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Archive for August, 2013

Back in 2009, then City Controller Laura Chick opposed placing Measure B on the ballot because of the flawed review process it underwent. Measure B was the solar energy initiative, the primary objective of which was to enrich the members of IBEW Local 18 of the DWP. Highly paid DWP workers would have been installing solar panels rather than private firms contracted through a competitive bidding process.

We are currently facing another flawed process, and once again the IBEW is at the heart of it.

The proposed labor contract with the already well-compensated union is being hailed as the greatest thing since Thomas Edison invented the light bulb.

While Mayor Garcetti did an admirable job of pushing back, the concessions received were far from what were needed to bring the DWP union’s overall compensation package in line with the market and the other public employee unions. For example, it is beyond belief the IBEW members will continue to receive a free ride on medical insurance and benefit from work rules designed to provide them with windfalls.

What makes matters worse is the outrageous assertion concerning the savings the deal will generate.

Of particular interest to me is the estimated savings of $3.9 billion associated with the deferral of raises until 2016. The amount is the result of a very deceitful present value calculation.

The DWP is assuming the savings through the expiration of the proposed contract in 2016 (a total of $385 million over 4 years), will roll forward for another 26 years beyond the expiration date. The $3.9 billion, then, is a very subjective estimate of the next 30 years’ savings. Yet, it is being trumpeted to the public and the media as if it is rock solid.

Present value calculations are widely used to project costs or savings for medium- to long-term projects. It is extremely rare to see them go out beyond 20 years unless a long-term contract is in play or well-defined parameters are in place (even then, the present value is viewed with an appropriate degree of risk). Otherwise, the variables and risks increase with each passing year, making anything beyond 10 years very subjective, if not pure speculation.

The labor contracts with the IBEW are negotiated every 4 years or so. It’s like playing blackjack with the deck being reshuffled after so many hands – your ability to predict the odds of getting the card you need is greatly diminished.

The same logic applies when it comes to placing a value on the IBEW contract.

The reality of labor negotiations in a turbulent political environment, where politicians look to the public unions for big money, can and will lead to concessions being offset directly or indirectly in subsequent negotiations – a little give here, a little take there. Does anyone believe the IBEW won’t try to recoup what they have conceded? To assume the savings will roll forward is naive at best and deceitful at worst. I’m betting more on the latter.

Just as Controller Chick challenged the Measure B analysis, we need Controller Ron Galperin to review analyses that relate to significant assertions put forth by our elected officials. This deal would be a good place to start.

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The City Council and the DWP’s IBEW Local 18 are projecting savings from the proposed new labor contract of over $6 billion over a 30-year period.

That’s a pretty good trick in itself since the contract will expire in four years. Who knows what the next one will look like. It could be higher, lower or the same. The result will likely be tied to Mayor Garcetti’s polling numbers when the time comes to negotiate.

So looking beyond four years is not just hypothetical, it is pure fabrication.

But let’s play along anyway.

Allow me to focus on the largest component – the $3.9 billion in projected savings related to the COLA deferral.

I addressed it in an article yesterday. At the time, the newspapers made it appear the $3.9 billion represented gross savings over 30 years, with $385 million attributable to the zero raises for the first three years in lieu of the bump scheduled for October of this year. Going with that assumption, I projected the city would have to invest the $385 million at 8.9% for the 27 year period after the 3-year raise deferral in order to achieve that growth. We’re talking Bernie Madoff numbers.

Well, it’s really worse.

The $3.9 billion is the present value of the gross savings over thirty years.

As I said earlier, let’s put aside the fact that the contract is for four years. Let’s also ignore the problems some of my colleagues in the Neighborhood Council system have raised with the $385 million estimate. They have what appear to be some sound reasons, but I want to focus on the $3.9 billion. Hey, why nitpick?

The formula for present value looks really ugly, but the concept is very simple – it is the value of a future stream of payments or savings in today’s dollars. A discount rate is used to convert future dollars to the present. The discount rate depends on individual circumstances.

The most straightforward example of present value is a fixed-rate mortgage. The unpaid balance is the present value of the remaining principal and interest payments discounted by the interest rate.

I ran the numbers using information from the proposed MOU summary. The city’s Chief Administrative Officer used a discount rate of 2.9% (no explanation was made available as to why this rate was selected). No information was provided as to the amounts of the future cash flows, so I assumed they were level amounts over the full thirty-year life.

The result was savings of $197 million per year, or $5.9 billion in total.

You would think the CAO would have provided detailed assumptions and calculations supporting the annual savings. After all, we are talking about billions of dollars.

Nothing.

If the contract is such a good deal and the assumptions are logical, why not share the calculations?

