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Pension Reform: True, City Made Promises to the Unions but the City Also Made Promises to Its Citizens

PERSPECTIVE - This is not the first time I’ve written about the external audit reports of the City of Los Angeles. You know, those affirmations of sound financial condition issued by the audit firm of Simpson and Simpson. The city issued yet another declaration of fiscal emergency on June 11. (Kevin James link) (Jack Humphreville link) It’s getting to be routine business, so routine that perhaps the partners of Simpson and Simpson may not take the resolutions seriously.  There was one in 2009, another in 2010 and again in 2011.

Auditors must assess the continued viability, or going concern, of an entity when trends clearly show a deterioration in finances.  Do multiple fiscal emergency declarations constitute a trend? The developing convergence of International Accounting Standards with U.S. GAAP will require the use of greater judgment – all available information about the future must be considered when weighing a going concern warning.

There’s plenty of information about the future state of the city’s finances; little of it good news. Will Simpson and Simpson take notice?

Will this recital in the latest resolution get the attention of Simpson and Simpson?

WHEREAS, even with all the drastic steps already taken by the City to close the Fiscal Year 2012-13 General Fund budget deficit, there is no feasible way to balance the budget and to preserve essential public services, without furloughs and other cost saving measures.

It didn’t seem to faze City Controller Greuel or Budget Chair Paul Krekorian.  On her website, Greuel puffed about unsubstantiated savings her department claimed to have identified, but did not offer any comments about the fiscal emergency. Mr. Krekorian made no mention of the resolution, but he did gush over what he considered the passage of a “balanced budget.”

The mayor avoids any discussion of dollars and cents on his page.

Maybe they are hoping the auditors won’t notice if they keep it quiet, but something tells me it would not make a difference even if the resolution was posted on billboards.

There are other recitals containing very serious admissions about the continued unraveling  of the city’s financial condition, especially the growing employee retirement entitlements. At a minimum, the audited financial statements should contain considerable disclosures about the state of the civilian and sworn retirement and benefit plans – how about a footnote showing what the unfunded liabilities would be under different plan assets earnings rate assumptions?

This is an issue almost every official in Los Angeles wants to avoid.  I fear local political pressures have made public pensions too hot for the auditors to handle. The mayor only recently seemed to take an interest.  You might say he was several years late and a few billion dollars short. He’s a lame duck on a track to leave LA behind and take up new digs on the Potomac, so his opinion matters little.

So who will step up and level with the residents of our city about the diminishing prospects for a sustainable future?

The current crew who runs City Hall won’t because they are married to the public unions.  Any talk of playing hardball on benefits will cost them support.  The unions will scream about the sanctity of their contracts, but no one cares about the level of service the residents receive.

Jonathan Holtzman and Steve Cikes of the Public Law Group summed up the situation better than anyone in their article posted on the firm’s website:  No one likes to hear that promises cannot be fulfilled. But promises to employees and retirees are not the only promises a government makes; it also makes promises to the residents ― promises that induce them to come to a particular city or county. The failure to live up to the latter promises has had a devastating effect on the public’s view of government and contributes significantly to the death spiral in which we find ourselves. For those who work for or with public agencies, it is a broken promise we ignore at our peril.

Will Simpson and Simpson acknowledge their responsibility to the citizens and users of the audited financial statements and disclose the prospects of the uncertain future facing the city?

It is healthy to change audit firms occasionally to get a fresh perspective.  A long relationship between a CPA firm and a client could adversely impact the auditor’s independence and lead to biased opinions.  This shouldn’t happen – and it usually does not – but when it does, it can be disastrous.  

Just think of Enron and Arthur Andersen.

Throw politics into a long time client/auditor relationship and you increase the risk of inadequate disclosure.

Let’s not push our luck.

(Paul Hatfield is a CPA and serves as Treasurer for the Neighborhood Council Valley Village.  He blogs at Village to Village, contributes to CityWatch and can be reached at:

Tags: Paul Hatfield, Perspective, Simpson and Simpson, Los Angeles, public pension programs, city budget, Paul Krekorian, Wendy Greuel, Mayor Villaraigosa

Vol 10 Issue 51
Pub: June 26, 2012