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Is LA Telling Investors the Whole Truth?

LA WATCHDOG - The City of Los Angeles is currently in the market to raise about $1.3 billion in Tax and Revenue Anticipation Notes (the “Notes”). 

The proceeds from this offering will be used to finance its early payment of $900 million to the City’s two seriously underfunded pension plans ($11.7 billion underwater and only 65% funded) and provide $400 million in short term working capital to fund the City’s operations until January when it receives a significant portion of our real estate taxes.

As part of the offering, the City has prepared an Official Statement that that should be “true and complete in all material respects.”  Unfortunately, the disclosure associated with this poorly written document is less than adequate.  

For instance, the City’s Information Statement does not have adequate disclosure about the dismal condition of our infrastructure and the over $10 billion of investment needed to reach a level of “sustainability.”   

Our lunar cratered streets are an everyday example of the failure to repair and maintain our infrastructure. Add to this our crumbling sidewalks, flickering street lights, dilapidated parks and recreational facilities, aging sewers, and run down City’s buildings, as well as the storm water infrastructure that is projected to cost $8 billion over the next decade.

Nor does the Information Statement include details about the multibillion investment required to upgrade the City’s Stone Age Information Technology.  Right now, the City’s Management Information System is incapable of generating reliable, real time information and financial data that is needed to effectively manage a $6.9 billion organization with over 32,000 employees.

Nor does the Official Statement adequately disclose the impact of Proposition 26, the Supermajority Vote to Pass New Taxes and Fees Act.  What are the consequences of DWP’s proposed 26% increase in our electricity rates? And what is the impact on the City’s General Fund if the 8% Power Transfer Fee is subject to a City wide vote?  The lack of disclosure is surprising given the recent litigation filed by the Ratepayers of Redding Electric Utility as well as the considerable legal research and related discussions by and with the City Attorney’s office.

On the other hand, while the Information Statement does a data dump on the City’s pension systems and other post retirement benefits, it does not disclose the dramatic impact of on the City’s annual contribution of a lower, more realistic Investment Rate Assumption or the lower rate’s impact on the unfunded pension liability. Nor does it discuss the impact of any changes in the very lenient accounting rules.

In addition to the lack of adequate disclosure, there are also significant concerns about the City’s credit rating and solvency.  In a recent article in The Bond Buyer, [link] former Mayor Richard Riordan once again rightfully questioned the solvency of the City of Los Angeles.  

While the City professes to have a balanced budget, the revenue projections may be overly optimistic since they are based on last year’s adopted budget, not the estimated budget which has revenues that are $70 million lower than the Adopted Budget.  

A balanced budget is also contingent on concessions from the Police Department’s union and other employee unions.  The budget also relies on a number of one off gimmicks, such as raiding Special Funds and deferring expenses, including those for adverse judgments and needed capital expenditures.

Once again, the City is projecting yet another budget deficit, one of only $281 million for the following fiscal year beginning July 1, 2012.  The underlying driver of this budget gap is the $296 million increase in employee related costs. And this shortfall does not include the necessary expenses to even maintain our deteriorating infrastructure.

The General Fund’s Balance Sheet as of June 30, 2010 also shows considerable deterioration.  Over the last four years, the key Unreserved and Undesignated Fund Balance has been depleted by 75%, from $453 million to a dangerously low $115 million.

This Balance Sheet also shows that the General Fund dramatically increased the early collection of revenue to fund its operations, a very worrisome indicator of Enronesque financial engineering.

There is also the issue of the extended maturities of the Notes way beyond the receipt of the real estate tax revenues, another indication that the City may be rolling over its current deficit into the following year.

Buyers of the Notes may also want to consider that Proposition 26 may have a negative impact on the $254 million transfer from the Power System to the General Fund, the first installment of which is in March.

Overall, it is very difficult to understand how the City’s credit rating is AA-.  Yet these are the same credit rating agencies that were instrumental in creating the meltdown in the mortgage market.

Compounding the lack of adequate disclosure and the concerns about the credit rating of the Notes, the City Administrative Officer is once again refusing to honor legitimate requests for public information, just like he did when citizens asked for data relating to the fiscally irresponsible fire sale of our parking garages.  

In this show of bad faith, almost 40 days after the request for a list of owners of the 2010 Notes and the 2010 Judgment Obligation Bonds, he refused to release the names of the institutional investors, even though their holdings are a matter of public record.  Rather, he cited the need for confidentiality of the individual buyers, ignoring the fact that institutional buyers such as Fidelity, Vanguard, Blackrock and Northern Trust are the major buyers of short term paper for their California tax exempt money market funds.  

More to the point, the CAO understands that buyers of the Notes are concerned about the reputational risk of being owners of these speculative Notes, especially those Notes that mature after March 31. After all, would you want your tax exempt money market fund buying this junk?

As for the so called investors in the Notes, they need to do their own analysis rather than relying on the City’s convoluted Official Statement, the politically intimated rating agencies, and the fee grubbing underwriters.

BUYER BEWARE is a very appropriate message to the speculators interested in buying the Notes.

(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: investors, Los Angeles, pension plans, real estate, city budget, Prop 26, infrastructure, information, City Attorney, Mayor Richard Riordan, credit rating, bonds, general fund, Bond Buyer




CityWatch
Vol 9 Issue 51
Pub: June 28, 2011