Co-published by The American Prospect
Over 60 percent of the county jail population in the Golden State is composed of “inmates awaiting trial or sentencing,” according to one report. That’s about 50,000 people on any given day.
Few will defend, on principle, keeping someone behind bars just because they don’t have the money to get out. In practice, however, while anyone awaiting trial is considered innocent until proven guilty, there are tens of thousands of people — many of whom will never be convicted of anything — sitting in jail cells right now due not to a criminal conviction, but simply because their bank accounts are empty.
But efforts to reform that system in California, one of the United States’ leading jailers, have always met the same fate, following an intense push by the multinational bail industry. In 2013, a reform measure passed the state Senate “but died in the Assembly after heavy lobbying” from that industry, as the Los Angeles Times reported.
This year, a measure that would have largely done away with money bail died on the Assembly floor by a vote of 37 to 35; its Senate companion, SB 10, passed that chamber, but on August 25 it was announced that this legislation would not be taken up until next year, its sponsors saying they plan to work with Governor Jerry Brown this fall.
“Nobody will sit there and tell you the bail system isn’t broken,” Andrew LaMar, communications director for California state Senator Robert Hertzberg, told Capital & Main before the August 25 announcement. Liberal California is an example of that: A broken system that all, including those who profit from it, will concede is deeply flawed. It’s actually changing that system which regularly proves controversial, with self-styled critics of the status quo funding politicians and lobbyists in a campaign to preserve it.
Over 60 percent of the county jail population in the Golden State is composed of “inmates awaiting trial or sentencing,” according to a 2015 report from the Public Policy Institute of California, a nonpartisan think tank. That’s about 50,000 people on any given day.
Many of those detained won’t be found guilty of anything: A third of those charged with a felony in 2015 were never convicted of one, per the California Attorney General’s office, and those who are convicted often receive sentences that do not entail any time behind bars, meaning the totally innocent can be deprived of their liberty for longer than a convicted felon. And anyone who is bailed out — charged or convicted or not — never gets back the money paid to secure their release.
As Human Rights Watch noted in an April 2017 report on bail in California, “The state jails large numbers of people for hours and days against whom prosecutors never even file criminal charges.” And those people, who can’t afford bail that is five times higher than the rest of the country, “are overwhelmingly poor, working class, and from racial and ethnic minorities.”
It’s hard to find anyone who will defend that, even at an industry trade association. “Is it overused? Is it abused in some places? Is it set too high? Sure,” says Jeff Clayton, executive director of the American Bail Coalition. “There are problems.”
One problem with changing the current system is, as is often the case, to be found in the details. Clayton argues that, while no one should be denied their liberty due to insufficient funds, practically doing away with bail altogether could mean empowering a judge to impose more onerous monitoring requirements than already exist.
“We realize something needs to be done,” Clayton tells Capital & Main, “but this is like doing a playbook of what the national talking points are, rather than really digging into the problems in California.”
This” is Senate Bill 10, introduced by Senator Hertzberg. The legislation, passed by the Senate, would have largely done away with money bail, replacing it with pretrial risk assessments that a judge could use to decide whether someone accused of a crime is a flight risk or danger to the public. Bail would be an option, but only if deemed necessary to ensure someone’s return. It would no longer be the default.
“Once we got a bill through the Senate, they started to go crazy,” LaMar, the Hertzberg aide, said of the pro-bail lobby. “For them it’s DEFCON 1. We knew that was going to happen.”
What’s arguably changed is what now constitutes the “bail industry,” where there are billions to be collected.
“It’s the insurance companies that are the people to watch here,” Margaret Dooley-Sammuli, criminal justice and drug policy director at the American Civil Liberties Union of California, tells Capital & Main. “They are spending a lot of money to hire lobbyists and make contributions, and to work behind the scenes to stop reform.”
One of those companies is Tokio Marine, a multinational insurance company with “an entire department exclusively dedicated to providing bail bond services,” according to its website.
“For the first time ever,” says ACLU spokesperson Daisy Vieyra, “they hired a lobbyist here in California, specifically to derail the bail reform legislation.”
