Stock-taking?: Part 1, “Simply Invalid”

October 15, 2014 | Bankruptcy, Bonds, California, Debt, Markets, Municipal bankruptcy, Pension funds, Primer posts, Stockton | 1 comment 189 views

By: David A. Smith

As politics is the process that advances the interests of the majority, law is the process that protects the interests of the minority, and when those who make the laws find themselves forced to live with laws others have mad, including the bankruptcy laws and the Constitution from whence they derive, the results can be comic, as reported (without the humor) in The Sacramento Bee (October 1, 2014) and Los Angeles Times (October 1, 2014; navy font):

A bankruptcy judge handed CalPERS and organized labor a decision they’ve long feared Wednesday, declaring the city of Stockton has the right to reduce pension payments and even sever ties with the powerful pension fund.

Only as I’ve studied the issue have I figured out the sneaky game that CalPERS and the public employees’ unions play.  It works like this:

1. Cities promise to pay public employees generous pensions.

2. Cities sign up for CalPERS as the insurance company to make the pension payments.  They pay CalPERS premiums to fund these insurance policies.

3. If the city gets in trouble, CalPERS and the employee unions say that the city can’t cut its CalPERS payments, because these are protected by California law.

Using the pension fund as an intermediary elevates the city’s obligation to pay the premiums over other city expenses – or it has, at least in the public and political consciousness. 

It creates a ruling that undercuts CalPERS’ contention that public pensions are ironclad and municipalities must make their contributions, no matter what.

If they were that ironclad, then state law would trump federal law.  And that is ending, as it must, in a series of bankruptcy courts including Vallejo, San Bernardino, and Detroit:

CalPERS has always fought any attempt by a city to reduce its pension obligations. When Vallejo went bankrupt in 2008 and hinted it might try to lower its annual payments, CalPERS said it could take the city to court.

Comes now Stockton.

The verbal ruling from U.S. Bankruptcy Judge Christopher Klein was groundbreaking. It pierced CalPERS’ aura of invincibility and made clear, for the first time, that public employee pensions in California aren’t sacred.

judge_christopher_klein

Engaging in political sacrilege

Two years after Stockton filed for bankruptcy protection, buried under more than $200 million in bond debt, a judge has declared that a municipality can walk away from its obligations to the California Public Employees’ Retirement System.

As usual with popular journalism reporting on finance, the metaphors are overwrought and inaccurate.  Stockton isn’t walking away from anything – it’s restructuring everything.

Reconfiguration

It’s always possible to reconfigure

Judge Christopher Klein said, “California public employee retirement law … is simply invalid in the face of the supremacy clause of the United States Constitution.”

Though like everyone else I knew the term, I didn’t understand bankruptcy until I had experience with it (as a professional, thankfully, not as a principal).  It’s simplest to imagine bankruptcy as an economic death and resurrection.

By filing for bankruptcy, the old entity (the debtor) enters a kind of purgatory.  (Sorry for the Puritan metaphors, but we must remember, American bankruptcy was invented by Boston Puritans.)  The debtor’s sins (liabilities) and virtues (assets) are identified, counted, and balanced.  The debtor’s soul (its bankruptcy trustee) proposes a rebalancing, which the court judges and finds either equitable or wanting. 

pantokrator_01

I find the plan equitable

When the rebalancing is complete, the soul is reborn (the debtor emerges from bankruptcy), and all past debts are settled, usually at fractions of their face amount.

While it’s evident that bankruptcy is financially beneficial for debtors, less obvious but more important is that bankruptcy is financially beneficial for economies and societies, because it resolves what would otherwise hang over for years or decades.  Before bankruptcy there was debtor’s prison, which was punitive but entropic, and in those eras credit was extremely scarce.  Bankruptcy sped up capital’s formation and re-formation, and motivated entrepreneurial risk-taking.

In the particular case of Vallejo in California, despite dire warnings, the City’s bankruptcy filing proved to be the best thing that could happen to its economy.

Bankruptcy depends on adjudicating competing claims fairly … because without that fairness of capital claims, then the supply of credit would shrink, as nobody would lend to borrowers likely to be disfavored.  Thus, in judging the debtor’s liabilities, the court classifies them by collateralization (are specific assets pledged against specific liabilities?) and then priority.  All claims of similar priority must be given a similar haircut.

same_haircut

Don’t take it personally; all haircuts are the same

And that, finally, brings us to Stockton’s bankruptcy and the judge’s ruling:

Klein’s ruling was prompted by a legal protest from Franklin Templeton Investments, which is due to be repaid just $4 million on a $36 million loan it made to the city during better economic times.

Observe that the City of Stockton itself didn’t raise the issue – it’s a political entity, after all, made up of public employees – so the principle of equity was left to another creditor to voice.  That’s why we have bankruptcy.

Franklin Templeton wants Stockton to reduce its CalPERS payments to free up more cash to repay the loan.  It said the proposed repayment amounts to just 12 cents on the dollar, while other creditors are due to receive 50 cents to 100 cents on the dollar.

“That’s discrimination, and it’s unfair,” said James Johnston, a lawyer for the San Mateo investment firm. He also said CalPERS was seeking “exalted status under California law.”

james_johnston_jones_day

Johnston is anti-unfairness

Think of it as the Creditor Fairness Act – though you wouldn’t know this from the Bee’s slanted phrasing:

Franklin wants a better deal from Stockton even if it comes at the expense of the pensions.

The bond fund is being treated four times worse than the employees’ pension obligations (12 cents instead of 50 cents) – and its bonds are bought by the same type of people who get pensions. 

pension_liabilities_bonds

Either way, it’s a stream of payment obligations

Although agreeing to pay CalPERS in full, Stockton has said in court that it could not pay more than 12% of the $32 million it owes Franklin.

Pensions are debts; bonds are debts.  Why are pension debts more equal than bond debts?

because_you_said_so

Got any better arguments?

While we’re on the subject, who benefits from those pensions, and how much are they?

The average 2013 CalPERS pension for those who worked 30 years or more and received a full year’s pension was $64,448 for the year.

