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Archive for July, 2015

Thoroughly Modern Millie was a Tony Award winner.

State Senator Bob Hertzberg is rolling out his own sequel.  The only problem is the production cost.

Actually, the real problem is we will be the ones bankrolling it if Bob gets the green light. It is the most expensive tax scam concocted, more than California HSR.

I’m talking about SB-8. Bob’s name for it is the Upward Mobility Act.  Who can’t like something with a name like that? Leo Bloom and Max Bialystock would be proud of the deception used to promote it.

Hertzberg claims it is about “modernizing” our tax system, to align it with our service-sector dominated economy of today. He correctly points out that the current approach to taxation was developed back when the goods-producing sector (manufacturing, mining and agriculture) was the revenue driver.

However, his modernization logic is irrelevant and baseless.

Service providers and their counterparts in the goods sector pay income taxes, as they always have.  A dollar of net income counts the same for a service sector firm or provider as it does for a manufacturer, mining operator or farmer. It always has.  The size of each broad industry segment in relation to the other does not impact total income. Income, from whatever the source, is fungible, just like money.

Bob’s energy would be better utilized if he led the charge to cull tax breaks and government programs that have outlived their usefulness, as well as tackle the state’s very expensive employee compensation and benefits.

So why is he blowing smoke by falsely correlating the objective of SB-8 with the ever-changing nature of the economy?

Because he wants your money: $10 billion more per year of it.  No matter the noble purposes he has in mind for the additional taxes, it is going to cost a large segment of the population big time.

Part of the increase, perhaps a big chunk, will come from levying a sales tax on services.  No matter how you cut it, it will disproportionately  burden middle income taxpayers, who would pay it on vital services such as insurance, tax preparation, legal costs to defend themselves in court, communications, car repairs…you name it.  It is not too different in concept from the Stamp Act of 1765.

The sales tax rate has more than doubled since 1962. Let’s make an already regressive tax even more onerous by applying it to everyday services!

But wait!

Bob said there would be a reduction in income taxes across the board.

Let’s see – half of the state’s income tax revenue is paid by the top 1% of earners, according to the state’s Legislative Analyst’s Office,  very progressive to say the least. Perhaps Bob will reduce rates for middle-income taxpayers much more than for the wealthy, but even he recognizes the dangerous volatility associated with relying on the wealthiest segment to carry most of the income tax load. Such a move would magnify that dependence. On the flip side, a proportional cut to all brackets would greatly diminish income tax paid by the wealthiest.

No matter what, middle- and low- income earners, who pay relatively little personal income tax today, stand to benefit the least from an income tax cut. They have far more to lose than gain with SB-8’s strategy.

According to an article in the Sacramento Business Journal, Governor Brown expressed reservations about SB-8:

Politically, the idea of applying the sales tax rate to professional services would look like an attempt to “burden the ordinary folks.” 

The plan “may be logical with some green-eye-shaded accountants, but I don’t know that from the political point of view that is very viable”.

In response, Sen. Hertzberg said the governor had not seen the completed tax proposal and he thinks Brown would change his mind.

“People are making assumptions on limited information and it’s just not accurate. The governor is a brilliant guy … I think he will like the proposal when he sees what it will look like.”

If anyone is to be blamed for limited information, it is the senator, himself. Hertzberg introduced the bill back in December 2014.  That’s seven months ago, sufficient time to share with the public its criteria and mechanism….and maybe even an estimate summarizing how much of the $10 billion per year each segment of the population could be expected to bear. And he hasn’t even briefed the governor despite the wide-ranging implications of the bill?

He is behaving like a car salesman who withholds negative information about the product in hopes of inducing the customer to sign on the dotted line.

At least there is a lemon law providing some degree of protection for the customer who buys a shiny new car.

If SB-8 becomes law, good luck on getting relief.

SB-8 would be the largest permanent tax increase in the history of the state. It would require a voter initiative for final approval, but do not expect transparency in how it would be worded in the ballot. After all, it is all about modernization.

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I’ve watched the Godfather saga many times.

It is very difficult to pick a favorite supporting character from an ensemble cast which is still, in my view, the strongest ever assembled.

One of my personal favorites was Alex Rocco, who played the irascible Moe Green, a Las Vegas casino owner whose character was inspired by Bugsy Siegel.

