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Archive for August, 2011

Whenever I need mindless entertainment to suppress the anxiety of the unscripted drama of today’s news, I tune in one of HGTV’s reality TV programs – Property Virgins

Watching young couples stumble through a home search, worrying more about the color of the paint the current owners applied rather than the structural aspects of the house, provides a false sense of superiority for established veterans of the real world.

The core of the San Fernando Valley will be treated to its own version of the show, but with a political twist. Incumbent Members of Congress Howard Berman and Brad Sherman will go head-to-head in the Democratic Primary for the newly drawn 30th District.

Berman has served in Congress since 1983; Sherman since 1997.  Yet, they are Election Virgins.

Neither one has faced a serious challenge to date.  The upcoming contest is a little like an allowance race in the thoroughbred racing world – say, an event for horses who have only won against competition destined for the glue factory.

The early handicapping sheets might say this about the candidates: 

Sherman – loves speaking to the public at town halls or other open venues.  Conversant on the issues, if not a bit geeky.

Berman – reclusive.  While Sherman faces the public regularly, Berman prefers insulated settings. It is worth noting that Berman has never appeared at Neighborhood Council Valley Village, which meets a stone’s throw from his house.  Sherman made an appearance at NCVV last night.

There are unknowns about the two: how will they handle questions about the economy and unemployment from voters who are becoming increasingly frustrated? 

Certainly, tax reform will be a hot topic.  Sherman, who is a CPA and a former member of the State Board of Equalization, may have the edge over Berman, but does anyone in Congress really understand the meaning of tax reform any more than LA’s City Council Members understand pension reform? That’s one issue I would like to discuss individually with the two gentlemen.

This could be the most expensive race in the history of LA politics.  Money will not be an issue, although  Berman might have the edge in this category with top celebrities hosting gala events on his behalf. Not only will Sherman be running against Berman, he will be facing the Waxman/Berman machine – a partnership that can virtually print its own money and broker deals with the right groups.

For certain, the primary will be the marquee event of Southern California.

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So I traveled almost three-thousand miles from the land of earthquakes to a normally seismic-free region only to find myself within ten miles of today’s 5.8 shaker.

It was felt throughout the South, Northeast and Midwest.  Seismic waves carry far this side of the Mississippi.  The New Madrid earthquake of 1811 proved that. It rang bells as far away as Washington, DC (known as Washington City at the time).

The weather was beautiful today in the Old Dominion.  I had just returned to my client’s office and remarked to some of the staff how this was so much like a day in LA.  My words proved prophetic just seconds later – the building shook and people poked their heads up and peered out their office doors.  No fear; just disbelief.

My reaction was no different from what I would do at home in a moderate quake – I went about my business, especially since the facility was well-constructed.

After a brief evacuation, everyone was sent home.

I did receive some eyewitness reports through co-workers who contacted family members.  Fallen chimneys, foundation damage and broken glass were not unusual as far away as Charlottesville.  There are many brick structures out this way, so reports of structural damage do not come as a surprise.

A construction worker told me he experienced the unsettling feeling of an undulating floor on the sixth floor of a building in downtown Richmond.

There is a silver lining to today’s event.  Scientists should be able to study the seismic wave transmission and extrapolate the effect of a major quake along the New Madrid fault.

So, what’s next?

How about Hurricane Irene bearing down on me? Richmond and DC are in its possible path.

They say bad things happen in threes.

Maybe the Richmond Spiders will lose to Duke the week after next.

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A report issued by the California State Auditor projected that the State Teachers Retirement System will run out of money in thirty years.

Nothing shocking about that, but this report is different from most prognostications regarding the pension crisis.

Most reports focus on the unfunded liabilities of the various public employee plans – many in the tens of billions of dollars. Quite frankly talk of billions and trillions of dollars in deficits do not phase too many people these days.  We are so numb to these astronomical amounts that we accept them and get on with our lives, despite the fact our standard of living will be adversely impacted for a long time to come if they continue to grow.

The state auditor’s report frames the problems in terms that still resonate: years.

Imagine if you were a forty-year-old teacher.  The report should give you pause.  Your retirement fund may be exhausted by the time you are seventy, with reasonable prospects of living until ninety.