Got that?  Work for the State of California for thirty years, retire with $64,500 annually for the rest of your life, even if you take another job.

sa_weet

For those who retired in 2000 or later, the average pension was $68,403. This is more than twice the maximum Social Security benefit of $31,704 that a private retiree receives.

Now we see the beauty of the CalPERS-funding end run: It’s not the retirees asking for the money, it’s mighty CalPERS.

Because of Stockton’s pledge, CalPERS attorney Michael Gearin downplayed the decision and said it doesn’t force the city to cut its pension payments.

gearin

Gearin up for a fight

“It doesn’t establish a precedent. Those were his comments about a hypothetical city” that wants to cut ties with the California Public Employees’ Retirement System, he said.

Mr. Gearin is mouthpiecing for his client, hoping to buy a news cycle or two. 

Nonetheless, CalPERS was disappointed.

Devastated, maybe?

jack_o_lantern_03_upset

Not devastated, fighting mad

Because if one bankrupt city gets away with cutting its CalPERS payments, and thus reducing its retired employees’ pension benefits, that may encourage the others!

Theresa J. Pulley Radwan, associate dean for administration business and a law professor at Stetson University in DeLand, Fla., said Klein’s decision could put public workers’ pensions more at risk during bankruptcies.

She said the ruling is not binding on other bankruptcy courts, but that those courts typically look to one another’s rulings in similar cases. “I would be surprised if other courts did not find the same thing,” she said. 

Of course they’ll notice; wouldn’t you?  CalPERS, the monolith revealed, may find itself under attack from dozens or scores of similar cities and towns.

About 2,000 municipal agencies cover their employees through CalPERS.

Stockton, hundreds of other municipal agencies and the state annually pay $8 billion to CalPERS to cover their workers’ retirements. Stockton owes the pension agency more than $15 million this year.

Eight billion a year goes in – that’ll pay a lot of legal bills, and there will be a lot of legal bills, because at this point, any city manager or city creditor is going to use Judge Klein’s ruling as the basis for challenging preferential settlements to retirees.

Klein compared the Stockton-CalPERS relationship to a retailer using bankruptcy to opt out of a bad shopping-mall lease. “The city’s contract with CalPERS could be rejected,” the judge said to a courtroom packed with lawyers, city officials and retirees.

The judge is absolutely right.  Creditors are creditors.

It raises questions about whether cities that have filed for bankruptcy would be free to slash their pension contributions — and even use the money to repay other debts. 

Or the cities could use the money to pay current obligations – like current employees – rather than past ones.

good_idea

[Continued tomorrow in Part 2.]

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Month in Review: August, 2014: Part 2, Longest

October 14, 2014 | Boston, Cities, Density, Development, Eminent domain, Harbor Towers, Housing, Infrastructure, Month in review, Urban renewal, Verticality, Zoning | No comments 142 views

[Continued from Friday's Part 1.]

By: David A. Smith

In the long, long month of August, I wrote three long pieces, none longer than the final one, a post that set a dubious personal record – ten parts! – in which I covered two hundred years of Boston history as seen through a time-lapse recollection of a single site – water that became land – in That’s rich, Harbor Towers: Part 1, Towering contradictions:

As part of my e-ringside seat for the revival of Don Chiofaro and his visible efforts at diplomatic euphemism after his release from political Coventry, where he’d been banished by now-retired urban autocrat Tom Menino, I was recently perusing The Boston Globe (July 23, 2014)’s article describing Mr. Chiofaro’s show-and-sell of his envisioned towers and his dollops of verbal design goo, when I hit this nugget:

bg_chiofaro_towers_01

What are those ugly gray things to the left of Chiofaro’s nice proposed towers?

A rendering showing a view of the new Harbor Towers buildings from the harbor. The new buildings are at the center of the rendering, to the right of the existing Harbor Towers buildings.

We believe the proposed development is historically and contemporaneously inappropriate in scale, height and density for a location adjacent to two Boston treasures, the Rose Kennedy Greenway and the harbor,” wrote two trustees of Harbor Towers

And I thought, that’s rich, coming from the likes of you. 

To appreciate fully the sanctimonious unintentional irony of that righteous garbage, one must understand how Harbor Towers gained its place on the waterfront, and to do that requires journeying back in space, time, and nine more post installments, to the very beginning of Boston, as I covered in Part 2, 1700 to 1960, “Currency around the world”:

india_wharf_1857

India Wharf, 1857

India Wharf!  Even the name was exotic, calling the youth to ship the high seas in search of adventure.

The focal point of all this activity was India Wharf, built in 1805 by the dean of Boston architects, Charles Bulfinch. “An address on … India Wharf was currency around the world,” writes Kay.

india_wharf_1899

India Wharf, 1899: the other wharves has grown as long as Long Wharf

It also played host to the India Wharf Rats Club, a renowned gentlemen’s club where, it was said, women could enter, so long as they didn’t ask about the long, shiny cylindrical object—a whale’s penis—hanging from the ceiling.

Then came the streetcars – public transport for the mid and late nineteenth century – and the subway.

With motorized transport, the waterfront fell into desuetude, only to be revived through slash-and-burn urban renewal, out of which sprouted the twin peaks of Brutalist Harbor Towers, which in turn became first an outpost for swinging urbanites in the rough-tough-downtown-Seventies, and then the vanguard of the post-industrial urban revival, as covered in Part 3, The 1960s, “Arguably a Mistake”, Part 4, The early 1970s, “A really bad reputation”, Part 5, The 1980s, “You will find yourself making excuses”:

Built in an area that had once been wharves and warehouses, Harbor Towers may have been ahead of their time. For much of the 1970s, the immediate surroundings remained something of a wasteland.

Economic revival came slowly to downtown Boston, but it did come, and then an opportunity arose:

They converted to condos in 1981.

When the towers were developed, the Section 207 program had some very mild affordability restrictions: (high) limits on residents’ income levels (possibly not calibrated for family size, so a swinging bachelor like Derek Sanderson could quality), and a gentle review of rent levels.  Under President Reagan, the Section 221(d)(4)’s were entirely decontrolled, because in Reagan’s view (which at the time astounded me, but in later life I have come to appreciate) adding supply was enough impact, especially given that the program was a lending  program, not a subsidy program, and the program paid for itself (in interest rates and mortgage insurance fees).

