LA WATCHDOG - On June 27, the City of Los Angeles successfully sold $1,256,290,000 (that’s $1.256 billion) of Tax and Revenue Anticipation Notes (the Notes”) at amazingly low yields, ranging from 0.18% to 0.22%. The final maturity of these short term Notes is June 27, 2013.
The proceeds from these Notes will be used to prepay the City’s contribution to its two major pension funds and to provide the City with $425 million of desperately needed working capital that is necessary to fund the City’s increasingly cash strapped operations throughout the fiscal year, not the first six months as was originally contemplated.
But this deal does not make sense from an investor’s perspective when you analyze the potential return on investment compared to the financial and management risks associated with the City.
If you were to invest $100 in a note that matures on June 27, 2013, you would receive the return of your $100 investment plus interest of a whooping 22 cents (yes, 22¢, or $0.22).
And this return is further diminished by management fees and expenses if you are an investor in a California tax exempt money market fund.
But for this meager return, investors are exposing themselves to considerable risks.
Once again, the City is projecting significant Structural Deficits which total $1.1 billion over the next four years, including a $216 million deficit next year and $326 million in the following year.
And, as in the past, the increases salaries, benefits, and pension contributions (aggregating $768 million) out strip the growth in General Fund revenues ($480 million).
But in reality, this projected deficit is grossly understated as revenues are projected to grow by an overly optimistic 10.5%. At the same time, expenditures do not include cash for the repair of our streets and basic infrastructure or even normal capital expenditures. The City also relies on overly optimistic rates of return on its pension plan assets to lower even further its pension contributions.
There are also increased short term risks as the General Fund’s average month ending cash balances will decrease to $200 million, a drop of 40% ($140 million) from the previous year. And even more worrisome is the projected December cash balance of a mere $44 million (less than 1% of the General Fund revenues), and that is only after borrowing $25 million from other City Funds.
One of the more interesting aspects of this offering of Notes is the City’s Official Statement dated June 27, 2012, a 128 page legal document that requires “full and complete” disclosure of information that for some strange reason is not readily available in the Budget and other City documents. (Link)
For example, we learn that the City short changed the massively underfunded pension plans by unilaterally deferring $307 million in contributions in Fiscal Year 2011-12 by extending its “smoothing” period from five to seven years and by expanding the “market value corridor” from its previous level of 20% to 40% or more.
The Official Statement also quotes the City Administrative Officer that “it is likely that the City will once again be faced with a significant deficit by the middle of the next fiscal year” and that “fiscal insolvency” is a likely result if the City continues with its present policies.
We were also alerted that the Budget only provides six months of funding for the 209 employees whose positions were scheduled to be eliminated by the Mayor. And as you can imagine, this will be a battle royal if these layoffs occur, especially since it will be only two months before the City elections.
Interestingly, the Official Statement failed to disclose that the City declared a Fiscal Emergency on June 6, only a week after approving the “balanced” Budget – one that relied on one time sources of revenue and deferred expenditures. (Link)
Nor does the Official Statement discuss our deteriorating infrastructure and the $10 billion or more that is required to repair and maintain our streets, sidewalks, curbs, parks, street lights, buildings and facilities, computer systems and the rest of our neglected infrastructure.
Nor does the Official Statement disclose that pension contributions and benefits are projected to total almost $2 billion in the Fiscal Year 2016-17, chewing up 40% of the General Fund.
The data dump provided in the Official Statement does not provide investors or Angelenos with a detailed and thoughtful analysis of the City’s dire financial condition and the looming prospect of “fiscal insolvency.” Nor does it provide any solutions.
It is obvious that Mayor Villaraigosa, Controller Wendy Greuel, former City Council President Eric Garcetti, and the Wesson led City Council have no strategic, operational, or financial plan for the City. Nor have they even considered the consequences of adverse legal decisions that could cost the City up to $1 billion. And heaven forbid we have an earthquake. Rather, despite the repeated warnings of the City Administrative Officer, our Elected Elite continue to make politically expedient decisions on the fly, the hell with the long term consequences which will eventually lead to insolvency.
The looming threat of fiscal insolvency and the unhealthy reliance on the large money center banks and fickle quality oriented investors are proof that we need a charter amendment that requires the City to “Live Within Its Means” to protect us from our grossly negligent Elected Elite who have clearly demonstrated over the years that they are incapable of managing the financial affairs of the City in a prudent and respectful manner.
We must demand to know whether the wannabe mayors - Controller Wendy Greuel, former City Council President Eric Garcetti, and Council Member Jan Perry - will join outsider Kevin James in supporting meaningful charter reform of the budget process and how they intend to balance the budget, fix our roads, and fund the City’s pension plans.
Angelenos cannot afford more of the same.
(Jack Humphreville writes LA Watchdog for CityWatch He is the President of the DWP Advocacy Committee and the Ratepayer Advocate for the Greater Wilshire Neighborhood Council. Humphreville is the publisher of the Recycler -- www.recycler.com. He can be reached at: [email protected]) –cw
Tags: Jack Humphreville, LA Watchdog, city budget, City Hall, pensions, bonds, TRAN
CityWatch
Vol 10 Issue 54
Pub: July 6, 2012