LA DWP, the Mayor, and the Unions

The City of Los Angeles has had quite a few difficulties in recent years, which of course is at the heart of it, budgetary.

One of the problems that has just come up is that there is a power struggle with the Los Angeles Department of Water and Power. LADWP is a municipal power authority, and it's board isappointed by the Mayor and the appointments are approved by the City Council. The board supervises the LADWP, but like a lot of boards, it is hard to tell just how much they really do in the way of work, and how much they leave to actual department managers.

Just recently, Villaraigosa was championing a significant rate hike to LADWP ratepayers, in part to create a "lockbox" for renewable energy projects that have yet to be explained. When that rate hike triggered a public furor, the mayor's office went into a tailspin, with a report of potential bankruptcy for the city, the mayor declaring two days a week as furlough days for city employees, and now the mayor is pointing at unions and entrenched management issues as being a large part of the problem with getting answers from the LADWP, seeing as there is no an outcry for a better understanding of what the LADWP is using the money it collects for. While there have been previous complaints against the LADWP regarding their budgets, nothing has come of it.

Of course, the Mayor is supposed to oversee all of this, and Villaraigosa has been mayor since 2005. He was clearly aware of the rate hike, and he clearly wants to appear to be involved in push to ensure that "Green" power services" are used for LADWP power generation (and that those funds are in a fund that the Mayor controls in some way, creating a so called "Lock Box).

But the Mayor seems to have just discovered that there are problems with the LADWP. Now Los Angeles has lots of problems though, so it's understandable if the mayor has been busy with other things. I mean, his divorce can't have been very easy, and that affair and all television interviews that entailed.

There are those that say that you get the government you deserve. That may be true, but I think that is also a matter of blaming the victim. The ability to game the system has turned American Politics into a strange business with its own rules, and the fact is that Unions (state workers unions in particular) have managed to organize their members quite well, creating a powerful voting bloc that is funded in a way that no other political organization can manage. This, in addition to the problem of entitlements is going to create a society that is very different from the one that we profess to wish to create.

Or maybe we are creating the society we do want. But if that is the case, then where can you go if you want a country where there is no welfare state and government, and very limited government intrusion into your life, even if all you want is a simple, but pleasant life. It's possible that never actually existed, but I have childhood memories of that kind of place. But then, maybe that's just my imagination. Or maybe Los Angeles is a bad example to try to find such a thing, since it really has become a much bigger city since I was that child.

The Greek Debt Crisis

I've been trying to get to the real bottom of why the Greek Debt Crisis is so "important." Greece is a Eurozone state of course, but it's GDP amounts to a little less than 2% of the Eurozone's GDP as a whole. If Greece was not part of the Eurozone, I rather doubt that their financial troubles would be considered very important.

But they are a part of the Eurozone, and so the Eurozone has gotten dragged into their mess. Thing is, the EU is a weird thing. It's not a real governmental unit, but it wants to be, and it appears that a large part of the problem is that a Greek default threatens to push other EU nations to that default brink, since they are relying in income from existing Greek bonds for their own revenue streams. Because of that, it is an EU problem, since a Greek Default would affect other weak members (Apparently Spain and Italy in particular). So, in the name of keeping things copacetic for member countries, the EU as a whole has to consider some way to implement damage control.

This also seems to be a headache for the EU, since there doesn't appear to be a mechanism for being kicked OUT of the EU. While there are rules for financial responsibility that nations are supposed to adhere to in order to be a part of the EU, those rules don't really appear to have any real mechanism to ensure that they are followed.

Add to this the fact that the Euro as a currency is a FIAT currency, which essentially means that the Euro is accepted by other countries because it is seen to be a stable currency, which means that the Euro members are also stable entities. Just simple default by a member country is not an indicator of a stability. If things reach the point of general civil unrest, that questions stability further.

This is where we see a "chain is only as strong as its weakest link" syndrome. If the Euro as a currency weakens, that actually impacts other nations that use the Euro. The relative cost to their economies is difficult to evaluate though, and well beyond the scope of my analysis. The question though is clear. Are you better off taking the hit from bailing them out, or taking the hit from the currency devaluation. The question though is further complicated by short and long term concerns.