With the shift from rental to occupant ownership, the residents’ profile changed, and along with it changed their incentives and behaviors. 

In 1985, four years after the rental buildings were first converted to condos, Hurricane Gloria roared in and blew out 70 of the towers’ windows.

hurricane_gloria_forecast

Be prepared! For cheesy graphics!! And bad hair !!!

With occupant ownership had come two different factions:

The trustees representing Tower I—which, by virtue of being closer to the water, has more moneyed residents—called for all of the complex’s 1,716 windows to be replaced. The Tower II board wanted to junk merely the most dysfunctional ones.

With the two sides at an impasse, the trustees moved to try to at least stop the indoor rainstorms by sealing up the vents. This meant the units no longer had proper exhaust systems—which turned out to not matter much, since the spaces between the windows and the deteriorating concrete walls were still wide enough to allow air (and some inclement weather) to flow in from outside.

Over the decade, the market set prices, the units cleared at the market price, and gradually the towers filled with people for whom the location and views compensated for the traffic noise and lack of walkability.

fort_hill

At the foot of Batterymarch street (which still exists), within sight of Long Wharf

(From the Bonner map, 1722)

Boston’s revival revalued the downtown, and made the waterfront, which had evolved from a commercial center to an urban sludgebank, into a visual and experiential amenity demanding cleanup, and with that came metropolitan demand for new urban infrastructure (the Big Dig) and, in consequence, a dramatic increase in the value of waterfront property, as unrolled in Part 6, The Big Dig: “You don’t have to look at Harbor Towers”, Part 7, The condo assessment, “Cut my losses and get out”, Part 8, The HVAC replacement, “A certain godlike remoteness”, Part 9, The new neighbor, “A two-star hotel always under construction”:

Even as the Harbor Towers residents were distracted by internecine intra-building disagreements over how to fix their decrepit and collapsing HVAC system, their landward neighbor (both of whose existing International Place towers were taller than theirs) was sizing up another investment opportunity, and in 2008 Don Chiofaro achieved his objective: in financial partnership with an institutional investor, he bought the Harbor Garage.

With that purchase, Mr. Chiofaro suddenly had a two-part foothold into Harbor Towers’ decision-making:

Harbor Towers residents lease several hundred parking spaces in the garage. (The 624 units have long-term leases for spaces that are set to expire in 2022.)

Mechanical equipment for Harbor Towers is located in the garage building.

As President Nixon’s aide Chuck Colson said, when you’ve got them by the mechanical systems, their hearts and minds will follow.

colson_reporters

Now that I have everyone’s attention …

Mr. Chiofaro’s move was as shrewd as Robert Kraft’s systematic real-estate-based annexation of the New England Patriots, first by buying land next to crappy old Schaefer Stadium; then in 1988 buying the stadium itself out of bankruptcy court.

Football Games Partiots  vs  Dolphins   1982

Built on the cheap, run on the cheap: Schaefer Stadium, December, 1982

In 1994, when the new owner wanted out of the leased to move the team to St. Louis, Mr. Kraft made a deft counteroffer to buy him out.  Mr. Chiofaro had a similar long-term view: own property, and sooner or later you’ll be able to develop it to its economic and zoning potential.  When that happens, of course, those formerly aggressive new arrivals will present themselves as guardians of tradition, as I concluded in Part 10, “Coming from the likes of you” :

Epitaph for the living Towers

young_woody

Money is better than poverty, if only for financial reasons

If 90% of life is just showing up, then ninety percent of becoming an architectural icon is longevity: “Politicians, ugly buildings, and whores, all get respectable if they last long enough.”

chinatown_cross_05

“‘Course I’m respectable.  I’m old.”

Todd Lee, the architect on the 32nd floor, has lived in the building three separate times: once after his first wife took ill, once after she died and he wanted to “live like a monk,” and again after he married Karen C.C. Dalton, a charming art historian from Texas now teaching at Harvard. “I don’t know of any building in the city that has affection like this,” he says. “People who live here understand what an anomaly it is, and how extraordinarily lucky they are.”

In a sense, Harbor Towers is kind of an island,” says Peter Forbes. “They fight everybody on the outside, and when there isn’t anybody on the outside, they fight each other on the inside.”

red_wedding_01

The trustees send their regards

“There have been coups left and right when one group gains ascendancy over another. But their victories seem to be short-lived, and then somebody else comes in and dethrones them.”

It’s not often the city finds itself with the opportunity for a transformative moment,” Chiofaro said. “But that moment is now before us.”

I close this odyssey where I began it, with that trustees’ letter quote:

“We believe the proposed development is historically and contemporaneously inappropriate in scale, height and density for a location adjacent to two Boston treasures, the Rose Kennedy Greenway and the harbor,” wrote two trustees of Harbor Towers.

That’s why I so instantly thought, that’s rich, coming from the likes of you. 

Cities belong to the future more than they belong to the past; and in a technological society, cities must become progressively more technological and more vertical – tradition is worthy not just because it is old but because that age connects the future to things we value because they have proven valuable in the past.  Though a suburban kid by birth, I have over the many decades been seduced by the concept of cities and by the reality of my cities:

super_gulp

39 years working in Boston

Boston where I have worked for 39 (gulp) years, and Cambridge where I have lived for (double gulp) 43 years. 

double_gulp

43 years living in Cambridge

Cities claim the right to be messy; the right to be politically tortuous; to be periodically infuriating; to be crowded and often unmanageable; to be loud and jostling and sometimes dirty; to be under-infrastructured and under-serviced.  Out of this, cities produce innovation and human enterprise and civilization.  To quote Harry Lime:

borgias_pope
Starting the Renaissance was collateral damage

Like the fella says, in Italy for 30 years under the Borgias they had warfare, terror, murder, and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland they had brotherly love – they had 500 years of democracy and peace, and what did that produce?

harry_lime_goodbye_holly

Goodbye, Holly

The cuckoo clock.