Tokio Marine did not respond to a request for comment, but a disclosure form filed by the Sacramento-based lobbying firm Aaron Read & Associates reveals that the company hired the group in April 2017 to lobby the California legislature and Governor Jerry Brown on bail legislation.
Between 2000 and 2012, the bail industry spent upwards of $500,000 on lobbying in California, according to the Justice Policy Institute. It has also been donating. The American Bail Coalition, which represents insurance companies such as Lexington National, Whitecap Surety and the American Surety Company, dropped $1.2 million in California campaign contributions in 2014 alone, according to the ACLU.
The chair of the ABC Board, Bill Carmichael, also serves as chairman of the American Legislative Exchange Council’s Private Enterprise Advisory Council. ALEC is known for drafting legislation, designed for states, with one such bill, the Uniform Bail Act, calling for the elimination of “pretrial services” wherever they might exist — SB 10 would create them — in favor of money bail.
ALEC has also lobbied states to create new forms of bail: In Mississippi, people who can’t afford a fine are turned over to bondsmen, who now administer payment plans, for a profit, and track down those who have been fined if they should ever stop paying. This is known as “post-conviction bail.”
In California, the industry isn’t so ambitious, merely seeking to beat back reform, not legislate into existence a new line of business. While supporters of SB 10 sounded optimistic, pointing to a broad coalition and a consensus that something should be done, the industry boasted of past success in defeating reform, and of allies in law enforcement who see bail as a means of detaining suspects for interrogation and pressuring them to accept plea bargains while in custody.
“Bail reform in California is imminent,” Senator Hertzberg said in an August 25 press release. Indeed, the consensus among policy experts remains: Something should be done. But industry — and politics — continues to be an obstacle: That was the press release announcing that imminent reform would be delayed.
Governor Jerry Brown is more cautious with respect to criminal justice reform than many of his state’s liberal Democrats, but his endorsement of bail reform could help ensure its passage; it’s just a question, now, of what that reform will look like following his collaboration with lawmakers for whom reform means something more radical.
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County Ballot Measures Would Fund Child Care, Early Education
Research that shows early childhood education can profoundly impact the future success of children. But early childhood educators are still chronically underpaid.
Teachers in West Virginia, Arizona and Oklahoma are not the only educators struggling to improve conditions in a profession they say is undervalued.
Teachers in West Virginia, Arizona and Oklahoma are not the only educators struggling to improve conditions in a profession they say is undervalued.
Alameda County’s low-income child care workers are joining cash-strapped parents in an attempt to raise wages, improve quality and expand access to care in a region where pay has not kept pace with the dramatic increases in housing costs for many families.
They are taking their fight to the ballot on June 5 with Measure A, an initiative to raise approximately $140 million per year to expand preschool and child care access and improve retention of teachers by boosting pay. In neighboring San Francisco, already considered a leader in early childhood education, voters will also have the option to vote for Proposition C, which would expand the number of child care slots and increase wages.
In many ways, child care workers face a steeper climb than newly emboldened red state K-12 teachers. As tough as things may be for school teachers in right-to-work states, there is some consensus that what they do is a necessary public good.
That’s not been so for early childhood educators in spite of research that shows that 90 percent of a child’s brain develops in the first five years of life and that quality child care programs can fuel the future success of children and stabilize families, especially those who are low income.
“Some of it has to do with historical baggage about whether mothers should be working outside the home,” says Marcy Whitebook, an expert on the childcare labor force at the Institute for Research on Labor and Employment at the University of California, Berkeley.
The United States lags far behind other developed nations in both preschool funding and enrollment.
Unlike the public schools, which are centralized and government funded, the early childhood education system is decentralized — taking place at a mix of private and public schools, centers and homes — and the funding is fragmented, with parents expected to shoulder the lion’s share of the cost.
Nancy Harvey, a former elementary school teacher, who runs a child care business out of her West Oakland home, feels the consequences of this underinvestment.
She serves a mix of middle and working class families in a diverse neighborhood that she says has been gentrifying. “Every other year, I’m looking for new staff because they get burned out or they need higher wages,” says Harvey. Meanwhile, she says, some of her families have had to leave the state because “between having to pay child care and rent, they simply couldn’t make it.”