Well, you say, a lot can happen in thirty years.  The US economy could do a one-eighty, and surely the taxpayers will be willing to kick in more.

While we can expect some turnaround at some point, don’t bet on a robust recovery when the economy is crying out for major restructuring – less reliance on consumer spending and housing, and more on manufacturing and exports.  Structural change can take decades considering the competition the country faces.

Taxpayers will be reluctant to pay more.  If we have learned anything in the thirty-plus years since Prop 13, voters are averse to approving tax increases for any reason.

What the teachers and other pubic employees must do is come to grips with reality and gradually increase their personal contributions.  In the case of the STRS, the California State Legislature must approve increases in employee contributions. Don’t expect the leaders of the teachers’ union to lobby Sacramento for this.  It is up to the rank and file to step up and seize the initiative from their selfish leaders.

The thirty-year clock is running, but may expire sooner if actual investment returns come in lower that the assumed optimistic rate  of 8%.

Take heed of the message on the banner in the final scene of this classic movie:

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One of the most important jobs of a controller is to project the long-term financial prospects of the organization.

Now, more than ever, that role is of paramount importance.

As I have stated in this blog before, we are not living in our fathers’ economy, yet the City of Los Angeles assumes it will be business as usual – forever. No thought has been given to the city’s balance sheet in the wake of the financial turmoil that has gripped the world since the housing bubble broke.  Indeed, the problems we face today are rooted in preceding decades.  They were just masked by unreasonable assumptions that real estate wealth would continue to grow unabated and that the deterioration of the manufacturing  sector could be replaced by a consumption-driven service economy.

What is desperately needed is a stress test of the city’s balance sheet.  We need to learn what it might look like if investment returns on the civilian and sworn employee pension funds were lower than the 8% return assumptions used today, especially when the Government Accounting Standards Board will probably implement more conservative criteria.

The city will also face much higher borrowing costs in time.

Despite the exuberance of LACERS over last year’s 23% return on investments (bouncing off the bottom), the 10-year return will more than likely be between 5 and 6 percent. However, much of current gain could be offset by what is shaping up to be a bear of a year, with little hope for robust growth in the years ahead.

A drop of even two points in investment returns could result in an increase of more than a billion dollars  in the unfunded pension liability. Even if GASB were not considering tougher measurement standards, common sense would demand that the City Controller would factor them in and prepare a pro forma forecast of the city’s equity over an extended period of time.

But Wendy Greuel lacks the common sense to face adverse developments.  She also lacks the intellectual faculties even if she wanted to.  Don’t count on Dennis Zine to raise the bar, either.

Being a City Controller is not about trotting to the podium to announce the results of performance audits, many of which will never see the light of day in the City Council, or at least soon enough to make a difference.

The job needs to be focused on the financial health of the city, more than ever in these increasingly turbulent times.

Just don’t count on Greuel to deal with it.

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Bong Hwan Kim, the general manager of the Department of Neighborhood Empowerment (DONE), supports a concept requiring a neighborhood council to attain and maintain a 1% turnout of registered voters in order to seat a board.  This is according to an article in Joseph Mailander’s blog.

Council Member Paul Krekorian acknowledged the embarrassingly low turnout evident in many NC elections, but did admit the same is true for all levels of local government .

Neither Kim nor Krekorian mentioned the lack of money available to NCs to publicize and run an election.  The Los Angeles City Clerk was supposed to conduct outreach on behalf of NCs in the last election cycle but did nothing – zip, nada – despite taking $5,000 from each council’s budget for that purpose.

If NCs had a fraction of the money City Council candidates spend on a campaign, they could generate more votes.  Mr. Krekorian should know that. He spent $771,000 to defeat Chris Essel in the special election for CD2 back in 2009 (Essel had double the expenditures).  Twenty-thousand votes were cast, which represented a 16% turnout in the runoff. In the primary, the total was sixteen-thousand ballots representing 13%

It’s not just the lack of money to market an election.  Stakeholders know that NCs are advisory bodies and do not legislate.  It is harder for the average voter to get excited when they know their votes will have little impact on city politics.  The sad fact is most City Council members and the mayor ignore input from the councils on any issue of significance because, unlike public unions and other interests, NCs as bodies cannot endorse or make campaign contributions.

