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Archive for June, 2012

I wrote a blog post about what the Daily News reported concerning an LAUSD solar project funded by bonds.

The reporter, Barbara Jones, quoted an LAUSD official about the costs-benefit relationship of  solar energy improvements to campuses across the city.  If you believe the figures used in the article, the payback for the project would be 245 years.  A little long.

Personally, I think either the reporter got the numbers mixed up, or the official, Kelly Schmader (Director of Facilities), did.  The savings may have been related to just one of the many projects in the program.

It happens.

Even the LAUSD can’t back a project with a payback transcending centuries. Probably.

What was disturbing was Kelly Schmader’s take on the cost-benefit relationship: “Every nickel we spend is bond money, but all the savings are going to the general fund. People look at these and ask, `How can they afford to build projects when they’re laying people off?’ I ask, `How can we not afford them?”‘

Yes, the savings accrue to the general fund, but you would think Ms. Schmader believes that bond proceeds are not real money. 

Any sensible person would calculate the savings net of maintenance and financing.  You do not have to be a Harvard MBA to come to that conclusion.

The debt service on bond proceeds is paid by taxpayers, along with the installation and maintenance. To tout gross savings without mention of the other components is being disingenuous. 

Too many bureaucrats silo themselves and refuse to look at the total picture, especially in this town.

Schmader seems to fit that characterization. She is another reason why the LAUSD cannot manage its finances.

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The Los Angeles Daily News reported on LAUSD’s solar power initiative.

The most recent addition to the school district’s solar applications was the construction of carports with solar panels mounted on top.  Not a bad idea – as the article points out, no drilling holes in rooftops which could lead to leaks. Nice for the cars, too.

“Los Angeles Unified launched its solar-power initiative in 2009, when it installed a rooftop array at Canoga High. By 2014, it plans to have nearly 60 solar projects erected districtwide, including 26 in the Valley. The entire system will generate a total of 21.3 megawatts of electricity, resulting in savings of $350,000 to $400,000 a year, said Kelly Schmader, chief of the district’s Facilities Division,” according to the News.

No mention was made of maintenance costs.

The full project cost was reported as $143,000,000 (budgeted); a net $98,000,000 after rebates.

The article begs the question: what is the payback period?  But the question was not raised by the reporter.

You don’t need to be an LAUSD AP math student to figure it out – it’s 245 years on the net total.  That does not factor in panel replacement, which I suspect will have to occur at least a few times over the next 100 years. There’s also interest expense. I realize it’s not as simple a calculation as that.  After all, utility rates will increase, which should shorten the payback period;  however, I suspect it would still be pretty long.

Perhaps the reporter got the savings wrong, or the facilities director misspoke. In any event, a confirmation is in order.

It would be nice if the LAUSD published its full assumptions to allow adequate public scrutiny.  While disclosures were probably made in the bond offering and the ballot measure that authorized it, it is a safe bet that most people voted yes without thinking of the cost-benefit relationship.  The program was launched in 2009, so the initial assumptions could have changed substantially.

When an organization is as financially crippled as the LAUSD, capital budgeting is more essential than ever. Projects must be weighed against alternative needs.

If the article is correct, we need answers.

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This is not the first time I’ve written about the external audit reports of the City of Los Angeles. You know, those affirmations of sound financial condition issued by the audit firm of Simpson and Simpson.

The city issued yet another declaration of fiscal emergency on June 11.  It’s getting to be routine business, so routine that perhaps the partners of Simpson and Simpson may not take the resolutions seriously.  There was one in 2009, another in 2010 and again in 2011.

Auditors must assess the continued viability, or going concern, of an entity when trends clearly show a deterioration in finances.  Do multiple fiscal emergency declarations constitute a trend? The developing convergence of International Accounting Standards with U.S. GAAP will require the use of greater judgment – all available information about the future must be considered when weighing a going concern warning.

There’s plenty of information about the future state of the city’s finances; little of it good news. Will Simpson and Simpson take notice?

Will this recital in the latest resolution get the attention of Simpson and Simpson?

WHEREAS, even with all the drastic steps already taken by the City to close the Fiscal Year 2012-13 General Fund budget deficit, there is no feasible way to balance the budget and to preserve essential public services, without furloughs and other cost saving measures.

