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Archive for February, 2016

Did you see it?

Can’t blame you if you missed it. It is sad when only numbers geeks take notice – nothing wrong with being a numbers geek, though, because they are a rare breed in City Hall.

As reported in the Comprehensive Annual Financial Report (CAFR)for FY June 30, 2015, issued by the City Controller on February 5, 2016, the equity of the City of Los Angeles took a hit to the tune of $7.6 billion, perhaps the most significant single adjustment ever recorded in its history. Most of the adjustment ($6.7B) fell on the Government Activities segment of the balance sheet. That segment went from positive territory of $5.1B to a negative ($.5B).

The adjustment was required under Statement 68 issued by the the Government Accounting Standards Board (GASB). 68 required government entities to recognize unfunded pension liabilities in the body of the financial statements instead of buried in the footnotes.

There was no discussion as to the background and reasoning behind it, nor the ramification – moving the liability from the hypothetical realm to the real world.

It would have been worse had the earnings rate assumption for pension assets been more realistic – say somewhere around 6.5% instead of 7.5%.

As revolutionary as Statement 68 was by requiring recognition of the net pension liability, it failed to rein in the discretion cities have in setting the earnings rate. Only the worst of the worst government pension plans would be subject to the application of a low risk-free rate. Please read my earlier article on the subject.

City Hall likes to suppress controversial news. Encouraging open debate over a delicate political issue, such as public pensions, creates tension.

To be fair, though, most people would not understand the nature of an unfunded liability, but it’s not complicated when you think about it. The liability is not much different than a negative amortization loan – and more than a few people wrestled with one during the mortgage meltdown.

Your loan balance grows faster than the value of the house because the variable interest rate runs higher than the one used to calculate the monthly payment. The balance grows to the point where refinancing is impossible and selling the home requires a short sale.

We are seeing a version of that scenario playing out in the city’s finances. Employer contributions as a percentage of payroll has steadily grown from 19.9% in 2006 to 36.5% in 2015 for Police and Fire, and 14.2% to 20.8% for civilian employees (LACERS) – Source: 2015 CAFR.

Controller Ron Galperin has done an unprecedented job of educating the public about the city’s finances. I particularly like his Community Financial Report, sort of a CAFR-light for the vast majority of the population with no times to review the 400 pages of the mother document.

The CFR covers the $7.6B as a one-liner on page 6.

Ron, whose public outreach should be a model for other officials to follow, needs to take this issue on the road and encourage an open discussion as to what it means to the city’s long-term capability of delivering cost-effective services.

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Apparently the California High Speed Rail Authority does.

Dionne Warwick knows, too, as memorialized by her hit song. But the only music CHSRA chair Dan Richards hears is his own whistling in the dark as he considers the odds against the system’s completion.

The change to give the Northern California terminus priority over Burbank, while designed to deliver an operating segment in a high density corridor sooner than later in hopes of attracting private funding, does not cure the core problem facing the system: very poor prospects for funding the completion of the entire project.

A commuter rail segment serving a specific metro area might make sense from a local transportation planning aspect, but that is not what the voters thought they were approving when they passed Proposition 1A in 2008. They assumed the goal was a complete system serving most of the state.

Former CHSRA Chair and Superior Court Judge Quentin Kopp was quoted in the LA Times:
“This project is nonexistent. There is no private investment. So what they are doing is just whistling Dixie and somehow hoping the public can be fooled. It is over except for the waste of taxpayer money.”

Kopp also emphasized that the project has substantially deteriorated since its passage.

“What they have done in effect is destroy my intentions and those of the voters of California.”

Would you put money down on the construction of a new home if you were uncertain of financing?

You would be throwing your money away.

Likewise, starting construction on any portion of HSR, anywhere – north, south or central – with no external financing in sight beyond the state’s cap and trade funds (which will have to be renewed by the legislature in a political climate that is becoming increasingly skeptical of the deliverables) is reckless at best and likely amounts to misappropriation of taxpayer funds.

The construction plan is counting on at least 50% of its funding from the federal government.

Fat chance. Congress has already stated its opposition to any additional financial assistance beyond the $3.5 billion initial grant, which is also in jeopardy.

There is no interest from the private sector, not that I would expect any at this stage, but making a compelling case for a positive net cash flow from operations for a system that may only be minimally operational by 2025 is a long shot. Confidence in any projection by CHSRA will be suspect in view of the gross understatement of the construction costs used in the promotion of 1A. The Authority made a big deal over revising the estimate down the other day – from $68 billion to $64 billion – but did not frame it in the context of the original projection of $38 billion. A minor oversight.

The provisions of Proposition 1A forbid government operating subsidies in the event of negative cash flows. That will be sure to scare off investors who will depend on a positive margin to assure repayment of the bonds they purchase. It could put the State in a Catch 22. Taxpayers would have to fund the debt service, which would violate the no-subsidy covenant.