Alameda County’s Measure A, a half-cent sales tax, would expand access to child care and preschool for low and middle income families, provide supports for homeless and at-risk children, and raise the wages of child care workers to at least $15 per hour. The scholarships could impact more than 20,000 children as the program ramps up, according to Angie Garling, who heads Alameda County’s Early Childhood Education Office.
In neighboring San Francisco, advocates gathered enough signatures to place Proposition C, a 3.5 percent surtax on commercial rents over $1 million a year on the ballot. The estimated $146 million raised annually would clear a waitlist of families who are in line to receive early child care and education services.
In neighboring San Francisco, advocates gathered enough signatures to place Proposition C, a 3.5 percent surtax on commercial rents over $1 million a year on the ballot. The estimated $146 million raised annually would clear a waitlist of families who are in line to receive early child care and education services.
Prop. C would also make quality early child care more affordable for families earning as much as $207,500, and increase wages for child care workers beyond the $15 per hour to be required by the city’s minimum wage law as of July 1. A little over $20 million of the revenue would be set aside for the general fund.
The two local ballot initiatives – in Alameda County and San Francisco – represent a “down-payment” on the kind of investment that only the state and federal government can provide, says Whitebook. And the measures are part of a wave of activism at the local level, according to Margaret Brodkin of Funding the Next Generation, who says other cities and counties plan to include child care measures on their ballots in future elections.
The state has been gradually increasing funding for child care since the end of the Great Recession, after cutting funding for 110,000 child care slots, according to Chris Hoene, executive director of the California Budget and Policy Center. But California is still 67,000 slots short of where it was, he adds. Even a substantial boost in federal child care dollars, recently approved by Congress, will not be enough to address the funding deficit, say advocates.
Those revenue sources help those who meet income eligibility thresholds. The U.S. generally lags behind other industrialized countries when it comes to providing universal preschool. The overall enrollment in preschool of 3-to 5-year-olds in the United States is 67 percent, the lowest of all but two of the 34 countries that are part of the Organization for Economic Cooperation and Development, according to an OECD study published last year.
And both measures will also help child care workers, many of whom rely on public assistance, according to a recent UC Berkeley study co-authored by Whitebook. Those who obtain bachelor’s degrees, as required by Head Start and some public pre-K programs, do not usually earn much more for their troubles, according to the study.
In Alameda County, center-based child care exceeds tuition at UC Berkeley and is often a family’s second largest cost after housing.
A child care worker in Alameda County earns $29,000 a year on average, about 79 percent of what it would take for a single person in the county to afford the bare necessities, according to the California Budget and Policy Project. Meanwhile, the cost of center-based care exceeds tuition at UC Berkeley and is often a family’s second largest cost after housing.
These statistics are more than just academic to Morgan Pringle, a child care center substitute teacher who is also pursuing a degree in human development at California State University, East Bay.
While she was growing up, she says her mother, also a child care worker, supplemented her main job with fast food and house cleaning gigs. When the car’s transmission gave out, “we just had to go without a car for a couple of years,” says Pringle, who also recalls stints living with her grandmother and aunts. “The pay of an early childhood educator has never matched the cost of living here in Alameda County,” she adds.
Like Harvey, she’s joined Raising Alameda, a coalition that has brought family day care providers, parents and child care center employees together in support of Measure A. The Service Employees International Union Local 521, which represents child care providers, is a member of the coalition.
Even advocates acknowledge that an increase in sales tax, which is generally considered a regressive tax, is not ideal. Measure A will raise the sales tax in some Alameda County cities to close to 10 percent.
Even advocates acknowledge that an increase in sales tax, which is generally considered a regressive tax, is not ideal. Measure A will raise the sales tax in some Alameda County cities to close to 10 percent.
But local governments do not have many progressive funding options since the passage of Proposition 13, the 1978 ballot initiative that limited tax increases on real estate, according to Hoene.
Voters who want to expand child care services in San Francisco will be able to vote to levy a surtax on commercial rents. However, they must choose between Proposition C and a rival measure, Proposition D, which would fund housing and supportive services for seniors, the mentally ill and homeless youth. Proposition D, which also would tax commercial rents, is endorsed by the city’s acting mayor and five supervisors, including mayoral candidate London Breed.
