City of Pasadena
Larry Moreno, Sunday morning host on KRLA AM 870, interviewed me yesterday. He was shocked that the OC Register included the City of Pasadena in Sunday’s piece on fiscally distressed California cities (see MOORLACH UPDATE — City Rankings and State Budget — January 18, 2020).
Pasadena News Now provides an editorial submission that helps explain why Pasadena placed 462 out of 482 cities.
The Pasadena News Now piece also mentions Pasadena Unified School District. It placed 527 out of 944 school districts (see MOORLACH UPDATE — Wedding Day and Group 6 — September 27, 2019).
25th Anniversary Look Back
Pensions & Investments, the international newspaper of money management, had two pieces on Orange County’s implosion on January 23, 1995.
The first was titled “Risk Amnesia.” It’s a classic, providing sage advice in a simple manner and is well worth reading in its entirety (see MOORLACH UPDATE — LOOK BACKS — January 23, 2010).
The second piece was written by Barry B. Burr, an excellent columnist for this publication, who penned “Credit Raters Miss Many Danger Flags.”
Barry Burr retired in 2016 after more than 30 years at P&I writing the publication’s editorials. He has received, among other awards, the Northwestern University Medill School/Strong Funds award for editorial columns and the Peter Lisagor Award for editorials.
It was satisfying to see Mr. Burr hold the credit rating agencies to account in this nationally respected publication. The column is provided here, in full:
Two disturbing aspects of the Orange County financial debacle, both revolving on accepting responsibility, deserve attention.
For one, users of the credit rating services of Standard & Poor’s Corp. and Moody’s Investors Service Inc. hardly can take reassurance in knowing Orange County has given them no reason to change their policies in rating such debt.
For the other, Orange County, while filing suit against Merrill Lynch & Co. to recover $3 billion in losses from the risky leveraged strategy, has forgotten its own liability to investors in its securities who relied on its trust. Regardless of whether the county wins anything from Merrill Lynch, investors should have cause to hold the county responsible for their losses.
In terms of the rating services, both Vladimir Stadnyk, executive managing director-public finance at S&P in New York, and Barbara Flinckinger, assistant director and manager-Far West regional ratings and public finance at Moody’s in New York, said in interviews the situation in Orange County has resulted in no change in the policies the companies use to rate local governments. (Only last summer, for instance, both companies gave the county their highest short-term rating in regard to a $600 million taxable note issue.)
The two explained the situation in Orange County prior to the revelation of the unprecedented losses raised no red flags alerting them of the need for more scrutiny. No warnings? Among the warning flags the raters outrageously ignored:
The Orange County investment pool’s $8 billion in capital made it one of the largest single funds in the nation, excluding its leveraged position. But its huge leverage should have given it even more notoriety with $12 billion in borrowing boosting the pool’s size to $20 billion.
All of this was run by a sole person, Robert L. Citron, an elected treasurer and a politician with no appropriate financial credentials attesting to his knowledge of complex and risky investment strategies.
The highly leveraged investment strategy Mr. Citron used was rare among local or state governments, even unique apparently, as neither S&P nor Moody’s has yet identified another entity with such big overleveraged strategy in use.
The policies and objectives of the investment pool were unclear: Was the pool supposed to be a money-market type fund holding sacred the value of the principal, or a longer-term fund taking interest-rate risk to enhance return?
The pool’s performance was not measured against the market or appropriate benchmarks. So how could the raters judge the effectiveness of Mr. Citron’s strategy? They couldn’t.
John W.M. Moorlach, who opposed Mr. Citron in last spring’s election and made the pool’s riskiness the campaign issue, noted at the time the risk of rising interest rates and increasing calls on the pool’s collateral were harming its liquidity; and he presciently forecasted the pool’s ultimate $2 billion-plus loss.
Last year’s rising interest rates caused the worst fixed-income market in 15 years, resulting in widespread loses to investors. Yet, Mr. Citron was presumed by the raters to be immune from it or outsmarting it. The rating companies should have called on their analysts in other departments who rate publicly available money market funds, mutual funds and other investment funds. But neither took advantage of this expertise to examine the pool.
In a seemingly unconnected matter, S&P last year began with some ballyhoo attaching an “r” rating to those securities it felt were subject to particularly volatile returns because of their market sensitivity. Yet, it neglected to extend the implications of its “r” mark to one of the most sensitive funds in the country.
Without question, the credit ratings proved worthless on Orange County. Any user of them has to wonder how reliable the companies’ recent assertions that no other situation in the order of Orange County is out there lurking. The raters’ policies and processes need tougher internal scrutiny and improvement.
Voters Need Candidates Who Have Indisputable Data, Analysis, Disclosure and Accountability.
By SHERYL TURNER, CEO, and LOUIS McGRAW, California Broker ABR
Business Leaders for Better Government
On the heels of the optimistic Pasadena Mayor’s State of the City Address, Business Leaders for Better Government notes Senator John Moorlach’s (R-Costa Mesa) annual 2019 Financial Soundness Rankings for California’s 482 cities, identifying Pasadena as one of the four worst cities in the State for managing debt.
