Archive for September, 2013

Conalysis: the result you get when a con man performs financial analysis.

The city’s chief administrative officer (CAO) Miguel Santana is a bright guy with a penchant for running numbers that please his bosses rather than enlighten the public.

I listened to Santana at the neighborhood council budget advocates session at the Congress of Neighborhood Councils on Saturday. He started off whining about Moody’s approach to ranking the city’s pension liability as the fifth worst in the nation among local governments. Our pension liability measured 325% of annual revenue. Chicago topped the list at 678%

CAO Miguel Santana, LANCC President Terrence Gomes and Controller Ron Galperin at NC Congress.

CAO Miguel Santana, LANCC President Terrence Gomes and Controller Ron Galperin at NC Congress.

According to Santana, Moody’s use of the entire liability as one of the measures was unrealistic since it is not due and payable now. He said if the lending industry followed the same approach, very few people would ever get a loan when the burden of their full debt loads is considered.

Rubbish. It’s apparent Santana does not work in the real world or he would know how long-term liabilities are evaluated in the loan underwriting process.

Let’s say you were applying for a mortgage loan. True – the bank would treat the new loan amount as a liability in determining your net worth, but new annual payments would be calculated and compared against your income. If your income could absorb the payments and still have enough left to cover living expenses and other obligations, the loan will probably be approved, assuming there were no adverse uncertainties on the horizon. The loan balance is more of a means to an end, not the end itself.

It is important to relate the city’s outstanding pension liability to income, as Moody’s did. The liability can be converted to equivalent annual payments which can be compared against annual revenues. Currently, the city’s share of pension contributions is equal to 18% of the general fund. They represented a mere 5% in 2003. Revenues will increase and decrease over time, but the pension liability will grow steadily and absorb an ever-increasing portion of the budget. There’s trouble ahead and Santana should embrace Moody’s work and use it to push for real pension reform – not the nibbling around the fringes the city has been doing.

Santana’s view of the pension liability as irrelevant to the poor ranking of the city’s employee pension plans is, therefore, nothing more than whistling in the dark. The obligation is relevant, it is growing…and it is not going away.

Santana also said all financial scenarios are academic, and I agree with him. What I stated above is academic.

However, you cannot cherry pick an analytical approach to suit your specific needs. You have to be consistent. He doesn’t get it.

In arriving at purported savings of $3.9 billion from the deferral of raises for DWP workers under IBEW Local 18, Santana took the same approach as Moody’s did with the pension rankings. Both rely heavily on present value calculations. The raise deferral savings are derived from taking the present value of the hypothetical savings over the next thirty years. The pension liability Moody’s used is calculated in much the same way. Santana wants to ignore the logic when it hurts the city and use it if it helps. As I told him at the session, you can’t have it both ways.

Actually, Santana was off base in forecasting any wage deferral benefits beyond the next round of labor negotiations with the IBEW, which will occur four years from now. A new deal could very easily offset any of the benefits in the current one. But why would he want to burden the public with that thought when he could claim an “academic” savings of $3.9 billion?

Con men have been misleading the public for centuries by playing it fast and loose with analysis and denying the obvious. That’s what our CAO is doing. He gets paid to do it – by us.

Controller Ron Galperin might want to keep an eye on him.

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The campaign to replace termed-out Los Angeles County Supervisors has run largely under the radar even though the election is now just nine months away. The L.A mayoral race sucked up the headlines for a year or so, then the IBEW contract controversy took center stage. Add to that, potential supervisorial candidates have stayed on the sidelines waiting for the fallout from the mayoral election.

But things are heating up as quickly as when Bert sensed the arrival of Mary Poppins: “Wind’s in the east. Mist comin’ in. Like something is brewin’, about to begin.”

And the campaign might be “something quite atrocious,” especially in Zev Yaroslavsky’s 3rd District.

The Third District, Los Angeles County

The Third District, Los Angeles County

As of now, the only two announced candidates are Sheila Kuehl, a former Assembly Member and State Senator, and former Malibu Mayor and City Councilwoman Pamela Conley Ulich.

Kuehl has already raised $250,000, probably enough money to discourage most lesser known candidates from entering the contest, but not enough to discourage bigger names who are veterans of high stakes races.

One of the potential candidates is Wendy Greuel. Her supporters are apparently urging her to run.

If Greuel had not run for mayor, she would have undoubtedly declared for Zev’s seat and would have accumulated a significant lead in money over Kuehl at this time.

But she ran and lost, leaving her with two problems – $680,000 in campaign debt and a damaged reputation, not exactly the foundation of a political force. She cannot afford another loss in such a short time span. It would mark the end of her viability as a candidate for anything but a Neighborhood Council seat.

