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Archive for January, 2015

State Senator Bob Hertzberg didn’t wait long after taking his oath of office to make a splash in the state’s  political scene.

He introduced SB8 – the Upward Mobility Act.  The name is more of a euphemism than a meaningful title.

Purportedly, his proposal is designed to stabilize the state’s tax revenue, a highly desirable goal. However, one would expect a somewhat revenue neutral effect from a plan marketed as a means to provide more steady and predictable income for the state. But Bob’s plan is designed to increase revenue by $10 billion per year. In other words, it is less a stabilization plan and more of a tax increase.

It begs the question: what segments would be hit by the tax and for how much?

Since it is a mixture of regressive sales taxes on most services and a general reduction in personal income tax rates, there will be a mixed bag of results.  Bob further muddied the water by saying the bill “examines the corporate tax structure to incentivize both business investment and the payment of a decent and reasonable minimum wage.”

Examines? What meaning can one draw from a weasel word like that in the context of the subject? In this case, it implies a plug which will enable the state to increase revenue to $10 billion, or whatever level is ultimately targeted.

In other words, SB8 is a very open-ended and unpredictable proposal from the taxpayers’ standpoint.

I hoped to get some answers from watching Conan Nolan’s interview of Hertzberg last Sunday on NBC. None were provided. Bob did not offer any explanation, but Nolan did not even bother to ask what groups would bear the brunt of the $10 billion increase.

Certainly, Bob must have the information at hand.  After all, when you toss out a number – especially a large amount – there is usually some math and logical assumptions behind it – maybe even a financial model in an Excel spreadsheet!

The only thing our Senator has disclosed is how he would apply the money, which leads me to believe he has not got a clue as to how the tax increase will be apportioned, only that the tax structure will be manipulated in a manner to produce the desired revenue.

Bob said a new structure is necessary to power a 21st Century economy.

All well and good, but he defines that economy as based on the information and services sectors.  They are very important drivers of future growth, but his dismissal of manufacturing’s importance is extremely shortsighted. Too bad, because although it has diminished, manufacturing accounts for 25% of the state’s economic activity while employing only 8% of the population. It would appear there is room to grow this very productive sector. And believe me, productivity equates to more taxable income.

We need diversification to help create stabilization. Our dependence on the service sector is one of the problems we face today.  Many service jobs do not pay well and lack career paths.  Manufacturing jobs are ideal for middle-class workers who lack advanced technical skills needed in the information sector, but who are adept at mastering production processes. No tax strategy should be formed without diversification in mind.

Hertzberg wants input, but it would help if he were more transparent about the cost of SB8 to the taxpayers. He also needs to come clean and refer to it as a tax increase.

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The Playa Vista Tech campus is an example of an effective model for creating business activity. It acts as a magnet that attracts cutting edge firms in the industry.

But will it create real growth, for both the city and the region?

Can this approach be adapted to blighted areas, long neglected by the city?

Mayor Garcetti made much of Yahoo’s announcement that it would move from Santa Monica to Playa Vista. He was particularly happy about the 400 jobs that came with it.

Really, though, these are not new jobs. They are coming all the way from far-off Santa Monica. Many of the employees probably live within the Los Angeles city limits and are unlikely to move from their present residences or change their shopping habits. Ultimately, some may choose to move to new housing in or near the Playa Vista complex, but that largely amounts to shuffling people around the region.

Yahoo is undoubtedly already paying Los Angeles business tax to some degree for its Santa Monica operation. Therefore, the business tax bump the city will receive may not be as significant as expected.

It is important to note that Yahoo is not moving its Burbank office. Burbank still beats Los Angeles for being business friendly.

Who will fill the space in Santa Monica left behind by Yahoo?

Of course, no one knows. It would be great if a replacement arrives from outside the region or state, but it is more likely to come from the city of Los Angeles, offsetting much of the advantage the city earned from the Yahoo move.

What we need to know is the composition and characteristics of the tech center’s new occupants. Is the mayor focusing on net new business for the region, or is he simply attempting to fill the campus with any tech company, from anywhere? The former provides definite benefits; the latter more or less shifts the economic impact in our regional economy, to the extent businesses are drawn from the local market.

It would help if Garcetti would share his objectives and ask for an independent analysis laying out the targeted net effect of the tech center for the city. Progress could then be tracked against the forecast. If the strategy just relocates existing businesses in the region, it is time to return to the drawing board.

