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Archive for the ‘California and Los Angeles Finances’ Category

The only thing as bad as Congress impulsively passing a tax reform bill, is conjuring a half-baked, equally impulsive countermeasure.

But that is precisely what State Senator Kevin de Leon and Assembly Member Autumn Burke are proposing with SB227 and AB2217.  The latter is a recent development.

Both bills allow taxpayers to donate to charitable entities sanctioned or controlled by the state in return for tax credits on their California returns.  SB227 would have contributions funneled through a state entity named The California Excellence Fund. AB2217 would have qualified charitable entities pass 90% of the donations to the state’s general fund. The entities would issue “Golden State Credits” to the donors, who in turn would use then to reduce their tax liability to the state….and also deduct them as charitable contributions on their federal returns.

The bottom line is that a very high percentage of the donations end up in the state treasury.

The sponsors are counting on the precedent of similar programs in a number of states being condoned by the IRS.  However, many of these are essentially one-off credits and not part of a wide-ranging policy, as would be the case in California.

In the grand scheme of things, existing tax credit donations are relatively small, and were virtually irrelevant under the old tax law.  It did not really matter if one took a charitable deduction in lieu of one for state tax  – the total deductions, all other things being equal, were the same. Note that SALT deductions were not allowed if the taxpayer was subject to the AMT.

But if California, New York and other high income states implement workarounds allowing higher income taxpayers to re-characterize state tax payments as charitable deductions across the board, rest assured the IRS will take a hard look.

If the states do not back down, the issue will end up in the courts and taxpayers who avail themselves of the credits would be at risk of owing penalties and fines if the IRS prevailed.

New York passed a version of the workaround which is similar to California’s (it also passed another that involves a payroll tax…not an approach California is pursuing).

If de Leon and Burke were smart, they would wait to see how New York’s plan is received by the IRS, then modify California’s accordingly, rather than subjecting the state’s higher income taxpayers to audits.  That could be the last straw that will send more of them to Nevada.

 

 

 

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Last Friday, I attended a community breakfast sponsored by Senator Bob Hertzberg at Vitellos in Studio City’s Tujunga Village neighborhood.

Among the subjects he covered was his latest attempt at state tax reform.

Yes, latest.

Soon after he took office in 2015, fresh from a hiatus from the legislature, where he had served as Speaker of the Assembly, he introduced SB8: the Upward Mobility Act. It was a plan to restructure taxes, an admirable objective, except it was not revenue neutral – not even close.   Try about  $10 billion per year in additional tax revenue. At the breakfast, he made a point that I had criticized SB8 for that very reason, a true statement.

But where would the additional revenue come from?  A  component would have applied sales tax to many services, regressive to say the least.

The bill went nowhere.  Even Governor Brown objected to it in no uncertain terms:

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”.

On February 5 of this year, Hertzberg introduced SB993, the Middle Class Tax Relief Act. He assured the audience…and me, in particular…..it was revenue neutral.

I would have taken him at face value, after all, there is very little detail available and it does appear the sales tax on services would not be as far reaching as SB8’s.  But in the same breath, he adamantly denied that SB8 would have increased taxes.

I reminded him of what he stated when SB8 was introduced, “Projected revenues from SB 8 would be in the range of $10 billion that would be apportioned in the following way: $3 billion for K-12 schools and community colleges, $1 billion each for the two university systems, $3 billion for local governments, and $2 billion for a new earned income tax credit for poor families.”

Noble objectives, indeed, but not revenue neutral.

So, the senator needs to define what he means by insisting his latest legislative proposal will be revenue neutral.

If it is, then let’s give it consideration.

But we need to check the math.

 

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Much has been written and said about the City of Los Angeles’ implementation of the ill-conceived exclusive trash franchise arrangement.

The news has focused on the unreliable service, excessive customer bills and lack of response by the haulers who have been granted monopolies.  Most certainly, more will be said.

But there has also been criticism of the mayor and city council for not owning up to their part in this costly fiasco.

Just not enough, and also missing a major point.

Yes, the trash monopolies are costly, but only to the residents,  The haulers are making money…..and so is the city; about $35 million per year in franchise fees.

As I mentioned in a previous article, at a recent meeting of the Valley Village Homeowners Association, the RecycLA representative told us that the fees were needed to administer the program.  I found that extremely difficult to believe and followed up with the City Controller’s office.  You can count on getting a straight answer from Ron Galperin and his staff, and I learned that the fees were going to the general fund, where there are no restrictions.

It really amounts to a virtual windfall to the city as the management of the solid waste program is already funded from the Citywide Recycling Fund, the revenue for which is provided under AB 939, the California Integrated Waste Management Act of 1989. It was the first recycling legislation in the country to mandate recycling diversion goals.