Leading European firms with HSR infrastructure development and management experience have expressed strong reservations over the prospects for a positive operating margin. According to a statement made by Spanish company Ferrovial SA, cited by the LA Times:
“We believe it is highly unlikely that the [California system] will turn an operating profit within the first 10 years of operation. More likely, [the system] will require large government subsidies for years to come.”

The CHSRA will continue to ignore common sense, not to mention the stipulations of Proposition 1A itself, and create a modern day version of “The Wreck of the 97” (by the way, this song was the inspiration for the Kingston Trio’s classic hit, the MTA). But it won’t be the poor engineer who suffers. The citizens and stakeholders of California will be stuck with the tab for a fragmented “system” that delivers way less than was promised, at a much higher cost.

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Fred Pickel, DWP Enabler

I don’t know what it is about doctors this year.

There’s a medical doctor running for president with no clue as to how to conduct policy.

Then there is this PhD who does not understand the basics of advocacy.

One’s a brain surgeon; the other needs one.

You can have the best education from the finest school, but it still does not prepare you to engage or inspire people; to create a path for others to willingly follow.

Dr. Fred Pickel, who holds the office of Ratepayer Advocate, with a charge to represent the best interests of DWP’s customers, has only managed to please DWP’s management. DWP general manager, Marcie Edwards, even quoted him in defense of the rate increases coming our way.

Pickel is lost in the weeds and has missed the key driver of the rate increase – the over $1 billion that has been pulled from the utility’s surplus, funds that could have gone a long way to rebuild infrastructure….and the continuance of the transfer, which will assure the need for rate increases in the future.

Adding salt to our wounds, he has been silent over the 10% tax we will pay on the increases.

It is not as if this penalty has been under the radar.

Jack Humphreyville has pounded away on it. His latest article in Citywatch is just his latest take on the subject.

Austin Beutner (former Deputy Mayor and ex-Interim DWP Manager – unfortunately, he did not serve long enough to make a difference) and Mickey Kantor (co-chair of the 2020 Commission charged with identifying reform measures for the city) expressed their strong reservations against taxing the higher revenue which will flow from the rate increases. As they pointed out, none of the tax will be devoted to improving the DWP’s infrastructure and customer service.

An excellent op-ed appeared in the LA Times back in August which said as much, too.

Dr. Pickel may have studied engineering, but he apparently never learned to read.

By avoiding a very public position on the tax, he has shown himself to be an overpaid bureaucrat ($237,000 per year) doing the bidding of the mayor and City Council, whose primary objective is to use the rate increases to embellish the general fund.

There is another culprit in this sad state of affairs – the Neighborhood Councils’ DWP Advocacy Group.

Its failure as a group to take Pickel to task for ignoring the issue and failing to ignite the ire of the public to this travesty is inexcusable. Individual NCs need to step up and insist that their own so-called advocates confront Pickel with his failure to deal with the elephant in the room.

And it’s a charging elephant.

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I recently wrote about the Neighborhood Integrity ballot measure proposal, an attempt to rein in the City Council’s tendency to play fast and loose with general plan amendments, especially when developers contribute to their re-election campaigns.

Just as the ballot measure is a grassroots-driven effort, so is a motion just passed by the Los Angeles Neighborhood Council Coalition.

LANCC’s motion calls on the City Attorney to prosecute illegal short-term rental operators. If he does not, the City Council is to hire outside counsel to do so and charge City Attorney Mike Feuer’s budget for the cost.

Here is the motion:
Whereas, it is now clear that short-term rentals are illegal in Los Angeles’ residential neighborhoods, and Whereas the City Attorney has consistently refused to prosecute short-term rental violations in the City of Los Angeles, for a variety of reasons, Now, therefore, be it resolved, that the LANCC urge City Attorney Mike Feuer to enforce the law as required by the Charter, and immediately prosecute short-term rental zoning violations in the City of Los Angeles.
LANCC demands that if after 60 days of this notice, Mr. Feuer does not start enforcement, City Council take action to hire a private law firm to start enforce procedures and reallocate the City Attorney’s budget to pay for those services.

Is it asking too much for our city government to honor our zoning laws and respect the residents quality of life?

It probably is.

Our officials, along with their business and union allies, will spend untold amounts of money to fight the Neighborhood Integrity measure and turn a deaf ear to the LANCC request. For that matter, the City Council generally ignores the NCs on any significant issues.

If the individual NCs vocally supported both of these endeavors and urged their stakeholders to do the same, they might just get some publicity in the media. While that alone would not be enough to influence policy, it would raise awareness of the selfishness that poses as governance in the city.

Ultimately, I see litigation in our future if the status quo persists.

But a better solution would be to defeat developer-friendly officials at the polls.

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