It didn’t seem to phase City Contoller Greuel or Budget Chair Paul Krekorian.  On her website, Greuel puffed about unsubstantiated savings her department claimed to have identified, but did not offer any comments about the fiscal emergency. Mr. Krekorian made no mention of the resolution, but he did gush over what he considered the passage of a “balanced budget.”

The mayor avoids any discussion of dollars and cents on his page.

Maybe they are hoping the auditors won’t notice if they keep it quiet, but something tells me it would not make a difference even if the resolution was posted on billboards.

There are other recitals containing very serious admissions about the continued unraveling  of the city’s financial condition, especially the growing employee retirement entitlements. At a minimum, the audited financial statements should contain considerable disclosures about the state of the civilian and sworn retirement and benefit plans – how about a footnote showing what the unfunded liabilities would be under different plan assets earnings rate assumptions?

This is an issue almost every official in Los Angeles wants to avoid.  I fear local political pressures have made public pensions too hot for the auditors to handle. The mayor only recently seemed to take an interest.  You might say he was several years late and a few billion dollars short. He’s a lame duck on a track to leave LA behind and take up new digs on the Potomac, so his opinion matters little.

So who will step up and level with the residents of our city about the diminishing prospects for a sustainable future?

The current crew who runs City Hall won’t because they are married to the public unions.  Any talk of playing hardball on benefits will cost them support.  The unions will scream about the sanctity of their contracts, but no one cares about the level of service the residents receive.

Jonathan Holtzman and Steve Cikes of the Public Law Group summed up the situation better than anyone in an article posted on their firm’s website:  No one likes to hear that promises cannot be fulfilled. But promises to employees and retirees are not the only promises a government makes; it also makes promises to the residents ― promises that induce them to come to a particular city or county. The failure to live up to the latter promises has had a devastating effect on the public’s view of government and contributes significantly to the death spiral in which we find ourselves. For those who work for or with public agencies, it is a broken promise we ignore at our peril.

Will Simpson and Simpson acknowledge their responsibility to the citizens and users of the audited financial statements and disclose the prospects of the uncertain future facing the city?

It is healthy to change audit firms occasionally to get a fresh perspective.  A long relationship between a CPA firm and a client could adversely impact the auditor’s independence and lead to biased opinions.  This shouldn’t happen – and it usually does not – but when it does, it can be disastrous.  Just think of Enron and Arthur Andersen.

Throw politics into a long time client/auditor relationship and you increase the risk of inadequate disclosure.

Let’s not push our luck.

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Now the SEIU is comparing Mayor Villaraigosa to Wisconsin Governor Walker.

Who woulda thunk that last year?

I cannot blame the mayor for pursuing pension reform, but why has he waited until recently to suggest even modest changes?

The first (and also one of the last) city budget days I attended was early in the mayor’s first term.  He acknowledged the problems posed by the structural deficit created by the city’s inflexible compensation and benefit program, but that was it. He made no effort to deal with it until last year, and then only scratched the surface.  Retirement and health benefits are still on the rise and swallowing more of the general fund.

Villaraigosa did not want to risk aggravating the public unions – it would have been devastating to his political opportunism. 

Now that he is in the twilight of his mayoral tenure, why not take a chance and turn on his supporters?  After all, a future cabinet post might be his if President Obama is reelected, but leaving Los Angeles on the road to bankruptcy without at least giving the appearance of doing something to prevent it would tarnish his image on Capitol Hill.  And it’s image and appearance that defines the mayor; not substance.

I actually feel a little sorry for the civilian union employees of the city.  A little sorry; not entirely sorry. They trusted Villaraigosa and had promise after promise broken. Villaraigosa was to the unions what Bernie Madoff was to his investors.  He offered unsustainable deals and the employees fell for them.

It’s been said time and again – when a deal sounds too good to be true, it usually is.

It amounts to exponential naivety on the part of the unions.  The members should also be asking whether their leaders were complicit.

I do have to credit the unions with their clever public relations campaign – “Villariagosa and Walker separated at birth.”

Maybe the DNC and Obama will get the message that their chosen gavel swinger in Charlotte is a  Charlotte-tan.

