A Commentary on the Nov. 2 Long Beach Ballot
By Keith Higginbotham
Come November 2, the voters of Long Beach in Southern California are going to be asked to vote on Measure D, which seeks to make two changes to the City Charter regarding the Port of Long Beach.
One change would strip the Port of Long Beach Harbor Commissioners of any authority over oil properties in the port area and give this authority to City Hall, including any revenue generated by said properties.
The other is a change in the way an annual transfer of port profits to city coffers is formulated – from 10 percent of the port's audited annual net profits to 5 percent of the port's gross revenue. Take it off the top, as some have described it.
In their ballot argument supporting Measure D, Mayor Bob Foster, City Auditor Laura Doud and Councilmember Gary DeLong describe the measure as an effort to provide "a more transparent, fair, and reliable funding method" for the city's Tidelands Fund.
Despite the benign claims by City Hall, what Measure D is really about is quite simple: money and control.
More port money for City Hall officials to spend as they see fit and more control by City Hall over the Harbor Department.
This has some people worried.
Nearly all the major stakeholders involved in the local international trade business community have expressed opposition to Measure D, including: the Long Beach Chamber of Commerce; the Los Angeles Customs Brokers and Freight Forwarders Association; the LA/LB Propeller Club; the Pacific Merchant Shipping Association; the Harbor Association of Industry and Commerce; FuturePorts; and the California Marine and Intermodal Transportation System Advisory Council, or CALMITSAC.
Why would nearly the entire international trade community band together in unanimous opposition to something purported to be a minor issue regarding the relationship between City Hall and the port?
Several reasons.
First, City Hall rushed the measure onto the ballot with almost zero vetting and with no analysis of the long-term impacts on the port.
Second, Measure D would shift significant portion of the port's revenue to City Hall, threatening the financial security and competitiveness of the port.
Third, Measure D would inject the political whims of City Hall into the operation of the port as a business by the Harbor Department.
Let's look at each of these individually.
A Rushed Measure
Late last year, City Auditor Laura Doud began an analysis of the port's finances at the behest of the City Council. The goal was to examine how the port determined the annual transfer of port profits to the city's Tidelands Fund. In presenting her findings to the City Council in June, Doud effused over the port's cooperation during the analysis. However, she said several issues related to the transfer process "merit further discussion and consideration."
One was for the port to stop deducting the previous year's transfer to the city as an expense – despite the fact that standard accounting practices allow the port to do this. A second recommendation was to speed up the time frame in which the port made the annual transfer. Under the current Charter language, City Hall can request the 10 percent transfer after the port's independently audited financial statements are complete – roughly six months after the end of the fiscal year on Sept. 30. Doud suggested a plan that would see the port make two transfers this year – to sync the timeframes – and in following years make 80 percent of the transfer on Oct. 1 and the remaining 20 percent when the port's audited financial statement is complete.
The Harbor Commission considered the recommendations and on June 28 rejected the City Auditor's recommendation regarding deducting the previous year's transfer as an expense.
On July 6, the City Council's Charter Amendment Committee met for the first time since September 2009. One of the items put forward by Councilmember Gary DeLong for further consideration for the November ballot was a Charter amendment requiring the port to not include the previous year's transfer as an expense. No mention was made of changing the transfer formula or the oil property issue.
On July 19, the Harbor Commission approved the first transfer payment but balked at making the second 80 percent payment on Oct. 1. Instead, the commission said it would attempt to complete it's audit for 2010 by January, 2011. This would allow the full second payment to be made to the city about three months ahead of time instead of the accelerated six month schedule the City Auditor requested.
Just a week after the Commission's rebuke of the Auditor's recommendation, the City Council's Charter Amendment Committee met again on July 27 and discussed the Measure D Charter amendment.