On behalf of cities, I claim them all.

 

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Month in Review: August, 2014: Part 1, Long, longer

October 10, 2014 | Boston, Cities, Density, Development, Eminent domain, Harbor Towers, Housing, Infrastructure, Month in review, Urban renewal, Verticality, Zoning | No comments 192 views

By: David A. Smith

Whether by accident, laziness, or design, during August I wrote only three posts, but they were all mega-expositions: 3, 7, and 10 parts. 

tall_taller_tallest

Long, longer, and longest

The shortest was my piece about New York City (where else?), and the New York Times’s headline writers missing the point about properties that have become Vertically obsolete: Part 1, Several families in Sunnyside?:

Despite its author, Josh Barro, writing a good article about the complications of inclusionary zoning, the New York Times (June 7, 2014) chose a headline that sends the reader on a long misdirection:

Affordable Housing That’s Very Costly

As we’ll see, that’s misoriented in two ways: (1) the cause isn’t the housing but something else, and (2) when assessing whether it’s ‘costly,’ as the late great Henny Youngman replied when asked, “How’s your wife?”, compared to what?

henny_nyc

If you ask how costly my wife is, you can’t afford her

Abington House, at 500 West 30th Street near the High Line in West Chelsea, is a new luxury residential building and, like a lot of new luxury developments in Manhattan, it’s extremely expensive. The cheapest two-bedroom apartment now listed there rents for $5,850 a month. That gets you only one bathroom; a two-bed, two-bath can run as high as $8,695.

But 78 apartments in the building, or 20% of the total, are set aside as affordable housing under New York City’s “inclusionary zoning” program. That means 19 two-bedroom apartments are priced from $687 to $873 — about a 90% discount to market rents.

The rent reductions are enormous … but even more enormous is the implied loss of capitalized value from them, which we can calculate as:

($5,850 – $687) = $5,163 per month x 12 months =

$61,956 annually / 5.0% cap rate = $1,239,120

The rent buydown inherent in that apartment cost the developers the equivalent of $1,240,000; using the higher market rents, the effective discount is ($8,693 – $873) * 12 / 5.0% = $1,877,000.

Those apartments were granted to 19 households that make from $25,612 to $42,950 a year and won a housing lottery the city held last year.

These figures work out fairly close to 30% of income for rent, so in fact it is genuine affordability – and it’s been created with zero cash outlay by City of New York.  Have we found the perpetual motion machine?

jobs_not_a_chance

Hint: No, as I demonstrated in Part 2, High implicit subsidies?, and Part 3: The political barriers to rezoning:

A city must manage its verticality, both with the zoning it permits and with the bargains it strikes when emerging hot markets, driven by urban immigration, a changing and growing economy, and improved urban infrastructure, transform the development potential of some neighborhoods (like the case-study’s former Garment District) so that they become worth rezoning and upzoning.

Inclusionary zoning generated fewer than 3,000 new affordable units from 2005 to mid-2013, according to an analysis from Brad Lander, a New York City councilman.

To be sure, 3,000 new affordable apartments are nowhere near enough to keep up with the effective demand, but they’re free (no city budgetary cost or appropriations outlay), and Mayor de Blasio has shown no conception at all that he can see the system as a whole, and that if he wanted to make real progress, he could reform rent stabilization to eliminate obvious abuse, eliminate overhousing, or comprehensively make over the criminally incompetent NYCHA.  Coincidentally, all of those would require genuine executive action or political courage.

cowardly_no_courage

You have no courage only if you believe you have no courage

At least one part of New York City, a cluster of Orthodox and Hasidic neighborhoods in northern Brooklyn, has welcomed increased density. Developers in South Williamsburg have aggressively pursued the right to build dense, boring apartment blocks to accommodate the area’s rapidly growing Hasidic population — and the added capacity has helped keep prices relatively modest, far below those on the north side of Williamsburg.

What the Hasidic know, the mayor evidently does not know; that his proposal (if enacted, which is unlikely) will hurt New York City, which desperately needs a more pro-development climate.  The mayor shows signs of localized myopia, thinking the entire city is like his own gentrifying neighborhood of Park Slope (where property values rose 17% in one year).

Despite my hatred of rent control and rent stabilization, my encyclopedia of rent control’s harmful effects was missing the one that Mr. Barro has flagged – it preserves the vertically obsolete out of a misguided belief that the built environment is fully built.  So rent control not only strangles the apartments, it strangles development (much like San Francisco’s well-meant but idiotic sunset zoning).

For now, inclusionary zoning may be politically necessary to make that additional density possible, even if the cost per affordable apartment is very high.

It isn’t high; New York City is paying the surcharge of development-blocked and rent-stabilized vertical obsolescence.

nyc_brownstone_boarded_up

Time to take this down so something taller can go up?

Longer posts exploit the blog medium – no word count or news hole, no pre-emption of an in-depth feature by breaking news, the ability to delve into the past to contrast what was confidently said back then (by those with a stake in influencing a decision) versus what actually transpired, and hence to provide rounding and texture to what the twitterati want to compress into Manichaean black and white, as shown by the protracted tussle among Atlantic City, Donald Trump, and feisty (now late) Vera Coking over whether You have the right to remain: Part 1, Immovable:

Vera Coking could have been Susette Kelo; in fact, she was Susette Kelo … but in 1998, she won her eminent domain taking case.