The City Council knows it can suffocate the system by ignoring it and by continuing to saddle the volunteers with a hapless layer of oversight – DONE.  So why not throw another impediment out there?

Instead of proposing a voter turnout requirement, DONE should be pushing for increased publicity for the system by the city.  Of course, there is no money for that unless you eliminate DONE and allow an autonomous board elected by NC members to plan and oversee outreach programs with the savings. There are well qualified members who could put Kim’s salary of $155,000 to better use.

But Kim only knows one-size-fits-all solutions – that without the resources to assist or restructure the most troubled NCs – will lead to the demise of most of the system.

It is bad enough he can barely manage DONE; perhaps he should propose solutions for his own department’s problems first.

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The market rebounded on Tuesday, but way short of the losses it accumulated over the last several days.

Buyers were bargain hunting and may be rewarded down the line with decent gains for their moves.  However, it is unlikely future gains will offset the capital losses, almost all of which will be reported on tax returns this year.

Flashback to Governor Brown’s aggressive revenue projections: about $4 billion in additional revenues were factored in the state’s budget based on robust capital gains related tax revenues from the prior year.

Can we expect the next several months to make up for the recent bludgeoning?

It’s unlikely given the combination of events occurring throughout the world – impending defaults in Southern Europe and Ireland, a slowdown in China designed to arrest an overheated economy.

If capital gains are flat, what about other tax revenue?

Growth in taxes on ordinary income, along with sales and property taxes, are likely to remain stagnant as long as unemployment remains high.

Even if the Chinese continue to spend, along with Brazil and India, the domestic unemployment picture is unlikely to improve.  Even with strong corporate profits, layoffs are likely to persist as companies shift resources to growing foreign markets.

Stimulus spending does not instill consumer confidence, because many of the jobs created by infrastructure improvements – a major component of stimulus – don’t have legs to last beyond a couple of years. Shaky employment prospects do not encourage spending.

So, get ready for more cuts.

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I really wanted to write a post about the unraveling economy and how it could affect California and Los Angeles.  I’ll save that for next week.

The NC system was rocked by the allegations against Al Abrams, until recently the President of the Board of Neighborhood Commissioners.  I have no comment concerning the allegations.  They are personal issues that should have no bearing on the ninety-five chartered councils spread throughout the city.

Unfortunately, some at City Hall may use this disturbing development, regardless of how it plays out, as another weapon against the grassroots organization, as they did with the handful of  crooks who stole hundreds of thousands of dollars from under the nose of the Department of Neighborhood Empowerment a few years ago.

Yet, these same downtown dons show no emotion or outrage with the mayor when departments reporting to him are implicated in charges of  bribery, sexual harassment and incompetence.  They look after their own….. and the neighborhood councils are not part of their city families.

The neighborhood council concept was born out charter reform following the failed secession movements of the Valley, Hollywood and Harbor areas of the city. The charter change was a bone thrown to the disaffected residents who supported breaking up the city.  It was a bone with no marrow.

Yet, that did not stop highly motivated activists from making the most of the meager offering.  From the defeat of  Measure B to the termination of the red light camera program, NC members have used the system to challenge the establishment responsible for running our city into the ground. Even the existence of a Board of Neighborhood Commissioners controlled by the mayor and the ineptness of the Department of Neighborhood Empowerment could not suppress them.

There is so much more NCs could do if they were allowed to be governed by their own.  For one thing, an oversight board elected by NC board members would clean up the system – and there is cleanup needed.  DONE has ignored non performing councils (for example, 30% have not even bothered to submit a budget). Board members from functioning councils would not tolerate slackers.  They know that dysfunctional bodies hurt the brand and would not hesitate to take appropriate action combined with an offer of assistance. If necessary, an empowered, autonomous oversight board would cut off funding in part or entirety for wayward councils.

If not an autonomous board, a conservator for DONE should be established to restructure the department and train the staff.

So it’s either a crossroads, where one direction eliminates DONE’s authority and most of the department and another restructures it into an effective source of support, or the off-ramp – where dedicated NC members decide to bail out of the traffic and go home.

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