I'm personally guessing here that long term the correct answer is to accept short term pain and let Greece default, but that involves short term pain, and politicians really hate inflicting short term pain, since voters hate to suffer, and so paying the bill later keeps the current politician in place longer.

Thing is, Greece may in fact be the weakest link, but the EU has other weak links in their chain, and this is highlighting it.

Lucky for Greece though, it looks like they will be bailed out, although they will have to cut back a LOT on government spending. We'll see if that is considered serious enough that they wind up with rioting anyway.

If that happens, it's going to be a lot dicier for the EU to deal with.

But then, this is international finance. What do I know?

RAISE OUR TAXES!!!

How often do you see a protest where citizens are chanting "Raise Our Taxes!"

http://www.youtube.com/watch?v=J0Dbx7buT9c

Local and State governments do not have the power to print money (well, not really), but they can implement tax hikes directly and indirectly.

Now the fact of the matter is that taxes at some level are necessary to fund programs that the state should provide. One of the clear programs that the state needs to provide is law enforcement and the court system. I certainly don't have an exhaustive list of what services the state should provide, but there is a reality that these services need to be funded. If there isn't sufficient funding though, the services need to be diminished or eliminated, or revenues need to increase.

There are different ways to increase revenues. It is important to understand that increased revenues are not always synonymous with increased taxes. Tax increases can in fact lead to decreased revenues.

One of the problems that governments throughout the U.S. have is that they treated the boom times as normal, and now that there has been a downturn, revenues have not been sufficient to cover expenses and rather than cut back on spending, debt was incurred. Now further debt is not an option, and service cutbacks are more likely.

Those service providers though are people, and while the majority of the private sector doesn't have the same sort of mechanism to pressure ownership to keep jobs, unionized workers do have some similar capabilities. Government workers are unionized, and the chant "raiser our taxes" is essentially the same as chanting "Raise your Prices."

Thing is, if a union demanded that their employer raise their prices, there is a clear competition mechanism that limits that option. When unions demand that the STATE raises its prices, there is a clear conflict of interest. The mechanism to counter that is the ballot box, which is likely to be invoked if legislators choose to increase taxes in Illinois, but that has yet to play out. But there is a flaw with the ballot box. If those that benefit from taxes outnumber those that PAY taxes, they can out-vote those that PAY taxes. This is an extreme scenario, but that seems to be the rode that this is leading to. The demonstrators aren't asking to have ONLY their taxes raised. They are asking to have everyone's taxes increased, so THEY can be paid.

Clearly at some point this system can fall apart. But what is telling is that this sort of position is considered reasonable to those paid by the state (or at least these protestors). When tax revenues suffer due to reduced economic activity, it would seem reasonable to expect the state to stop performing a variety of services, or to implement cuts in salaries and benefits to reflect the new economic reality.

Situations similar to this are playing out through the country. If you are a member of a state workers' union, you should consider what it is you really expect when the State doesn't have sufficient revenues. If you aren't, you need to consider just what it is you want the state to provide, and you should look into what it is that the state DOES provide, because odds are good that there are many programs that you don't think should be there. And be careful if your legislators claim that essential services such as police and fire need to be reduced. That may be true, and for that matter, it may be prudent (I believe that both services could be overstaffed or overpaid, but for the most part consider it unlikely), but clearly other programs need to be reviewed and reduced first.

California Global Warming Solutions Act of 2006

Once upon a time, California was the go to state. The place where people would go to make their fortunes. The Golden State, with sunshine, movie stars, beach parties and open roads. Over the years though there a disconnect has occurred between the elites and the middle class, as well as a growing underclass that seems to wind up locked into underclass status. There are a myriad of reasons for this evolution, and one of the big reasons for this has been the ever increasing amount of regulation that the governing entities require.

One of the more recent regulations that California has decided to implement is AB32, the California Global Warming Solutions Act of 2006.

http://www.leginfo.ca.gov/pub/05-06/bill/asm/ab_0001-0050/ab_32_bill_20060927_chaptered.pdf

While there is certainly a "Yay us, we're a leader when it comes to solving Global Warming" element to this, the act itself seems to rest on the premise that by mandating emissions control to revert back to 1990 levels by 2020, entrepreneurs will come up with new and cost effective methods of doing so while at the same time continuing to increase growth and development in the state.

