- Written by Jack Humphreville
26 Oct 2012
LA WATCHDOG - The finances of our once great City are so desperate that selected movers and shakers in City Hall are secretly discussing the sale of our Department of Water and Power. The billions and billions in expected proceeds would be used to reduce the $10 billion unfunded pension liability of the City’s two pension plans; fix our roads, sidewalks, and the rest of our deteriorating infrastructure; and, without doubt, fund numerous pet projects of our Elected Elite.
The City is projecting a budget deficit of $216 million for next year and $1.1 billion over the next four years. These amounts are seriously understated because the City is relying on an overly optimistic investment rate assumption (7.75%) for its pension plans and failing to provide adequate funding for the repair and maintenance of our streets, sidewalks, parks, and the rest of LA’s infrastructure, including our Stone Age management information systems and computer hardware.
Over the next four years, the understatement of pension, infrastructure, and other miscellaneous expenses easily exceeds $1 billion and may even approach $2 billion or more.
Compounding the river of red ink is an unfunded pension liability of $10 billion and a deferred maintenance bill of at least another $10 billion.
And once again, the pension liability may be understated by $3 to $4 billion because of the reliance on faulty investment assumptions as well as other short sighted decisions designed to defer contributions to the two plans.
If the City is going to sell DWP to help alleviate the over $25 billion ocean of debt and off balance sheet liabilities, an amount equal to more than five times General Fund revenues, what is the largest municipal utility in the nation worth?
DWP has annual revenues exceeding $4 billion and an operating profit before interest, depreciation, and amortization of over $1 billion. Total assets exceed of $18 billion and are supported by a stated net worth north of $7 billion and long term debt of almost $10 billion.
While there are strategic buyers who would pay a premium price for DWP, there are a number of issues that would need to be addressed, especially with regard to increases in our already escalating water and power rates.
To support a premium price, the buyer would have to have the flexibility to raise rates to earn an adequate return on its investment and to pay hefty, newly instituted real estate taxes and franchise fees.
Interest expense would also increase as the buyer would have to refinance DWP’s tax exempt debt with taxable debt.
This would require a significant bump in rates, in excess of those already higher rates being contemplated to fund environmental mandates and regulations as well as the reliability program involving the repair and maintenance of the water and power infrastructure.
There is also the issue of DWP’s pension plan that is underfunded by almost $2 billion, a low ball number since it is based on overly optimistic investment rate assumptions.
There are other impediments to completing a deal at a premium price on a timely basis, including overcoming the numerous, mind numbing regulatory hurdles involving the State of California, Washington, DC, and numerous other governmental entities that would be impacted by this transaction.
Furthermore, the sale of this or any proprietary department may also require the affirmative vote of Angelenos who, for the most part, would not be overly receptive to another massive increase in their water and power rates.
But the real “poison pill” for any strategic buyer (most likely another utility) who is willing to pay a premium price is DWP’s union and its leadership, its burdensome work rules which limit operational flexibility and efficiency, and its excessive compensation and benefits package that exceed other regional utilities by at least 30% according the recent report by PA Consulting.
This is a cancer that no sane buyer would want to inject into its current operations.
The sale of DWP is no silver bullet.
This deal will take years to complete, given the numerous regulatory issues, the renegotiation of numerous union contracts and pension arrangements, the massive financing requirements that will most likely exceed $20 billion, and the possible approval by Angelenos.
Rather, the proposed sale of our heritage demonstrates the utter failure of City Hall and its leadership, especially that of Villaraigosa, Garcetti, Greuel, and Zine, the members of the Executive Employee Relations Committee (the “EERC”), who gave away the store in 2007 labor negotiations rather than addressing the Structural Deficit and our infrastructure, all in an effort to advance their political careers and not alienate the campaign funding union leadership.
The sale of DWP (and, for that matter, the Port of Los Angeles, LAX, our parking garages, or any other capital asset) is poor financial policy as the proceeds will be used to finance operating expenses, a sure sign of a bankrupt city.
The proposed sale of DWP is just another example of the City Hall “kicking the can down the road,” hoping to avoid a crisis that drives the City to insolvency.
Unfortunately, the wizards that occupy City Hall do not have the will power or the guts to address the Structural Deficit, where over the next four years labor costs will increase by over $750 million, outstripping the growth in revenues by $300 million.
That is why we need a charter amendment that requires the City to “Live Within Its Means.”
This common sense amendment would require the City to develop and adhere to a Five Year Financial Plan, approve two year balanced budgets based on Generally Accepted Accounting Principles, and, over the next ten years, provide adequate funding for the elimination of the City’s unfunded $10 billion pension liability and the repair and maintenance of our streets, parks, sidewalks, and the rest of our crumbling infrastructure.
We need to say NO to the sale of our Department of Water and Power, not only because the City is selling our heritage, but it is poor fiscal policy. Plus our water and power rates will increase significantly more than large increases that are already in the pipeline.
And finally, would you trust City Hall and all their cronies with $10 billion in cash from the sale of our Department of Water and Power?
Vol 10 Issue 86
Pub: Oct 26, 2012