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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.

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By the time this article is published,  either the most awaited or unawaited presidency, depending on your point of view, will have begun.

Trump’s loyal supporters believe he will initiate sweeping, long-overdue changes; his most ardent detractors fear he will take us down the road to fascism.

For certain, we are in for a wild ride, but I do not believe President Trump (can’t believe I am typing those two words together) will be able to wave a magic wand and have his way across the board. This is a guy who did not have a majority of his own party behind him.  His victory was more about the other candidate’s problems.

A Washington Post/ABC poll showed his favorability rating on the eve of taking office as 40%.  That does not signal a honeymoon; an impending divorce is more like it, a nasty one at that.

Without a broad consensus behind him, Congress will not rubber-stamp much of Trump’s agenda, assuming he really has one other than poorly defined tweeting points.

So one should not expect broad support for any of his plans beyond the selection of a new Supreme Court judge. That’s a big one, but the High Court has always ebbed and flowed between conservative and liberal influence.  It’s been that way for a few decades. There’s always a wild card, too, like Justice Kennedy. Let’s not forget that Chief Justice Roberts saved Obamacare. You just never know.

I anticipate we will have a balanced court, unless one of the liberal judges retires during Trump’s term. It is unlikely any of them will retire during a first term.  It would take a Scalia-type departure for another vacancy on the left side of the bench.

What about a wall across our southern border?

I think you might see some segments constructed in strategic locations, but funding will be a problem for any lengthy stretch.  It will be more show than substance. The repercussions will give Republican lawmakers pause.

But there will be some extensive changes to immigration policy, some of which will be embraced. Take for example tightened restrictions on H-1B visas.  Even there, Trump will learn that this abused program can only be throttled back so far, because our schools are not turning out enough STEM talent to meet the demands of science and industry.

A beefed-up Border Patrol is one practical objective many will support.  The members of the USBP save lives and interdict dangerous criminals. Unlike a wall, they offer a flexible response for dealing with illegal immigration. Walls cannot make arrests or render assistance to those challenging the hostile terrain which exists over a vast swath of the border.

Government environmental regulations will be reduced, but to what degree depends on popular support. A majority of our citizens do care deeply about the environment.  People depend on it for recreation, comfort, health and a safe food and water supply. If they feel the environment is significantly threatened, they will push back in noticeable numbers, enough to turn up the political heat in Congress.

A reduction in corporate taxes is almost a certainty.  However, it will be a balancing act between what it will take to bring offshore earnings back home and avoiding the appearance of catering to Wall Street. And no politician wants the Wall Street label to stick. This could be the biggest battle Congress faces, one in which Trump will have the least influence for fear of alienating blue collar workers, the very constituency that helped push him over the top in the election.

The greatest uncertainty involves international relations.  A president has wide leeway in deploying or redeploying troops. Some would argue he has the power to terminate a treaty without the consent of Congress. The Constitution is not specific on this subject.

Most certainly, Trump could effectively undermine NATO by pulling resources from it, turning the alliance into a mere shell.

How about a trade agreement such as NAFTA?

NAFTA is a congressional-executive agreement, not a real treaty. There are no rules as to who can terminate one, so it would appear Trump could pull out over the objections of Congress.

In the end, for Trump’s policies to prevail, he needs broad support from both Congress and the public.

You do not earn broad support with provocative remarks in social media.  Think of the number of people who are unfriended on Facebook because of their relentless partisan posts and memes.

The Tweeter-in-Chief will have more to lose than gain in his use of the internet. People just might unvote him.

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Costly Accounting

Accounting topics usually do not show up on the radar, especially in times when other news topics are red hot. There is, however, a conceptual transition worth noting with wide ramifications.

Good accounting is not just desirable; it is vital. Business and the general public require the best possible financial information in order to transact and invest in confidence.

Regardless, it makes sense for the cost of accounting changes to favorably correlate with the benefits.  For example, spending a fortune to analyze or report on an obscure, immaterial activity is hardly a sound course of action.  A cost vs. benefits standard should be applied when a widespread accounting change is entertained.

The largest accounting change in the last 10 years (perhaps one of the largest ever) is underway. It’s ASC 606. ASC stands for Accounting Standards Codification and is the source for what is commonly known as Generally Accepted Accounting Principles (GAAP).  666 might be a more appropriate code number.

