LA WATCHDOG - The City, its elected officials, its key employees, and others with material inside information about the city’s operations and finances need to be very careful about what they say (or do not say) now that there is a new sheriff in town making sure they are telling the truth and not feeding us a line of garbage.
Over the last several years, the Securities and Exchange Commission (the “SEC”) has made a concerted effort to improve the transparency and accountability in the $3.7 trillion municipal bond market. Through the use of the antifraud provisions of the federal securities laws, the SEC is forcing state and local governments to disclose true and complete financial information on a timely basis.
For instance, earlier this year, the SEC charged the State of Illinois with securities fraud because of the State’s inadequate disclosure about its 40% funded pension system and the associated risks to the state’s precarious finances.
Similarly, in August of 2010, the SEC accused the State of New Jersey of fraud for failing to disclose to investors its funding plans related to the State’s severely underfunded pension plans.
Last week the SEC escalated its efforts when it charged Harrisburg, Pennsylvania with securities fraud because its officials made misleading statements in public, trying to “put a good face on a difficult situation.”
In Harrisburg’s case, this City with a population of almost 50,000 is on the brink of bankruptcy because of $350 million of debt associated with an ill-conceived incinerator project that burned cash faster than trash.
Harrisburg’s debt load of $7,000 per person would result in a $28 billion burden for the City of Los Angeles, a liability approaching the sum of our unfunded pension liabilities and the deferred maintenance on our streets, sidewalks, and the rest of our failing infrastructure.
While Illinois, New Jersey, and Harrisburg all agreed to settle the charges without paying any fines, the SEC has served notice to the 50,000 issuers of municipal debt and their officials that misleading statements about the their finances will not be tolerated.
To quote the SEC’s position on the “potential liability of public officials with regard to disclosure obligations in the secondary market:”
“Public officials should be mindful that their public statements, whether written or oral, may affect the total mix of information available to investors, and should understand that these public statements, if they are materially misleading or omit material information, can lead to potential liability under the antifraud provisions of the federal securities laws.”
You can just imagine the utter frustration of some of our City’s more eloquent politicians if these barnyard specialists adhere to the SEC guidelines about true and complete disclosure of all financial information. And imagine, these restrictions also apply to the Sacramento spinmeisters who are also experts at painting lipstick on a pig.
Fortunately, this is just the beginning of the SEC’s efforts to improve the transparency and accountability of the $3.7 billion municipal bond market.
Joining the SEC will be the investors in municipal bonds who are pressing for greater compliance with the disclosure laws and the adoption of Generally Accepted Accounting Principles that mirror those for corporate issuers. And this in turn will require more sophisticated and accurate accounting and management information systems, especially for larger issuers such as the City of Los Angeles whose accounting systems are back in the Stone Age.
For example, the recent disclosure of $43 million being hidden in an obscure unaudited Department of Transportation fund revealed the glaring inadequacy of the City’s accounting systems. And there are other funds that are being mismanaged such as the $10 million Attorney Conflicts Panel Special Fund.
While City officials are celebrating the $325 million increase in revenue from last year’s adopted budget, there will some interesting disclosure issues involving the upcoming balanced budget and certain of its speculative assumptions involving negotiations with the civilian unions. There are also disclosure requirements involving the City’s unfunded pension plans and failing infrastructure.
Rather than seeing our Elected Elite in orange jump suits, we look forward to full and complete disclosure on a timely basis.
(Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee, the Ratepayer Advocate for the Greater Wilshire Neighborhood Council, and a Neighborhood Council Budget Advocate. Humphreville is the publisher of the Recycler Classifieds -- www.recycler.com. He can be reached at: email@example.com. Hear Jack every Tuesday morning at 6:20 on McIntyre in the Morning, KABC Radio 790.)
Vol 11 Issue 39
Pub: May 14, 2013