However, the legislation doesn't require growth or development in the state, and in fact seems to encourage significant lifestyle changes on the populace. Given that greenhouse gases, CO2 in particular, are a component of mammalian LIFE, this can have a very sweeping impact on all sorts of industries.

Most people think of vehicle emissions and power generation (coal burning electric plants) as the specific targets of this sort of legislation. While those entities are certainly in the crosshairs, any company that emits greenhouse gasses can be regulated. And that can certainly mean the raising of livestock.

http://www.npr.org/templates/story/story.php?storyId=4789554

Now, it may in fact be possible to drastically reduce livestock emissions, but the research cost alone is likely to cause a competitive disadvantage, and odds are that reduced emission farming techniques will result in a competitive disadvantage when compared to methods that do not require reduced emissions.

And unfortunately, the fact of the matter is that such a competitive disadvantage will be in play for any industry that California entrepreneurs choose to engage in. This is leading to a stratification in the society, where those that have made their fortunes are able to live quite well, while those that are seeking their fortunes find their way up to be more and more difficult. And those in the middle find themselves squeezed in a vicious race to the bottom, as the middle class shrinks and an even more vicious cycle of reduced tax revenues that and cutbacks in public safety and services such as fire, police, and prisons, followed by schools since cuts in those services will most likely lead the voting populace to accept tax increases. At least until the point where the voting populace simply WON'T accept further tax increases.

The tax limit may have been reached, at least for the time being with the general economic climate in California being so weak , and while CARB has yet to go into effect, if it does, it will simply add to the regulatory disadvantage that potential businesses will see If they consider setting up shop in California. And really, why is it that California's leaders want to put the economy in California at a disadvantage?

For quite some time there has been a back-door tax on Los Angeles Residents through the power of the Department of Water and Power. There have been those that have railed against the way the DWP does business for years, but I think that for the most part their activities (and their detractors) have flown under the radar for a variety of reasons.

DWP rates are indeed lower than other regional power suppliers. DWP in particular looked good back when power rates were being manipulated, and rolling blackouts were occurring, with Enron at the bottom of a system of market manipulation that had been allowed to come into being through a combination of de-regulation and a relative lack of supply that really was a result of market manipulation (although there were plenty of claims that the lack of power plants having been built and infrastructure upgrades were to blame).

There was a lot of outcry over the market manipulation, and many lost their retirement because they believed in Enron and had tied their financial future into the stock of the corporation, some did go to jail over the scandal. LADWP however controls enough of its power that it's rate-payers suffered no blackouts. In fact, during the time of the rate manipulation, actually sold excess power to other utilities at the prevailing (manipulated) rates. While getting paid entailed a legal battle (those that owed LADWP for the power that was sold at the time), LADWP finally received $146.5 Million in 2009 for that period. http://www.wadisasternews.com/go/doc/1475/360415/ . You might think that sort of windfall would actually help subsidize DWP expenses, and bring DWP ratepayers a credit of some sort, or at least delay an increase in rates. You'd be wrong.

DWP is a municipal monopoly. In theory this means that rates can be kept lower because there are no shareholders demanding dividends. Any profits can be (in theory) used to pay for improvements, or to reduce rate costs, or both. Or, those profits can be transferred to the city in order to keep tax rates from increasing on the public. Or, those profits can be a backdoor tax on ratepayers.

On a regular basis, DWP makes transfers to the city of Los Angeles General Fund. It is a regular dance for the DWP to request a rate hike, or threaten to withhold the transfer of funds. This year though the proposed rate hike was so high that it couldn't be ignored. And when questions were brought up, the rationale for the level of rate increase that was proposed kept changing. And given the current economic environment coupled with the nature of unchecked government spending, coupled with the Mayor's apparent fixation to ensure a "green" city despite the cost has brought a spotlight to this issue that may or may not fade away soon, but hopefully it will be an issue that the people take back under control.

No way to know what is going to happen next, but there is at least some talk about changing how the board for the LADWP is appointed. That probably won't be enough though. An audit with teeth needs to be performed, and how any surpluses that they do earn need to be better monitored as to how they are used, but that's more a matter of the "surplus" being a government slush fund of sorts.

The city has a lot of problems. The worst part is that this isn't even the biggest problem. This is a symptom. It's likely to be get worse before it gets better, but the real question is "how much worse can it get?" I don't think I'm going to like the answer.