The key objective of 606 is to create consistency for reporting revenue across all industries for customer contracts. Current GAAP is more industry specific. This amounts to a transition to  a one-size-fits-all approach from one which recognizes unique business practices.

There is much to say about the benefits of consistency, but plain vanilla does not necessarily deliver the disclosure the public needs in an increasingly complex world.

If anything, ASC 606 increases the complexity of evaluating customer contracts by requiring revenue determination at various points in time. Basically, the economic substance of the affected contracts remains the same, so it is mainly a matter of timing of when the revenue hits the books.

OK, not so bad, but the current method has been working well for a long time. (A side note: the Enron-type disasters of the past were due to lax compliance with internal controls.  No change in revenue recognition principles will prevent a recurrence. The objectives of ASC 606, as well as any other accounting change, are not intended to address fraud, abuse or lack of due diligence).

Is 606 worth it? The benefits are arguable. And for all the talk about consistency, some industries are exempt from the scope! Eventually, it is likely other exemptions will be made.  After all, industries and products are not static.

Companies have and will incur significant costs to implement it.  The sad part is no one really knows how much. There is no national tracking tool in place.

My guesstimate of the price tag is based on the ratio of accounting, IT and auditing costs to revenue, roughly 5%.  The aggregate revenue for S&P 1500 companies is $13 Trillion, so it works out to around $65 Billion, or about $43 Million per company, if you figure that major conversion efforts require an equivalent of around 10% of the  5%.  The cost will be disproportionately worse for smaller companies, and probably even worse for nonpublic firms.

Companies can make substantial improvements to reporting and control systems for that kind of money, improvements which can provide greater protection and quality of information to the shareholders and stakeholders than playing with the timeline for revenue recognition.

The Financial Accounting Standards Board (FASB) purports to consider the cost to the private sector of its decisions, but it missed the boat here. One author even suggested that ASC 606 was pushed forward to justify FASB’s efforts in the wake of its failed attempt to converge US GAAP with International Financial Reporting Standards – an objective that grew out of the Norwalk Agreement of 2002, the inspiration for 606.

Fourteen years of futility comes at a pretty high price…and difficult to explain when you have little to show for it!  Reminds me of DWP’s decision to implement its new billing system rather than man up to the public and admit it would be a disaster.

The conversion, which for the largest companies started ramping up in earnest a couple of years ago,  will run through 2017.  The implementation date is in 2018 (2019 for nonpublic companies).  Afterwards, addressing post-implementation glitches will undoubtedly cost a bundle. As cousin Eddy told Clark Griswald in Christmas Vacation about the Jelly-of-the-Month Club,”Clark, it’s the gift that keeps on giving the whole year through.”

In this case, years to come…and as useful a gift as fruit cake.

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State Senator Bob Hertzberg is a smart man; smart enough to know the power of language. According to his bio, as an undergraduate English major, he wrote a 400-page handbook titled A Commonsense Approach to English.

To paraphrase a quote attributed to the late US Senator Everett Dirksen: A deft turn of a definition here, and a subtle re-characterization there, the next thing you know, we are dealing with some serious money!

And that has been Hertzberg’s game plan since he returned to the legislature in December 2014.

He introduced SB 8, a bill cloaked by a seemingly harmless name – the Upward Mobility Act. The senator described it as a tool to “modernize” the state’s tax structure. He admitted it would be designed to yield another $10B in tax revenue.

The bill died, but that did not stop Bob from reintroducing a replacement: SB 1445.

As SB 8 proposed, this new bill would extend the application of sales tax to services, a direct hit to all segments of society – the middle class, most notably. As he did with SB 8, he is characterizing it as “modernization.”

The only thing being modernized is the state’s access to our wallets.

But the “serial hugger” is not stopping there.  He again whipped out his English to Taxation dictionary to conjure up SB 1298.

His objective is to do an end run around Prop 218’s requirement for voter approval of tax increases by redefining “sewer service” to include stormwater projects. Perhaps “serial wordsmith” would serve as a better moniker for him. Please read the excellent editorial concerning 1298 in the Daily News. 

The bill has a worthwhile objective.  It is designed to encourage recovery of stormwater. No one is arguing with the benefits it offers to our drought-stricken state.

But it is dangerous to override the benefits of government transparency and the legislative process.

Californians are being asked to pony up more cash to fund a growing list of expensive projects.  In Los Angeles alone, we are being asked to pass a permanent increase in the sales tax for the MTA.  The city and county are considering spending over a billion dollars to provide housing to the homeless.  There is also the trainwreck of HSR absorbing funds that could be used to enhance the state’s water capacity.