You would think that the leaders of the NC Budget Advocates and the Los Angeles Neighborhood Council Coalition would have introduced a motion demanding answers from the CAO at their emergency meeting at City Hall on Monday. A number of attendees told me there were excellent questions asked by individual members, yet all that was produced was a lame motion, the objective of which seemed to be to avoid upsetting the City Council. We deserve answers from the leaders of the NCBA and LANCC as to why.

The press and media should also demand more detail from the CAO.

Until then, the public cannot evaluate the deal.

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Ever wonder how the City of Los Angeles came up with the estimate of $6 billion in savings over 30 years on the current version of the IBEW contract?

I’m still wondering since the detailed assumptions underlying the calculations have not been released.

So, I took it upon myself to take a stab at the largest component.

According to the Patch, the raise deferral from 2013 to 2016 amounts to savings of $385 million. That’s the net amount we will not have to pay to the well-compensated DWP workforce for three years.

The article goes on to say that the deferral will save $3.9 billion over 30 years.

It’s a very hypothetical calculation that appears to be based on the assumption of investing the $385 million at around 8.9% for the 27 years following the three-year deferral period.

Perhaps there are other factors as well, but the city seems reluctant to disclose them.

Ask yourself, who besides Bernie Madoff would guarantee 8.9% on your investment for 27 years?

City Hall, of course!

If you have access to the city’s underlying assumptions, please share them with me.

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We have a Mayor going to bat for the ratepayers. Eric Garcetti threatened to veto the proposed contract with IBEW local 18 unless there were further concessions. Already, there appears to be some movement – mainly reducing the year 4 raise from 4% to 2% – but not much else seems certain. Regardless, we can thank the Mayor’s determination to deliver on behalf of the ratepayers for the possible concession.

Our City Controller is doing his best to support the Mayor by providing valuable data exposing the excesses of the DWP work force. We owe him our thanks as well.

I wish we could thank the Neighborhood Councils for stepping up.

To the credit of the Los Angeles Neighborhood Council Coalition and the Budget Advocates, they organized an emergency meeting on very short notice to discuss the proposed contract. As you would expect, attendance was anything but robust. I could not attend because, as many Neighborhood Council board members – all of whom volunteer their valuable time, I had commitments.

Unfortunately, the momentum provided by the Mayor and Controller was lost.

After much discussion about the contract, the best the group could muster was an insipid motion.

According to an e-mail distributed by LANCC’s president Terrence Gomes it reads (note that it appears to be a LANCC motion. No mention is made of the Budget Advocates):

At a joint meeting with the Los Angeles Neighborhood Council Coalition (LANCC) and the Los Angeles City Neighborhood Council Budget Advocates (NCBA), a motion was proposed and is being sent to their 95 member certified Neighborhood Councils for review.

The City of Los Angeles should have the best and most efficient Department of Water and Power (DWP) in the country. We encourage and support the efforts of our Mayor, Eric Garcetti, to bring about prompt and lasting reforms to our LADWP.

We have reviewed the available information related to the recent IBEW, Local 18, proposal to modify the current LADWP-Union Memorandum of Understanding.

After due discussion and deliberation, the LANCC recommends to its member Neighborhood Councils that the City Council and Mayor accept the IBEW, Local 18. offer with the caveat that the following concerns are also addressed:

1. There are some steps that must be placed in the agreement prior to implementation of the provisions of this agreement in time to effect the “Freeze of the COLAs” which is due to begin on October 1, 2013.

2. That specific action be started, immediately, to resolve the issues at the heart of the Romero vs. City of Los Angeles litigation. This will include negotiations to maximize the benefits of the establishment of a second Tier in the LADWP Pension Plan and the negotiations to equalize all DWP and City job descriptions and salary scales/common classes.

3. That the Work Rules of the LADWP be submitted for objective review and recommendations by an appropriate non-City-based organization (such as, PA Consulting or the Huron Group, etc.) and the IBEW agree to good faith negotiations within the next 12 months after approval of the MOU to resolve any inefficiencies.

4. That the City and the LADWP concurrently open discussions to reconcile the imbalances caused by the differences between the LADWP Employee’s Health Care benefits and contributions and those of other L.A. City Employees.

There is absolutely no demand for savings of any sort, only requests to “review” or “recommend” analysis or reconcile imbalances.

If this is the best LANCC can offer, its board should resign, starting with Terrence Gomes.

This is the type of motion I would expect from a useless body such as the Valley Industry and Commerce Association (VICA), whose spokesman Stuart Waldman fawned over the agreement at last week’s City Council contract hearings.