Basically, then, this makes the franchise fee a windfall for the city, if not a backdoor tax.  Even though it is paid by the haulers, common sense dictates it is baked into their pricing structures. $35 million is too much for them not to recoup from their captive audience. It is an incentive to bill the customers for anything related to trash, maybe even the rodents who most certainly dine on accumulated uncollected waste. So the city is skimming off the top at the expense of the already beleaguered commercial property occupants.

At last week’s hearings at City Hall, only Councilman Mike Bonin dared to suggest that the fees be returned to those complexes and businesses hard hit by the price gouging.

To add insult to injury, the haulers reap the cash from the sale of recycled materials, while customers face the prospect of having to pay fines for over-filling blue bins because of missed pickups.  Talk about double-dipping.

Unfortunately, the brunt of the effort to push back falls on the customers. They are the ones who must document the unacceptable level of service, along with erroneous and inaccurate billings, not the city.  They do not get paid for their efforts, unlike our council members for doing little more than threatening the haulers.

Contract law will make undoing the damage a potentially costly affair in itself, especially considering the 10-year duration of the deal.  All the more reason for reserving the windfall and returning it to those who have suffered because of it.

 

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I don’t like surprises that adversely affect personal finances……anyone’s.

The recently approved tax bill had a few, particularly the elimination of personal exemptions and capping state and local taxes.

It’s not as if I am against such measures, but it is thoughtless and reckless to spring them suddenly.  Turning individuals’ finances upside down overnight complicates lives.  Fundamental changes of this nature should be transitioned over years, allowing people time to adjust.  That’s not much to ask for from our government.

It’s not just Congress.

Exclusive franchises for trash hauling were approved by the City of Los Angeles in 2014. The contracts were awarded in late 2016,  (activated in mid 2017), effectively pulling the rug out from under average citizens much in the same way the tax bill did.

While HOAs and commercial owners expected problems, the magnitude caught many off guard. Budgets had to be adjusted and costs passed on to residents already saddled with high housing costs.

If you have followed the news, there were 28,000 complaints filed by residents concerning poor service, and costs double or triple those under their previous contracts. That’s what happens when you replace competition with monopolies.

Seven companies each have pieces of eleven zones.  On a positive note, that is not as restrictive as the five crime families that controlled the rackets in New York City, as depicted in the Godfather. Could there be a little muscle in play as time goes on? Any offers anyone can’t refuse? Tony Soprano, the fictional waste disposal mobster of the former hit HBO series, would be proud.

For the scheduled January 17th  meeting of the Valley Village Homeowners Association, I asked Councilman Paul Krekorian’s office to send representatives from RecycLA and Waste Management, the exclusive hauler for the community. I was pleased to see them there, however, no one from Mr. Krekorian’s own staff attended. It’s worth noting that the Councilman voted for the franchise arrangement, along with twelve of his colleagues.

Please note that the Valley Village Homeowners Association is a community organization, not a condo HOA. Membership is available to all residents.  The Association works closely with Neighborhood Council Valley Village.

There were around 60 people in attendance that night, about a dozen of whom  represented condos, landlords or other affected stakeholders. They did not pull punches with their questions, but did keep them civil.

I was amused by how the RecycLA rep responded when an individual made a reference  to “30,000 complaints” filed.

She quickly responded, “There are only 28,000!”

She added that many of the complaints overlapped as some were received from the same complexes.

I reminded her that for every complaint – on any subject – there are usually several more that do not surface. Also, many renters may not have felt the impact yet, but will when their leases are up for renewal. I fear, though, that renters will not be as organized in their opposition. I think the city is counting on that.

Nevertheless, the fact that 28,000 people made the effort to complain is impressive, especially in a city known for  its apathy on local issues.

It was pointed out that the city did not consider the structural limitations many commercial properties face.  Most were constructed many years ago before landfills and the general environment became issues. For example, there are buildings which use trash chutes and do not have the physical capacity to separate recyclables. Timing of pickups also causes a problem.  The franchisees cannot be counted on to arrive within a reasonable range of time.  Building managers are thus compelled to leave their bins near the streets for hours.  Trash continues to fly down the chutes.  Other bins are now necessary to prevent an unsanitary pile up on the ground, an added cost on top of the higher fees.

I take pride in recycling, but I live in a single-family home, so it’s easy.  By contrast, not enough apartment and condo dwellers are likely to make special trips to dispose of  recyclables.  For all the talk about reducing the need for landfills, the exclusive franchise system does too little to encourage individuals to make the extra effort and use the blue bins. Having once served as a condo HOA board member for a 250-unit complex, I can assure you that effecting change among individual owners is as difficult as herding cats.

