LA’s Insolvency Shell Games
- 08 Jun 2012
- Written by Jack Humphreville
LA WATCHDOG - The cash generated from the annual sale of the Tax and Revenue Anticipation Notes (the “Notes”) by our debt addicted City is the major lubricant that allows our profligate Mayor Villaraigosa, our don’t-rock-the-boat Controller Wendy Greuel, and the fiscally irresponsible members of the City Council to conceal operating deficits and continue to “kick the budget can down the road.” This borrowed cash allows our Elected Elite to avoid making the tough decisions that are absolutely necessary to avoid insolvency and to rein in the Structural Deficit, actions that will surely alienate the campaign funding union leadership in this election year.
But the scoundrels that occupy City Hill are aided and abetted in their financial chicanery by Moody’s, Standard & Poor’s, and Fitch, the three fee-hungry credit rating agencies who have turned a blind eye to the City’s budget shenanigans and gross financial mismanagement that are going to burden the next generation or two of Angelenos.
In late June or early July, the City anticipates raising approximately $1.25 billion through an underwritten offering of Notes.
Of this amount, $400 million will be used to finance the City’s operations (primarily salaries) over the first seven months of the fiscal year as our financially strained City does not have the resources or liquidity to wait until the proceeds from our property taxes begin to roll in during December and January.
The remaining $850 million will be used to prepay the City’s contribution to its two massively underfunded pension plans. This allows the City to “save” $10 to $20 million by taking advantage of the arbitrage between the overly optimistic assumed rate of return (7.75%) on its $25 billion investment portfolio and the low interest rate (0.25% last year) on the Notes.
However, once again, the City will pull another nifty financial sleight of hand by delaying the repayment of the Notes beyond the receipt of the property taxes in December and January and the monthly amortization of pension payment.
This stunt, by increasing the “average life” of the Notes by four months, from 6½ months to 10½ months, will allow the City to finance its working capital deficit until it receives the last installment of property tax payments, the bulk of the gross receipts tax from businesses, and the $250 million Transfer Fee from the Department of Water and Power.
And we are not talking chump change as the incremental difference in payment schedules is anticipated to approach $900 million in the third quarter of the fiscal year.
But the City’s depleted working capital does not seem to bother the three credit rating agencies who continue to provide the City with an unwarranted AA- (double A minus) credit rating, implying that our City has a “very strong capacity to meet its financial commitments” and is not “susceptible to adverse economic conditions and changes in circumstances.”
Furthermore, the City’s Budget is hardly balanced since it is based on the understatement of expenditures such as banked police overtime and deferred civilian raises and the overstatement of continuing revenues.
And this so called balanced Budget fails to provide adequate resources to repair and maintain our deteriorating infrastructure and to properly fund the pension plans that are $10 billion underwater.
As an aside, the City lowered its projected contribution to its two massively underfunded pension plans by almost $135 million based on increased employee contributions (financed by increases in salaries) and back room changes in selected underlying assumptions (such as healthcare inflation) that will decrease the City’s annual required contribution.
And the credit rating agencies must have glossed over the fact that over the next four years, the Structural Deficit is projected to produce red ink of over $1 billion, an average of in excess of $250 million a year.
And what about the City’s $20 billion Black Hole, consisting of the Enron like off balance sheet liabilities related to the underfunded pension plans and the deferred maintenance associated with our lunar cratered streets and deteriorating infrastructure.
There are also a number of uncertainties that adversely impact the City’s credit rating, such as the legality of the $250 million Transfer Fee from DWP to the General Fund as a result of Proposition 26 (where is the City Attorney’s opinion?) and the outcome of the $750 million Ardon class action litigation involving the illegal levy of the Telephone Users Tax from 2005 to 2007.
And these financial problems are compounded by the City’s very limited ability to increase revenues because the voting public does not trust the Mayor, the Controller, the City Council, the union leadership, and all of their special interest cronies that occupy City Hall and have brought the City to its knees.
Of course, all of this, and much more, will be required to be disclosed in the City’s Official Statement relating the offering of the 2012 Tax and Revenue Anticipation Notes.
The Official Statement will be interesting reading, not only for what is said, but what is not said.
But you cannot believe everything you read, especially when you consider the source. And it does not mean you can trust the rating agencies, especially since they have attracted the attention of the Securities and Exchange Commission as a result of their gross negligence during the mortgage and credit crisis.
So a word to the wise: this junk bond may be hazardous to your mental and physical health and is definitely not a prudent investment for your retirement account.
Tags: Jack Humphreville, LA Watchdog, insolvency, LA insolvency, budget, city budget, LA budget, TRANS, Los Angeles
Vol 10 Issue 46
Pub: June 8, 2012