What is missing from this motion is a definitive recommendation for concessions well into the nine-figure range before any wage increase is granted in year 4.

What LANCC can’t seem to get into its head is that our City Council Members are not our friends. The Council has done everything possible to put the public unions, especially the IBEW, above the residents and ratepayers.

LANCC only provided ammunition to the critics of the NC system who claim it is nothing more than a debating society.

I would believe that, too, but I know enough members who believe the City Council has ignored us in favor of deep-pocket public union supporters. This motion never would have made it past the Valley Alliance of Neighborhood Councils. It would have been ripped to pieces and sent down the hall to the restroom for final disposition.

I advice individual Neighborhood Councils to ignore the motion and insist on actual concessions beyond what are being considered and to admonish LANCC for its lack of leadership.

Please note: there is a press conference at City Hall tomorrow. Whether it announces an agreement remains to be seen. Regardless, Neighborhood Councils should support only those measures that call for clear and measurable cuts to the present proposal, not a meaningless motion as proposed by LANCC.

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Your utility rates are rising steadily, and will continue to do so.

The city and the DWP have an obligation to the residents and ratepayers to hold the line on operating costs. While rate increases are needed in order to upgrade or replace water and electric infrastructure, every opportunity to reduce expenses must be made to mitigate the impact on us.

We have a Mayor committed to controlling operating costs. Eric Garcetti wants to see more concessions from the IBEW Local 18 in the latest contract proposal. He especially wants to see DWP employees contribute towards current health benefits (they pay zero).

We have a City Controller, Ron Galperin, willing to provide the Mayor with data to support his objectives of reform and cost control in the DWP.

Unfortunately, we have a City Council led by Herb Wesson, who has been aided and abetted by Council Members Krekorian and Fuentes, trying to force-feed us a contract that has been negotiated behind closed doors. The so-called concessions in the contract only delay a scheduled raise to IBEW employees who are already paid at least 20% more than their industry counterparts. The ratepayers are still left holding the bag on employee healthcare costs.

The savings touted by Wesson, Krekorian and Fuentes are hypothetical. It is as if you characterized personal savings as the difference between buying a Ford Focus instead of a Mercedes. In other words, the contract is less painful than it could have been – it does not change the fundamental cost structure of the DWP. Such savings!

Angry citizens appeared before the City Council on Friday to protest the contract. Their arguments were heard only after a dog and pony show put on by the Council praising the deal.

What’s more, the City Council wants to approve the contract by August 30th; the Mayor plans to veto it, but it is likely the Council will override it.

There is an emergency meeting of the Neighborhood Council Budget Advocates this Monday, 7 PM, August 19, at City Hall to discuss the crisis. I only wish I could attend.

You can reach out to your Council Member and urge him to delay the vote on the contract by 90 days and support a city-wide series of town halls to air the details. For those of you in Council District 2, please contact Paul Krekorian at (818) 755-7676 or e-mail his office: Councilmember.Krekorian@lacity.org.

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The e-mails are flying and the Facebook posts are multiplying.

The Sierra Club is predicting environmental disaster for the Tahoe Basin if the California Assembly ratifies SB 630, recently approved by the California Senate 39-0. The bill preserves the bi-state regulation of Lake Tahoe and the surrounding lands through the Tahoe Regional Planning Authority.

TRPA, or Ter-pa as it is referred to by the locals, was created in 1969 when Congress ratified the compact between Nevada and California.

It has been a rocky relationship between the two states over the last few years over the degree of regulation, specifically the impact on the region’s economy. Nevada threatened to pull out of TRPA over policies it perceived as detrimental to the economic health of the region.

Allow me to digress a little.

I count myself as an ardent proponent of protecting the lake and its surroundings. It is my second home and I have spent increasingly long stays in my abode on Nevada’s North Shore. I served as CFO of Sierra Nevada College in Incline Village, NV for a year, returning to Los Angeles this past April.

The college has an impressive environmental resume and is home to the Tahoe Center for Environmental Studies. The center is located in a Leed Certified Platinum building on the campus. I was proud of our partnership with UC Davis, who shares the facility with SNC and conducts environmental studies of the lake.

Outdoor activities are important to the faculty, staff and students. Many organized events were developed around responsible use of the natural splendor we lived in 24/7.

Although surrounded by one of God’s and nature’s finest creations, we were also acutely aware of the fragility of the environment.

If the Sierra Club fears Nevada will favor economic development to the detriment of the environment, the concern is exaggerated.