Regardless, the basic concept is sound as long as it promotes real growth wherever it is implemented. It is also important to design clusters that cater to the middle class.

Why can’t the strategy be used to inject life into blighted sections all too prevalent in other parts of the city? For example, how about Valley Plaza in the East San Fernando Valley?

I fear the tired old mixed-use retail and residential concept being planned for nearby Laurel Plaza will ultimately be applied at Valley Plaza. We do not need another NoHo Arts District in the East Valley. Retail is not an economic engine – at least one that creates good-paying jobs. And the residential aspects do not come close to addressing affordable housing needs.

Let’s be bold and condemn the blocks south of Victory, north of Oxnard and east of Laurel Canyon all the way to the Laurel Plaza holdings. Re-zone the area to industrial and do whatever it takes to attract manufacturing. We can offer incentives just as the mayor did for Yahoo.

Los Angeles should look to Reno, Nevada for inspiration and ideas. The Biggest Little City has been on a roll these last few years, attracting Apple, Tesla and, just recently, Switch. Not only will these companies add billions of dollars to the Washoe Valley/Northern Nevada economy, many of the new jobs will be of the solid middle-class variety, the very type of jobs that are needed here to relieve unemployment among semi-skilled and skilled workers who were displaced by the recession.

High tech jobs are very desirable, but the city appears to be fixated on them at the expense of the middle class labor force. An unemployed manufacturing laborer will face a tough time, if not impossible barrier, to land a job in a tech cluster similar to Playa Vista’s.

We need to encourage and foster industries that form an employment path, one that enables workers to develop new and more competitive skills that will help them progress.

Otherwise, we can expect a continuation of the barbell effect the 2020 Commission feared. We will be on a path leading to a work force skewed towards burger flippers and application geeks, with very little in between.

How many burgers can a geek eat?

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I was glad to hear Inglewood is in line for a new NFL stadium. The location sure beats the congested downtown site our City Council and mayor were trying to push.

Any major project – whether a stadium, commercial or residential – carries with it promises of new revenue and economic growth.

The promoters of the Inglewood stadium are assuming that the tax revenue generated would be more than sufficient for the city to reimburse the investors for required infrastructure improvements to the surrounding area.

Aside from whether it is fair to provide any form of assistance to the investors, can we really bank on estimated economic improvements developers and politicians put forth?

It depends in part on whether you believe commercial projects are similar to a zero-sum game concept – an improvement in one area produces an offsetting effect in another.

The answer has much to do with what I call discretionary substitution…..and few segments of the economy are as discretionary as entertainment. And the NFL, as any major sport, is pure entertainment.

For a broad range of residents, available dollars for entertainment are limited. Whether a family goes to Disneyland or a professional football game is a mutually exclusive decision for all but those with deep pockets.

Another factor is availability of free time. Many wealthy people do not necessarily have an abundance of it. They are rich in part because they devote significant time to their business affairs. The average family, on the other hand, is consumed with staying above water; their time is devoted to making ends meet.

As a result, there are trade-offs when it comes to what events or activities we choose to entertain us. To some extent, the discretionary spending deck gets reshuffled with each new product entering the market. There are still 52 cards, and the card values remain the same. The odds of winning at solitaire are unchanged. You substitute a Disneyland ace for one from the NFL.

Price points for major sports admissions are skewed heavily towards high-rollers. Corporations and other large organizations purchase blocks of tickets and use them to entice clients and as perks for key employees. But there are budgetary limits. Most companies want assurances of value in return as they would for any other form of marketing or compensation. It is very reasonable to assume that a company may replace ticket purchases for, say, Kings games for the NFL.

Where does that leave the Kings or other teams?

They will market the available seats to other buyers in the chain, who will make their own substitutions, and so down the line it goes.

What about the client or employee who receives a ticket gratis from a company?

Almost always, the recipients are on their own for concessions – a pretty expensive bite at any venue. That may translate to fewer nights out at a restaurant or movie.

For a new stadium’s positive economic impact to pan out, you need an abundance of deep pockets, something LA has. There are enough wealthy individuals and firms who will spend more than they otherwise would if the NFL comes to town, so I expect there would be an uptick in the region’s net revenue and economic activity if a team is secured.

