PERSPECTIVE - Conalysis: the result you get when a con man performs financial analysis.
The city’s chief administrative officer (CAO) Miguel Santana is a bright guy with a penchant for running numbers that please his bosses rather than enlighten the public.
I listened to Santana at the neighborhood council budget advocates session at the Congress of Neighborhood Councils on Saturday. He started off whining about Moody’s approach to ranking the city’s pension liability as the fifth worst in the nation among local governments. Our pension liability measured 325% of annual revenue. Chicago topped the list at 678%.
According to Santana, Moody’s use of the entire liability as one of the measures was unrealistic since it is not due and payable now. He said if the lending industry followed the same approach, very few people would ever get a loan when the burden of their full debt loads is considered.
Rubbish. It’s apparent Santana does not work in the real world or he would know how long-term liabilities are evaluated in the loan underwriting process.
Let’s say you were applying for a mortgage loan. True – the bank would treat the new loan amount as a liability in determining your net worth, but new annual payments would be calculated and compared against your income. If your income could absorb the payments and still have enough left to cover living expenses and other obligations, the loan will probably be approved, assuming there were no adverse uncertainties on the horizon. The loan balance is more of a means to an end, not the end itself.
It is important to relate the city’s outstanding pension liability to income, as Moody’s did. The liability can be converted to equivalent annual payments which can be compared against annual revenues.
Currently, the city’s share of pension contributions is equal to 18% of the general fund. They represented a mere 5% in 2003. Revenues will increase and decrease over time, but the pension liability will grow steadily and absorb an ever-increasing portion of the budget. There’s trouble ahead and Santana should embrace Moody’s work and use it to push for real pension reform – not the nibbling around the fringes the city has been doing.
Santana’s view of the pension liability as irrelevant to the poor ranking of the city’s employee pension plans is, therefore, nothing more than whistling in the dark. The obligation is relevant, it is growing…and it is not going away.
Santana also said all financial scenarios are academic, and I agree with him. What I stated above is academic.
However, you cannot cherry pick an analytical approach to suit your specific needs. You have to be consistent. He doesn’t get it.
In arriving at purported savings of $3.9 billion from the deferral of raises for DWP workers under IBEW Local 18, Santana took the same approach as Moody’s did with the pension rankings. Both rely heavily on present value calculations. The raise deferral savings are derived from taking the present value of the hypothetical savings over the next thirty years. The pension liability Moody’s used is calculated in much the same way. Santana wants to ignore the logic when it hurts the city and use it if it helps. As I told him at the session, you can’t have it both ways.
Actually, Santana was off base in forecasting any wage deferral benefits beyond the next round of labor negotiations with the IBEW, which will occur four years from now. A new deal could very easily offset any of the benefits in the current one. But why would he want to burden the public with that thought when he could claim an “academic” savings of $3.9 billion?
Con men have been misleading the public for centuries by playing it fast and loose with analysis and denying the obvious. That’s what our CAO is doing. He gets paid to do it – by us.
Controller Ron Galperin might want to keep an eye on him.
(Paul Hatfield is a CPA and serves as Treasurer for the Neighborhood Council Valley Village. He blogs at Village to Village, contributes to CityWatch and can be reached at: [email protected]) –cw
CityWatch
Vol 11 Issue 79
Pub: Oct 1, 2013