Our state and local governments have no grasp of prioritization.  Capital budgeting is completely absent in the minds of Hertzberg, his colleagues in Sacramento and counterparts at the local level.

Taxpayers have a right to weigh in on what needs attention and the means of paying.  To do so requires presenting the big picture of competing needs. Let the people decide what is most important and authorize appropriate funding levels.

We do not have unlimited funds; we can only afford what can be sustained without breaking the bank.

Sneaking around the voters and playing word games, as Hertzberg has been doing, is disrespectful to all of us.

 

 

 

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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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Trust status report

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I’ve watched AMC’s hit show, The Walking Dead, since season one.

The characters grew on me, although only a few of the original cast have survived the zombie apocalypse to date.

But I am losing interest in the show. There was a time where I eagerly looked forward to the new season. I would plant myself in front of the TV at 6:00 PM on Sunday night – thank God for satellite TV, or it would have been 9:00 PM.

Since season three, the story lines have become repetitious: the group, led by Rick Grimes (played by Andrew Lincoln, a Brit who has mastered a pronounced southern accent for his role of former county sheriff in Georgia), would find solace in a relatively safe setting, only to encounter a psychopath heading up another band of survivors, in some ways more organized and efficient than Grimes’ people. A conflict ensues; as many of the living die as the zombies in the violence. In the end, the bad guys are killed and our heroes are forced to move on.

The process repeats with yet an even more perverse villain standing in the way of survival.

Plots are advanced through the stupidity of Grimes and his followers – inexplicably poor judgment considering their experience coping in the zombie-infested world. The main characters will often wander off alone on some misguided mission, only to be captured by the latest gang of heartless miscreants.

Recently concluded season six was built on hype – the meanest, baddest-ass villain would appear and killed a beloved member of our protagonists. Throughout the season, the finale was touted to depict the must violent end to the life of a major character on the show. It lived up to the billing, but it was so anticipated, the shock value was somewhat lost. The viewers did not see the actual death – only the villain bringing his baseball bat down on someone’s head. The crunching sound of the impact and the screaming was all that was necessary to convey the brutality….but it was expected. Fans of the show will not know the name of the victim until the next season.

Next season will undoubtedly be dominated by violent confrontations between the two groups until the bad guys lose again.

The Walking Dead needs an end game.

The first TV series I can recall with a definitive ending was The Fugitive. It wrapped with a two-part finale, which set a ratings record at the time.

Other popular series followed suit, but with longer wind-downs: MASH took almost an entire season to wrap, and Lost required three seasons to conclude its complex story.

I could put up with the regurgitation of plot devices if The Walking Dead was committed to an end game – three, four, five seasons from now, it wouldn’t matter, as long as one could sense progress.

But the producers are in it for the money. As long as they have a hit show, one where major characters can be slowly killed off and whose replacements have time to develop their own fan followings, it is an express train to the bank (something California HSR will never be).

I fear that the show caters to the fans of the graphic comic books that inspired the TV series, the millennials who still live in their parents’ basements and have yet to discover Bernie Sanders as their contemporaries have. Perhaps Hilary Clinton should buy some advertising on the show as a way to cut into Sanders’ lock on that generation. Trump could, but he would be more terrifying than the zombies.

The comic book fans do not like story lines that veer from the written genre.

Too bad.

One of the few departures from the comics could set the stage for a path to an end. In season one, Grimes and company enter the CDC in Atlanta and find a lone, surviving scientist who informs them that the French were making progress on a cure for the zombie virus. He chooses death by an explosion set off by the CDC’s fail-safe destruction system.

The series could cut away from our survivors and depict a resolute effort conducted by a handful of French scientists to develop a vaccine.

Something like this won’t happen until the ratings start to slip, because as long as the cash flows, the zombies will continue to shamble along.

What does this have to do with Los Angeles?

Our city was afflicted by the zombie apocalypse years ago.

80% of the registered voters stay home for local elections. They are effectively the undead. As a result, we are governed by officials who take advantage of the apathy and allow their followers to live off the sweat and blood of the rest of us.

And like Rick Grimes and his band of survivors, too many of us break off on their own to no positive effect, rather than uniting and consolidating with the objective of reviving the walking dead, possibly enough to run the bad guys out of town.

What end game would you prefer?

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