02_vera_coking_1998

She won? Vera Coking in 1998, after winning

At the time nobody beyond the antagonists – and we have Donald Trump as the Eeeevil Developer, in fact as an Eeeeevil Casino Developer in a city known mainly for its sins – quite appreciated that Ms. Coking’s victory for property rights would be a defeat for Atlantic City, and for Ms. Coking herself. 

boardwallk_empire_good_story

The first rule of journalism, too

If journalists did not invent survivorship bias, they are its most dedicated proponents, if only because the living give better interviews than the departed, and a lucky winner (or unlucky loser) makes for good storytelling, and even if the storytelling has to invert logic, as reported in The New York Times (July 21, 2014):

In the eminent-domain tussle, Ms. Coking proved herself to be Part 2, Anachronistic, Part 3, Stubborn, Part 4, Unreasonable, and Part 5, Ornery:

As I would have guessed, behind Ms. Coking’s successful litigation was pro-bono assistance from the Institute for Justice, the same folks who seven years later would take Susette Kelo’s case all the way to the Supreme Court:

”If this kind of analysis is adopted throughout the country,” said Dana Berliner, a staff lawyer with the Institute for Justice, “it will be a revolution in condemnation law and a very important restraint on the ability of government to take private property and hand it over to other private parties.”

Seven years later, Kelo would be that revolution.

Ms. Coking’s house is wedged between the Trump Plaza Hotel and Casino and Caesar’s Palace, so close to Trump Plaza that visitors knocking on her front door can feel the spray from sprinklers used to water the hotel’s grass.

The three owners had prevailed, but then a funny thing happened: two of them sold.  The price for the Sabatinis’ restaurant tripled, from $700,000 to $2,100,000.

claire_sabatini_trump

We love our restaurant, but for 3x its value?

Claire Sabatini, who eventually, perhaps reluctantly, sold

Mr. Banin did even better, as his pawnshop’s sale price rose tenfold, from $169,500 to $1,600,000.

”I never thought that in the U.S. because one party wants something it will be backed up by the government,” said Peter Banin, 42, a Russian immigrant and a goldsmith, runs the Golden Island, a jewelry business and pawnshop. ”Here, you buy it, you pay for it, you work to pay for it again, and then CRDA says, ‘I want this.”’

That is the conundrum of eminent domain, one inherent in urbanizing, verticalizing, and technologizing cities.  For his property and his emotional distress, Mr. Banin (who as a pawnshop owner would have been very familiar with the concept of economic necessity and putting a price on memories) was at least both vindicated and compensated:

Finally, though the Sabatinis and Mr. Banin eventually became reluctant if profitable sellers, Ms. Coking remained, to the last, Part 6, A holdout, and Part 7, The owner:

After decades of happily running her boarding home, Ms. Coking was eventually relocated to the ground floor before her family moved her out.  Now 91, she lives at a retirement home in the San Francisco Bay Area.

I find myself immensely happy for her.  But her property eventually closed, and was eventually foreclosed and sold at auction:

Soon bidders began driving the price up in increments of $5,000.

An hour later, the bidders were down to two.

The winning bidder, whose name was not disclosed, took the home for $530,000 plus the 10% auction commission.

Notwithstanding the lack of confirmation, I think it was on behalf of Trump Entertainment; why else would the buyer choose to be anonymous?

turmp_smug

Because I’m shy?

Our concept of private property derives from the pre-technological and agrarian era: a homestead was land that a family settled upon, built upon, fenced, and defended.  The homestead had no infrastructure: the homesteader built his own water and sanitation; there was no electricity, and vehicles followed dirt paths and roads.  The homestead owner had the right to remain foolish; the right to remain stubborn; ornery; as long as he remained independent, no one could tell him what to do with or on his own property.

keep_out_sign

Past here, you do not own and have no right to enter

But the modern world depends on infrastructure; infrastructure depends on networks; and infrastructure establishment costs are usually greater than can be supported by the recurring revenues from users.  If a city is to sustain infrastructure, therefore, government must finance and subsidize it, and if the infrastructure is to be retrofitted into a previous urban grid, then eminent domain is necessary. 

In many ways, this tussle between Ms. Coking and Atlantic City was prefigured in Aldous Huxley’s 1932 Brave New World, which envisioned an entire society of benevolent government in which everyone’s property rights – in fact, everyone’s personal rights, including their right of life – were subject to the all-knowing benevolent state, as personified by the aptly named Mustapha Mond (word code for ‘devil’s world’):

“In fact,” said Mustapha Mond, “you’re claiming the right to be unhappy.”

“All right then,” said the Savage defiantly, “I’m claiming the right to be unhappy.”

“Not to mention the right to grow old and ugly and impotent; the right to have syphilis and cancer; the right to have too little to eat; the right to be lousy; the right to live in constant apprehension of what may happen to-morrow; the right to catch typhoid; the right to be tortured by unspeakable pains of every kind.”

There was a long silence.

“I claim them all,” said the Savage at last.

Mustapha Mond shrugged his shoulders. “You’re welcome,” he said.

[Continued next week in Part 2.]

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When the house loses: Part 12, The butt end of Boston?

October 9, 2014 | Boston, Casinos, Cities, Economic development, Economics, Everett, Gambling, Housing, Infrastructure, Land use, Local issues, Real estate taxes, Speculation, US News | No comments 135 views

[Continued from yesterday's Part 11 and the preceding Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, Part 9, and Part 10.]

By: David A. Smith

I got no chance of losing this time

Loser, Grateful Dead (Jerry Garcia, Robert Hunter)

Finally we have reached the end of this epic – should we vote to repeal casino gambling in Massachusetts?

community_not_casino

A voice from West Springfield, MA

Sources used in this post

Alan Mallach, Economic and Social Impact of Introducing Casino Gambling: A Review and Assessment of the Literature, Federal Reserve Bank of Philadelphia, March, 2010

Dice or No Dice: The Casino Debate in Massachusetts (Spring, 2011; navy font)

Economic Impact of Casinos on Home Prices, undated NAR 2013 study; red font

Boston Globe (June 30, 2013; gray font)

Revere Journal (October 16, 2013; bruise font)

Seniors in Casino Land: Tough Luck for Older Americans (Spring, 2014; teal font)

Boston Globe (April 11, 2014; emerald font)

Boston Globe (June 24, 2014; orange font)

The Atlantic (August 7, 2014)

Washington Post (August 26, 2014; olive font)

Boston Globe (September 15, 2014; turquoise font)

Boston Globe (September 16, 2014; blue font)

Boston Globe (September 16, 2014; photographs)

Massachusetts Gaming Commission web site (lavender font)

Boston Globe (September 23, 2014; magenta font)

springfield_casino_rendering

A vision for Springfield, MA?

