California Still Dead: CalPERS Bribes, Tax Assessor Bribes, Stockton Bankruptcy

Updates on three tales of the Golden State's decline that Reason has covered in the past: 

1. The downfall of Los Angeles County Assessor John Noguez continues. In May, I wrote about the arrest of Noguez underling Scott Schenter in a scheme wherein West Side property owners would pay a fixer to arrange lower tax assessments. Now two more high-ranking officials in the assessor's office have been gotten the axe. The wonderfully named Randy Economy breaks the story in Los Cerritos Community Newspaper: 

Mark Mc Neil, who is the West District Division Chief and his counterpart Andrew Stephens who oversees the East District operation for the Los Angeles County Assessor's Office have been removed from their positions.

Los Cerritos Community Newspaper obtained a copy of an internal memo late Tuesday afternoon under the direction of Santos Kriemann, Chief Deputy Assessor that confirmed the move.

LCCN published hundreds of internal emails between Stephens and McNeil during the past several months that outline their close working relationship with several private tax agents who represent multimillion dollar property owners in Los Angeles County including Ramin Salari, who is one of the key figures involved into a massive criminal probe that alleges "pay to play" allegations by members of the Los Angeles County District Attorney's Office.

Kriemann said in the email that "after careful consideration of the department's current management assignments, and in an effort to encourage a collegial environment of collaboration and mutual respect, I have concluded that changes are needed."

Noguez is a California type: a supremely corrupt official with an eventful history of ethical violations (including repeated use of assumed names and credible reports of threats and physical harassment against opponents when he was mayor of Huntington Park) who also manages to lack the color and charisma you'd expect of an accomplished crook. For me it all comes back to the mania for maintaining an artificially inflated real estate market: 

The grownup thing might be to say "Hey, even Jesus hung out with corrupt tax collectors," and leave it at that. But it's illustrative of how far from a free market real estate has wandered that you have to bribe public officials to get a lower assessment in a county where 30 percent of all mortgages are underwater. It's true that the West Side, where Noguez' office is said to have done much of its business, has less negative equity than other parts of L.A. County. But this interactive map from the L.A. Times (a fine national newspaper), shows Santa Monica's beachfront zip code with 20 percent negative equity, Brentwood with 11 percent, Malibu with 16 percent and Marina del Rey with 21 percent. 

Here in the land of the million-dollar starter home and the half-million-dollar teardown, in an era that has given us the deathless phrase "repenetrated bottom," the idea that real estate can only go up remains so stubborn that we don't even have language to describe the decline. Predictably, local pols are agitating for re-assessments, and I'm guessing they don't expect those assessments to be lower than Schenter's.

Nationwide, housing will mark its sixth straight year of deflation next month. Yet to this day you only get in trouble if you say a house has lost value. If you pretend the price is still inflated, nobody will bother you.

2. An influence-peddling lawsuit filed in 2010 by then-Attorney General Jerry Brown has apparently had some effect in dissuading big private equity players from hiring "placement" agents to get business from the California Public Employees Retirement System. 

CalPERS, the largest institutional investor in the United States and the second largest buyer of health care (after the United States government), had long maintained a close but unclear relationship with agents like Al Villalobos, whom I wrote about in 2010 and 2011 and who now faces charges from the Securities and Exchange Commission. CalPensions.com founder Ed Mendel reveals how the placement market has shriveled:

Middlemen who help investment funds get money from CalPERS received $1.85 million in fees during the past two years, a sharp drop from the $58 million collected by a former CalPERS board member in a pay-to-play scandal.

A report on "placement agent" fees given to the CalPERS board last week was the first required by reform legislation. Big fees received by Al Villalobos, a former CalPERS board member, prompted a long list of reforms.

A trial on bribery-related fraud charges against Villalobos and former CalPERS chief executive officer, Fred Buenrostro, is scheduled next Jan. 28 in Santa Monica in a civil lawsuit filed by the state attorney general.

Mendel, who is both redoubtable and indefatigable in his coverage of the great pension bust, notes that the reduction in placement fees is mostly due to the decrepit market for private equity. 

As his legal bills pile up, Villalobos has also taken to welshing on his vast gambling debts. The Sacramento Bee reports that he has sued two casinos for $600,000 he apparently lost fair and square: 

The lawsuits, filed last week in U.S. Bankruptcy Court, are an outgrowth of the Lake Tahoe businessman's 2-year-old bankruptcy case.

Villalobos is trying to retrieve money he paid to the two casinos to settle gambling debts in April 2010, about two months before he filed for Chapter 11 protection.

Villalobos wants the Eldorado Hotel Casino in Reno to return $500,000. He wants $100,000 back from the MontBleu Resort Casino & Spa at Lake Tahoe.

Back in the day, I noted that the corruption of CalPERS' investment process didn't seem to have hurt the fund's returns, which have averaged between 7 percent and 8 percent over two decades. That's in part a function of the fund's massive size and ability to get its way on Wall Street. But it's a recipe for long-term disaster: 

Like all too-big-to-fail institutions, CalPERS is a creation of the government. In retrospect, the 1984 decision to give the fund unlimited access to the capital markets was a mistake. CalPERS laid waste its handsome returns with excessive payouts. And as the sad story of the lobbying money managers makes clear, the capital markets suffered too, from having to please another oversized player. If you want to solve this problem you can put CalPERS back into super-safe government debt investments (to the extent even those still exist in the future), and let California's government employees lower their sights just as those of us in the Social Security system have to do. Or you can accept that influence peddling must occur when the government is paying. But you can't give people more money than God and expect them to act like saints.

3. The city of Stockton is on its way to becoming California's second fairly large city to file for bankruptcy. AP reports: 

THE PROBLEM: Stockton, Calif., is struggling to restructure millions of dollars of debt that threatens to turn the city with the nation's second-highest foreclosure rate into the largest U.S. city to file for bankruptcy protection.

THE DEADLINE: A new state law intended to reduce bankruptcy filings required Stockton to reach a deal with creditors by 11:59 p.m. without an announcement. The Central Valley city of 290,000 already has cut police, fire and other services.

NEXT STEP: If mediation fails, the city likely will adopt $26 million in further cuts and could file for bankruptcy protection by Wednesday.

That "new state law intended to reduce bankruptcy filings" was a transparent ploy by government employee unions to prevent cities from using insolvency protection to get out of crushing pension contracts. And it may not even have been necessary. As Steven Greenhut wrote after the city of Vallejo went belly up in 2010, even municipal bankruptcy doesn't seem to get taxpayers out of their solemn obligation to pay former government employees not to work: 

But when it came to voiding those contracts on pensions—a major driver of public expenses—the city blinked. The "workout plan" the city approved in December calls for cuts in services, staff and even some benefits, such as health benefits for retirees. However, it does not touch public-employee pensions. Indeed, it increases the pension contributions the city pays.

I talked about California's accelerating decline the other day on KTTV in Los Angeles, and I'll be back on the 10 o'clock news this Friday.