Posts Tagged ‘Galperin’

As I pointed out in Monday’s edition of Citywatch, the City of Los Angeles booked a $7.6 billion adjustment to recognize the unfunded pension liability owed to the beneficiaries of its public pension programs. It is an admission that the residents and stakeholders of the city are on the hook for very generous retirement benefits offered to municipal employees. For the record, the adjustment does not cover exposure to virtually free health benefits.

Anyone who follows the city’s finances expected this. All of our elected officials have been expecting this.

I got around to reading the Comprehensive Annual Financial Report, which was issued on February 5th, on last Saturday, February 27th. I wrote and published my article about the very significant adjustment on February 28th. Citywatch picked it up on the 29th….and still beat the city’s press release by a day! I thought I was slow.

It is common- in the interest of transparency – to disclose material adjustments to an entity’s financial position in sufficient detail to stakeholders, whether they are shareholders, investors or, in the case of a governmental unit, taxpayers and others who pays fees for public services. Such disclosures should be timely, too. Almost a full month after the financial statements were released is not timely.

However, worse than the poor timeliness, was the lack of sufficient detail.

The nature of the disclosure was simply that it was mandatory. The Governmental Accounting Standards Board (GASB) issued pronouncement 68 requiring that unfunded pension liabilities be included in the face of the financial statements, identified as Net Pension Liability. The statements, cover letter and subsequent, but late, press release did not offer any explanation as to why GASB issued the new reporting requirement, that it was necessary to emphasize the impact defined benefit plans had on governments’ long-term resources.

Furthermore, the treatment on the financial statements is still not as transparent as it should. According to a white paper issued by California Committee on Municipal Accounting (a joint committee comprised of representatives of the League of California Cities and the California Society of Certified Public Accountants) the Unfunded Pension Liabilities will become a new liability on the Statement of Net Position, appropriately named “Net Pension Liability.”

I challenge anyone to find a line in the CAFR’s Statement of Financial Position that states “Net Pension Liability.”

Instead, you will find “Non-Current Liabilities due in more than one year.”

Only if you compared that line with last year’s CAFR could you determine the impact on the liabilities. So, the most significant, long-term liability is buried. You must dig much further by diving into the notes to get a sense of what occurred – that is simply what GASB 68 was trying to avoid.

As I mentioned, the press release is short on details.

But it also obfuscates the result by aggregating the impact on a city-wide basis instead of the operating segments.

If you break it out by segments, the Government Activities segment took the brunt of the adjustment, putting its equity in negative territory. This is the segment responsible for core services residents depend on for quality of life. It includes public safety, recreation and transportation, among others.

No where is there a discussion of how the Net Pension Liability is likely to grow. City contributions to retirement plans as a percentage of payroll has been growing steadily (see my previous article). That is a reflection of the increasing burden the retirement plans are having on the budget.

Ron Galperin is the best controller Los Angeles as ever had – by far.

If the city elections were held tomorrow, he would have my vote.

However, this all demonstrates how strong the influence politics has on the Office of Controller. No one wants to risk raising awareness over this controversial and costly problem, because doing so could create tensions with the powerful public unions many of our elected officials depend on for their re-election campaigns.

Galperin may not be a beneficiary of such support, but he must work with city officials who are.

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It’s the start of the Holiday season and Controller Ron Galperin is going to check his list to see who has been naughty or nice in the city.

In the case of Brian D’Arcy, the head of the influential IBEW Local 18, the union representing most of the DWP’s workers, it will be an audit checklist which determines if he finds coal in his stocking. Not from the Navajo generating station either.

The very first city audit of the controversial nonprofit trusts, which will start in early December, has already been saddled with a handicap in the form of a restriction as to how far Galperin can look back. Only data from the most recent five years will be open for examination. That’s a limitation almost any CPA would find unacceptable, but Ron lives in the world of politics. With hardly any support from the City Council, several of whom depend on support from the union, he will have to make the best of it.

In reviewing a sample of transactions from the data provided, Galperin will need to consider two benchmarks to determine whether any are inappropriate: those that are permissible under the by-laws and internal policies of the trusts, and those that are in the best interests of the ratepayers.

Do not assume for a moment that the benchmarks overlap.

What may seem perfectly reasonable to the union could amount to poor value for the money to the ratepayers, especially considering the DWP corporate safety program (the trusts ostensibly exist to improve safety) is funded by over $100 million from the utility’s annual operating budget. By contrast, the safety programs managed by the trusts are fully funded by the city’s contribution of $4 million per year – $1 million of which goes to salaries! How many of you would donate to a nonprofit organization that takes 25% off the top for payroll before adding other administrative costs?

To get a sense of how the trusts have been managed and operated, it will be important for Galperin to review the bylaws and minutes from board meetings – including how the trustees voted on important matters, such as determining delegations of authority, key hiring decisions, budgets, approval of financial statements…..

Ron and his auditors should interview past and present members of the boards, the staff, the external auditors and any other contacts of the trusts to gain insight into what are arguably the most covert bodies in the city. Subpoenas may be required and the City Attorney may have to step in.

It will be important to review individual transactions in the context of the entire history – ideally that would amount to all years, but the five-year limitation will make that difficult. The risk is that a one-off event may seem inconsequential by itself, but when combined with others could disclose a questionable trend. I would be particularly interested in events and transactions that occurred in the formative years of the trusts, but that period is blacked out, and it may take another court battle to get access – that’s assuming the City Council would even press the issue. Given that the City Council approved this substandard audit settlement, one must question the resolve of the members.

Galperin must demand an answer as to why the trusts have $12 million in cash squirreled away as of June 2013, probably $13 million by now. That represents more than three times the annual operating expenses. The trusts are organized under IRC 501c(6) and can support political causes and attempt to influence legislation. $12 million can go a long way in that regard.

I am less than optimistic we will learn enough from the audit, but it may be enough to provide political cover for the City Council. It will provide the appearance of progress, enough to sell to the ratepayers, many of whom may not be informed enough to question the judgment of their council members.

For those who are concerned about transparency and are following this conflict, let’s support Ron by using every opportunity to corner your council member and insist on complete, unfettered access to all records and persons associated with the trusts.

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