Ranking Pasadena as the ninth worst city per capita with a population over 50,000, the report (https://moorlach.cssrc.us/sites/default/files/City_CAFR_Report_for_2019_Jan._2_2020_Moorlach.pdf) identifies the unrestricted net position of purely governmental activities for each resident as negative $2,510. So, for a family of four, multiply times four, or $10,040.
Revenue Streams Identified
Our Mayor identified the four biggest sources of revenue that account for more than half of the City’s revenue: property tax, sales tax, utility users’ tax, transient occupancy tax, and then everything else, with “new development and rising property values” continuing to be the primary source driving revenue increases. These are all areas Business Leaders for Better Government monitors.
However, from 2018 to 2019, the property, sales and utility users’ taxes only increased by $520,000, (www.cityofpasadena.net) a statistically insignificant amount, further underscoring that new developments and new retail sources are sorely needed for our City revenue streams. One Councilmember seems to think increasing parcel taxes make more sense when it comes to generating revenue. As if housing were not expensive enough, he seems blind to the impacts of his random thoughts from the dais.
In the last three years, new development in the city has been obstructed by votes of the City Council, often ignoring staff recommendations but relying rather on the input from local residential or historical groups, who remain critical of the level of city fire and police services, yet who staunchly reject the development and business projects that could create the critical fiscal revenue to fund them.
The City continues to roll over the Rose Bowl Operating Company debt of $175 million which was incurred to update the facility. Yet it has not yet been able to come up with a plan that covers the annual stadium operating cost and debit service requirement in the future.
While it is a new retail revenue generator, the cannabis retail sales industry, has not performed to expectation in other cities. However, Pasadena’s controversial permitting process may finally be getting support from unopposed candidate Councilmember Tyron Hampton. Moving forward with an amended process may provide the legal structure this potential revenue-generator needs.
Our leaders have (successfully) promoted taxing residents with an additional sales tax under Measures I and J in 2018 to help balance the City coffers, a measure which Business Leaders for Better Government opposed. Yet despite the new tax revenues, the revenue is a drop-in-the-bucket strategy for fiscal relief when our annual liabilities for CalPERS continue to rise from $29.3 million in FY 2014 to $58 million for FY 2020.
The additional Measures I and J sales tax brought with it the misguided bonus of underwriting the poor management strategies of the Pasadena Unified School District (which continues to have “transparency” problems between the seemingly autonomous, out-of-control staff and the rudderless PUSD Board). All the while talk of an $850 million bond to bailout PUSD from their ever-looming insolvency continues, a staggering figure that PUSD estimates would burden the average home-owner/taxpayer with an additional $274 per year for the next 32 years until 2052. This would constitute the biggest property tax increase on all real estate property ever in the history of Pasadena.
“But it’s for the children” is staff’s argument, making questioners seem unsupportive of education when critics ask the Board to identify a single specific project for a designated site to be accomplished on a particular schedule.
The Transient Occupancy Tax, a revenue the city could directly increase by approving new developments, only slightly increased last year. Sadly, Pasadena has built only three new hotels in the past 30 years and discouraged the Kimpton Hotel project that would have generated $45 million in TOT, sales and property revenue per year. There is simply no factual basis for Councilmembers who say “we have enough hotels” when the Convention Center is perpetually short on the number of rooms it needs to book bigger events, all of which would generate even more revenues for the City.
Be on the lookout. Proposals about an increase in parcel taxes and in utility taxes paid by every homeowner and business may be next. That Pasadena already has one of the highest taxes and fees schedules in the State is of no concern to certain locals and City Council members.
What will new leaders do? Outsiders vs. Insiders in City Council Districts
Mayoral candidates for the March 3 Primary Nominating Election are long on rhetoric and short on specific solutions. One candidate opposes development (despite voting for it for 15 years) and has proposed redoing the General Plan to downzone developable properties. Ignoring that such actions are prohibited by State Laws, as far as he is concerned, the City should incur the expense of suing the State.
From their website platforms, one candidate opposes “overdevelopment” as a way to ensure quality of life, but at least seems more fiscally responsible; one candidate focuses only on the Northwest, which is good but misses the bigger picture on our City’s debts; and, one candidate’s platform includes making Pasadena more “business friendly” without explaining how. Bad actors, conflicts of interest and ‘dark money’ influence are very visible, with one candidate even suggesting a vote for him might get you a salary increase.
Independent and new District candidates carry the stigma of being ‘outsiders.’ But their original information and proposals are in the public interest. What we need is for all candidates to produce content using indisputable data, expert analysis on the issues that we care about most while improving their disclosure and accountability. To have better government, we need solutions and new revenue streams in the city; and we need to reign in the undisciplined PUSD School Board to keep Pasadena’s education and government solvency off the Moorlach report.
This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District. If you no longer wish to subscribe, just let me know by responding with a request to do so.