Proposition C, an initiative backed by Supervisor Norman Yee and Breed’s rival in the mayor’s race Supervisor Jane Kim, only requires a majority vote, while Proposition D — which was placed on the ballot by a vote of County supervisors — requires a two-thirds vote. However, if they both win, only the one with the most votes will be enacted.
At least one voter has already voiced frustration that the city’s political leaders have pitted the need for affordable housing against the need for child care.
“In my day, we would go into a room with these two competing great ideas and take as much time as we needed, and not come out until we’d resolved them,” former Mayor Art Agnos said at a Board of Supervisors committee meeting earlier this year, according to a report in Mission Local.
Back in Alameda County, Trisha Thomas, who runs a family day care in North Oakland while also selling life insurance and working as a church musician, says she is happy to be raising the visibility of her profession through a ballot campaign that has involved testifying at public meetings and phone banking.
“For many years, people just saw us as babysitters,” says Thomas, who has a bachelor’s degree and plans to pursue a master’s degree. “My kids can do math. My kids can read. My kids are well above the average child starting school.”
“To be viewed as a teacher, it’s important to me,” she says.
Critics Worry Proposition 70 Will Bring Back Budget Gridlock
Among other things, the ballot measure could endanger the bullet train, one of Governor Jerry Brown’s favorite projects, by giving Republicans a say over how cap-and-trade money is spent.
There are not as many propositions on the June ballot as usual, but none has fewer supporters than Proposition 70, a constitutional amendment calling for a one-time, two-thirds vote in 2024 to determine how the billions of dollars generated by California’s cap-and-trade program will be spent. That two-thirds vote requirement conjures up frustrating memories of the gridlock that occurred each year before past budgets were finally passed.
Supporters are a collection of strange bedfellows: Governor Jerry Brown, former Assembly GOP leader Chad Mayes (R-Yucca Valley), who crafted the amendment, and the state Chamber of Commerce. Opponents include the Democratic and Republican parties, every environmental group in the state and nearly every major newspaper.
Cap-and-trade requires that polluting companies buy permits allowing them to release greenhouse gases into the atmosphere. Money from these permits now goes into the Greenhouse Gas Reduction Fund (GGRF), and the legislature decides by a simple majority vote on how to spend that money each year during budget negotiations.
If Prop. 70 passes, money from those permits would be deposited into a new state reserve fund starting in 2024, until each chamber in the legislature passes that one-time bill on a super majority vote that would decide how to spend the money. But once that bill passes, new money collected through cap-and-trade would once again go into the GGRF and again could be allocated on a simple majority vote.
Prop. 70 emerged from a compromise last year to extend cap-and-trade, California’s ambitious climate change program, until 2030. Brown has called climate change a “threat to organized human existence.” But some Democrats were skeptical of the extension and their support was shaky at best. Republicans were also looking at the program with wary eyes. Gov. Brown knew he would need Republican votes to extend the program, and decided it was time to deal. He enlisted Mayes to round up the needed GOP votes.
Brown sought the supermajority vote, when only a simple majority was required, as an insurance policy against unforeseen future legal challenges.
Prop. 70, however, could endanger the bullet train, one of Brown’s favorite projects, by giving Republicans a say over how cap-and-trade money is spent. By the end of 2016, about $800 million had been spent on the high-speed rail project. Given the GOP’s opposition to the train, it could strangle the project if their votes are needed in 2024 to provide a two-thirds majority to continue its subsidy.
Opponents of Prop. 70 say that it makes sense for cap-and-trade allocations to be reviewed, but that review should be done every year through the budget process on a simple majority vote. If passed, Prop. 70 could change the mix of cap-and-trade funding sent to state and local programs.
“We’ve seen other legislation where the two-thirds vote holds hostage money for disadvantaged communities,” says Strela Cervas, interim director of the California Environmental Justice Alliance. “This would be budget gridlock and backtracking.” Cervas worries that one major program benefiting from cap-and-trade investments, Transformative Climate Communities, could be starved of funds if Prop. 70 passes.
