April 18, 2014 - From the May, 2014 issue

Austin Beutner on LA 2020’s Suggested Fixes for City’s Economy and Budget Sophistry

The LA 2020 Commission, established to study and report on fiscal stability and job growth in Los Angeles, released its second report, “A Time for Action,” in early April, offering recommendations for addressing persistent problems facing the region that the Commission identified in “A Time for Truth,” made public in January. On April 16 former Los Angeles Deputy Mayor and “Jobs Czar” Austin Beutner, a Commission co-chair, explored the report’s findings to an audience at the California Club. TPR provides the following edited transcript of his remarks.


Austin Beutner

"As you read each of the [report's recommendations], ask a pretty simple question: 'Is our community better served by the status quo or by change?' We propose change." —Austin Beutner

Austin Beutner: I’ll put LA 2020 in some context. Herb Wesson asked Mickey Kantor and about a dozen folks independent of city hall to give him some suggestions. The dozen folks range from what I call the far left to the far right of Los Angeles. We have Republicans like Dave Fleming, to Hilda Solis, the former US Secretary of Labor. As a working construct, we decided to see if we could agree on where things stood first, before we got to recommendations. The old adage says that if you can look at the same set of facts, more often than not you can agree on the recommendations. Our first report was called “A Time for Truth.” It’s pretty sobering.

All of us volunteered our time to do this because we care about Los Angeles and because we think we can be winners. Most of us do see the glass as half full. We are the most diverse big city in this country; we own ports—the largest in the country; we own airports; we have universities and higher education second to none. We should be a winner. But the truth is, we’re not.

In this region, we have the highest number of unemployed people in the country. We have more unemployed people here than actually live in Detroit. We have the highest number of people living in poverty in the country. Of those fortunate enough to have a job in Los Angeles, 28 percent of them earn a wage that puts them below the federal poverty line. Less than two thirds of our kids graduate from school—and looking at kids of color, less than half. Of those who graduate, less than a third of them have the requirements to go on to a Cal State or university system. Our traffic is the worst in the nation.

If anybody thinks we’re doing just fine after looking at all those things, I’d like to have a conversation with them. In our first report, we said that we’re barely treading water and the rest of the world is moving forward. That’s been interpreted by lots of folks as sour grapes.

I don’t think so. It’s the facts. Some folks have said, “We already knew that.” What are you doing about it?

Our second report, “A Time for Action,” sets forth a dozen differing ideas. As you read each of the issues, ask a pretty simple question: “Is our community better served by the status quo or by change?” We propose change. To paraphrase Teddy Roosevelt: First prize is a good idea; second prize is a bad idea; third prize is no ideas. We encourage criticism. We encourage debate and engagement—but we can’t land up in the land of no ideas. We divided our recommendations into three broad categories: transparency and accountability in city hall, (which we think is lacking); the budget; and jobs.

I’ll start by talking a little bit about jobs and will touch on a few of our key recommendations. One of the main ones is that we need to start working as a region. During my brief time with the city, one of the areas I oversaw was trade and tourism. I took a trip to China and had a wonderful visit, including visiting the woman who was responsible for tourism activities and overseas visitors from Shanghai to the US. She hosted me for a lovely lunch, and started by saying, “It’s so wonderful to see you. Just yesterday, someone from Beverly Hills was here to visit me, as well.” We have Los Angeles and Beverly Hill competing for tourists from China. Santa Monica, Long Beach, and other cities in the region all maintain independent tourist efforts.

To put that in some context, foreign visitors are our most profitable visitors. They spend four times as much as any domestic visitor, and they’re the ones that are easiest to track. If you look at our report, we took objective data from federal authorities. Everybody who comes to this country fills out a customs report and declares whether they are a tourist or business visitor—not perfect, because it’s self-reported, but equally imperfect around the country. Forget all the other data you see out of LA Inc.—it’s easy to assume that a visitor from Riverside who goes to the beach in Santa Monica for the day is a tourist, but let’s focus on the ones we can actively count, the ones who spend the most money—those oversees visitors.

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If you look at the major points of embarkation in our country—let’s focus on New York and Los Angeles—all of them took a dip after 9/11. By 2005, New York had recovered. Today, they have more than doubled the amount of foreign visitors. Los Angeles took until 2011 to get back to pre-9/11 levels, and we’re only up about 5 percent. What has New York done differently? Halfway through Mayor Bloomberg’s term, he said, “Enough of this city hall-like approach to tourism.” They put some top Madison Avenue people in charge and embraced the private sector. Hawaii’s governor, about a decade ago, said: “We don’t need the island of Hawaii and the island of Maui competing with the island of O’ahu. We need to sell Hawaii.” We should be doing the same thing here.