Alex Rocco passed away at his home in Studio City over the weekend.

A movie about Moe would have made a worthwhile spinoff project – a no-nonsense casino operator with ties to the mob, trying to run an efficient business while balancing the demands of the bosses with the requirements of the Nevada Gaming Commission.

But we did get a spinoff of sorts.

It was Casino. with the role of the casino operator played by Robert De Niro, another of the Godfather saga’s memorable supporting actors.

De Niro’s character in Casino, Sam “Ace” Rothstein, was also based on an actual person – Frank Rosenthal.

The contrast in management styles between Greene (Rocco) and Rothstein (De Niro) would be worthy of a Harvard Business School case study.

Greene’s unabashed tirade about why he slapped Michael Corleone’s brother, Fredo, in front of the casino’s patrons is 180 degrees from Rothstein’s measured defense of his firing of an incompetent brother-in-law of a gaming commissioner.

The results speak for themselves – Rothstein lived a long life; Moe was shot through the eye by a Corleone family hitman while enjoying a massage.

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Anyone can run numbers, including the crowd that passes itself off as management at DWP.

Attendees at last week’s Valley Alliance of Neighborhood Council meeting got to listen to Marcie Edwards deliver a dog and pony show about proposed rate increases, owing to the need to replace aging water infrastructure and increase power capacity.

No one is doubting the need, but the DWP was not in a full disclosure mode and offered a litany of excuses for its failure to address the problems over the years.

The utility has been feeding pablum to the public about its rate increase plan in an attempt to silence possible criticism. Characterizing the proposal as a 5-year plan is insultingly disingenuous. The higher rates will not go away after five years. With 20% of water pipes destined to reach the end of their useful lives over the next 15 years, the rate increases for the water portion of our bills alone will continue for years to come.  It took an astute attendee at the presentation to pull the admission out of Edwards.

There will be debt service on new bonds for both water and power reaching out 30 years from the issuance dates, which will also contribute to ever-increasing rates.

Once again, no one is doubting the need for restorative capital investments.

But since DWP and the City Council have neglected upgrading and replacing delivery and generation systems, yet continued to divert an annual transfer of a bogus operating surplus (currently around $245 million) from the utility to the general fund, it is only fair for the public to demand an end to that process.  A large part of the surplus must be retained by DWP, and the rate increase reduced accordingly, to help fund the vital improvements.

Edwards, as her predecessors, likened the transfer as a dividend to shareholders.  Anyone receive a dividend check from DWP in the mail lately?  Ever?

I reminded Edwards that well-run companies do not declare dividends when they have ongoing, significant cash needs.

She did not understand the question, instead falling back on how much money DWP has saved its ratepayers as a result of the last labor negotiations.

Savings?

I suppose so, in the same sense as when a burglar does not steal all of your valuables.

Also, she had the hutzpah to compare LA’s leakage rate as favorable to other major cities, all on the east coast – much older systems, not to mention they are not located in a desert where the importance of every drop is magnified many times.

When I asked Edwards if anyone in management had been fired as a result of the costly billing system debacle and the pathetic response to correct customer accounts, she blamed the civil service system and the fact she can only hire ten managers on her own.

Almost any CEO will tell you that ten well-picked hires can make a huge difference in any organization.

According to Jim Collins, author of Good to Great, “Start by getting the right people on the bus, the wrong people off the bus, and the right people in the right seats.”

I think Marcie Edwards missed the bus.

Ten competent leaders can establish and enforce demanding standards.  If their direct reports are not cutting it, they can document their shortcomings and make a case for removal, demotion or termination of the weakest links.

Yes, it takes work, but highly motivated leaders are persistent and will rise to the occasion.  Edwards, herself, must step up and support her direct subordinates along those lines instead of throwing up her hands. Her current approach will preserve a culture that rewards incompetence or mediocrity.

As ratepayers, we need to insist on sound management.

If not, the cost of implementing the very critical capital improvements over the next 15-20 years will be far more expensive than necessary.

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Would persons applying for citizenship in the United States through the established legal process be denied if they had committed felonies?

Murder, for certain, would be automatic cause for denial.

Aggravated felonies, too, would very likely result in denial. One should note that some misdemeanors at the state level could qualify as aggravated felonies in evaluating an applicant for immigration.  Follow this link for a partial list of offenses. The bottom line is that federal immigration law has a broader range of offenses in its tool kit to deport immigrants regardless of the path they followed to gain entry to the United States.

