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FEDERAL SHUTDOWN: Day 34
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Happy Wednesday! I guess it's not really humpday when it is a four-day week, but at least it's midway through miércoles. I hope you're reading this after the lunch hour, as it's beautiful pretty much everywhere in California today. I'm tackling another meal at South on Whole30. I'm going to gain a reputation there of hating on the fried chicken. I may just rent out the place for February 1.
PACIFIC GAS & ELECTRIC & LIABILITIES CORP: As I noted yesterday, fire victims held a press conference on the Capitol's south steps yesterday to call for closing the 2018 "donut hole" and take steps to prevent the state's largest utility from filing for bankruptcy on or after January 29. The headliner of the presser was Erin Brockovich, the longtime critic of PG&E and subject of the eponymous 2000 movie starring Julia Roberts. The
There are several issues at work here and I won't tackle them all as the clock ticks toward 11:30.
January 29, 2019 is the date announced for a Chapter 11 reorganization bankruptcy, an announcement of a requisite state filing by a utility. After that filing, a federal judge will approve ongoing operational expenditures and provide a process to consider the utility's debt. As of December 31, 2017, the utility had $42.7 billion in current non-shareholder liabilities. Some of that is secured and some is unsecured. Lawsuit liability is unsecured and falls low on the priority order of debt repayment in a reorganization, a pecking order that ends at individual shareholders. There is also a precedence of when a liability is incurred, whether it be for issuing operational bonds or paying out an individual claim.
The most time-critical issue for the plaintiffs is stalling the PG&E bankruptcy. However, the utility has already secured $5.5 billion in bank financing to operate during what is anticipated two-year bankruptcy. With its bond rating already reduced to junk status by Standard & Poors, this was a necessary step. By lining this up before the bankruptcy filing, it is secured debtor-in-possession financing. The lending banks are JPMorgan Chase & Co., Bank of America Corp., Barclays Plc, and Citigroup Inc.
It is unclear how the financing deal announced yesterday affects the timing of the bankruptcy filing. The PG&E presentation states "PG&E is seeking to enter into financing agreements on or about January 29th, 2019." Obviously, there are few legislators that want to blow up the financing for ongoing operations of PG&E announced yesterday by delaying a reorganization filing on or after next Tuesday.
Let's jump back to the "donut hole." As we've talked about several times before, the SB 901 cost recovery securitization provisions apply to certain fire liability incurred in 2017 after December 31, 2018. SB 901 was adopted by the Legislature on August 31, 2018 and signed by Governor Jerry Brown on September 21. The concept was "simple." If PG&E's equipment was determined to be liable, either through negligence or inverse condemnation, for destruction of private propery, PG&E could seek the cost of recovery in rate surcharges adopted by the Public Utilities Commission. These rates would repay bonds sold on private markets and paid over the life of the bonds, like we pay for building a new university.
However, two days after the November 6 election, calamitous fires broke out in Butte, Los Angeles, and Ventura counties. Before they were out, the Camp Fire in Butte and the Woolsey fire in the Southern California counties #1 and #7 most destructive wildfires in California history. The Camp Fire alone destroyed 18,804 structures and took 86 lives, making it the deadliest wildfire in history. The problem is that the fires weren't foreseen in the SB 901 legislation, although from a legal standpoint, are in the same position as the 2017 victims, primarily those of the Tubbs Fire in Lake, Napa & Sonoma counties.
None of these fires have been conclusively determined to be caused by PG&E equipment. For actual property damage, all that needs to be shown that there is a preponderance of the evidence ("more likely than not") that the damage was caused by equipment under inverse condemnation. I wrote about inverse condemnation on January 5, 6, and 14 so I won't repeat it. Let's just say it's not covered in Property Law in your 1L year. That said, I can still state the Rule Against Perpetuities for some strange reason.
So, inverse condemnation is strict liability based on whether or not the equipment was more likely than not the cause. However, plaintiffs will argue for punitive and other non-property damages through negligence by the utility. And, with 31 deaths in Northern California in 2017 (Tubbs and Redwood Valley) and 86 in 2018 (Camp), the non-property damages quickly accelerate under negligence in the least and to the extreme, the theory corporate homicide.
