- Written by Jack Humphreville
06 Sep 2011
LA WATCHDOG - In 18 months, we go to the polls to elect a new mayor. So far, four candidates have filed papers and several are still waiting on the sidelines for the opportune time to enter the race to be the mayor of California’s largest city.
While all of the candidates will no doubt be very eloquent about their qualifications to be mayor and at the same time highlighting their opponents’ warts and pimples, they all need to develop a detailed written plan with specific recommendations on how they intend to deal with the City’s approaching financial insolvency.
Over the next four years, the City is projecting a cumulative budget gap of over $900 million, in large part because of the $720 million increase in employee related costs. And these budget gaps assume a generous 13% increase in General Fund revenues of $564 million.
The Mayor, the Controller, and the rest of our Elected Elite proclaim with great fanfare that the City has a balanced budget, as required by law. But what they fail to tell us that they are “cooking the books” by neglecting to include major expense items in the budget.
Conveniently, the City neglects to include various overtime expenses and wage deferrals in the budget because the actual cash payment of over $100 to $200 million is not going to be made until after July 1, 2014. Of course, this is contrary to Generally Accepted Accounting Principles. Nevertheless, the City will argue with a straight face that it is permissible to use cash accounting for the budget.
The City is also underfunding its two major pension plans. As of June 30, 2010, the Los Angeles City Employees Retirement System (“LACERS”) and the Fire and Police Pension Plans were underfunded by a total of $11.7 billion (64% funded) when the assets are marked to market, $4.9 billion more than the City’s calculations that rely on accounting gimmicks that would get any corporate executive tossed in the clink.
As a result, the City is able to defer annual contributions to our grossly underfunded pension plans of about $300 to $400 million.
And this underpayment would be even greater if the City used a more realistic Investment Rate Assumption of 6.5% as recommended by Wilshire Associates and Warren Buffett, not the 7.75% pie in the sky return dictated by the Villaraigosa cronies appointed to oversee $21 billion in pension assets.
The City has also neglected to fund the repair and maintenance of our infrastructure, whether it is our lunar cratered streets and crumbling sidewalks, or the City’s street lights, parks, buildings, sewers, storm water system, or management information systems.
Overall, the City needs to invest more than $15 billion over the next ten years to upgrade our infrastructure. But once again, the City fails to account for this critical expenditure, dumping it onto the next generation of citizens.
The General Fund’s balance sheet is also an indication of the City’s financial deterioration. Since July 1, 2005, the day Mayor Villaraigosa was sworn into office, the net worth of the General Fund has declined by almost 50%, from $810 million to $437 million on June 30, 2010.
During this same period, General Fund expenditures have increased $800 million, from $3.3 billion to almost $4.1 billion. Yet, during this period of rising expenditures, the Mayor has been telling us that the City has cut over $1 billion from the budget.
The Mayor has also told us that he has reduced the City’s workforce by over 4,500 employees.
But once again, he neglects to tell us the whole truth. In this case, 2,400 of these employees participated in the Early Retirement Incentive Program that cost LACERS, our grossly underfunded pension plan, $350 million, or about $150,000 for each participant.
Nor does the Mayor tell us that he and his office strong armed our Department of Water and Power into hiring 1,600 under qualified City workers, including many employees from the Department of Public Works, and at the same time, sticking DWP’s underfunded pension plan with $200 million of new liabilities.
The Mayor and our Elected Elite have also been unwilling to confront the City’s politically powerful unions by eliminating departments that are not essential to the core mission of the City. Nor has the City been willing to address its bloated and inefficient work force and its overly generous benefits such as retirement, medical, holidays, sick days, and seniority.
In the most recent negotiation, the City and its unions extended the current contract by a year, from June 30, 2013 to June 30, 2014, in large part so that the next round of negotiations would not be an issue in the upcoming Mayor’s race.
It is obvious that the Mayor and our Elected Elite cannot be trusted to manage the financial affairs of our City in a prudent manner. Rather, to the contrary, the expectation is that they will take the politically expedient action, regardless of its impact on future generations of Angelenos.
The upcoming Mayor’s race presents us with an excellent opportunity for change by requiring that each candidate present a detailed written plan on how he or she intends to solve the City’s financial problems. The old line of “eliminating fraud, waste, and abuse” does not cut it these perilous times.
In addition, knowing that we cannot trust the Mayor and Elected Elite to tell us the complete truth regarding the City’s financial affairs, we need to establish a well funded and empowered Independent Budget Advocate to review and analyze the City’s budget and financial affairs. This Independent Budget Advocate would also have the authority to force the City to balance the budget based on Generally Accepted Accounting Principles and to fund the necessary operating and capital expenditures needed to maintain and repair our infrastructure.
Now our Elected Elite, along with the political class, the municipal unions, the bureaucracy, and the chattering class, will argue vociferously that an Independent Budget Advocate is not necessary in our democracy and that we should rely on the judgment of the Mayor and the City Council.
But that has not worked. Just look at the mess we are in, with budget deficits, underfunded pension plans, a crumbling infrastructure, and a complete lack of trust and confidence in City Hall.
While our Elected Elite may make political decisions as to the allocation of the City’s resources, they must do so in a fiscally prudent manner that is consistent with the resources available to the City.
So we need to know which candidates support the establishment of an Independent Budget Advocate that will require the future Mayor and the City Council to make prudent financial decisions.
Or put another way, do you trust present and future Mayor with your money?
Tags: mayor, City Hall, City Council, budget, pensions, Budget Advocate, election
Vol 9 Issue 71
Pub: Sept 6, 2011