin air – there are no notes or bonds underlying the liability.  It is assumption driven and off the books. It is also gambling. Since pension boards, such as LACERS, generally consist of political appointees, there is nothing to stop this form of manipulation from being repeated over and over in order to cover up what could be a costly and politically unpopular mess for the taxpayers to fix.  God knows many politicians will not have the guts to ask the unions that support them to kick in more.

Normal bull and bear market trends should not be a cause for adjustments or alarm.  However, protracted severe downturns, such as we are experiencing, do have long term-consequences.   Recovery of portfolio values to pre-bubble levels will take years.

Consider this example: NASDAQ has never come close to recovering from the dot-com collapse of 2000. 

The real estate market will eventually recover, but it will be ages before many individual segments rebound

Many pension boards throughout the state could fall under intense political pressure to create phantom money through the legerdemain of smoothing adjustments, creating a fiscal minefield for their successors to clear and the taxpayers to bear. They will want to extend the horizon for amortization as far as possible.

For now, almost all of the focus is on plugging budgets for the current year.  Even if successful, elected officials will face an immensely larger problem in restoring health to the pension plans.  The nation will be watching what happens here.

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Can a local government boycott another state without running afoul of Federal law?  Would a boycott under these conditions constitute restraint of trade?

 

Article 1, Section 8 of the US Constitution limits the power to regulate interstate commerce to Congress.
 
The Sherman Antitrust Act states “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is hereby declared to be illegal.”
 
There is no question that citizens can boycott anything or anyone, but is a line crossed when a government in one state restricts trade with businesses in another state?  That’s what the proposed boycotts of Arizona amount to.
 
It will be interesting to see how Arizona’s controversial law plays out in the courts.
 
Just as Arizona must cover the bases on its recently enacted law, both San Francisco and Los Angeles should do the same regarding their proposed boycotts.
 
I’d like to hear opinions from individuals with backgrounds in constitutional or antitrust law on this subject.

  

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I am certain some journalist will look into the possibility that it was more than coincidence Bernard Parks was a minute late for today’s vote on the DWP rate increase.  The Council fell one vote short of securing jurisdiction over the future of the DWP rate hike. 

There was confusion over whether the recently approved increase was for three months or permanent.  The Council wanted to revisit what they thought was a done deal to clarify the impact.

It was a known that Parks would be attending the funeral of former LAPD Chief Daryl Gates.  You would think Council President Garcetti would have delayed or realigned the agenda to assure Parks’ participation on this very important topic, especially under the somber circumstances.

He did not, and the vote to assert jurisdiction failed by a single vote –  the one Parks would have cast had he been there.  Not only did he arrive a minute too late, he was unaware a vote was scheduled, thinking it was only for discussion, according to the LA Daily News.  How did Garcetti frame the purpose of the meeting? Was Parks the only one left in the dark?

Garcetti cast one of four votes that effectively blocked jurisdiction and allowed the DWP to get away with yet another slap in the face of the public.

Yet another odd twist to the conflict between the Mayor/DWP tag team and the City Council.

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The SS Edmund Fitzgerald sank with all hands on November 10, 1975.  The tragedy was immortalized by Gordon Lightfoot’s mournful ballad.

Many maritime experts agree that loss of buoyancy sent the ship to the bottom with very little warning.  So little, there was no time for a distress call. It was there one moment; gone the next.  There is a tipping point when it comes to buoyancy, once crossed, there is no recovery, and the end comes quickly.

Our state and local government pension funds are similar to “the Fitz.”

To the uninformed, everything looks fine.  After all, the plans are not about to run out of cash any time soon.  The seas appear calm, but no one notices the small leaks in the hull allowing water to add weight to the cargo.  The weight is the growing unfunded liability; the cargo is represented by the taxpayers and beneficiaries.  If the pumps are started in time, perhaps a disaster can be averted – but no one wants to start the pumps.

The defined benefit pension plans need pumping from higher employee contributions – much higher.  If not, the plans will lose buoyancy and sink like a rock some years in the future.  At that point, even high investment returns will not be enough to rescue them.  There will not be enough of an asset base to support the higher payout load.

The bailout will be more than the taxpayers can afford.  That is apparently what the union leaders want – to hell with the taxpayers as long as the members have a lifeboat.