Bill Magavern, policy director of the Coalition for Clean Air, said that a two-thirds vote would lead to budget gridlock, regardless of the partisan composition of the legislature in 2024.
“For years we had budgets that were delayed. Since 2010, when we passed Prop. 25, which required a simple majority vote, we’ve have had balanced and on-time budgets. Brown’s success in getting his climate agenda passed is largely due to this.”
California’s major political parties oppose Prop. 70. With the exception of the Bakersfield Californian, all major newspapers have opposed it. The San Jose Mercury News called it a “colossal waste of voters’ time.” And the Los Angeles Times described it as a “pointless exercise.” The only institutional supporter of the ballot measure, the California Chamber of Commerce, didn’t respond to requests for comment.
So far there’s no evidence of big money backing Prop. 70. But Magavern said he isn’t complacent. “Our side definitely doesn’t have the money to fight this,” he said.
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Blue State/Red District: What Do the Suburbs Want?
Seven Republican congressional districts in California went for Hillary Clinton in 2016. CA-4 was not one of them but Democrats are hoping to unseat Tom McClintock in November.
CA-4’s Gold Country counties are recipients of an urban exodus fueled by affordable housing, a desire for good schools and the expansion of high-tech jobs into suburbia.
On the day of her funeral, Barbara Bush’s image beamed down from an electronic billboard along Interstate 80 outside of Sacramento, along with a quote: “Believe in something bigger than yourself.” Her image and words lasted five seconds before an insurance ad flashed up.
As an unofficial welcome to California Congressional District 4, which includes suburban and exurban Placer and El Dorado counties, plus several other rural and sparsely populated counties, the former first lady’s image is apt. Her husband and son both carried the district by wide margins in the presidential elections of 1988, 1992, 2000 and 2004. While no friend of the Bushes, Donald Trump won the district with 54 percent of the vote to Hillary Clinton’s 39 percent.
There are seven congressional districts in California with Republican incumbents that Clinton won but CA-4 is not one of them. What gives Democrats buoyancy here is the general chaos of the Trump presidency, along with positive results of special elections elsewhere in the country, and some solid-looking candidates running in the CA-4 Democratic primary. Conservative Republican Tom McClintock, who actually lives 15 miles outside of District 4, first won the seat in 2008, when his Democratic opponent got within 1,800 votes. In the last four races, he has beaten every challenger by at least a 20 percent vote margin.
If CA-4 is dicey as a flippable district, part of the reason is because of demographics (it has relatively few Latinos or Asians) and because, in many ways, McClintock’s hard-line anti-immigration policies and close hewing to President Trump fit the district’s conservative tilt. According to the Kaiser Family Foundation, over 26,000 people in CA-4 were enrolled in an Affordable Care Act (ACA) health plan in 2017 and another 49,000 gained coverage from the expansion of Medicaid. McClintock voted against the January 2017 congressional budget resolution to repeal Obamacare – a resolution that Trump supported – only because it did not go far enough in repealing the ACA. The political analysis site FiveThirtyEight has McClintock, some of whose largest contributors are real estate developers with projects in his district, voting in line with Trump’s wishes about 86 percent of the time.
McClintock has shown no sympathy for DACA (Deferred Action for Childhood Arrivals) students, describing the program as an “unconstitutional usurpation of legislative authority,” and he is a reliable vote against a woman’s right to have an abortion. The large mega churches that often accompany suburban sprawl, like Bayside Church in Granite Bay, with its 12,000 members, help anchor the district’s culturally conservative base with a mixture of Christian/New Age uplift and entrepreneurial flair.
On a recent Friday afternoon, while watching her son play Little League baseball at a Roseville park, Heather McCarthy reflected on why she has become increasingly active in politics. “I’ve never been concerned that our political system could be taken over by billionaires and corporate interests,” she said, “so it has been a wake-up call for me.”
McCarthy, a Roseville real estate agent, participated in the Sacramento Women’s March last January, but has not followed the congressional race closely. She has a college degree, is not particularly ideological and is concerned that the Trump tax reduction, which McClintock supported, will mainly benefit the wealthy and explode the deficit. “I don’t think the average person realizes how disproportionate the benefit is, or how the Republican Party that used to be fiscally conservative has abandoned that.” she added.