When asked who will keep the proceeds from the sale of the recyclables, neither the RecycLA nor Waste Management representative could answer, but promised to get back to us.

No response as of today.  It was not a difficult question.

When asked about how the $35-million franchise fee earned by the city would be used, we were told it was needed to administer the program. I suspect an inordinate share of it will go towards staffing – it is difficult to imagine the program requiring much in the way of new equipment or costly software. If this is true, there must be some well-paid positions.

I followed up with an e-mail asking for a breakout of how the franchise fees would be spent. I received a reply stating RecycLA LA would get back to me. You would think at least a budget would be readily available. After all, $35 million is a lot of money. One would assume there was a detailed plan in mind when the fee was established. I copied City Controller Ron Galperin and Councilman Krekorian on my request.

Others expressed dismay that the city nixed a non-exclusive alternative which would have created a citywide pool of haulers.  This plan was supported by former City Administrative Officer Miguel Santana.  It would have facilitated competition and created environmental benefits, a real win-win.

Awarding the franchises for 10 years under an exclusive arrangement was perceived as a slap in the face, especially given the mercurial nature of the fees charged by the haulers, many of which are in dispute. Who wants to deal with that for the long-term?

Competition would have forced the market to sift through various pricing structures, assuring that the fairest and most sensible ones would rise to the top.  Instead, residents have no leverage, and the 10-year duration will effectively crowd out any new players.

Perhaps the response that rolled eyes more than any other was when we were told the exclusive franchise system was, after all, no different than DWP’s role in managing the city’s utilities.

So, what’s the final score?

The city skims $35-million per year.

The haulers rake in more fees.

The residents pay much more.

A viable alternative was rejected.

What could be wrong with that?

We trust the mayor and City Council know what’s best for us…..don’t we?

 

 

 

 

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As much as the California High Speed Rail Authority would like to hold its own version of the Golden Spike ceremony that marked the completion of the first transcontinental railroad, it is more likely to experience rusty nails driven into its already beleaguered and overly-optimistic business plan.

The latest derailment affecting the timeline – and undoubtedly the cost – is a two-year delay in completing environmental reviews of the project.

This news comes on top of growing concerns about tunneling, not just in the San Gabriel Mountains,  but the Pacheco Pass connecting San Jose with the San Joaquin Valley. Even if the almost 14 miles of tunnel is bored, it could be a budget-buster and throw the project even further behind. In view of this challenge, attracting bond investors will be difficult for this segment; yields would have to be enhanced to generate investment, diminishing the already slim prospects of the system operating in the black.

When voters approved $9 billion in bonds in 2008 to start the project, the measure stated that operating subsidies from public funds would not be permitted.  But we are on the fast track to just such support.  The costs, which will most certainly blow through the current estimate of $64 billion, could easily triple.  Although large overruns are common on major projects (i.e., Boston’s Big Dig was over five-times the original estimate), the public was misled as to this possibility with HSR.

So far, nothing has been delivered according to promises made in selling the concept to the voters – not even close.  Even the train speed has been downgraded.

I happen to be a fan of rail travel.  I used Amtrak and Metrolink to commute from LA to Irvine.  I often thought how much more comfortable and reliable the trip could have been had the trains been able to run on dedicated tracks, free from freight traffic delays.  The current engines can run at 100 miles per hour.  While not high speed, there would be no reason why most commuters from the far suburbs of Los Angeles couldn’t reach downtown in about an hour.

Instead of pouring billions into HSR, a system which will serve a relatively very thin segment of the traveling public, we can relieve much traffic from our clogged freeways in Southern California by investing in the region’s rail infrastructure – far more than could be reduced on I-5 through the San Joaquin Valley by the bullet train.

A similar investment could be made in the Bay Area with the same results.

There would be no costly tunneling in either market.

Our next governor should kill this vanity project.  Candidate Newsom was once on record as opposing  the project.…maybe he will come back to his senses.  His key opponent, former mayor Villaraigosa, has always been for it.

The voters should demand that both candidates explain just how they plan to fund it.

 

 

 

 

 

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In several of my articles, I’ve characterized the City of Los Angeles’ finances as being in a state of virtual bankruptcy.  Pension costs are the key drivers of the city’s unsustainable model. Growing pension costs are plugged by reducing service levels or holding them flat in the face of higher demand.

It appears as if I am not the only one to coin a term for this form of neglect.

An article published by the California Policy Center describes it as “Service Insolvency.

I like mine a little better.  It’ packs more punch.

No problem, though. Service Insolvency gets the point across.

One need not look much further than police staffing to understand what it all means.

The city’s population grew from 3.7M in 2010 to 4.0M in 2017….and the trend will continue.   The 300-thousand increase is the equivalent of a small city.