Springfield’s pro-casino campaign focuses on “saving the 3,000 jobs that are coming to Springfield.”  But critics think those promises are illusions:

No one should look to casinos to revive cities, “because that’s not what casinos do.” So explained the project manager for a new Wynn casino rising near Philadelphia. He’s right, but it has taken a surprisingly long time for city governments to acknowledge a fact that was well understood by the nineteenth-century Americans who suppressed gambling in the decades after the Civil War.

[I’m letting that claim stand unchallenged because this post is already overlong, but I’ll check his source. – Ed.]

As we’ve seen, casinos do improve some cities, if the casino becomes a destination:

The type of patron is important: Extended visit patrons tend to spend more money at a casino and in the area than do day-trippers. To the degree that a casino area becomes a destination rather than relying on local patrons, the casino is likely to generate additional jobs and income for the region.

Thus, if in fact Massachusetts is already losing patrons to nearby Connecticut – which I find quite plausible, as I’ve heard lots of people speak of ‘going to Foxwoods’ for a risque outing – then the Commonwealth will be repatriating benefits that would otherwise be fleeing the state.

Personally, I wouldn’t want a casino in Cambridge, but then I have that luxury because my city is affluent: Cambridge already has plenty of global destinations in the form of universities.  Everett, Revere, Charlestown, Chelsea, Winthrop – these towns have weak economies and want economic development.

revere_says_yes

Mind you, this is back when Revere thought it, not Everett, would get the casino

When voters in Everett were presented with Wynn’s casino proposal, they approved it in a landslide: 86.5% in favor.

everett_votes_yes

Barely 1 in 8 said No

They did so in the name of hope:

Mayor Carlo DeMaria of Everett said the vote would transform a “desolate’’ section of his city.

“This is going to be a snowball, getting bigger and bigger,” DeMaria said. “You won’t recognize the city of Everett, hopefully, in 10 years. We will no longer be the butt end of the city of Boston.”

It’s amazing how clearly the debate breaks down on socioeconomic lines.  Senator Warren, from my rich city of Cambridge, opposes casinos and favors repeal.  Senator Markey, whose former Congressional district included Malden, Medford, and Everett, towns that can expect to benefit from the casino, favors the casinos and opposes repeal – and I think it’s going to break that way right across the state:

A Boston Globe poll this month found that only [Curious interjection of ‘only’ – Ed.] 52% of likely voters favored keeping the 2011 gambling law authorizing casinos on the books, while 41% favored repeal. A Suffolk University poll in early June found that only 37% approved of casinos here.

“I think the campaign will matter a lot,” said Clyde Barrow, a casino expert from University of Massachusetts Dartmouth [Who resigned acrimoniously, though apparently not over anything to do with his studies into gambling. – Ed.].

clyde_barrow

Enduring “Where’s Bonnie?” jokes for decades: former Professor Clyde Barrow

“I don’t think it’s a foregone conclusion for either side.”

John Ribeiro, chairman of the citizen-led repeal effort, hailed the court ruling as “the starting gun in this incredibly important campaign.”

john_ribeiro

John Ribeiro: “A very decent person but a zealot on this issue for sure.”

I credit Mr. Ribeiro entirely for forcing the issue before the voters, because the public-choice theory implications are enormous: state legislators who favor casinos, anticipating they will benefit their towns, will be powerful proponents of enabling legislation, while those who opposed casinos would be far less adamant, as they would know that even if the casinos were legal statewide, the sin would never come to their town.  This is an issue that affects the whole state, and it’s entirely proper that the voters as a whole should decide it. 

john_ribeiro_02

Mr. Ribeiro, thanks for giving me a hard choice

Like Alan Mallach, I don’t like casino gambling; the one time the Boss and I spent any time in a casino (for a trade association convention), we both hated and were bewildered by the experience.  But that is my class snobbery talking, and it must be coloring my view of whether casinos are good for struggling cities. 

Here’ as best I can tot it up, are the pros and cons:

mask_money_fans

Do these look like good arguments to you?

Pros

1. New taxes, a reliable evergreen flow.

2. New jobs (though low wage).

3. New capital investment that will motivate the casino developer.

4. Free cleanup of an environmentally questionable site.

5. Freedom of choice for consenting adults.

Cons

1. Politically dubious process of selection implied likelihood of continuing political machinations.

2. Historical connection between gambling and organized crime (mainly when gambling was illegal).

3. Irreversibility: once legalized, gambling is unlikely to be banned.

4. Inconclusive and unprovable claims for economic development.

5. Convincing evidence that casino development will create new gambling addicts.

Even without casinos, gambling is here to stay.  Every day at my 7-Eleven I see people coming in to buy state lottery tickets, whose payouts are much, much worse than the casinos’.  The dopamine rush referenced in earlier posts is real: one can observe it in others, and feel it in oneself.  (Sports fandom is a kind of emotional gambling, and goodness knows the dopamine rushes there are insanely powerful.)

sports_fans_excited

Dopamine galore

I don’t like what gambling does to people – but I resist the notion that adults should be prevented from making their own choices.

While we sat silently with our free sodas mindlessly hitting a slot machine button, we were inching toward oblivion, guided by machines designed to create zombie addicts, something to which any of us—but especially the most vulnerable—can fall prey.

I do fear for the elderly, especially the lonely and isolated elderly.  In the last few years, I’ve reached the age where every time I turn around, someone from my cohort is coping with an aging, demented, frail, or dying relative. 

As I thought of the seniors I met during my travels, I felt the onus on me and my generation. If we don’t create and support environments that foster dignity and connection for all ages, shame on us.

If I knew gambling were severely addictive – and I know many experts think it is, at least for a fraction fo the population, and maybe more if they are depressed – I’d ban it (even though we don’t ban tobacco and are on our way to unbanning marijuana). 

If there were a better alternative for the elderly, I’d fund it.

If the gambling taxes were ring-fenced for elderly services, I’d be ecstatic.  

None of these are available options.  We have to choose on the imperfect facts and incomplete knowledge we have.