There is very little the Legislature can do at this to stave off a bankruptcy. The question for members and Governor Newsom at this point is whether to immediately close the 2018 donut hole to put the victims of the Camp Fire on the same footing as the 2018 fires. In the end, there could be the question of whether that hurts or helps the 2017 victims, as it could reduce the ultimate payout per victim in what is concluded in litigation, made payable through bankruptcy, and approved as a rate hike by the PUC.
Oh, yes, the securitization piece. At the end of the day, there is still the big question about the amount deemed to be liable and financeable through rates set by the PUC. Someone has to buy a lot of debt that would be ostensibly set by rates established by a political regulatory body.
Of course, in most cases where I use the word "victims" above when discussing property damage, I am really referring to insurance companies. The $30 billion number floating around in total liability is reportedly the amount that insurance companies have paid out or have in pending claims. They are as big of a player in the upcoming fight as anyone.
Only when liability is determined and amounts are established, can the political issues of rates and PG&E's ultimate structure truly be settled. This story is going to be around for a long time and there is little the Legislature can do at this point.
LA UNIFIED STRIKE ENDS AND #CAKEDAY after the jump...
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LA UNIFIED: United Teachers Los Angeles (UTLA) members voted to ratify the new contract and returned to the classroom today. Here is a copy of the two-page summary provided by UTLA and for those with the insomnia that plagued me for a few months, here are the 40 pages of language. Remember, for insomnia, you must print it out.
On a serious happy note, I have finally been sleeping. Whole30, good tea, and reading before bed instead of watching who is tweeting through the night works wonders.
Oh, yes, I'm talking about the end of the LA-LA land teachers strike. Here are some of the key points:
Everyone walks away a winner, assuming the state's budget remains okay through the contract term, which ends June 30, 2021. Generally, it is fairly aligned with revenue projections of the Legislative Analyst's Office unless a significant recession occurs during that term. Things would be tight under a mild recession or tepid growth.
On compensation, the deal doesn't come as much of a surprise to those who have been following the negotiations. The parties were down to between 6% (district) and 6.5% (UTLA). The debate was on the timing. The district initially wanted increases of 3% in each the 2018-19 and 2019-20 school years, but had ceded ground in recent counter-offers.
The Nooner is not the place for a lesson on education salaries, but it's worth a shot. These amounts are inflationary increases that apply to salary schedules. Those "step and column" schedules have increases based on longevity and other factors, such as educational attainment. So, if Sam was a teacher in 2016-17 and remains so, s/he would have received "step" increases each year. If Sam finished a master's degree in one of those years, s/he would have moved over a column, in addition to a step. Each step and column has a fixed salary that applies to all employees in that "cell" on the "salary schedule" table.
The negotiated increases are cost-of-living adjustments that increase the schedules for each of the respective years (2017-18 and 2018-19) by 3%. So, let's say Sam was a first-year teacher with a bachelor's degree and a teaching credential in 2016. Let's say that s/he was working on a master's and completed it that first year of teaching. Thus, in 2017-18 s/he received an increase in both step and column based on fixed rates affecting all employees in the bargaining unit.
Those fixed rates in steps and columns are what are being adjusted with the new contract agreement, so it's not as simple as saying 3% each in two academic years. How they did this before computers I have no idea.
The union gets more nurses, counselors, and librarians, although of course would have liked more.
The above items are the dollars and cents. Those parameters were largely defined by the November budget forecast by the Legislative Analyst's Office and the budget proposed by Gavin Newsom on January 10. LAUSD played their role of being cautious and seeking a large reserve to prepare for a downturn and the union sought the financial priorities of its members.
The governor's budget proposal to use $3 billion in one-time 2018-19 funds to pay down unfunded liabilities of CalSTRS provides significant relief to district budgets. Specifically, the proposal is expected to lower the districts obligation for current and new employees by 1% in 2019-20 and 2020-21. That frees up existing commitments and makes new hires less costly. That creates room beyond a proposed 3.84% cost-of-living adjustment for 2019-20, which is on top of the 2.71% COLA included in the current year 2017-18 budget.