Violent crime grew 38% over the two-year period ending December 2016, after a period of stability going back to 2010.

Robberies increased 14% since 2015 citywide.

The LAPD ranks have fallen below the 10,000 achieved in 2013.  Its per capita numbers rank way below New York’s and Chicago’s.

Despite the widening gap between higher crime and LAPD’s resources, there has been no serious plan offered to narrow it.

City Controller Ron Galperin’s recommendation to reassign officers from desk jobs to the streets was a good one, and has the potential to free up 450 officers.  But the city requires a force of 12,500 to perform effectively, that’s according to our current police chief, Charlie Beck, and his predecessor, William Bratton. That level requires a bit more than what Galperin’s proposal would cover.

One can argue about the exact size of the force required to maintain an acceptable level of service, but trends clearly support the need for a sizable increase.  Let’s not forget the additional civilian jobs needed to support a larger force and those hired to backfill the desk jobs.

The problem is money; that has always been the case.

To put it in perspective, if you assume the LAPD has a budget of $1B, a 25% staffing increase would add $250M per year.  That’s a very raw number and does not factor in economies of scale. Still, an overall increase of well north of $100M would not be a surprise.

A key factor which limits how much can be budgeted is the city’s share of pension costs. They consume 20% of the general fund budget, up from 5% in 2002. In 2008, the beginning of the great recession, it was 15%. So, despite a robust recovery, the slice has increased in size.

And let’s not get into the unfunded liability, which has also grown significantly since 2003. It is a leading indicator of more financial stress in the years to come. Citywatch’s Jack Humphreville could teach a course on the subject.

It is difficult to increase the level of service while lugging that much baggage.

Former Mayor Antonio Villaraigosa promoted a trash fee hike to pay for an additional 1,000 officers (although it fell far short of that number).  But the public is not going to tolerate a layer of expensive new fees, especially if they disproportionately fall on property owners.

Until City Hall pushes back against the public unions and demands higher employee contribution levels to go towards their incomparable retirement benefits, look for the mayor and City Council to propose fees. Probably not all at once – that would never fly – but over time.  A parcel tax here, a sanitation fee there.

Outsourcing many civilian jobs to the private sector would also help to decrease the benefit load.

Restructuring the labor force and increasing employee contributions are not going to happen given the composition of our current city council and the grip the unions have on its members.

Diminution of vital public safety services will continue until reaction time and effectiveness become intolerable.

And for many, that is probably the case today.

If only they voted.

 

 

 

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If your financial adviser suggested that you invest in an arbitrage arrangement but offered no information concerning the risks, would you?

That is exactly what State Treasurer John Chiang and Governor Brown want us to do with $6 Billion of our money.

The plan to allow Calpers to borrow from the state’s short-term investment pool to pre-pay the state’s contribution to the pension plan is inherently risky. It is a pig-in-a-poke without a thorough independent analysis. Did Chiang earn his degree from the Robert Rizzo School of Management?

According to the Legislative Analyst’s Office: “…the administration is asking the Legislature to approve a large commitment of public resources with insufficient consideration. The administration has provided few of the legal or quantitative analyses that the Legislature should expect when receiving a request of this magnitude and complexity.”

The LAO went on to state: “Instead, the administration plans to conduct this analysis after the Legislature has approved the loan.”

The budget deadline is fast approaching; it all but appears that the proposal is going to be forced through with scant analysis and even less time for the public to voice concerns to their legislators.

The governor is motivated by pure selfish politics, but there is no excuse for someone in Chiang’s position to advocate for its passage. He should know better.

It is possible the deal might not even be legal.  It can be construed as the equivalent of a pension obligation bond, which would be unconstitutional based on a 2003 case.

The administration does not care.  Meeting the June 15th budget deadline is all they care about…that, and papering over an unsustainable pension plan rather than negotiating for structural improvements requiring higher employee contributions.

To make matters worse, the rate the state wants to charge Calpers smacks of a sweetheart deal.  The duration of the loan will likely be eight years, yet a rate approximating short-term US Treasuries may be used (estimated by the LAO to be less than 1%) .  Something approaching the 10-year yield of 2.25% would be a far better match.

But that would make Chiang’s optimism more suspect. He is anticipating a long-term savings of $11 Billion, provided Calpers hits its a targeted return of 7%, overwhelmingly considered way too high by the investment community.

A major market correction would completely destroy his assumptions and make the unfunded liability worse.

You don’t play games when guaranteed benefits are on the line.  Calpers is already doing just that.  It takes an aggressive investment strategy to hit 7%, which translates to higher risk. Chiang and Brown would be raising the ante.

In other words, it is an attempt to bet their way out of the pension time bomb, just as  gambling addicts double their bets in the face of a losing streak.

 

 

 

 

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