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Archive for June, 2016

Controller Ron Galperin has uncovered a gap in the City’s cash management controls.

The audit report, covering the issuance of Proposition O bonds, makes a case for the city to hire a real Chief Financial Officer instead of parsing out finance responsibilities to a mishmash of  executives who appear to have trouble communicating with each other.

Bonds to fund various projects were issued way in advance of the commencement of actual work on projects dealing with water quality.  This finding raised a red flag and called into question the management of projects authorized under other propositions.

The net result was an average balance of $171 million in idle cash from 2010 through 2015 – idle meaning sitting in the treasury earning very little. All the while debt was serviced at higher rates. The negative margin was 1.9 points, which amounts to an average loss of $3.2 million per year. The actual loss was pegged at $54 million.

This is a loss of real dollars; the payments were unnecessary.

There is plenty of blame to go around.  CAO Miguel Santana either failed to perform basic analysis of the cash flows or did not understand the magnitude of the timing.

The Bureau of Engineering regularly failed to reasonably estimate project schedules, which led to the too-early issuance of bonds.

But there is one department that should share accountability – the Office of Finance.

According to the Office’s website:

The Cash and Debt Management Division manages the City’s cash handling policies and practices as well as the City’s relationship with our banking partner Wells Fargo Bank. This Division manages Street Improvement Bonds and coordinates other debt issuance in the City.

Antoinette Christovale served as Director of Finance/Treasurer for 16 years, which happens to span the entire time the bonds were issued. I do not know what her specific duties were, but a treasurer would ordinarily stay on top of debt service and be involved in analyzing the need and timing of bond issues.

It appears that Christovale’s department failed to identify another problem.

In an audit report issued  June 2015, Galperin discovered $500,000 in payments to Wells Fargo Bank for check printing from February 2012 to March 2015.  The City prints its own checks.

Christovale retired in early 2016. She was replaced by Galperin’s Deputy Controller, Claire Bartels.

While the players may change, the organizational structure that led to this embarrassing lack of due diligence is still in place.

Let’s hope Bartels and Santana ride herd on the departments charged with managing debt.

Better yet, let’s fold the Office of Finance and the CAO under an independent CFO with solid credentials. The City is an $8 Billion entity.  Only the most able executive should be trusted with its finances.

 

 

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Some popular media outlets have hyped the BREXIT as either the end of western civilization or the dawn of the golden age for the UK.

But that’s how the media operates. The more sensational the spin, the greater the following.

What counts is how it all plays out in the long-run.

No one is disputing the turbulence in the short-run: what happens to trade agreements, ease of travel among the 28 member states, immigration policies. It is no different from a divorce. Life goes on, only differently, with some friendships extinguished and new ones formed. Some will always remain unchanged. And like a divorce, there will be alimony – but flowing in two directions, in various forms. It will be difficult to project who will pay more.

Even with the UK as a member, the EU has an Achilles Heel owing to the sovereignty and nationalistic bent of its member nations, combined with a common monetary unit used by the nineteen members who comprise the Eurozone. The propping up of weaker economies in the union by the healthier ones, without the power to effectively influence legislation in the former, is like supporting your ne’re-do-well cousin Eddy.

Unemployment is pervasive: 8.9% in the EU and 10.3% in the Eurozone.

Overall, the EU is not only an unhappy family, but a somewhat dysfunctional one.

So one cannot blame the UK for wanting to leave, especially since it has been on its own for over a thousand years.

The patriotic lyrics of “There Will Always be an England” come to mind.

Well, there might only be England. Scotland and Northern Ireland voted heavily against BREXIT and could consider secession. The Jacobites might finally get their wish! Mel Gibson may apply blue paint to his face once more.

But they should be careful what they wish for. Just as the UK is taking a risk by bailing, Scotland and Northern Ireland would be well-advised to consider the health of the EU. In the next few years, other major players may part company with the EU. The remaining members, aside from Germany, will not be powerhouses. The EU could become a German-centric body. Maybe the Fourth Reich? A German hegemony is what some Europeans have suggested is developing, with or without the UK, certainly more likely without the UK and France.

Despite the urge by BREXIT’s most ardent supporters to break as quickly as possible, it will not be that easy. 52% support for the measure is not exactly a mandate. There will be a donnybrook in Parliament that will make our Congressional battles look like spats.

In the end, we need to respect the UK’s process.

Regardless, there will always be a Europe.

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It is no surprise that Assembly Member Patty Lopez advanced to the finals in the 39th AD. More on that later in the article.

Henry Stern’s path to the general election in the 27th Senate District was less certain.