It was stunning to me to find in city hall that the tourist effort didn’t seek to join together cultural institutions with the Dodgers. The two biggest draws for tourists in our area are Disneyland and Universal Studios. But each operates in its own world. The Regan Library had about $10 million to market the anniversary of Regan’s birth—the centennial. It never occurred to them, and they were never invited, to visit the Getty or to talk to the folks from the California African American Museum to see how they could work together.

Our proposal is a simple one. We should have a regional tourist authority, subsume LA Inc. into that, and invite along Beverly Hills, Santa Monica, and Long Beach. Our dollars would go much further. If we work together, we can create jobs.

Let’s take a look at our ports. Side by side, cheek to jowl, are the two largest ports in this country: LA and Long Beach. We hear “record levels” pretty consistently. There are record levels of trade at every port in our country because we have a lot more exports and imports than we’ve ever had. Let’s parse through that data a little bit and look at the region. The federal customs data is reported with LA, Long Beach, and Port Hueneme together. At Port Hueneme, they bring in a few cars, so LA and Long Beach are the core of it. Over the last decade, you’ll see that Southern California has gone from handling about a third of the nation’s cargo traffic to a little bit more than a quarter. We’ve lost five points of share of the national trade in goods. To give you some dimension and scale, that’s about the size of Seattle Tacoma, which accounts for 60,000 jobs and $100 million in tax revenue.

I’ve seen some reactions to our proposal, and they’re what you might expect. Long Beach doesn’t like it, and the folks at the Port of LA don’t like it. It didn’t surprise me. If they liked it, they would have done it a long time ago. I told the folks at the LA Times, “I’d be willing to engage with you, and I want to hear what you have to say after you speak to the head of the Port Authority in New York and New Jersey.” They closed the bridges—they don’t even let people back and forth between New York and New Jersey. They don’t like each other. But the governors of New York and New Jersey see that the path forward is collaborating, not competing. Seattle Tacoma recently formed a port authority. Georgia and South Carolina collaborate. Yet, somehow, we think competition right next door is doing good for us.

For those who think that’s the better path, I have a simple question for you: Who do we hold accountable for that loss of 60,000 jobs? I haven’t heard an answer to that one yet. We need to start thinking as one region. We need to grow the pie—not have 88 cities competing with each other.

Let me talk a little bit about the city and budget. I’m surprised that every year we reflexively fall for part of the truth—a simple version when an honest rendition of the facts would tell us something different. We’ve proposed a couple of things to get us closer to the truth. The first is requiring a baseline budget to actually be published, like the CEO does for the federal budget, over a period of three years. We’re trying to capture things like when Mayor Villaraigosa, in his last year, declared a balanced budget in his forecast. That balanced budget was premised on labor getting no increases even though their contracts called for increases. I don’t think that would work at any business—pretending that what you had agreed to isn’t going to happen.

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We’ve also said to look at a three-year budget, not a one-year budget. What they’re doing right now in law enforcement is banking overtime. When a detective works overtime today, he or she is given an IOU instead of being paid in cash for that overtime. That IOU is paid when he or she retires or at the end of that particular labor contract. It doesn’t show up in this year’s budget. This year’s budget has ignored $100 million of police overtime. Police overtime shows up somewhere in the future to be paid—it’s owed. It doesn’t make sense to me. No business would say, “We balanced.” But, government accounting is cash accounting. It’s balanced even though we’re putting that off.

In addition to the financial liability, you’re taking resources off the street because the way the city tries to manage the size of that financial liability, which is already a little more than $100 million, is to give compensatory time off. Chief Beck has himself said that the impact of that—giving a detective the ability to earn off their overtime by staying home—is the equivalent of having 4-700 fewer law enforcement officers on the street at any given time. Remember that sanitation tax that was tripled a few years ago to pay for 10,000 sworn? The headline said “10,000 sworn,” but Chief Beck says, “It’s not really 10,000 sworn. It’s somewhere between 9,300 and 9,600 hundred because 700 folks aren’t working.” That has impact. Look at clearance rates—the rates at which crimes are solved. It’s a state standard. If you look at clearance rates since this banking practice was adopted three years ago, they have fallen off a cliff. The rate of rapes solved is less than half of what it once was. Murders solved is at half of what they once were. The headlines say, “We are safer.” There are fewer rapes and murders. That’s a good thing and a national trend. Los Angeles is just about on par with other big cities in the country. But if you look at what we’re actually doing in terms of solving those crimes, we’re falling way behind because of these budgetary practices.

