Feeds:
Posts
Comments

Archive for the ‘Uncategorized’ Category

The town of Loyalton, CA is a short scenic drive north of Truckee and, seemingly, a world away from the financial strain facing Calpers. It is the equivalent of a gnat on an elephant’s back.

Yet, the town’s pension woes provide insight to the overwhelming crisis facing other – and much larger – municipalities whose employees are participants in Calpers.

An article in the Los Angeles Times reads like a case study in the dangers of unsustainable promises.

In summary, the last of the town’s covered employees retired; there are four retirees with a vested full retirement benefit.  Loyalton’s City Council elected to pull out of Calpers when the fourth one retired.

Calpers smacked the town with a $1.7M termination fee,

Why?

Because the long-term liability associated with future pension benefits was grossly underfunded. The article does not say that, but it is the primary underlying reason.  You see, if the town’s plan had been properly funded, there would have been sufficient assets to cover the four until the day they died, plus spousal benefits to the extent they existed.

Loyalton does not have anywhere close to that money lying around, so pensions will be slashed by 60%.

The retirees are screaming foul.  After all, they were promised a sum-certain benefit for life.

To be fair, the employees, council and mayor should have done the math a long time ago. The town itself was not managed well, but you can say that about many municipalities., including Los Angeles (LA does not participate in Calpers.  Nevertheless, it faces the same fundamental problem within its own retirement plans).

What Calpers is doing is financially and technically justifiable, but it demonstrates just how deluded many beneficiaries have become.  The promise of  guaranteed pensions for life is only as good as the assets backing them.

Loyalton could have weathered the crisis had it stayed in Calpers. What that points out, though, is the weakness in the assumptions underlying the entire retirement fund. It depends too heavily on contributions from current employees to cover past service.  It is a Ponzi scheme, in that respect.

But it does not have to be.  A defined benefit plan can work….if contribution levels are sufficient.  I accounted for several small defined benefit plans back in the day when I was just out of college. We used conservative assumptions and were straightforward in our projections to the employers and employees.

Employees throughout the state need to contribute more of their own money to close the funding gap.  It is unfair to charge the taxpayers for the state’s years of over-promising more than it could afford.

The good news is that higher contributions can be spread over many years.  The pain would be no worse than felt by private sector employees who do the math and decide to increase their 401-K payroll deductions.

If employees want a guaranteed benefit, they must pay a premium for the protection. That’s no different than when we choose  lower-yielding investments in return for less risk.

It is also essential to educate the participants in Calpers about what a promise really is.

No sense in trying to teach that to our legislators.  They have been in bed with the public union leaders for way too long.

 

 

 

Read Full Post »

LA unFitness

I am a member of LA Fitness.  I most often use the facility at Universal City because it has a hardwood basketball court.

Although my recreational playing days are over – no semblance of speed left in me – I derive much fulfillment  from moving the ball around the court, going in for a layup and nailing a 3-pointer from the corner.  Actually, I still have a pretty good shot.

Overall, it amounts to an enjoyable form of exercise and loosens me up for the rest of my routine…..and I can pretend to be any guard in the NBA,  although delusion might better describe my thoughts on the floor.

My basketball activities are best suited for times when the court is not crowded, usually late Saturday and Sunday afternoons and early evenings; and that’s when I notice it.  It was particularly evident today.

The sidelines were lined with empty water bottle and energy drink containers,  with partially eaten food items, too- I saw two banana peels just today.  Based on the volume of refuse, I estimate about 30 people were responsible .

I have complained to LA Fitness about this before.

I did so, again, today.

This time I made a suggestion that the facility’s management place signs in the gym reminding players to clean up before they leave. Even then, there will probably be those who ignore the message.

If that doesn’t work, LA Fitness should threaten to close the gym for, say, a week. Then do it again, if necessary. Maybe then there will be some peer pressure by responsible members to get the slobs to perform the simple task of tossing waste in a trash can.  Even the worst players can make that shot.

I know this solution sounds like a form of parochial school discipline one might expect from the Sisters of Perpetual Abuse, but we are dealing with those who lack basic respect for other members, and especially for the maintenance crew assigned to clean it all up at the end of the day.

 

 

 

Read Full Post »

Much has been written and discussed about the recently approved contract with DWP’s IBEW Local 18 members.……but not enough.

I will not revisit the points already covered by Citywatch’s Jack Humphreville and the LA Times’ Steve Lopez –  mainly, the unconscionable disregard by our elected officials for their constituents and neighborhood councils across the city, all of whom should have had a voice in the negotiations.

Consider this the epilogue.

Where was our Ratepayer Advocate? Did anyone hear from him?

In all fairness, Fred Pickel was left in the dark throughout the process.  Basically, he knew what we knew, and at about the same time.

But as a ratepayer advocate, he needed to step up and at least rally the neighborhood councils, to inspire an outcry against this blatant insider process which denied their participation.  Perhaps nothing would have changed, but allowing the mayor and City Council to conduct such critical business in the absence of public input – unchallenged – is not the stuff of advocacy.  Pickel could have at least picked up the phone and called Steve Lopez.

The NCs are also partly responsible for the current state of affairs. If ever an issue should have called for drawing a line in the sand, it was this one.  The NCs have quietly and steadily acquiesced to City Hall over the years.  Oh, how things have changed since they backed the effort which defeated Measure B!