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For those of you that follow my blog, you know that I occasionally resort to sci-fi themes to make a point.  It’s fun and provides relief from the cloud of bad news enveloping our city and state.

A few months ago, I published an article about an unexpected sharp decline in registered voters for CD2.  I blamed it on Morlocks snatching people from the streets and carrying them underground through the many sinkholes that formed from failed water mains.  HG Welles fans will remember the Morlocks as the subterranean mutated humans in The Time Machine that lived underground and lived off the flesh of the helpless humans above.  George Pal’s cinematic version of the novel is still one of my favorite sci-fi movies.

Since then, Village to Village has picked up a small but steady stream of views from people using the search term Morlocks.

As many of you know, former Daily News editor Ron Kaye is forming a PAC to vet and select candidates for next year’s City Council elections.  It is apparent to me that the Morlocks command a silent but potentially strong following.  Since they are living under our very streets, why not run them as a slate for the even-numbered seats?  They don’t require compensation or benefits  – just a few stray surface dwellers, say 10% of the registered voters, to keep them happy and fed.  Not a bad deal compared to the present Council.  It also lessens the need for greater density.

Let’s Flash Forward (another of my favorite shows) to the Mayoral race in 2013.

While the Morlocks may be perfectly capable of running the City Council, they are inarticulate and primitive; therefore, they require a strong leader.  Wendy Greuel has her sights set on the mayor’s office, but she lacks the personal charisma and strength to manage the city.

That brings me to the remake of the 1980s series The Visitors, now called V, which follows the good old-fashioned theme of an alien race conquering the earth through subterfuge and deceit.

The leader of the V’s is named Anna.  Anna is not only a natural leader, but she has the answer to DWP’s green energy plan – at no cost to the taxpayers – and national health care.

Compare the video below with this interview with the actor who plays Anna and tell me who you would support in 2013 – Wendy or Anna?  I must admit, there is an uncanny resemblance between the two.

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Carmen Trutanich is the only elected official in this city to openly challenge the mayor’s politically corrupt budget proposal.  His strongly worded memo to the mayor pulled no punches.

“The budget shows a remarkable lack of leadership and imagination. The proposed budget is not a successful strategy to protect and promote the fiscal health or public safety of the city.”

In my view, it is not a budget at all, but an attempt by the mayor to undercut a popular rival, one who has aggressively protected the city’s treasury by fighting frivolous lawsuits – unlike his predecessor Rocky Delgadillo (who is currently running for State Attorney General).

Mayor Villariagosa wanted Jack Weiss to win.  A Weiss victory would have created a triad capable of controlling the city from the top down.  The mayor already had Greuel as City Controller but, without having his man in the City Attorney’s office, his leverage with the City Council would be uncertain.

Dealing Trutanich two back-to-back 18% cuts is so disproportionately skewed it can only be political payback.

Trutanich is correct when he says his office is an important element of public safety.  We can hire an army of cops, but their noble efforts will count for nothing if we can’t prosecute criminals timely or enforce laws designed to thwart gang activities.

By contrast, City Controller Greuel is being cut by 9.2% – only half of Trutanich’s hit.

I do not agree with the cuts her office is absorbing either, but they are relatively tame compared to the City Attorney’s.

What is interesting is her lack of protest. It is as if she has a tacit agreement with the mayor to keep silent.  After all, she will need his support when she runs for mayor in 2013.  As unpopular as Villaraigosa is now, he still has the ability to raise money and secure campaign support from the unions.  That is not lost on Greuel, who herself benefitted from $250,000 from the IBEW, those benevolent folks who run the DWP.

While the mayor himself is unelectable for any office in California, he still wants to shape the political landscape of the region by impeding a high-profile rival through selfish manipulation of the budget process.

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Note: Michael Cohen of Reseda NC videoed the meeting and will post it in entirety – watch for his e-mail.  He graciously provided me with a clip covering the opening statements by the petition’s signers and McCue’s initial response.

There was a general consensus among both Michael McCue’s supporters and detractors regarding his public persona and interactions –  annoying, grating, verbose. 

However, the real question before the SCNC Board was not whether Michael was a “pain in the ass,” as one Board Member claimed, but did Michael cross the line on several occasions and violate its code of conduct? 

I will get to that.