COLAs are applied to the local control funding formula (LCFF) rates given to each district on a per-average daily attendance (ADA) basis. So, that compounding adjustment is a 6.654% LCFF rate increase to districts, plus the 1% proposed STRS contribution reduction in 2019-20, which compounds to a 2% reduction in 2020-21. Altogether, the financial picture is pretty good for most local school districts. Before you jump to your calculators and add the compounded inflationary adjustments to LCFF and the freed-up pension funds, remember that there are automatic increases inherent in the salary schedule to fund as well.
This is why there are lots of lawyers, consultants, and lobbyists who make entire careers out of this stuff.
Some districts have big structural problems and I know many readers have kids in Sac City Unified, which is why I emphasize most. I haven't had time to dive in to how far the governor's proposed budget abates SCUSD's major financial troubles. None of this includes outstanding liabilities for retiree health benefits, which is the biggest long-term fiscal issue.
If a recession hits before 2021-22, it may be back to the drawing board on this bargaining agreement. I don't have the information this morning on exactly what the agreement means for the overall LAUSD reserve for such uncertainties.
The monetary conclusion of the standoff of LAUSD and UTLA was pretty much what was expected. The big issue really was in the growth of charter schools approved by the Los Angeles Unified Board of Education. The board has a majority of members deemed to be charter-friendly, and they hired a superintendent accordingly. There are currently 275 charters operating (XLS) with five more (PDF) approved to begin instruction in 2019-20.
Charters have been and continue to be the biggest issue in LAUSD school board races. There is a special election in district 5 on March 5 to fill the seat left by Ref Rodriguez. UTLA has endorsed former assemblymember Jackie Goldberg in the race. Goldberg, who served in the Legislature from 2000-2006, is aggressively anti-charter. Running not overtly as "pro-charter" but rather "pro-parent" is Ana Cubas, who is close to pro-charter LAUSD board president Mónica Garcia. For longtime denizens of the Capitol, Cubas worked at the Legislative Analyst's Office in the 90s. Here is the full list of candidates for next month's elections, which will likely lead to a runoff on May 14.
UTLA wins on the establishment of community schools, which are part of a national effort supported by education labor unions to slow the spread of charter schools. They provide greater local control without breaking free of the day-to-day oversight of elected and appointed school district oversight.
While there may be agreement in Los Angeles, the discussion now moves to Sacramento. As discussed above, two major outcomes of the contract are state issues--the modified "split roll" property tax and caps on charters. Mayor Garcetti has endorsed the "split roll" ballot measure as have many Democratic legislators. Governor Newsom has called for it in the past, but now wants to see it as part of an overall reform of the state's tax system. Few people other than campaign consultant on both sides and media buyers and sellers want to see a November 2020 ballot measure war.
Whether or not he runs for President, Garcetti certainly doesn't want to see that ballot fight, even if he has now endorsed the measure. Newsom doesn't want to see it either. In 2018, the City of Los Angeles had 64,571 commercial-industrial properties. I tried to look up the assessed valuation of these and I'm sure it's there. That wouldn't tell us anything, though, as each property's last assessment date would have to be evaluated.
On the charter school cap, the charters have an aggressive lobbying presence in Sacramento and big campaign benefactors. They had setbacks in the 2018 elections with losses of Antonio Villaraigosa in the gubernatorial primary and Marshall Tuck in the general for Superintendent of Public Instruction. However, several of the pick-ups by Democrats were of moderate members, and the more moderate members in SD22, AD15, and AD76 were elected in all-Democrat generals.
It is no secret that the LAUSD-UTLA negotiations weren't solely in conference rooms of the district. They were also in-person and electronic between Los Angeles and Sacramento. Don't expect a long, drawn-out process in policy committees of what a cap on new charter schools should look like. Rather, I would expect that it is tucked in the omnibus education trailer bill with the biggest question being whether it only applies to Los Angeles Unified or to all districts statewide.
In short, most of the local issues were pretty much settled by the offense and defense of the teams who arguably landed in a tie. Now actors in Sacramento have the chance to kick a field goal on the final budget, but the overall rules of the game will may be determined by Roger Goodell, I mean the economy.
For now, the biggest winner is Mayor Eric Garcetti. Now, his supporters are just hoping that the damned FBI investigation into City Hall corruption, which has hit the mayor's office but not him specifically, would just go away.
#CAKEDAY: Happy birthday to Blanca Arellano, Larry Dozier, Michele Gundros, Glenda Higgins, and George Soares!
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