Let’s say she decided to run, how would she match up against Kuehl?

She certainly has the advantage in name recognition, especially since Kuehl has been largely out of the limelight since she was termed-out in the State Senate in 2008. However, Greuel’s embarrassing mayoral campaign might make it difficult for her to raise money. Big pocket donors like to back candidates who are proven winners. Despite millions of dollars in her campiagn treasury and endorsements from some of the biggest names in politics, including Bill Clinton’s, she crashed and burned. The outcome is bound to give donors pause. They expect something for their money, but losers can’t deliver.

Kuehl has the track record of a winner, serving fourteen years in the legislature, with important committee posts under her belt. She would likely rack up big votes from the southern part of District 3, as far north to Ventura Boulevard and the 101 – some of which was within her old senate seat’s boundaries.

Greuel would need to score big in the Valley, but you saw what happened in the mayoral race. She barely eked out a majority, even in her own precinct. Although you can attribute her lack of success there to Kevin James, Valley voters will not soon forget how she pandered to the DWP’s IBEW 18 union, basically throwing the ratepayers under the bus in return for big money.

Greuel’s gender card strategy was not productive; it will be even less so against Kuehl. Her so-called achievements as City Controller were largely debunked by the media and opponents, so no help there.

Greuel’s candidacy will only add to her debt with nothing to show for it. Mary Poppins would be a more effective candidate. Even Zelda Gilroy.

Talk is that CD2 Councilman Paul Krekorian might run. Apparently, he considered running for City Attorney.

It would not surprise anyone if he did. He has a history of jumping from one office to another every three to four years, so why not from councilman to supervisor? It makes you wonder about his attention span.

If he does announce, Greuel’s chances go from slim and none, to none. Krekorian would cut into what remains of her Valley base. If John Shallman manages her campaign, her chances drop to less than none.

Ulich could play the Kevin James role in a tight race between Krekorian and Kuehl, but would probably not make significant inroads beyond Malibu.

Based on the continuity of her former legislative experience, Kuehl seems to be the candidate who offers the best commitment to actually serve the residents for the long run, rather than use the position as a stepping stone, as both Greuel and Krekorian would probably do.

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The roles of the City Controller’s Office include protecting the assets of Los Angeles and promoting efficiency. To that end, audits are used to test compliance to internal controls and best practices, along with assessing the effectiveness of operational processes.

But what if decisions by the City Council lock the city into a bad deal from the start?

Fait accompli – no amount of auditing will change the end result.

Two recent newsworthy events are perfect examples of this: the giveaway of the Encino fire station to an Armenian cultural organization and the IBEW labor contract.

In each case, the Council presented flawed analyses to justify approvals.

The fire station analysis did not offer an alternative to the annual one-dollar lease for the next 50 years that was offered to the Armenian group. At a minimum, an outright sale scenario based on input from independent commercial real estate professionals should have been presented side-by-side with the lease proposal. Councilmember Koretz should have solicited feedback from the Encino Neighborhood Council. Opportunities should have been given to other non-profit groups to make a pitch for acquiring and using the property. Koretz and his colleagues are incapable of thinking along rational economic lines.

The City Council largely justified its approval of the recent IBEW labor contract on a present value analysis of the agreement. A projected savings of $3.9 billion related to a four-year deferral of upcoming raises was announced in the same fanfare as Neville Chamberlain proclaimed “peace for our time” or in the Bush administration’s assurance that there were WMDs in Iraq. All three shared the same flaw – lack of substance – but were presented as if backed by gold.

The fundamental problem with the present value analysis was the duration of the contract. The analysis projected the savings going out 30 years despite the contract’s 4-year life. After four years, all terms would be up for renegotiation, which would render any prior assumptions worthless.

These types of instances demonstrate the need for Controller Ron Galperin to expand the role of his office.

It is important that city residents are protected from overly optimistic or misleading projections. City Council members are politically motivated to push certain deals. We need the controller to review their assertions before a vote… and in time for the public to weigh in.

The $3 billion Save Our Streets bond is on the horizon. Don’t count on Mitchell Englander and Joe Buscaino to be straightforward with the numbers used to justify it or who will cover the debt service.

The people deserve independent, unadulterated analysis; not the work of spreadsheet jockeys doing the bidding of political hacks.

Let the people’s elected watchdog review the assumptions and alert the public to the bad math too often used to justify deals.

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There’s an expression golfers use: you drive for show, but you putt for dough.

When it comes to Syria, both Vladimir Putin and President Obama have been doing plenty of driving, but very little putting.

Obama’s bellicose stance has lacked support among people in the United States and the west in general. In other words, he is playing the role of a paper tiger.