On August 3, the final day for ballot measures to be considered for the November ballot, the City Council voted to place Measure D on the ballot. The only public discussion of the Measure D item was during the July 27 Charter Amendment Committee meeting and at the Aug. 3 Council meeting. From the Charter Committee discussions on July 27, it is clear that the language for Measure D had only just been drafted. In fact, at the Aug. 3 Council meeting, the City Attorney was still tweaking the language, only moments before the vote to place it on the ballot.
One thing missing from the City Council debate on Measure D was a study, report, or analysis of how Measure D would impact the port. This is because one was never done.
A recent study of Measure D by the California State Lands Commission – the state watchdog over local port authorities – stated that State Lands staff, despite numerous requests to City Hall for such a study, report or analysis, was "unaware of any evidence that the City Council analyzed and considered any potential impacts to Port operations when it voted to place [Measure D] on the November ballot."
Shifting Revenues
Mayor Foster repeated several times during the Aug. 3 City Council meeting that Measure D was not about getting more money from the port. He even offered the suggestion that Measure D would only amount to and increase of $1 million to $2 million a year from the port to the Tidelands Fund.
In fact, the number is drastically higher.
A recent presentation by the port financial staff detailed that Measure D would shift more than $130 million from the port to the Tidelands Fund over the next five years – $100 million in oil revenues and $33 million in added port-to-city annual transfers. This represents roughly 20 percent of the port's net income per year.
This presents several real concerns for the port.
One area is in the port's bond rating. The port currently enjoys very positive bond ratings from each of the major bond rating agencies.
This rating assess the credit worthiness of a business entity's debt issues and serves almost the same function as a credit rating or FICO score does for individuals.
On a basic level, a high bond credit rating allows an entity like the Port of Long Beach, to obtain easier access to credit and at better terms. The opposite effect results from a lower bond rating.
Just like Equifax or TransUnion generate credit ratings for individuals, so to do a group of ratings agencies issue bond ratings for businesses and municipal entities like the port. In the case of bond ratings, the "big three" ratings firms are Fitch, Moody's and Standard & Poors.
In their evaluations of the port, each of these agencies cite similar specific port strengths that could be impacted by the continued diversion of port revenues.
One of these strengths is the port's infrastructure, including, as detailed in a March 2010 Moody's report, "state-of-the-art facilities, including mega terminals and good road and rail connections."
In order to maintain this infrastructure the port has to invest sizable amounts of money. For example, the port's cost for the recently started Middle Harbor Project, which will rehabilitate and reconfigure several smaller terminals into one larger and more efficient mega terminal, is expected to be $751 million over ten years.
An increase in the amount of port revenues headed to City Hall could not only delay such port projects but could cause the port to re-evaluate which projects are deemed a priority. This in turn could cause a re-evaluation of the port's bond rating by the ratings agencies.
At least $1.2 billion of the port's 10-year $4.7 billion capital development project is expected to come from issuing debt. Any change in the port's bond rating would add significant cost to obtaining this debt. Port financial staff estimate that the port could face between $40 million and $158 million in additional debt interest payments depending on the severity of any rating agency downgrade.
The rating agencies have also cited any increase in cargo diversions from the port as a potential risk to the port's rating.
The shifting of port revenue to City Hall could result in such diversion, if the port were forced to increase service fees or even implement a container fee to cover the loss of revenues to City Hall.
And it would not take much of an increase to force shippers to look elsewhere, according to a recent a recent analysis done by the Southern California Association of Governments, or SCAG. This group, the largest regional planning group in the nation, is mandated by the federal government to research and draw up plans for transportation, growth management, hazardous waste management, and air quality for the Southern California region.
The SCAG analysis, which looked at the impact of container fees on Southern California port traffic, found that a $100 fee per container would drive away 10 percent of the port's total imports in the short term and 23 percent over the long term. A $200 per-container fee would drive 19 percent of the port's total imports away over the short term and nearly 43 percent over the long term.
In other words, a $200 per-container fee would, over the long term, eliminate all the traffic gains made by the port in the past 15 years of growth. Even the $100 per-container fee's short term impacts would return the port to the same levels experienced during the height of the economic downturn in late 2008 and early 2009.