If anything, Nevada has been a better steward of its 29 miles of shoreline than California has of its 41. The worst damage ever inflicted on the Lake was the development of the Tahoe Keyes Marina in the city of South Lake Tahoe. It destroyed irreplaceable wetlands that filtered tons of sediment and nutrients. By contrast, about one-third of Nevada’s shoreline is encompassed by a large state park that effectively blocks any development over a large portion of the eastern basin.

Incline Village and Crystal Bay on Nevada’s share of the North Shore are as developed as they will ever be. Both towns are managed with environmental sensitivity by the Incline Village General Improvement District. IVGID managed the restoration of the Incline Creek and Third Creek watershed, the largest source of sediment on that part of the lake.

If the Sierra Club were truly committed to protecting the Tahoe Basin, it would support the thinning of the surrounding forest.

To the naked eye, the pine-covered landscape appears healthy. It is a carpet of green.

Upon closer inspection, the effects of the bark beetle are evident. Swaths of trees are showing signs of infestation – their needles are turning brown. Death is certain and the dying trees will become fuel for fires.

The forest is too thick. Besides being conducive to the rapid spread of wildfires, growth beneficial to wildlife has been crowded out.

The single greatest threat to Lake Tahoe is a massive wildfire. It would reverse decades of improvement to the renowned clarity of the water. Local fire districts have done excellent work creating halos of defensible space around the population centers, but thinning of the forest is the only defense against a massive, catastrophic blaze.

Yet the Sierra Club has stubbornly fought this strategy.

Yes, there would be damage to the environment. You can’t cut and remove trees without causing harm, but the damage would be temporary. What’s more, it would have to be done over a long period of time; therefore, the visual and physical impact would be mitigated. I would gladly deal with the damage from thinning over the widespread destruction caused by a fire.

The Tahoe Basin bounced back from the massive clear cutting done during the silver mining boom of the Comstock Era in the 19th Century. However, the new forest was not diverse and was too dense. It will recover from thinning….but in a healthy way.

The Sierra Club should be more concerned with real natural dangers to Tahoe than fear Nevada’s legitimate concern for the region’s economy. What’s more, the vast majority of Californians and Nevadans who live in this special place today, including local businesses, appreciate the importance of preserving the lake. They will not allow any government or special interest to abuse it.

Tahoe Blue 2

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Mayor Garcetti throttled the Darcynian Candidate Wendy Greuel in the recent mayoral campaign. He has the political capital and the public’s support to insist on meaningful concessions in the current round of labor negotiations with the IBEW Local 18 headed by Brian D’Arcy.

Garcetti, or possibly no one, will ever enjoy leverage of this magnitude for a long time to come – or at least until all of the water mains break.

The proposed contract under consideration represents D-Day as far as DWP compensation goes. This is no time to yield and sacrifice the hard-fought initiative won in the last election, passing the advantage back to D’Arcy. It is now, or possibly never.

It does not help matters that Chief Legislative Analyst Gerry Miller is characterizing the current draft as the best deal we can get and recommending its adoption, according to Rick Orlov’s article in Sunday’s Daily News. It’s fine if Miller wants to tell the Mayor that in private, but a public comment from a bureaucrat regarding delicate negotiations before this deal is sealed tips off the union about what some elected officials might find acceptable. D’Arcy has enough friends on the City Council willing to help him without Miller telegraphing inside information.

And why is Miller so hot to get the deal approved? If you believe the independent analysis he is relying on, there would be savings from $5-7 billion over the next 40 years. The contract calls for delaying a currently scheduled 4% salary increase by three years and requiring retirees to contribute a paltry 3% towards post-retirement health coverage (employees pay nothing today).

Wow, delaying a 4% raise when the IBEW 18 members earn 20% and as high as 40% more than their industry counterparts is really saving us. Gerry Miller must have had a lesson in union-speak when he described the delay as the equivalent of a cut.

If anything, we should insist on phasing in salary cuts over a period of years until the DWP is more in line with other major utilities. More should be required from employees for health insurance premiums as well.

Agreeing to the deal would mean an end to the lawsuit filed by the DWP which seeks to recover for the pension obligations of general fund employees transferred to the DWP – another phantom budget cut foisted on the public by the City Council a couple of years ago.

But withdrawing the lawsuit will not produce any long-term savings. The city is on the hook for the unfunded liability associated with the transferred employees regardless.

The savings Miller refers to are illusory – they are comparing the proposed contract to a largely hypothetical scenario – one that could change significantly over the next 40 years as future officials look to the IBEW for campaign cash.

The terms of the contract are reminiscent of Don Fanucci’s offer to the young Vito Corleone in Godfather 2. Basically, if the city approves the deal, it would be like paying protection against worse damage down the road.

That’s not negotiation, that’s extortion. Garcetti needs to face down Don D’Arcy.

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