At the same time, I think the campaign won’t be fought on rational calculation but on people’s gut beliefs.  Gambling provokes the latent Puritanical instincts of Americans (including Massachusans):

eliot_puritans

We’re going to found a God-fearing colony here …

And after about four hundred years, you’ll get to run casinos on it

Chip Tuttle, the chief operating officer of Suffolk Downs who has often faced off with Ribeiro over the casino proposed for the racetrack, said in an e-mail that Ribeiro is “a very decent person but a zealot on this issue for sure.”

“It’s not possible to have a reasonable dialogue,” Tuttle said, “because he starts with an absolute position, that gaming is intrinsically evil and that in 38 other states and in world-class cities like New York and London, many of which have thrived with casinos in their midst, it has led to widespread devastation and ruin.”

Twenty thousand words into this blog, I’ve become skeptical of my own biases.

twenty_thousand

Time for skepticism

If we don’t like the externalities of gambling, e should deal with them affirmatively rather than try to ban them negatively.  And for that reason, to my utter astonishment, this November I think I’m going to vote against repealing the casino-enabling law.

But I won’t at all mind if it is repealed, because there is life after casino failure, as speculated (if not proven) by this morning-after column by Paul McMorrow:

The Massachusetts Gaming Commission put Suffolk Downs out of business last week, when it handed Steve Wynn a coveted casino gambling license. Dreams of slot machines and table games were all that kept the politically wired East Boston horseracing track from closing long ago. When those dreams vanished, the axe fell swiftly on Suffolk: The track’s owners announced racing at the state’s only thoroughbred track will end within weeks.

In fact, it’ll close before you read this: the last day of racing is October 4, 2014.

There’s a funereal pall hanging over these last races. Hundreds of locals who work at the track are losing their jobs. Scores of seasonal racing workers used to shuttling up to Boston for the summer won’t be back.

Even so, losing the casino sweepstakes is the best thing that could have happened to Suffolk Downs and Greater Boston.

Though it’s easy for Mr. McMorrow to look beyond the disruption effects of losing hundreds of jobs, disruption is part of Schumpeter’s cities. 

It pulls the track off life support, and clears the way for the largest development site in Boston to finally get on with its next act.

And it clarifies the mind wonderfully:

From the beginning of the casino chase, Suffolk Downs has been pushing a two-pronged argument — that putting a casino along the East Boston-Revere line would bring new jobs, while rescuing the ones connected to the track’s stables. Never once did the track or its political sponsors wonder whether the neighborhood could do better.

chip_tuttle_suffolk

Now Mr. Tuttle must find another future for Suffolk Downs

There has been life after army base closures (a similar low-wage negative-externality event).  For Suffolk Downs and Revere, there should be life after the track closes.

Now, with the casino license heading up the Mystic River to Everett, the area has a chance to become Boston’s next great neighborhood-building project.

Maybe.

roulete_vegas_1960s

Just one more lucky spin

No, I got no chance of losing this time

Loser, Grateful Dead (Jerry Garcia, Robert Hunter)

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When the house loses: Part 11, Twice as many problem gamblers

October 8, 2014 | Boston, Casinos, Cities, Economic development, Economics, Everett, Gambling, Housing, Infrastructure, Land use, Local issues, Real estate taxes, Speculation, US News | No comments 240 views

[Continued from yesterday's Part 10 and the preceding Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 8, and Part 9.]

By: David A. Smith

I could pay you back with one good hand
Loser, Grateful Dead (Jerry Garcia, Robert Hunter)

One cannot indict casinos as societal ills without indicting every legislator who pressed for their authorization, every mayor or city councilman who clamored to win the license.

patrick_signs_casino_bill_1212

Signing the casino bill, Governor Patrick shakes hands with speaker Robert DeLeo of Winthrop (Suffolk Downs’ district)

19th_suffolk

The 19th Suffolk District contains Suffolk Downs

Sources used in this post

Alan Mallach, Economic and Social Impact of Introducing Casino Gambling: A Review and Assessment of the Literature, Federal Reserve Bank of Philadelphia, March, 2010

Dice or No Dice: The Casino Debate in Massachusetts (Spring, 2011; navy font)

Economic Impact of Casinos on Home Prices, undated NAR 2013 study; red font

Boston Globe (June 30, 2013; gray font)

Revere Journal (October 16, 2013; bruise font)

Seniors in Casino Land: Tough Luck for Older Americans (Spring, 2014; teal font)

Boston Globe (April 11, 2014; emerald font)

Boston Globe (June 24, 2014; orange font)

The Atlantic (August 7, 2014)

Washington Post (August 26, 2014; olive font)

Boston Globe (September 15, 2014; turquoise font)

Boston Globe (September 16, 2014; blue font)

Boston Globe (September 16, 2014; photographs)

Massachusetts Gaming Commission web site (lavender font)

Boston Globe (September 23, 2014; magenta font)

Readers will recall that when the bill was signed, everyone thought Suffolk Downs was a lock to win the Boston license … and yet it went to Everett, and now Suffolk Downs is closing.  And that leads to the question, Does casino development kick-start urban revitalization?

kick_start

You say you want revitalization?

10. Urban casino development becomes an unbreakable cycle

We’ve seen already that casinos generate net revenue for communities when they attract players from a very large (regional or even national) area:

According to Mallach, fewer than 15% of the patrons in Atlantic City and Las Vegas are local area residents, and there is general agreement that these cities have benefitted economically from hosting gambling enterprises.

In contrast, local residents are over 80% of patrons for Illinois riverboat casinos, 75% for Missouri casinos, and 80% in the case of Detroit. The economic benefit has been reported as being much smaller.

And the societal costs of local gamblers are higher, as it seems that some fraction of them, given easy access, become addicted to gambling:

People who live close to a casino are twice as likely to become problem gamblers as people who live more than 10 miles away.

Which is the effect, which the cause?

As casinos have become more prevalent, so has problem gambling: in some states, the evidence suggests a tripling or even quadrupling of the number of problem gamblers.

