Feeds:
Posts
Comments

Archive for the ‘California and Los Angeles Finances’ Category

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.

 

 

 

 

Read Full Post »

In a recent news release, State Treasurer John Chiang said:  “…the Governor and I are partnering on a fiscally prudent plan to buy down our pension debt using what Albert Einstein once called ‘the eighth wonder of the world,’ compound interest. ”

It’s not Albert Einstein he should be crediting, but Bernie Madoff.

The plan calls for shifting $6B from the state’s short-term investment pool, where it earns less than a point, to Calpers, where it could conceivably earn 7% (the most recent 20-year average).  The difference in earnings could generate $11B over the next 20 years for the financially challenged fund.

The math is theoretically correct, but it is a classic example of papering over a problem.

Just as Madoff used cash from recent investors to pay established clients, Chiang is shortchanging the needs of the rest of the state by denying access to these monies for general purposes.

He is also ignoring the risks of shifting funds from a risk-free pool to a highly volatile investment fund.  As I have stated before, the world economy has undergone major structural change over the last few decades.  Increased competition, which has been generally good for consumers, has also heightened investment risk.  Chiang should know that past performance is no indicator of future returns, especially when the past has little resemblance to the present. Whipsawing is a more appropriate description of Calpers performance in more contemporary times.

Rather than coming to grips with the real problem, that is, insufficient employee contributions to cover very generous benefits, Chiang wants to play a shell game. Yes, even assuming the 5.1% rate for the most recent 10 years, more cash would be generated, but any improvement in returns is lost to the general fund.

Chiang should be considering altering the investment strategy of the short-term pool.  A targeted rate of 1.5 points (about one-third more than  the current return) could be accomplished without undue exposure to additional risk. It would be much safer than allowing Calpers to roll the dice and pray we do not have a major economic crisis.

But regardless, he is re-purposing cash and locking it up at a time when the state has other pressing needs.

Once the $6B is transferred to Calpers, it becomes political capital benefiting only one segment of the state’s population – public employees.

But then, they are who Brown and Chiang represent.

Read Full Post »

Governor Brown is making an appeal to the Trump administration to transfer oversight of environmental reviews of the high-speed rail project from the federal government to the state.

If this strategy sounds familiar, it is.  The City of Los Angeles allows developers to arrange their own EIRs.

Brown has a vested personal interest in pushing HSR.  It’s his vanity project.  It will probably put the state in a position where it will have to subsidize the system, in direct violation of Proposition 1A, as approved by the voters in 2008.

He and his colleagues, along with other politically connected interest groups who stand to benefit from the most expensive folly in history, are hell-bent to complete the project, regardless of the cost and the diversion of funds from far more critical needs.  Do not think for one moment that the state will take an unbiased approach in evaluating the results of an EIR under its control.

There is no private investor interest in the project.  That is unlikely to change even if an initial segment, constructed over the easiest terrain and serving markets with the least possible need, were to be completed. The risks of tunneling through faults in the San Gabriel Mountains, essential for fulfilling the promise of service between San Francisco and Los Angeles, will be too risky to attract sensible investors unless the state were to offer substantial guarantees and establish reserve funds.  Such a move would put California on the hook for losses. Like a subsidy, that would contradict taxpayer protections in 1A.

CAHSR will collapse under its own weight and from voter frustration with pouring more money in what will be a system which grossly underdelivers for the costs.

There is no scenario where it can be built and operated within the limits of Prop 1A.  The sooner the governor and legislature put aside their personal ambition and admit it will be a fiscal failure, the more likely the state will be able to afford far more pressing capital improvements.

There is much work to do; we do not have endless sources of affordable debt and tax revenue. Choices have to be made, and HSR is near the bottom.

Read Full Post »

Illegal sources of income are subject to federal and state income tax; so, why would I object to the City of Los Angeles collecting Transitory Occupancy Tax (TOT) revenue from illegal short-term rentals, such as Air BnB?

In the former case, taxation does not exempt scofflaws from prosecution.  If anything, tax compliance requirements are useful tools to bring criminals to justice or enhance their sentences . If Al Capone were alive, he would agree.