Francisco Sanchez, who shot and killed Kathryn Steinle, had seven felony convictions, four of which involved drug charges. He also used a number of aliases.

Owing to his criminal record, he would not have been eligible to enter the country legally under the law. The City and County of San Francisco are complicit, then, in the murder of Ms. Steinle, not to mention all state and local politicians who allowed law enforcement to overlook past criminal activities when deciding to release an illegal alien from custody.

Politicians argue that sanctuary laws are to protect average illegal immigrants who go about their business, and to encourage their cooperation with law enforcement.  Average ones do not commit felonies, contrary to what Donald Trump suggested. They will not be impacted by the deportation of real criminals.  If anything, getting career criminals off the street can only help them.

Our elected officials may quibble over the number and degree of felonies as a matter of political correctness, or maybe even of conscience, when it comes to defining the conditions of sanctuary. It is impossible to fathom, though, allowing someone with multiple convictions – even nonviolent ones – to stay here one second beyond the end of a sentence. Such scum are time bombs destined to explode.

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According to the lyrics from the memorable theme to Never on Sunday (enjoy the trailer), it is OK to kiss in Greece except for Sunday.

However, on this past Sunday, July 5th, Greek voters invited the EU to kiss them. I need not mention the part of the anatomy, though.

Contrary to some extreme views, this does not mean the end of western civilization or the EU, but neither can it be shrugged off by the major trading blocks around the world. The Asian markets have opened way down as of the wee hours of the morning in North America.

There are also adverse strategic implications, not the least of which involves Russia’s ruling sociopath, Vladimir Putin.

Let’s review the financial data first:

Greece’s national debt is  €342bn, including €220bn in bailout funds owed to EU partners.

Payments on the EU debt extend out to 2055, but the lion’s share is due before 2040 and €17bn over the next two years. It may as well be ten times the amount – the Greek banks are almost out of cash.

A switch to a new currency can take any country up to two years with careful planning.  There is no meaningful planning underway and the Drachma would be worth a small fraction of the Euro in any event. All foreign debt is payable in the national currency of the lenders.  Greece would conceivably have to issue trillions in Drachmas to buy Euros in order to liquidate its current debt alone.

Initially, the Drachma might provide short-lived relief, but inflation will be certain to overwhelm the economy.

80% of the economy is in the services sector, and a large portion of that is from government spending.  In other words, Greece has little to sell to the rest of the world.

Tourism, which accounts for 17% of the Greek economy, has been the only bright spot in the crisis. However, Greeks should not count on it if their country devolves into social unrest, a likely prospect.  Tourists will be targeted by thieves for their cash and cards.  Service providers will operate a black market to avoid paying taxes.  Drachmas may not be readily accepted by merchants. Visitors will have to carry wads of Euros, Pounds and Dollars, since ATMs will be unreliable.

The EU nations will eventually be able to absorb the losses from a Greek default, though not without some pain and political repercussions.

The greater risk is social chaos and the possibility it could turn Greece into a haven for terrorists.  Face it, terrorists love to fill a vacuum created by disorder. Also, one cannot rule out armed fighting between extreme socialists and capitalist factions.

A repeat of the Greek Civil War of 1946-1949 would be possible.  80,000 were killed in the conflict.  The Truman Doctrine and Marshall Plan restored stability and stopped the spread of Communism. I am not suggesting that scale of death would occur.  The Greek army would intervene to maintain some degree of order, but thousands of deaths could still result.

Enter Vladimir Putin.

He has already expressed a desire to “help” Greece.

Even though the Russian economy is stretched, Putin has the power and popularity to push his people to make greater sacrifices in the name of Mother Russia. To be honest, it would be a strategic windfall for Russia if it were granted port facilities by Athens in return for financial support. Putin would hold the high ground of the Eastern Mediterranean. Greece would not only cease to be a functioning member of NATO, but become the Mediterranean base Russia always desired. Such a development could leave Ukraine helpless as its southern trade route would be compromised.

Israel would have to sweat, too, surrounded by an increasingly hostile set of neighbors.

We can only hope the Greeks will consider the long-term implications of their decision and not let the “no” vote become a Greek Tragedy.

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