Anywhere casinos arrive, they seem to cycle as Las Vegas has done: newer flashier casinos are built, rendering the previous generation obsolete, whereupon the older casino’s revenues collapse, so that the facility is eventually bankrupted and then shuttered … leaving land, a licenses, an operator, and an incremental imperative to build a new glitzier one on the same site.  As put by the Institute for American Values:

“When you bet the whole farm on gambling … it’s not an industry that grows the economy. It’s an industry that sucks money out of the economy,” said Paul Davies, a senior fellow for the New York-based Institute for Family Values [aka the Institute for American Values – Ed.], a non-government organization that opposes closing state budget shortfalls through gambling. “It’s sort of like a roach motel – takes your money and sends you on your way.”


If that’s true, a city using casino development is like a punter who’s down money and trying to get back to even – chasing lower odds through impaired judgment born of money anxiety.

slot_machine_one_armed_bandit

There’s a reason they’re called ‘one armed bandits’

old_people_playing_slots

While away your hours, at the price of your quarters

Four casinos have closed or will soon close in Atlantic City, including the glitziest hotel on the boardwalk, Revel (and the Trump Taj Mahal).

trump_taj_mahal

Should’ve sold out, Vera

Revenues from Maryland’s first casino, in Perryville, at the northern tip of Chesapeake Bay, have already dropped 30% from their peak in 2008, and are expected to decline even more rapidly in future as competitors proliferate.

kal_emergency

Like restaurants, casinos seem to open with a great fanfare, flourish for a time until the novelty wears off, then drift slowly down into failure.

As years are added to life, we should work to add life to our years. Casinos drain life. They bank on our buying into an illusion of luck—an illusion that makes a sham of human dignity, creates a false sense of community, and fashions an empty construct of “fun” that lures us into a place of mindless escape rather than of mindful connection. Ultimately, the transaction always profits the house. It is deeply troubling that our state governments are the sponsor and promoter of commercial casino gambling. None of us—including those of us who never visit casinos—can turn a blind eye to the growing presence of this new and corrosive institution in American life.

An addict’s addiction drives health out of the body.  New Orleans is addicted to sin-music-food-tourism, and Atlantic City has become addicted to commuter gambling, busing them in from New York and Philadelphia – and each casino expansion in Atlantic City has left it more dependent on casinos, less diversified into productive or sustainable economics.

11. Are urban casinos good for cities?

Like gambling itself, I got into this post thinking it would be manageable, but instead I find myself ‘writing until extinction,’ as this single post will set a personal record for most parts and most words (over 20,000 in total).

According to the American Gaming Association’s State of the States annual report, casino gambling has become one of the country’s fastest growing industries: commercial casinos in the twenty-three states that license them earned more than $37 billion in gross gaming revenue in 2012 alone. One-third of the U.S. population visited a commercial casino in 2012 and more than half of those people were aged fifty and older.

mallach_table_1

Good or bad for Wisconsin?  You decide

The impact of casinos on neighboring property values is “unambiguously negative,” according to the economists at the National Association of Realtors

As we’ve seen, that isn’t true.

Casinos don’t encourage non-gaming businesses to open nearby, because the people who most often visit casinos do not wander out to visit other shops and businesses.

That is true.

In only five weeks, the casino issue will go to the voters, who haven’t been consulted up to now, as a statewide referendum is on the ballot to repeal the casino law. 

The casino industry’s national trade group, the American Gaming Association, promised Tuesday to “ensure that voters have the facts about our industry, instead of tired stereotypes.”

Yes, please, let’s get fresh new stereotypes.

In its unanimous decision, the high court ruled that Attorney General Martha Coakley made a mistake last year when she ruled that the repeal measure was unconstitutional.

brown_coakley_2010

Expecting to win, shocked to lose: Martha Coakley in 2010

In 2014, Ms. Coakley is busily running for governor –

baker_coakley

I may shake your head but I really don’t like you: Martha Coakley in 2014 against Charlie Baker

– after in 2010 having unsuccessfully run for Senator against Scott Brown, who himself lost in 2012 to Elizabeth Warren (who’s said she’s going to vote to repeal) and is now running for Senator from new Hampshire, where he has a slight lead.

Sen. Scott Brown at the Wachusett Mountain Ski Resort in Princeton.

Southern New Hampshire’s full of economic expatriate Massachusans, anyway

Coakley had said the repeal would illegally take the implied contract rights of casino developers without compensation.

As somebody who’s written extensively about eminent domain taking, I find Ms. Coakley’s legal analysis risible; the point of eminent domain is to take and pay just compensation; if the government never took anything that required compensation, there would never be any eminent domain for any purpose.

coakley_fingers

I’m against eminent domain … except when I’m for it

The Supreme Judicial Court also briskly dismissed the Attorney General’s reasoning:

The court rejected that argument.

First the court said it was not a taking because there are no unambiguous property right:

“We conclude that …. the Legislature and, through initiative, the voters of Massachusetts may choose to abolish casino and slot parlor gambling and parimutuel wagering on simulcast greyhound racing, and doing so would not constitute a taking of property without compensation,” the court said in a lengthy decision written by Justice Ralph D. Gants.

ralph_gants

Gants the SJC, the pols themselves contend in vain

Then it observed that the developers weren’t unaware of the repeal potential:

The court also said casino developers who paid the state’s $400,000 application fee and then spent millions more developing their bids had entered the process with eyes open.

eyes_wise_shut

I wonder, can I get my fees back?

“The possibility of abolition is one of the many foreseeable risks that casinos, slot parlors, and their investors take when they choose to apply for a license,” the court said.

Of all entities, casino developers, for goodness’ sake, understand the concept of making a bet on a spin of the wheel – and they understand the concept of backing up the ante by staying in the pot:

 “This is going to be a multimillion-dollar campaign, no doubt about it,” said Springfield political strategist Anthony Cignoli, who has closely followed the development of the state’s casino industry.

tony_cignoli

Cignoli’s got a ringside seat

Who should win it?  Should casino gambling in Massachusetts be repealed?

[Continued tomorrow in Part 12.]

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