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.
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.