Adjacent neighborhoods may realize an improvement in quality of life, as would certainly be the case in Inglewood, although there would be hidden costs as well.

But how much will the net benefit be to the local communities and the greater metropolitan area?

It will be important to discount projections to account for the ripple effect of discretionary substitution, as complex an analysis as one can attempt. Although extremely challenging, it is a task government needs to perform if it is to fulfill its due diligence obligations to the public. It is debatable whether local governments make an honest effort, if at all, to understand all of the key ins and outs.

Inglewood will probably come out a clear winner because the ripple effect will mainly hit beyond its borders. Los Angeles – both the city and county – could realize a modest benefit (allowing for costs of managing additional traffic and safety), especially if many fans visit from out-of-town and fill hotels, but little benefit should be assumed to the extent attendance and participation is drawn from the general population.

Property tax revenue would experience a big bump, and state income tax on the players’ earnings would not be chump change (that’s assuming the new team comes from outside the state). But how much of that will filter down from Sacramento to local governments?

Residents and stakeholders have to be on guard for gung-ho assumptions. It is important that voters in communities adjacent to Inglewood scrutinize the deal, too. After all, we share the same freeways, airport, and hotels. Emergency services overlap, too. Residential and commercial streets flow into each other – traffic is a shared liability.

I welcome the return of the NFL to our important sports market, but we better understand the deal to be sure it is as positive an addition to our greater economy as suggested by its supporters.

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A city with $1.8 billion of assets and no internal audit manager since 2011.

Is anyone surprised that an independent audit report has uncovered everything from sloppy accounting practices to outright fraud?

It was recently reported that an employee with Pasadena’s Public Works department had siphoned $6.4 million over the last 11 years. But his methods are what made the fraud more shocking than even the amount of his take.

Preparing fake invoices, altering check amounts and bypassing approval policies are as blatant techniques as a white collar criminal can use. Only in an environment where management incompetence is the norm can this occur, as long as it did and with the degree of damage.

Whenever I read about financial problems, fraud or waste in a government entity, I first look at its financial statements to get a sense of the scope with respect to the size of the organization and its components.

Pasadena is structurally much smaller than Los Angeles and quieter, but its finances are definitely not minor league. The Fiscal Year 2013 Comprehensive Annual Financial Report (CAFR) has assets at $1.8 billion and revenue of $626 million. Not to digress, but over $100 million of pension bonds are on the books. That is over 10% of the city’s long-term debt. $65 million of that was issued in 2011 to plug a funding gap that would have threatened the city’s solvency. This is an indication that the city may not have the brightest bulbs in the ceiling managing fiscal matters.

It’s a large enough bureaucracy to allow wiggle room for an unscrupulous employee in the right position to navigate and bypass procedures. But for eleven years?

The perpetrator, Danny Wooten, was hired in 2002 and held positions with payment authorization delegations. According to the Pasadena Star News’s article, he had a criminal record and several run-ins with his supervisors. Not the type of person you want around a checkbook, yet no one at City Hall seemed to care. It didn’t seem to bother officials to leave the internal audit post vacant either.

Pasadena, as Los Angeles, has a host of special funds, including the one Wooten controlled. These funds are like cells, with limited oversight. You will recall that a Los Angeles special transportation fund accumulated $43 million over 17 years, completely unnoticed by former controllers Wendy Greuel and Laura Chick. The DWP Joint Trusts accumulated $13 million over 10 years without attracting attention from management-appointed trustees such as Ron Nichols.

City Manager Michael Beck’s job is on the line, as it should, but nothing short of his immediate dismissal – without pay – should be tolerated by the residents.

After the District Attorney completes an investigation, a recall effort would seem to be in order for the mayor and certain members of the City Council, mainly those on the finance committee.

Other culprits will be uncovered, some will fit the category of unwitting. Regardless, they will have to go in order to send a message to others to take their jobs seriously.

Lastly, the outside accounting firm of Brown Armstrong should be replaced and a complaint filed with the State Board of Accountancy.

As part of its audit, the firm should have conducted a review of internal controls and tested the degree of compliance. Separation of duties appears to be one policy you could have driven a Rose parade float through. Did Brown Armstrong even look at the bank reconciliations for Public Works?

All of this points to the potential for waste, fraud and abuse above and beyond Wooten’s scheme.

Like the scandal at Bell, this story has legs.

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