The IBEW did not agree to any substantive concessions.  The members were well compensated before the deal; they are now more so.  Still no contributions towards health care, either. The argument about staying competitive with other utilities is as big a sham as Pickel’s approach to advocacy. There is not going to be a mass exodus of trained DWP employees for greener pastures.  If anything, some turnover would be desirable to maintain a better balance of age demographics. It would facilitate an orderly and more gradual replacement of retirees over the long-run.

City Controller Ron Galperin recognized the need to adequately compensate those workers who require special training and are susceptible to competing offers, but as he told the Times: “At the same time, I’m not convinced that all of the across-the-board increases were justified by the need to attract and retain employees.”

He is correct.

Then there’s the matter of the two Joint Trusts, those grossly mismanaged entities which were used to fund conferences in Hawaii and Las Vegas, along with five-star dining, for union bosses and their minions; to pay inflated salaries to staff who could not balance the books and to promote safety programs, although DWP maintained a robust budget to do the same. Funded by an annual contribution of $4M from ratepayers, it was quite a perk for D’Arcy and company.

The good news is the trusts will be dissolved; unfortunately, not right away.  The first step will be to consolidate the two, which was one of the necessary reforms requested in the wake of Ron Galperin’s revealing audit – and should have been accomplished already!

The audit exposed the negligence of the day-to-day management and the shameful indifference to it by the trusts’ board members, half of whom were appointed by the city. It also pointed out the inefficiency of maintaining two separate trusts when they could easily have been managed as one.

But here’s the kicker – there may be as much as $15M in cash remaining with the trusts. The latest available IRS 990 filings are through June 2015 and reported $12.5M on deposit.  Given past spending patterns, $15M is a reasonable estimate for today’s balance. The surviving trust will draw it down to zero. And given those same patterns, don’t expect the money to be spent wisely.

For that matter, what happened to the progress reports for the reforms? The last one I saw posted on the DWP website was from over a year ago.  It was written by former GM Marcie Edwards.  The details were scant.  She appeared to have approached it with the enthusiasm of a fifth-grader writing a punish assignment. From her perspective, maybe it was.  After all, she openly endorsed D’Arcy’s criticism of the audit. Regardless, given the trusts’ track record, the progress report meant little without a new audit,..and no one downtown was clamoring for Galperin to do a follow-up, much less fund one. I am certain he would have welcomed the opportunity.

Considering how generous Garcetti was by agreeing to allow union members free health care, you would think he could have sweet-talked D’Arcy into returning the remaining cash.  It would have been a one-off item with no effect on the other provisions of the contract.

Now $15M is not large relative to the overall cost of the deal, but in a city where residents are paying more to expand mass transit and construct homeless housing; where the backlog of street repairs extends for decades; and where the LAPD lacks the resources to combat growing property crime, leaving cash on the table sends a disrespectful message to the residents.

It amounts to a poke in the eyes to all of us.

And not just a one-finger poke.  No, I’m talking about the two-fingered jab used by Moe on his fellow Stooges.

To the mayor and most of the City Council members, we are Larry, Curly and Shemp.

 

 

 

Read Full Post »

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 »

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 »

Mayor Eric Garcetti caught some flak in a recent LA Times article for failing to mention the $1.1B the city must pay to fund employee pensions.

But let’s be fair: the Chair of the Budget and Finance Committee deserves an equal share of the criticism:

“Despite recent funding shortfalls, over long periods the performance of the pension system’s investments has met or surpassed expectations.” Council Member Paul Krekorian, as quoted in the LA Times, November 18, 2016.

This is an example of the naivete of our elected officials. Mr. Krekorian forgets, or chooses to ignore, that past performance is no indication of future returns;  the further back in time, the less relevant are the results. The 15-year return for LACERS is 6.5%; the 10-year is 5.9%. The world economy has undergone major structural changes over the 30 year period, for which the average return was 8.4%.  Projecting investment performance based on data from over 20 years ago is as useful as comparing Barry Bonds’ stats to Hank Aaron’s.

Or maybe its an acknowledgement that city officials do not represent the public as a whole, only the city employees and retirees, many of whom reside outside of the city. According to the results of a 2014 study reported by the Times, about two-thirds of city employees live elsewhere. So much for a multiplier effect. While those employees cannot vote in city elections, the unions representing them are powerful political forces.

The mayor and City Council hope to make a dent in the problem by taxing short-term, Air BnB style rentals, effectively trashing zoning in residential neighborhoods.  Certainly, a share of the new gas tax will flow to the city, along with some “legalized” pot-related revenue (it remains to be seen how the Justice Department deals with the conflict between federal and state laws).  However, the city could lose some, or all, of the surplus transfer from the DWP.

The fact remains, 20% of the general fund goes to cover the city’s pension contribution, a rate that has increased from 5% in 2002. It’s been fairly flat at around 20% for a couple of years. In 2012 it was 15%, the same for 2008, during the height of the subprime mortgage meltdown. Overall, city revenue has increased by $1.2B since Garcetti took office. With that much of an increase, one would expect the city’s contribution rate to drop considerably.  It’s an inconsistency any CEO would have to explain to a board in the form of a simple variance analysis.

It is the result of the deteriorating pension position.  While explaining what an unfunded liability means would put any general audience to sleep, it is far easier – and more understandable – to present an analysis of the contribution rate over a period of several years.  It would make the growing unsustainability of pension promises apparent in terms the public could appreciate.

I will propose to the Government Accounting Standards Board (GASB) to make such information a required disclosure in the Comprehensive Annual Financial Report (CAFR).

Who knows – maybe Paul Krekorian would be enlightened.

Read Full Post »

Older Posts »