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Posts Tagged ‘Ron Galperin’

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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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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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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When the City Council announced a “compromise” with Brian D’Arcy, boss of DWP’s labor union, over the scope and conduct of an audit covering two non profit trusts, my eyes rolled.

An audit with restrictions is not a legitimate audit.

I suggested a number of audit steps that City Controller Galperin could apply to make the best of a bad hand. Unfortunately, he was never given a chance. No surprise when you are dealing with people who do not believe in transparency.

An editorial in the Daily News provides an excellent summary of what Galperin was up against, so I won’t go into the details here except to say the objection D’Arcy’s people raised about the auditors’ extensive note-taking is enough to prove the union was never serious in its negotiations with the City Council. Kind of like Vladimir Putin’s strategy in dealing with the west over Russia’s interference in Ukraine.

Where does this impasse leave us?

The court has to rule on the union’s appeal of the decision that supported the city’s right to audit the trusts without restriction.

If the appeal fails – and it should – then the city will have leverage to conduct a real audit, including the power to subpoena anyone or anything.

But will the City Council go the whole nine yards if given the opportunity?

My guess would be no. After all, there was no sound logic in compromising to begin with. Why would the Council care now? It was obvious that politics trumped the public’s interests – D’Arcy’s history of directing millions of dollars to candidates for city offices saw to that.

Controller Ron Galperin and City Attorney Mike Feuer appear to be the only ones willing to push back. The Mayor,for whatever reason, seems to prefer standing on the sidelines despite being denied the right to appoint management representatives to the boards of the non profits .

It may take a while before the court rules on the appeal. Ron Galperin steadfastly wants to withhold the next $4 million installment. But there’s still $12 million in cash sitting in the trusts’ accounts we may be able to recover. The city should ask the judge to order the trusts’ assets frozen until the case is decided. It would be a shame if the funds were transferred beyond the reach of the city.

It is time for the Mayor and City Council to get on board with Feuer and Galperin to protect the interests of the residents and ratepayers. If they cannot do it on this issue, then what good are they?

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Ron Galperin has added more value to the City Controller’s office than all of his predecessors combined (the last occupant actually decremented the office’s role).

It is not just opening up the books of the city to the average resident and standing up to the thug running the DWP’s IBEW Local 18, either. Galperin has changed how the city reports its performance to the public.

The preliminary financial report is a scaled down version of the final Comprehensive Annual Financial Report (CAFR). It is the closest thing to an aggregate summary the city has, yet prior preliminary reports were an encyclopedia of vast detail with poor graphical or tabular displays of key relationships. One would have to spend hours sifting through pages of bureaucratic vernacular to uncover relevant details.

Ron’s integration of bullet points in the sidebar and crisp charts displaying the most meaningful data are refreshing enhancements compared to the mind-numbing narratives prevalent in past reports. Not only do they facilitate a better understanding of performance drivers, but the points should spur some casual readers to delve deeper into the subject matter, perhaps searching the internet for related topics.

There is always room for improvement.

A summary similar to the preliminary report should be included in the final CAFR. While little should change in the time between the issuance of the two reports, there should be a summary that is a product of the audited financial statements.

Both the preliminary and CAFR should include more trend analysis with respect to key revenue and cost components. For example, property tax revenue is the largest single source of revenue (33%), but it is the least controllable. Assessed values have stayed relatively flat since the mortgage crisis. Oddly enough, it may have been Proposition 13’s automatic increases that prevented them from falling through the floor. Links to real property data and projections should be an integral part of the report. I would go so far as recommending an annual report on this subject alone.

The city’s share of pension contributions, just short of a billion dollars in 2013-14, represented 16% of the general fund. It was a mere 4% back in 2002-03 at $194 million. It will likely grow, especially if the Coalition of City Unions is able to halt the rather sensible reform measures Mayor Garcetti helped craft when he was president of the City Council.

The growth rate of the city’s contribution is unsustainable. Galperin should issue an annual report tracking the latest developments on this front and the potential impact upon future years. He can work in concert with Chief Administrative Officer Miguel Santana.

These are just three examples of important disclosures.

The voters elected the right person to the office. We now need to do everything possible to support and encourage Ron’s practical and informative approach to reporting the city’s financial position.

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