Leiba: the city is falsifying its pension debt

Ned Leiba makes a point at a meeting of the Measure A advisory committee.

Ned Leiba writes:

“Thanks for the links to the study by Professor Joshua Rauh and article by Ed Mendel.

“They do a good job of pointing out that a proper economic and accounting measure of pension liabilities should be based on a risk free discount rate.  That concept seems IMPOSSIBLE for most state and local government accountants to accept.  When the discount rate is brought up, the response of the City is that the CALPERS rates will be “phased in” over time.  The proper measurement standard is a low discount rate and is not something to be “phased in over time.”  Period.

“The prayed-for rate of return is something else, as is the politics that influences the decisions of CALPERS, as is the marketing spin kicked out by the City, e.g., the City Manager claimed “we are in a good position” in respect to our pensions.

“I liked this quote from the footnotes of the Rauh study:

“The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent” (Walsh and Hakim 2012). Buffett: “[State and local governments] use unrealistic assumptions . . . in determining how much they had to put in the pension funds to meet the obligations. The pension fund assumptions of most municipalities, in my view, are nuts. But there’s no incentive to change them. It’s much easier to get a friendly actuary than to face an unhappy public” (Summers 2011).

“Now, let’s get a little more accurate.

“Do you realize that the estimates of unfunded pension liabilities even by Rauh are understated?

“Look at the Stockton pension bonds. They are 100% unfunded.

“At the last Audit Committee meeting, a very important question was asked of the City accountant by a member of the Council Audit Committee.  How much of the contingent liability to Assured Guarantee will the City pay on the pension bonds?  What is the threshold to start payments?  In other words, what is the true estimated present value of that added part of the unfunded debt? The City accountant had no answer, other than pure generalities.  No numbers.

“It is at least $55m.  Assured Guarantees (perhaps) values the entire debt at $100m.  The face amount before adjustment in bankruptcy was over $140m.

“Hopefully you can see that we need to add in the unfunded pension bonds to reach the correct amount of unfunded pension liabilities for our City. You need to know the true present value of the pension bonds, and the City does not seem to know, or will not say.

“And finally, you need proper accounting, audits and financial statements.

“You recently posted a display of selected financial information for Measure A.  That was not a GAAP financial statement.  It was not audited.  It was not reviewed and approved by the Measure A Committee.  It seems to have material misstatements compared to GAAP.  But someone gave you that document and you posted it, without understanding its meaning.

“Well, think about this issue.

“We have substantial past pension liabilities – relating to the CALPERS debt and the pension bonds – that have been charged to Measure A police costs.  Those costs were included in that statement you posted as part of the 65% Marshall Plan costs.

“Is it proper to show as a current cost of hiring new officers, the costs of a pension debts that existed well before Measure A passed?

“The answer is no.  Expenses belong in the period they economically arise.  Not when they are paid.  Because you have a pot of $28m per year, does not mean that anything paid from those funds is an expense properly charged to the 65% or 35%.

“There are other significant problems with the “display” you posted.  The City adamantly refuses to produce (1) a proper financial statement of Measure A, and (2) have a proper audit of Measure A.  Instead, they gave you a display of some, selected financial information.

“Do you know why?

“Perhaps because a proper financial statement audit would result in an audit report that (1) the financial statements are materially misstated (2) the financial statement are incomplete (3) there are material weaknesses in internal control like with the CAFR and (4) the City did not comply with the expectations of the voters to spend 65% of the Measure A proceeds wisely, efficiently on the Marshall Plan activities and 35% to get us out of bankruptcy (already done as of February 2015) and for services to citizens etc.

“Today is April 18, 2016.  We do not have a proper financial statement nor audit for Measure A activity for the periods ending 6/30/2014 or 6/30/2015.  No auditor would even respond to the cockamamie RFP issued by City Management in March.   The City has failed to have an audit as promised to the voters.

“Thanks for continuing to follow the very important pension story, and of course, for watching Measure A.”

A few comments:

• Leiba is right that a proper measure of pension debt should be based on a risk-free “discount rate,” the estimated investment returns of the pension management system. Discount rates are inflated for political reasons to hide the true cost of pensions from the public.

• But the idea that more realistic accounting should not be phased in is crazy. If CalPERS switched to a risk-free discount rate tomorrow, Stockton would be bankrupt before the end of the year. Again. The books would be tidier but the city would be in a permanent vegetative state.

• Leiba’s point about the pension bonds — they’re part of the liability, too — is right on. So add at least another $55 million to the city’s staggering pension liability.

• To criticize me for posting a city financial report “without understanding its meaning” is presumptuous. I understand Leiba believes most every city financial report and chart is false. But we have to start fiscal discussions somewhere. The important thing is that we’re having far more fiscally literate discussions than we did before Stockton’s meltdown.

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Stanford guru: pensions will bankrupt more cities

“More and more money is going to have to go into these funds, and you are going to see more and more bankruptcies along the likes of Detroit, San Bernardino, Stockton, California.”

—Joshua Rauh, a Stanford University finance professor.

Rauh added, “And over a five- to ten-year horizon, I would expect there to be a number — many, many more cities going bankrupt and many states that are insolvent.”

