LA 2020: Buffett’s ‘Financial Tapeworm’ Fears Are Very Real

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LA 2020: Buffett’s ‘Financial Tapeworm’ Fears Are Very Real

Warren Buffett was at his prophetic best when he wrote in Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s 2013 Annual Report:

“Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans… During the next decade, you will read a lot of news – bad news – about public pension plans.”

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Underfunded pension and retirement liabilities have already reared their heads in Los Angeles, which in early 2013 appointed a committee of eminent city personalities chaired by former US Commerce Secretary Mickey Cantor to study and report on fiscal stability and job growth in Los Angeles.

LA 2020: Challenges faced by the city

The Los Angeles 2020 Commission (LA 2020) published its assessment of the challenges and opportunities the city faces in its first report, A Time for Truth, in January 2014. One of these challenges was:

Wishful thinking and avoidance of hard choices have endangered the secure retirements promised our public employees. Today’s workers are paying into a system whose benefits they’re increasingly unlikely to see. The City’s retirement system has seen the amount of money saved to fund the retirement of active City workers drop from 50% of the money needed to pay for their retirement to less than 10%…Pension costs accounted for 3% of the City’s budget a decade ago, and 18% this year. The cost of covering further increases will continue to cut into the City’s ability to supply services.

LA 2020 suggest measures renew job creation

The Commission has followed up its first report with another, A Time for Action, issued yesterday, which suggests measures to renew job creation in Los Angeles, improve fiscal stability and enhance transparency and accountability in its municipal operations.

Amongst the many suggestions put forward, including the combination of L.A.’s two harbors into a single port, increasing the minimum wage, and promoting tourism, there was one for closing the gap in L.A.’s retirement liabilities and available funds.

The LA 2020 commission suggested that the discount rate of 7.75% used to determine the present value of L.A.’s future retirement payouts was “at the high end of the range which makes future obligations seem smaller, and raises the question whether is sufficient savings are being put away today.”

The LA 2020 commission suggested that Los Angeles adopt a new “Buffett Rule” that would model funding of the city’s future promises after Warren Buffett’s Berkshire Hathaway, which uses a discount rate of only 4.0%.

However, according to Reuters, the city of Los Angeles owes nearly $10 billion in unfunded pension and retirement liabilities and is unable to balance its budget – next year the budgetary deficit could touch $240 million.

In such a situation, contributing an additional $560 million a year, which is the implication of adopting the Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) discount rate, may not be feasible.

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Saul Griffith is an investor in stocks, commodities and forex, writing under a pen name. Saul has top accounting qualifications and extensive experience in industry and the financial markets. He also has an abiding interest in breaking news that could be a harbinger of new trends and give insight into an instrument’s potential for providing value, growth or yield.
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1 COMMENT

  1. This report should make Mickey Kantor the laughingstock of Los Angeles. He thinks that appointing an Office of Transparency and Accountability, where Garcetti and the City Council appoint 4 of the 5 members, will stop Garcetti and the City Council from gross incompetence and corruption.

    This report was more Mickey Mouse than anything else. For example, Garcetti’s Hollywood Community Plan had 70,000 page Administrative Record and after reviewing everything, Judge Goodman found that Garcetti and the Council had subverted the law. That was something which Mickey just happened to over look. After all, Mickey is a downtown lawyer so he should be an expert on subverting the law.

    We’ve got 35 community plans to finish in 6 years. That would be 2,450,000 pages for this Office of Transparency to review if it limited itself to only the community plans. Even if the Office members were not all stooges of a corrupt city hall, they physically could not do the job. That is 6 community plans per year and it took the City 26 years to update the Hollywood Plan and that was fatally flawed. Only an idiot would make such a suggestion.

    Accountability? How does Mickey Mouse think the Office with no power will hold people accountable? They will write reports!!! WOW, Shock, I am certain Garcetti is cowering in fear. Oh, No, Heaven forbid, they will write a report! The biggest mystery is how this group of yahoos did not realize what fools, utter fools, they make of themselves with the Office of Transparency and Accountability. In fact, Mickey could have shown the way for transparency by revealing his conflict on interest about the ports of Los Angeles and Long Beach. Transparency, I guess, is not for the rich and powerful.

    He also failed to disclose that one of his main contributors, Norman Emerson, who is with the Los Angeles are Chamber of Commerce, who are responsible for most of LA’s ills, and Emerson has a $360,000.00 contract with the City dealing with the ports.

    Just when one thinks this clown car of Hasbeens couldn’t be more inane, they turn themselves to the matter of Community Plans. Do they mention that Judge Goodman just through out the prototype of all future community plans, the mayor’s beloved Hollywood Community Plan, as a subversion of the law? There is no mention that community plans are a compendium of lies with the single goal to justify giving more tax dollars to developers? What does the esteemed commission want? That the city should turn out these subversions of the law faster and faster — do them all by 2020. Of course, he does. It’s no secret that the mega-firms are having a terrible financial time and they need to get this towers constructed as soon as possible without an NIMBIES, like the citizens who discovered that the mayor was going to build two towers STRADDLING the active Hollywood fault LINE. [the caps are merited. Straddling a fault line means that part of the building is on one side of the line where the ground ruptures at the surface and the other side of the building is anchored to the other side so that when the quake hits and the ground splits along the line, the towers crash to the ground.

    Yes, Kantor had to condemn the NIMBIES who objected to 40 storey towers which straddle an active earthquake line as well as the NIMBIES who objected that the Hollywood Community Plan was a subversion of the law – those of the court’s words.

    Some people act as if they just arrived from Mars; this commission beamed in from Uranus. They wrote “Plans were adopted almost two decades ago and haven’t been updated since. Without valid information it’s difficult to assess where, for example, to put bus stops or transit lines that reflect a community’s current circumstances and future needs.” Is there anyone concerned with city government that Garcetti just changed the law so that community plans will NOT monitor infrastructure! Not a word about THAT absurdity in Mickey’s report. [BTW, The Hywd Plan was 26 years ago. Get a calculator.]

    Underfunded pension plans? Is there anyone in Los Angeles who has not known for the last 5 to 7 years, that the pension plans were intentionally underfunded while billions of tax dollars went to developers represented by the downtown law firms like Mayer Brown and Latham & Watkins who wrote this foolish report? Yep, Garcetti had the ab surd 7.75% number which was far above an acceptable rate for pensions and then he made certain that the pension contributions were not made.

    This Commission and its *&@# Report merits all the derision and insults that one can muster. The idea that anyone would write such sheer balderdash is close to inconceivable. OK, here’s one thing it teaches us. These $750 to $900 per hour lawyers wrote this type of tripe — such incompetence can only exist in a basely corrupt society.

    “Power tends to corrupt and absolute power corrupts absolutely.” Lord Acton 1887, “Corruption destroys.” Hollywoodians Encouraging Logical Planning 2014

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