We highlighted several issues involved with retirement costs. About a decade ago, retirement costs were 3 percent of the city’s budget. This year, they’re approaching 20 percent. It has a crowding out effect. If we’re paying 20 percent for retirees, that means we have 20 percent fewer dollars to pay for current service. If you narrow it down to public safety, we’re paying for a retired officer who has earned that retirement pay, but it means we can’t afford one today. That is not a sustainable position, nor is the trend of retirement costs ever increasing and becoming a bigger share of the budget a sustainable proposition.

One of the ways the city hides the true cost of all of the retirement promises is by using an artificially high discount rate. Discount rates are a budgetary practice that takes a future cost and discounts it to today. You don’t take a whole dollar from 10 years in the future to make a whole dollar today. The higher the discount rate, the lower the number appears today. In our report, we compared the discount rate that Warren Buffet uses to what the City of Los Angeles uses. Warren Buffet oversees GEICO, among other things—a very sophisticated global insurer. They discount their future liabilities at 4 percent. The federal government discounts theirs at 4.5 percent, and the City of Los Angeles discounts theirs at 7.75 percent. Who in City Hall can claim that they know more about understanding future liability than Warren Buffett and Charlie Munger? To give you some sense of the magnitude of this, if you took 7.75 and substituted 6 percent—not Warren Buffett’s 4 percent or the federal government’s 4.5 percent—the amount of money we’re not properly accruing for today is more than $400 million, the size of the fire department.

The other bit of sophistry is that the city further assumes it’s going to earn 7.75 percent on its savings forever. Warren Buffet assumes 6.5. He’s got a pretty good track record. I’ve yet to see a person at City Hall who’s going to manage money better than Warren Buffett. It begs the question that maybe the city should get into this line of business—managing money for others—if it can promise returns for 30 years better than what Berkshire Hathaway can promise. We’ve got to start being honest about what our city costs to run and what the services cost to deliver.

We’re not proposing any specific set of recommendations to handle the retirement issue, for a pretty basic reason—we couldn’t get the facts. We had 12 people with a diverse set of backgrounds: business and labor, not-for-profits, academics. We kept coming back to two basic questions, “What does an employee cost over his or her life, while working for the city and in retirement?” We couldn’t get an answer. “What does that person take home?” We couldn’t get that answer, either. We propose a special, one-time commission comprised of experts, actuaries, lawyers and accountants, to have access to the city’s books and records and tell us what they are.

I’ll finish my remarks by talking a little about transparency and accountability out of city hall. What I found consistently inside the belly of beast, versus outside, is that we only see a portion. Remember about a year ago, the CAO—hair on fire—said unless we pass a sales tax, all hell will break loose? We saw Charlie Beck on TV saying, “No more cops if we don’t have a sales tax increase.” The same CAO issued a report about a month ago called “Staying the Course.” “Things are fine—we just need to keep doing what we’re doing.” What’s changed? Nothing. The only thing that’s changed is the narrative. The facts are still the same. Retirement costs are still ballooning 20 percent of the budget, and we’re still kiting overtime for law enforcement, we’re not fixing and paving our roads.

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We propose to establish an honest cop in all of this—some organization to put out a fact. New York has a citizen’s budget office that’s independent. Congress has the CBO that’s independent. The state has the legislative analyst that’s independent. We have nothing like that. Think in the context of rumors and the proposition circulating in city hall that we should be faced with a tax increase to fix our sidewalks and pave our roads. I paid my taxes the last 10 or 20 years. I thought that’s what they were doing. Is the practice going to be not to share anything until it’s a big enough problem, and then say, “We don't know where the money went either, but we have to raise your taxes to pave the roads”? I don’t think that’s the right approach. We’re suggesting establishing an independent office of transparency and accountability, giving them a small professional staff, and allowing the facts to help frame the discussion rather than the spin.

If you put all three of these things together, and all the individual recommendations under those subheadings, they will not change Los Angeles overnight. It has taken us a long time of malaise and lack of change to get where we are. We haven’t solved every problem, nor did we try to. Education is a massive problem that needs engagement. Transportation needs engagement.

What we tried to do is suggest some things that are all doable. None of them require an act of Congress. None of them require some magic dust sprinkled from on high. But they do require political will to say, “Change matters. Change is going to better serve our community than the status quo.”

If we are prepared to start to change, we have all the tools to succeed—and we will. If we’re not prepared to change, we’re going to get left behind, and that’s what concerns us. Give our actionable recommendations serious thought. You can adopt none of them or you can adopt all of them. But, we think as a community that they are owed serious discussion. If the status quo is not serving us, and you don’t like our ideas, come up with something better—but we have to act.

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© 2014 The Planning Report | David Abel, Publisher, ABL, Inc.