The unions can do the nation a service if they knock the stage right out from under ‘the mayor who broke LA.”

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Academia Semillas del Pueblo : a charter school in El Sereno that has been, and still is, the subject of controversy.

According to a story in the Los Angeles Times, the school has performed well below standards and even lags behind schools with similar multilingual immersion programs.

Academia accrued negative publicity in 2007 after a confrontation with a KABC reporter who was investigating whether the school’s cultural mission, which includes an emphasis on Pre-Columbian social and educational practices, had a racist bent. A lawsuit was filed against the radio station and its popular morning host Doug McIntyre charging them with propagating hate speech. The case was dismissed and the plaintiffs were ordered to reimburse KABC for litigation costs.

Recently, the school’s legal counsel sent a cease and desist letter to the Mayor Sam blog  concerning its unflattering coverage of Academia’s administration.

The Mayor Sam blog has a reputation of being irreverent and raucous – especially when it allowed anonymous posts that were often raunchy and disrespectful (that has since changed).  I once took issue with the blog after I read offensive remarks posted by readers regarding a candidate in the 2009 CD2 special election.

However poorly I thought of the comments, I never once condemned the mission of Mayor Sam.  Despite its somewhat outrageous approach to covering local politics, it was a refreshing alternative to the innocuous reporting of the mainstream media in Los Angeles.

There’s nothing wrong with challenging the establishment.  Criticizing the actions of public institutions or officials is as integral part of our First Amendment rights.  Yes, there are limits – for example, you cannot willfully defame another party, which  Academia alleges Mayor Sam did.

However, were Mayor Sam’s criticisms defamatory or was it a classic case of whistle-blowing?

Not having followed any of the developments since the KABC confrontation, I cannot say.

Regardless of what they were, the cease and desist letter did not specifically refute the accusations, it just listed specific comments attributed to the blog that it claimed were potentially libelous.

The school is certainly entitled to defend its reputation, but it is always far more effective to do so by stating clear rebuttals, otherwise it simply amounts to shouting “you’re wrong.”  Threatening what could be construed as a strategic lawsuit against public participation (SLAPP) without first engaging in a debate comes across as overbearing and reactionary. 

We have to be able to challenge our government and public institutions through the media without the threat of retaliation. Academia is at least partially funded by tax dollars through the LAUSD. The way tax dollars are used in Los Angeles, especially by one of the most inept school boards in the nation, requires every whistle-blower we can get.

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There were three races I watched closely on Tuesday; all were barometers of public opinion on the issue of state and local union health and retiree benefits.

In the Golden State, voters in San Diego and San Jose passed referendums by overwhelming margins that will lower the taxpayers’ cost burden for platinum municipal employee benefits.

The recall attempt of Wisconsin Governor Scott Walker was a referendum, too, but it was intended as punishment for the controversial benefit reforms he enacted last year. Walker kept his job by a comfortable margin.

San Diego, San Jose and Wisconsin are disparate in many ways, but they shared a common outcome on Tuesday.

But what was the message?

It was not a referendum on President Obama.  He stayed as far away from the issues as possible.

It was not about Scott Walker either.  He created the conflict in Wisconsin, but I suspect a fair number of voters who cast their ballots against the recall were not doing it because they loved the governor.

It was not even about the public unions per se. Most voters don’t deny the right of employees to unionize.

It was the voters’ realization that public union benefits are growing uncontrollably and will curtail the ability of cities to provide adequate core services. For example, San Jose has had to absorb an increase from $73 million to $245 million in pension payments since 2001. As a result, the city cannot build approved police and library facilities because it cannot afford the operating costs.

The unions cry “unfair” at any mention of higher employee contributions, but they fail to realize that fairness is a two-way street. They see nothing wrong with the residents shouldering an ever-increasing share of their benefits costs.  Voters are learning that the unions’ concept of fairness amounts to selfishness.

The election outcomes shared another characteristic – bi-partisan and independent support for reforms.  It’s not often we see that these days, so politicians should take note.

All of us share one view – we all want clean cities, with decent roads, adequate public safety, nicely maintained recreation facilities, etc.  If public employee benefits  are not reined in, we can kiss all of that goodbye, forever.

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