Putin has been all talk and no action while raising the specter of further chaos that would erupt in Syria if the U.S interferes militarily, but he has offered nothing to deal with the mess as it exists. Nothing until now. Give him credit for playing off of Secretary Kerry’s extemporaneous remark about securing Syria’s chemical warfare arsenal.

As Kerry has suggested, it would be a tough, at best, to round up and destroy Assad’s stockpile of poison gas, especially in the middle of a civil war where the Islamist/Al Qaeda faction would love to get their hands on some of it for future use. Transporting the gas through contested territory would provide an opportunity for the rebels to seize some of it.

It does not help that Obama wants to tie the proposed deal to the use of force if it does not succeed or amounts to a sham. It is not just a matter of an empty threat – or else the effective end of the Obama presidency if he pulled the trigger without Congress and the people behind him. This is a perfect opportunity to allow Putin to put his money where is mouth is. The United States can use moral suasion, not a missile strike, to pressure the former KGB hack to do good instead of being an obstacle in the UN Security Council. If he doesn’t produce, it will be his reputation, his international credibility that suffers.

If Obama insists on the threat of an attack and the deal collapses, Putin can blame the failure on the use of extortion by the United States.

Regardless, the killing will continue no matter what happens.

So let Putin take the pressure putt.

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Up until the disaster in Benghazi, Libya, President Obama was doing as good a job as any president could have in the Middle East.

He downsized our presence in both Iraq and Afghanistan without endangering the security of the United States or exposing our troops on the ground to undue risk. To boot, he ordered the raid that whacked Bin Laden.

He also wisely resisted getting too involved in the bitter sectarian/secular struggle in Egypt, which would have led to a no-win scenario as far as US foreign relations go.

Our intervention in Libya was risky but at an appropriate scale and helped bring down one of the biggest thugs in that region, Maummar Gaddafi, who was responsible for the deaths of 270 people in the bombing of Pan Am flight 103 over Lockerbie, Scotland.

But Obama dropped the ball in Benghazi. Security was totally inadequate. It was a dangerous place at a dangerous time. You don’t put people in Fort Apache without an ironclad plan to rescue them in a hurry, if necessary. There was no excuse for limiting protection to lightly armed security officers. It was gross negligence not seen since Les Aspin, the first Secretary of Defence in President Clinton’s administration, declined to provide armored support and heavily armed helicopter gunships to our troops in Mogadishu, Somalia in October 1993. 18 US Rangers were killed and 85 wounded in a gunfight where just a few tanks and modest air support would have prevented most of those casualties.

Aspin tendered his resignation soon after Mogadishu. Bill Clinton was only too happy to accept it.

Neither Secretary of Defense Panetta nor Secretary of State Hilary Clinton offered to resign after the tragedy in Benghazi. Their ultimate departures were planned and had nothing to do with the turn of events that resulted in the deaths of Ambassador Stevens and three others. The administration seemed more concerned with the presidential campaign than affixing responsibility for the poor decisions of either Panetta, Clinton or both.

Syria is now in Obama’s sights.

I wrote about the conflict earlier, before deadly chemicals were used against innocent civilians.

At that time, I expressed my deep concerns about getting involved. My position has not changed since 1,400 people were wiped out by the gas attack. There are no good guys in this fight, although a “moderate” faction is in play, no one can vet just how moderate it is.

Regardless, whoever wins – if there is even such a thing as winning – will still face unrest and violence from the remaining elements of the other factions. Does anyone think Al Qaeda will rest if Assad is booted out or the moderates seize control? Do you think the Russians will end their support of Assad and his faction?

We have as much chance of affecting the regime in North Korea as we do in Syria. Just as China holds the cards in North Korea, the Russians can deal aces to Assad whenever necessary.

To make matters worse, Obama backed himself into a corner with the “red line” statement he made last year, then tried to re-frame it in the context of the post World War 1 treaty barring the use of poison gas. This is an excellent example of moving the line for political expediency. It diminished the integrity of the president.

For the record, the Geneva Protocol, signed in 1925, while banning the use of gas, does not obligate any nation to take action against one that does.

So, why should the United States take action, especially if the end result will leave gas stockpiles untouched and Assad unharmed?

Russia will provide whatever it takes to replace or repair damage to Syria’s military capability.

If we were to take any action, it should directly target Assad. He is Bin Laden in a tailored suit. Yes, Russia and Iran would scream bloody murder, but it would send an effective message rather than lobbing cruise missiles at traditional military targets.

To Obama’s credit, he is asking Congress to approve a course of action (yet to be clearly defined). But I wonder if he would have taken that step if it had not been for the British House of Commons recent vote to oppose Prime Minister Cameron’s support for military action?

The president’s handling of foreign events is throwing away the international credibility he built up in his first term. He could well become the laughing-stock of the world’s leaders.

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