If last night’s meeting proved anything, it was how ill-equipped and unprepared neighborhood councils are to deal with issues of conduct.  I imagine many NCs would have struggled with compiling a removal motion and acting on it; SCNC should not feel alone.

The starting point of the process was flawed. The Petition for Removal is required to present the reasons in reasonable detail.  Here is what it stated:

  1. Failure to conduct himself in a professional and civil manner at all times as a representative of SCNC.
  2. Failure to treat each member of the SCNC Board with respect at all times.
  3. Engaging in verbal attacks and accusations on SCNC Board Members.
  4. Using language that is abusive, threatening and/or potentially slanderous.
  5. Failing to present information truthfully, and knowingly misrepresenting, mischaracterizing and/or misquoting information received from others.
  6. Placing personal interests before the community’s interests.

In my view, the petition amounts to generalizations.  I can tell you from my experience as a corporate manager that an employee performance review that failed to cite specific instances would not hold up in any proceeding.

The SCNC owed Michael a specific list of instances in advance to allow him time to adequately prepare his challenge.  What occurred was a rambling, disjointed airing of grievances by several Board Members.  As a result, McCue was forced into a position of mounting extemporaneous rebuttals, a situation that was sure to elicit emotional responses from him.  And it did. 

Actually, very few details were disclosed in the course of the evening.  It was as if the Board Members assumed all the participants were fully and equally knowledgeable of McCue’s alleged misconduct.  That is a very dangerous approach to take when someone’s reputation is on the line.

It is ironic that the issue described in most detail was not even covered by the general points in the petition.  Much was said about McCue’s job performance as a committee chair – not holding meetings, being late in rolling out a video on leafblowers, all of which he rebutted.  Failure to perform his duties was not mentioned in the petition.  Ben Neumann (SCNC President) should have disallowed that portion of the discussion.

As someone who has never attended a SCNC meeting or had first hand knowledge of the conduct issues presented, I was not swayed one way or the other by either side’s arguments.  It was mostly “he said, she said.”    Other than the petition and an e-mail from Ben Neumann to the SCNC Board, the thread of which included a controversial e-mail from McCue, there were no other documents distributed to the public.

The e-mail from Neumann contained this paragraph:

“As a clarification, many of the procedure-related statements Michael makes in his e-mail are either incorrect, distorted or simply a very subjective presentation of the matter, omitting some important facts and exaggerating others.  As I have stated before, the City Attorney has been informed about this matter from the beginning and all procedural steps required by the SCNC Bylaws have been followed.”

McCue questioned the legality of the e-mail.  Ben Neumann presided over the removal proceedings – should he have expressed his opinion to the entire Board in advance?  Did the e-mail violate the Brown Act?    I can’t answer these questions; they are best left to experts.

I do wonder if the City Attorney’s office reviewed the content of the petition.  As I mentioned earlier, it appears to be too general.  It is difficult to imagine trained attorneys approving it.

Several members of the Board and the audience said it was unwise to remove McCue this close to the NC elections, and his future on the council should be decided by the voters.  I agree. 

There is probably a better than even chance he will win his seat back.  It sets up the possibility of further confrontations which will add to the tension that already exists on the Council. 

There were acrimonious statements from both sides and impassioned remarks from the audience – mostly in favor of McCue.  Many people exceeded the time limit of one minute despite Ben Neumann’s efforts to cut them off.

However, the most unfortunate and shocking comment came towards the end when Lisa Sarkin angrily told the audience that their opinions did not matter.  The audience responded as you would expect.  Even some of her fellow board members appeared to be stunned. Please watch Mr. Cohen’s video in entirety when he distributes it, but pay special attention to Ms. Sarkin’s statement.  Basically, her outburst is no different in nature from what Mr. McCue is accused of.  Whether ill-advised tirades come from McCue, Sarkin or anyone else, they do not belong in a public meeting.

As was pointed out last night by a Board Member, NCs are run by volunteers who are mostly amateurs.  I fully agree.  We stumble and fall in dealing with complex issues.  That’s how we learn.

However, there are some issues that should require professional assistance or intervention.  Last night’s process should have involved the City Attorney’s office in all phases: the framing of the petition, the communication prior to the meeting, and the presence of a Deputy City Attorney at the meeting itself. 

When personal reputations are at stake, you cannot leave that to amateurs and volunteers.

Link to complete video:

http://vimeo.com/11144901

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