The latter is different – it creates an impediment to enforcing zoning laws.  A cash-strapped city like Los Angeles will not want to bite the hands that feed it.  It is the equivalent of bribery.  Pay to play, and the city will not pursue enforcement of residential zoning codes. The City Council and mayor will drag their feet, if not completely overlook, the protection of honest residents’ right to enjoy their neighborhoods without the adverse effects associated  with revolving door occupancy.

In his annual budget letter to the mayor and City Council, City Controller Ron Galperin weighed in.  He said the city must be “vigilant to consider the potential TOT revenue impacts to the general fund.”

As I read between the lines of his statement, that’s not really an endorsement of the policy. If anything, it is a carefully nuanced assessment.  Ron is the controller and he is required to advise the city on any financial matter – good or bad.

But zoning violations should not be ignored just because the cash generated by the TOT partially mitigates the effects of the city’s reckless approach in managing its budget. Please note that Galperin also emphasized the importance of a prudent and well-balanced budget. Ignoring laws does not meet the definition of prudent.

It’s a good thing that a city-sanctioned, short-term rental scheme did not exist when Scarface Al was around. No telling how much more power he would have wielded in Chicago.

We now face an army of non violent mini-Als, no baseball bats or Chicago pianos, but armed with industry lawyers and plenty of money.

 

Read Full Post »

The first thought that popped into my mind when Governor Brown proposed his gas tax hike was former mayor Villaraigosa’s infamous trash collection fee increase.

You may recall, the fee was hyped as a means to hire 1,000 new LAPD officers.

Less than half that number were hired; the rest of the funds went to overhead,

As I told NPR’s Patt Morrison and the LA Weekly in interviews back in 2008, controls and reporting are insufficient  to assure the proper allocation of taxes and fees.

This is especially true with state tax revenues, which are allocated to various funds, including those at the local level.  At every layer, allocations are made for multiple purposes. Such is the case with gasoline taxes. They are also used to fund mass transit and other transportation projects unrelated to automobiles. Gasoline excise tax revenue is also used to pay the debt service on highway bonds (Brown’s proposal is an excise tax), effectively relieving the general fund of the obligation.

This all makes for quite a trail to follow. Few individuals have the time or wherewithal to do so.

Determining how much of gas taxes actually improve roads is almost a fool’s errand. Politicians know this and use it to their advantage.  Lack of accountability gives them all the cover they need to divert funds.

This much is known: Brown’s plan would increase taxes by $52 billion; $7.5 billion would go to public transportation and another $1 billion for bike lanes and walkways, not exactly what you would call road and bridge improvements.

It also includes a constitutional amendment requiring spending to be limited to transportation projects.  And Villaraigosa’s trash fee was supposed to cover hiring officers.

You can be assured that new definitions of transportation will abound if the proposal is passed. If it fails – and it could – don’t be surprised if it is resurrected.

Here’s an idea: instead of the tax increase, let’s just pass a constitutional amendment requiring all existing gas tax revenue be spent on roads and bridges.  We might then see a major decrease in the maintenance backlog.

Read Full Post »

The Government Accounting Standards Board (GASB) is pretty clear about how it wants state or local governments to report Net Pension Liability. As stipulated by its Statement 68,  on the face of the financial statements, not buried in the morass of footnotes.

But the City of Los Angeles did not read the memo.

A quick survey of the Comprehensive  Annual Financial Reports (CAFR) of a few major cities – New York, Seattle and San Francisco – show compliance.

There are probably a few, besides Los Angeles, who have failed to do so, but weak oversight by GASB is a prescription for sloppiness.

There is no shortage of other professional or authoritative materials on the subject, for example, articles published by the AICPA, such as this government brief.

This is also the second year in a row where the liability was not reported on the face of the financial statements. … and the pronouncement has only been in effect for two years! Although the required footnote disclosures were included, footnotes amplify the contents of the standard accounting reports; they are not a substitute.

Before I go any further, why is this even important?

Analysts, accountants and numbers geeks will know to dive into the footnotes, so who cares if it is not staring at the users on the face of the balance sheet, or statement of net position, as it is also called?

As GASB and others have clearly stated, it is about transparency.