Rauh authored a new study pubished by the Hoover Institution “that 564 state and local pensions systems reported a “net pension liability” of $1.2 trillion under new government accounting rules,” reports Calpensions.

“But Rauh believes the debt is nearly three times larger, $3.4 trillion, because the pension systems, even under the new rules, use an overly optimistic annual earnings forecast, 7.4 percent, for investments often expected to pay two-thirds of future pensions.”

$3.4 trillion is an immense black hole devouring government.

The big worry locally is not “more bankruptcies along the likes of Detroit, San Bernardino, Stockton” — but that Stockton itself will suffer Chapter 18, a second bankruptcy. Some of the most fiscally literate Stocktonians believe it’s only a matter of time.

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The inanity of San Francisco’s housing policy

Joseph Amster, dressed as Emperor Norton, waves while marching in a parade to remember the great San Francisco 1906 earthquake and fire's 110th anniversary Friday, April 15.

The New York times did a piece on San Francisco’s housing crisis that made it pretty simple: San Francisco doesn’t have enough housing, and its leaders are too dumb to build more.

“To get prices down, “You’d have to, like, build another city on top of the city,” said David Campos, a progressive-wing member of the San Francisco Board of Supervisors,” the Times reported, adding, “He thinks the city should focus the vast majority of future development on affordable housing limited to people making well below the city’s median income.”

In other words, abandon the middle class.

“This thinking is at odds with a February report on housing prices from the California Legislative Analyst’s Office, which said underdevelopment was the primary cause of the high prices that afflicted cities throughout the coastal part of the state, especially in the Bay Area,’ the story goes on.

“Many housing programs — vouchers, rent control and inclusionary housing — attempt to make housing more affordable without increasing the overall supply,” the report said. “This approach does very little to address the underlying cause of California’s high housing costs: a housing shortage.”

The result of this inane leadership — which doesn’t think the solution ot a housing shortage is to build more housing — “Every few weeks, when a company like Zillow puts out a new price report, both sides hold up the numbers as an example of how San Francisco has failed the middle class,” the Times writes.

“Zillow puts the city’s median home price at $1.1 million, neck and neck with Manhattan. The region’s rent, at $3,500 a month for an average apartment, is the highest in the nation.”

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The Pampanito and sundry images

The USS Pampanito was towed to Colberg’s shipyard in 1976. There it was to be fitted with protective screens that would make it safe for visitors when it became an attraction at Fisherman’s Wharf.

Here it is without its conning tower. Note the tug alongside.

Here’s an aerial view. The powerful union boss Harry Bridges, who sat on the Port Commission, said it was shameful to glorify an engine of war. So San Franciscans had to argue that one out for six years. Finally they overruled Bridges.

And the sub left. It’s docked at Pier 49 now and open to the public.

The archive contains many images of the Delta King and Queen and other historic Stockton vessels. Many of these seem familiar, even if you haven’t seen the specific images before, because there are so many around Stockton. Here’s a painting of the Delta King that feels fresh.

The column also mentioned the Smith and Lang fire — admittedly a digression. But here we go.

Smith & Lang was Stockton’s oldest department store, dating to 1899. The story employed 125. On July 22, 1958 the store burned to the ground.

According to the Online Archive of California, the was the “worst national mercantile fire of 1958.” Insurance claims totaled $3 million.

The owners rebuilt and reopened in 1959. Ultimately, in 1963, they sold out to Weinstock-Lubin.

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“We will not be the next Owens Valley”

Attorney Brett S. Jolley fired off that defiant statement to the chief of the mighty Metropolitan Water district of Southern California. The MWD is in the ominous process of buying four Delta islands.

Ostensibly largely for habitat restoration. Jolley & Co. tell the MWD straight out they don’t buy it.

“In the early 20th century William Mulholland and Fred Eaton devised a plan to surreptitiously acquire Owens Valley water rights in order to bring the valley’s water resources to arid Los Angeles,” Jolley writes. “In  he process, history tells us, they deceived the residents and landowners of Owens Valley, assuring them Los Angeles would use only Owens Valley’s excess waters with no impact to the valley.

“But this was not the case. Los Angeles began sending water form the Owens River for storage in the San Fernando Valley and within a quarter century Owens Lake had withered from a lush, miles-long natural reservoir into an arid, alkali flat — resulting in dust  storms, agricultural difficulties, and loss of natural vegetation …”

“A century later MWD seeks to purchase 20,000 acres of Delta islands land for alleged “habitat restoration … Through this lawsuit we will ask the court to … compel MWD to honestly and transparently disclose the harm that these activities would cause the Delta.”

A fairly ringing declaration that our region will not be subsumed and destroyed by the thirsty giant. Read the whole letter here. Letter to MWD

 

In other news …

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Time off from accomplishing nothing

For any responsible council member, the decision what to do Tuesday night was easy.

One look at the calendar would have been enough to see the Carrie Underwood concert conflicted with the City Council meeting. The choice between doing important public business and having a good time should have been no choice at all.

But Mayor Anthony Silva chose the good time.

