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Archive for March, 2016

California has got its own version of a Runaway Train, a 1985 Oscar-nominated movie about escaped convicts who steal a train. It does not end well, as the out-of-control consist hurdles towards a violent end, with the lives of the convicts and their hostages at stake.

The California High Speed Rail Commission is run by the equivalent of convicts who are taking the state’s taxpayers on a ride to a disaster of the financial kind.

Proposition 1A, passed in 2008 by a margin of 5 percentage points, stipulated the following:
the train system would have to be financially viable, enable trains to maintain headways of five minutes in each direction, operate without a subsidy, have all construction funds identified for an operating segment before breaking ground and travel between Los Angeles and San Francisco in two hours and 40 minutes.

It has failed on most of these requirements and the others are in doubt.

A blended system, that is HSR would have to share tracks with slower freight and current passenger service, would make it very difficult to reach the promised speeds, times and headways, not to mention that freight traffic is harder on the rails, which translates to higher maintenance. If you have ever ridden on shared tracks used by heavy freight, smooth is not the word to describe the ride; delays are a certainty.

Only half the construction costs for the proposed first segment from San Jose to the Central Valley are available. Funding is also challenged by the reliability of cap and trade funds, an important piece of the already anemic available capital.

Also in doubt is the avoidance of an operating subsidy from the government. Technically, that would be enough to kill the project as it would be in clear violation of the bond covenants. It was hinted by a peer review committee that the state might have to make financial guarantees to investors in order to entice them into buying bonds backed by revenue, but that would amount to a commitment to subsidize an operating deficit.

Although Sacramento Superior Court Judge Michael Kenny dismissed a lawsuit aimed at stopping construction, the reason was because there are “too many unknown variables.” In other words, he is not convinced that the project is viable at this stage. His decision appears to err on the side of due process, giving CAHSR time to back up its optimism.

But time is running short for CAHSR to put its money where its mouth is. The lawsuits will continue, cost overruns will pile up and public pressure to kill the project will grow, especially in Southern California and the Central Valley.

If not stopped soon, the people of California will be left with only part of a system, serving only a minority of the population, at a cost much higher than promised for the entire system, as promised in Proposition 1A. According to CAHASR Chair Dan Richard,this is what passes as “delivering what the public voted for.”

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There is much to chew on concerning the MTA’s proposed ballot measure to add a half-cent sales tax and extend the current Measure R tax.

I’ll focus on the Valley.

Tunneling through the Sepulveda Pass to allow a rail line is apparently one of the top priority tasks, but it would not be complete until mid-century.

The Orange Line would eventually be converted into light-rail, but that is even further down the timeline. However, in the interim, a reduction in at-grade crossings will allow faster transit times. A light rail route down Van Nuys Blvd to connect the Northeast and Southeast Valley neighborhoods to the Orange Line is another piece of the plan.

As we all know too well, commuting through the pass is a nightmare during drive time (no one says rush hour anymore). But is there an effective alternative to the tunnel? A great opportunity was lost when the car pool lanes were added. They could have been busways. Perhaps they still can, with stations at both ends. No doubt a far less expensive option, but buses can’t carry the volume rail can.

The interim plan for the Orange Line might be the most cost-effective strategy on the menu. Light rail might cause over-crowding at the NoHo Red Line station. It is already a busy place; I can only imagine the mob scene on the platform as light rail discharges throngs of commuters. Ever been on an over-crowded subway platform? I have twice…… and it’s pretty scary as people get antsy waiting for a train to arrive. Several years ago, MTA acted on a recommendation of mine, when circumstances dictated, to stage people at the upper levels until the train-level crowd could be absorbed. That strategy may not be as effective with light-rail feeding the station.

A busway down Van Nuys Blvd would offer most of the benefits of rail without the heavy costs.

Could we trade cost savings from alternatives to expand or improve other transportation modes in the Valley?

All of us need to seriously consider the options and express our opinions to the MTA.

Even if the measure passes, there will still be time to reconsider the plan’s components and insist on the best value for the money.

We don’t want to suffer the fate of poor old Charlie.

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As I pointed out in Monday’s edition of Citywatch, the City of Los Angeles booked a $7.6 billion adjustment to recognize the unfunded pension liability owed to the beneficiaries of its public pension programs. It is an admission that the residents and stakeholders of the city are on the hook for very generous retirement benefits offered to municipal employees. For the record, the adjustment does not cover exposure to virtually free health benefits.

Anyone who follows the city’s finances expected this. All of our elected officials have been expecting this.

I got around to reading the Comprehensive Annual Financial Report, which was issued on February 5th, on last Saturday, February 27th. I wrote and published my article about the very significant adjustment on February 28th. Citywatch picked it up on the 29th….and still beat the city’s press release by a day! I thought I was slow.

It is common- in the interest of transparency – to disclose material adjustments to an entity’s financial position in sufficient detail to stakeholders, whether they are shareholders, investors or, in the case of a governmental unit, taxpayers and others who pays fees for public services. Such disclosures should be timely, too. Almost a full month after the financial statements were released is not timely.

However, worse than the poor timeliness, was the lack of sufficient detail.

The nature of the disclosure was simply that it was mandatory. The Governmental Accounting Standards Board (GASB) issued pronouncement 68 requiring that unfunded pension liabilities be included in the face of the financial statements, identified as Net Pension Liability. The statements, cover letter and subsequent, but late, press release did not offer any explanation as to why GASB issued the new reporting requirement, that it was necessary to emphasize the impact defined benefit plans had on governments’ long-term resources.

Furthermore, the treatment on the financial statements is still not as transparent as it should. According to a white paper issued by California Committee on Municipal Accounting (a joint committee comprised of representatives of the League of California Cities and the California Society of Certified Public Accountants) the Unfunded Pension Liabilities will become a new liability on the Statement of Net Position, appropriately named “Net Pension Liability.”

I challenge anyone to find a line in the CAFR’s Statement of Financial Position that states “Net Pension Liability.”

Instead, you will find “Non-Current Liabilities due in more than one year.”

Only if you compared that line with last year’s CAFR could you determine the impact on the liabilities. So, the most significant, long-term liability is buried. You must dig much further by diving into the notes to get a sense of what occurred – that is simply what GASB 68 was trying to avoid.

As I mentioned, the press release is short on details.

But it also obfuscates the result by aggregating the impact on a city-wide basis instead of the operating segments.

If you break it out by segments, the Government Activities segment took the brunt of the adjustment, putting its equity in negative territory. This is the segment responsible for core services residents depend on for quality of life. It includes public safety, recreation and transportation, among others.

No where is there a discussion of how the Net Pension Liability is likely to grow. City contributions to retirement plans as a percentage of payroll has been growing steadily (see my previous article). That is a reflection of the increasing burden the retirement plans are having on the budget.

Ron Galperin is the best controller Los Angeles as ever had – by far.

If the city elections were held tomorrow, he would have my vote.

However, this all demonstrates how strong the influence politics has on the Office of Controller. No one wants to risk raising awareness over this controversial and costly problem, because doing so could create tensions with the powerful public unions many of our elected officials depend on for their re-election campaigns.

Galperin may not be a beneficiary of such support, but he must work with city officials who are.

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