Loss of Autonomy
The City of Long Beach Harbor Department, which operates the port, was set up under the City Charter to be nearly autonomous from the day-to-day politics of City Hall. In fact, City Hall only has several ways to directly impact the operation of the port: the mayor and City Council appoint the five members of the port commission; the City Council must approve the port's annual budget; the Mayor has line-item veto power over the port budget; and, the City Council can remove a sitting port commissioner under specific circumstances. Beyond these actions, City Hall has very little control over port staff beyond the application of political pressure on port officials.
In the past, all three rating agencies have cited the port's autonomy from City Hall politics as a distinct strength enjoyed by the port that figures into the port's strong ratings.
However, Foster has made it clear in recent days that while the port should be kept at "arm's-length," the port has a fiduciary responsibility to the city in addition to its trust responsibility to the state.
While this opinion runs counter to numerous legal decisions by the state Supreme Court stretching back to the early days of the port, the mayor and city staff have become more aggressive in the past year on imposing the will of City Hall on the port.
Examples of this include the development of an oil deal with Occidental Petroleum, which was ultimately approved by the Council in November 2009. During the negotiations, City Hall officials sided with Occidental over the valuation of the port oil property and attempted to pressure port officials who disagreed to go along with the valuation. City Hall also led port officials to believe that the port would still be receiving the revenues from any future oil development. Port officials were notified shortly before the deal was signed that City Hall had unilaterally decided that the city, and not the port, would be receiving any revenue generated under the deal.
Another example was the recent dressing down of port officials by the Mayor and members of the Council at the Aug. 3 Council meeting. After two port commissioners rose to question the timing of Measure D and the fact that no financial impact study was done, Foster and nearly all of the council members slammed the two commissioners for not cooperating with City Hall on the transfer timing issue, despite initial assertions by the City Auditor that the port had been very cooperative.
Perhaps most disingenuous was the Mayor's and Councilmembers' repeated expressions of shock during the Aug. 3 meeting over the Harbor Commissioners' questioning of the Measure D process. This despite the fact that the Harbor Commission had sent a memo to the Mayor and City Council prior to the meeting explaining that they would be opposing the measure and why.
The most recent example was the recent veto of a $60 million item in the port budget by the Mayor. Foster intimated that the line item, for the removal of a port maintenance yard sitting in the path of an impending bridge replacement project, was a way for the port to move forward with a decade-old plan to build a new port administration building. This despite several assurances by port officials prior to the veto that the administration building was no longer moving forward. Foster told port officials that the port could seek approval for the funds from the council as a budget amendment, thus placing the council in the position of approving the funds for the port project instead of the port commission.
No on Measure D
The bottom line is that Measure D is a solution that addresses the wrong problem.
The Mayor and Council believe the problem is that the port is not stepping up to the plate when the community needs its revenues most.
This is an odd sense of reality when you consider that the port has contributed close to $800 million to the city since 1990, or just over $41 million a year for the past two decades. With or without Measure D, this support from the port will continue. And despite the fact that the port could refuse the Council's request for the annual port-to-city transfer, the Harbor Commission has approved the transfer every year since the Council first asked for it in 1995. If anything, the port has stepped up to the plate more times than most people remember: the Queen Mary, the Convention Center, the Aquarium, Colorado Lagoon, the Spruce Goose, the Municipal Band, the Fourth of July fireworks, the SeaFest, the Grand Prix. All of these owe some degree of gratitude to contributions made by the port.
No, the real problem is City Hall's inability to live within its means.
Let's deal with that problem before we consider taking hundreds of millions of dollars away from the port – which has proven year after year that it can not only handle money but can actually make its lucrative financial situation work for the city – and turn it over to the keepers of the black hole we know as the city budget.
I encourage you to draw a line in the sand on Nov. 2 and vote "NO" on Measure D. Perhaps a rousing defeat at the ballot box will convince City Hall that it must clean its own house before plundering one of the few golden geese left in Long Beach.
