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.