Silva put several public safety-related items on Tuesday’s agenda, for instance police substations, which the Chief says are not needed. Staff did no report on this nonstarter.

But Silva moved it to the front of the new business — so he could catch the concert — made a bunch of public statements about law ‘n’ order, and declared a 10-minute break.

When the meeting resumed, he was gone.

It’s ironic that Silva postured as a Public Safety candidate. Because one of the votes he skipped out on was the new health plan for city employees. Exit interviews with departing police cited unsatisfactory health insurance as a prime reason for quitting. The new health plan is therefore the most important step the city can take to retaining police hires.

A mayor sincerely concerned with law enforcement would want to vote on that. A mayor who knows only how to campaign and to party would not.

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Villapudua’s albatross

"My recipe needs work."

Mayoral candidate Carlos Villapudua has tweaked and re-submitted The Stockton Public Safety Improvement Act. The City Attorney said the first version was illegal.

Oddly, Villapudua, and/or his political consultant, Don Parsons, took out the part that the city attorney did not say not say is illegal, and they left in the part he did say is illegal.

The part they took out — hiring other law enforcement agencies if city police cannot staff up — while legal, was merely next to impossible to do in practical terms.

It appears quite possible that the initiative will be rejected again as an illegal usurpation of council budget authority. It appears equally possible (see item, below) that there was never enough time to gather the requisite signatures to put it on the ballot, anyway. Finally, it appears the authors didn’t understand the complexities of inter-agency staffing.

If this initiative was intended to make Villapudua look mayoral, it has backfired. Villapudua looks like he does not understand city government – like the part about listening to the City Attorney.

If the initiative stands, and he garners the signatures, I stand corrected. If it gets rejected a second time, his signature campaign act is a debacle.

 

 

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Does Stockton haunt CalPERS?

"This pension plan is killing me."

The state pension Hogzilla helped drive Stockton bankrupt once — and it paid a price. Stockton did not cut its pension debt, but a federal bankruptcy judge ruled it could. The judge wrote that all the state legislation and case law granting CalPERS royal immunity from haircuts by bankrupt municipalities was illegal and void.

So the next city to go bankrupt may well give CalPERS a shearing.

CalPERS’ dilemma is that it was understating the true cost of pensions, and now that it is getting more real, it has to hike the bill to the state and municipalities. It’s going slow.

Reports Ed Mendel in Calpensions:

“Gov. Brown said in a news release the CalPERS risk reduction plan is “irresponsible” and based on “unrealistic” investment earnings. His administration had urged the CalPERS board to phase in the big rate increase over the next five years.

“The CalPERS board president, Rob Feckner, said the go-slow decision emerged from talks with consultants, staff, stakeholders and concern about putting more strain on cities “still recovering from the financial crisis.”

In other words, CalPERS knows it could drive Stockton bankrupt again. And other municipalities as well. CalPERS was quite the bully to Stockton in the run-up to the city’s bankruptcy. But since Stockton’s bankruptcy trial exposed the giant’s Achiles heel, CalPERS is showing cities more consideration.

As well they might. Stockton’s next bankruptcy, should it come, will not be due in any part to fiscal excess as was the case before; it’ll all be on CalPERS. Which will deserve no leniency in court.

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Behind closed doors with the mighty Met

The Metropolitan Water District also takes water from the Colorado River.

Urban water districts are powerful players in the politics of water. And the Metropolitan Water District of Southern California is the most powerful in the nation.

The mighty Met writes or rewrites bill language “authored” by such powerful figures as Sen. Dianne Feinstein. It pushes House Republicans to ever-more radical positions. It has worked to undermine the San Joaquin River restoration.

And much more. Pardon the pun, but if you want to get your feet wet in this issue, read this story by Debra Kahn of E&E Publishing.

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“A measure of justice”

Benjamin Wagner

Uncle Sam has levied $5 billion in penalties on Goldman Sachs for its part in triggering the Great Recession, which sank Stockton into bankruptcy.

A recession  from which the Valley has yet to recover. Stockton’s median home price in 2006 was $342,000. That was up a steroidal 29.7% year-over-year.

The current median home price is $225,400 — down 35 percent.

Of course, the 2006-7 home prices were inflated by a bubble. Goldman Sachs was blowing that bubble. The company admitted its guilt in the settlement. It knew that Countrywide was selling shaky mortgages, but told investors everything was fine.

“Over the course of 2006,” writes the New York Times, “Goldman employees took note of the decreasing quality of loans that it was buying, according to a statement of fact released along with the settlement. When an outside analyst wrote a positive report about Countrywide’s stock in April 2006, the head of due diligence at Goldman wrote in an email: “If they only knew.”

U.S.Attorney Benjamin Wagner took a victory lap. “I am very pleased that this office, which serves the district that was ravaged by the financial crisis, played a major role in delivering a measure of justice in this matter.”

But the Times reports that the settlement is a lot easier on Goldman Sachs that it looks. You can read about that here. 

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    Mike Fitzgerald is The Record’s award-winning metro columnist. His column runs in the paper three times a week. Born in San Francisco, he was raised in Stockton. His column covers diverse beats including, sometimes, the offbeat. Read Full
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