There was no doubt that Republican Steve Fazio would make it, but most figured a Democrat would come in second due to the large field of Democratic candidates carving up the vote. He finished with 26.5% of the ballots cast, behind Fazio’s 37.5%, but well ahead of his chief Democratic challenger, Janice Kamenir-Reznik.

Reznik held an advantage over Stern early in the evening when absentee ballots weighed heavily.

Two key endorsements abandoned Stern for Kamenir-Reznik: former County Supervisor Zev Yaroslavsky and current Supervisor Sheila Kuehl. Despite those two big name defections, Stern prevailed and appears to have a lock on winning the general. Fazio’s support is unlikely to grow significantly to where he can give Stern a run for his money. Supporters of the other candidates are likely to line up behind Stern, who is a senior staff member of Fran Pavley, the termed-out, current office holder.

The race makes you wonder about the value of endorsements from individuals

I had the pleasure of discussing a number of issues with Stern a few weeks ago. He is someone who appears to be receptive, especially on issues with a direct impact locally.

Patty Lopez, the Rocky of local politicians, appears to face a similar challenge to the one which confronted her back in 2014. Her opponent, Raul Bocanegra, a favorite of the establishment, with the backing of the State Democratic Party, and who outspent Lopez 10 to 1, finished the night with 45% of the vote. Lopez garnered 27%.

With that kind of spending and structural advantage, earning measurably less than a majority is unimpressive and points to vulnerability in the general for Bocanegra. He had almost 63% of the vote in the 2014 primary before falling to the Lopez’ indomitable grassroots push in the general, when he ran as the incumbent. He starts off in a weaker position this time around.

If Lopez can attract support from the pool of voters who supported other fine candidates in the primary, then Bocanegra could be in for a long night on November 8. A loss would all but destroy his aspirations to regain a seat anywhere. It is hard to raise money from deep pockets when you have burned through a small fortune in back-to-back losing efforts.

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Trust status report

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A long-awaited report on the status of reforms at the Joint Institutes for Safety and Training, the two non profits who have eaten through over $40M of DWP ratepayer money, was released on May 12th. Go to the link at the bottom of the article.

As with her first report last September, DWP GM Marcie Edwards failed to provide any substantiation of reported progress. This is in direct contradiction of promoting “the purposes of transparency and follow-up,” as she claimed in her cover memo of this latest report.

It only remains to be seen if Edwards, who openly criticized City Controller Ron Galperin’s audit of the trusts, legally changes her name to Marcie D’Arcy.

Before I dive into the report, “Let’s do the numbers,” as Kai Rysdall of American Public Media’s popular Marketplace broadcast says.

Unfortunately, the Trusts have not published their audited financial statements since the end of fiscal year 2013, compelling me to rely on the IRS 990 filings for 2014 data. The 990s are short on detail, but there is enough to point to an increase in cash accumulation of $500K over the previous year.

That brings the total cash for the two trusts to $11.3M, pushing three times the annual contribution they receive from us, the ratepayers. Still no explanation is forthcoming as to what plans there are for this excess funding.

It is worth noting that the trusts are 501(c)(6) corporations.

IRC 501(c)(4), (c)(5), and (c)(6) organizations may engage in political campaigns on behalf of or in opposition to candidates for public office provided that such intervention does not constitute the organization’s primary activity.

It would appear, then, that some of the $11.3M could work its way into political action. The Trusts previously reported they wanted the money for a “rainy day fund.” Not a bad idea, since it would help offset the $4M IBEW Local 18 poured into Wendy Greuel’s failed campaign for mayor.

The rapid growth in prepaid expenses from $75K to $991K over three years in the Joint Safety Institute raises questions. Is it an advance for a major program – or perhaps junkets for the next few years? A reconciliation of the account is in order. Ordinarily, prepaid expenditures tend to level out in most organizations owing to timing (as appears to be the case at the Joint Training Institute).

Edwards’ report pointed to accomplishments, but offered no evidence of what the specific steps were, not even a hint. It alludes to the establishment of formal spending and contracting policies, without sharing so much as a summary; the same for assurances that there would be adequate segregation of duties – a vital safeguard against fraud.

Perhaps the most pathetic admission is the failure to identify duplication of services between the two trusts. At the same time a dedicated manager has been engaged to invest the Trusts’ cash even though the city is capable of handling the role.

No justification was given for the $220K salaries paid to each of the administrators beyond being linked to the DWP pay scale. You would think the jobs could be consolidated.

Edwards did not question any of the assertions.

It is time to authorize another audit of the Trusts by the City Controller. This time, the audit should focus on the reform process and the so-called accomplishments. Otherwise, the report is nothing more than a “trust me” statement.

Would you trust an unaudited report from an organization with an unscrupulous track record?

Trust status report

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