As residents, we are the most important recipients of the city’s financial statements.  We live here and bear the consequences of our elected officials’ decision-making; the financial effects of which are imparted in the CAFR. Even though only a fraction of the residents bother cracking open the CAFR, and those that do rarely get into the footnotes, there is an obligation to provide complete disclosure.  Anything less is implicitly misleading and a disservice.

I would not be as irritated or concerned if this had not occurred before, but suspect political pressure is behind not reporting the NPL as evidently as it should. And that rankles me more…as it should you!

Most of our officials depend on the support of the public unions to fund their campaigns. In return, they receive generous retirement benefits that come at a high cost to the residents of the city.  Shining the light on the $7 billion net liability that has been incurred to support these plans is not in their best interests. It’s much safer to bury it in a line with other long-term liabilities. Doing so does not invite questions.

The NPL is over 50% of the total long-term liability in the governmental activities segment.  It cries out for the specific recognition GASB 68 mandates.

To make matters worse, the footnotes downplay its significance by stating it is not, by itself, evidence of economic or financial difficulties.

Tell that to the city of Richmond, CA, which faces the prospects of bankruptcy.  Its residents are already feeling the impact of diminished services, the result of diverting more of the budget to pay for pensions. Add San Bernardino, Stockton and Vallejo to the list, too.  Others will follow.

In Los Angeles, we cannot afford to increase the police budget to deal with the rising crime rate.

So while our officials avoid the subject, we will pay more for less service.  That’s the city’s plan to deal with the problem.

The City Controller is in a position to educate the public about the dangers of ignoring this bleak prospect. Ron Galperin has the wherewithal and the standing to heighten awareness, but if he is not willing to at least give it the basic recognition it warrants on the face of the balance sheet, where it is more visible, then it is unlikely to get any attention at City Hall.

Galperin has not shied away from auditing waste and abuse, however unpopular that has been among some powerful forces. He is still the most effective City Controller we’ve had, but he must lead the charge to fight the pension cancer, which is consuming our city from the inside.

The NPL is the tip of an iceberg.  Pretending it is not there will only run the city into the rest of it.

Read Full Post »

I had a firsthand look of the chaos bestowed on the population by the passage of Prop 47. As almost all of you know, the measure raised the threshold of a felony and led to the early release of many career criminals.

A neighbor’s house was ransacked and robbed last night.  The family was on an errand for a period of less than two hours, not a long time by most measures, but far more than enough time for criminals to do their deed.

I talked with the LAPD officers who were investigating.  When I mentioned there has been a steady increase of property crimes in the community since the passage of Prop 47, the officer piped right up, “We are seeing an influx of thieves from other states. They know the odds of going to jail are slim.”

There have been steady reports posted to Nextdoor about burglaries in Valley Village.  As president of the homeowners’ association, I am acutely aware of this growing problem, which effects many communities in Los Angeles.  I have lived here since 1986 and have never before seen such a spike in crimes.

Many of the crimes are brazen – carried out in broad daylight.  Thieves have walked all the way up driveways to break into cars, not simply satisfied to target those parked on the street. That takes some cajones…and desperation, a combination that is dangerously explosive and could indicate a propensity for violence by the perpetrators.

It is bad enough that thousands of professional burglars have flooded the streets after early release; we have also become a magnet for out-of-state talent, as the LAPD officer related.

The people of California voted for Prop 47. It was supported by the top elected officials in the state.  It even had the support of New Gingrich!

It is time for the state’s voters to reverse this truly misguided policy.  It will require a new ballot measure, and, in the short run, legislation mitigating the impact of 47.

It is also time to build new prisons.  Instead of selling bonds to construct an extraordinarily expensive  high-speed train, let’s invest in state-of-the-art prisons which have the facilities for addressing and correcting the causes of recidivism. There will always be those who do not respond to intervention – they will ultimately require a lifetime of incarceration, so the capacity must be in place to deal with them as well.

Opponents to this would claim we cannot incarcerate ourselves out of a growing, statewide crime wave.  The converse for that argument is more grounded in reality – we cannot reduce crime by rapidly increasing the supply of criminals, as Prop 47 has done.

 

Read Full Post »

Older Posts »