Two articulate women candidates, Jessica Morse and Regina Bateson, have experience in policymaking and have demonstrated an ability to attract supporters and raise money, and now lead a field of four Democratic primary contenders. In rural Calaveras County, where Mark Twain invented his story about jumping frogs, ordained minister and Democratic Party activist Mickey Williamson outlined the long-shot logic of her party’s campaign at a park in Angels Camp. Williamson says the political atmosphere feels different this year: “The [Democratic] candidates are moving up and down the district, events are happening, thousands of dollars are being raised. It’s just a different ball game than we have ever had before.”
Williamson has a worry, however: That after the June 5 primary, supporters of the losing candidates will stay home, replicating some of the internecine fighting that characterized the Clinton/Sanders contest and which continues to roil the Democratic Party throughout the country.
While most of CA-4 is rural, the key geographic areas where the majority of voters live, and where elections are won or lost, are found along the I-80 and I-50 corridors — places whose dairy farms and orchards not too long ago reached to the outskirts of Sacramento. The cows have been replaced by “Tuscan”-style housing estates with names like Serrano Village, and by retirement communities, large retail centers, high-tech business parks — and relatively few people of color. Over 70 percent of the congressional vote will come from here.
Ricardo Calixtro holds a Bible as he stops to talk in front of St. Patrick’s Catholic Church after services one April Sunday. An anti-abortion banner hangs on the front of the church asking for prayers for the unborn. He says that the abortion issue is the first priority for him and that it would be difficult to vote for someone who does not share that position.
Calixtro, a registered Democrat who lives in Murphys, a town tucked in the Sierra foothills, works three jobs as a bartender, baker and house cleaner. “I don’t mind working hard,” he says, “but it’s hard for a regular Joe trying to make it on minimum wage.” Calixtro voted for Bernie Sanders in the 2016 Democratic primary and, later, for the Libertarian Gary Johnson for president.
When told that McClintock agrees with him on abortion but is opposed to raising the minimum wage because it would “hurt minorities,” Calixtro becomes speechless for a long half minute. “Wow, that’s a tough one,” he finally responds. He says he is contemplating leaving the area for better opportunities: “I’ve heard Oklahoma and Kentucky are good states to live in right now.”
Calixtro is not the stereotypical working-class voter duped by “cultural” issues instead of watching out for his own economic interests. Yet President Trump has triggered feelings and responses that are pulling many voters away from single issues like guns and religion that previously determined their vote.
Others are sticking with Trump and McClintock despite the president’s seemingly daily scandals. In Placerville, an old gold-mining town along the route to Lake Tahoe, Trump supporter and former correctional officer Robin McMillan Hebert was concerned that gun rights and public safety were under threat. “I believe in law and order, otherwise there would be chaos — and I don’t believe in chaos,” she said. “Sacramento is a good example. There have been a lot of recent protests there.” A registered Republican, she compares President Trump’s treatment of women to Bill Clinton and John F. Kennedy’s. “I’m not going to expect someone to be perfect when I myself can’t be perfect.”
In Roseville, a man who works for the city utility company and is a member of the International Brotherhood of Electrical Workers, talked about the threat of outsiders.
“I’m tired of seeing cities burning down, and all the lawlessness,” he said, directing traffic for his crew of municipal workers. “It started with Occupy Wall Street.” He added that homeless people were like cats: “If you feed them they keep coming back.”
The man, who refused to give his name, said his wife is a vice principal at a local public school, and claimed she “got emotional” last January and went to the local Women’s March. He believes it was organized “not to defend women but to hate Trump.” He also thinks that homosexuality is morally wrong and is “pushed in your face” by liberals.
He said he supports McClintock but is reluctant to talk publicly about electoral politics because he thinks liberals will “throw a brick” at him if he expresses his opinions. “Now we have to accept transgender. Come on.”
Placer and El Dorado counties are recipients of the flight from cities — an exodus fueled by affordable housing, the desire for good schools and the expansion of high-tech jobs into suburban and exurban environments. Indeed, the suburbs surrounding Sacramento were among the top 25 growth areas in the country between 2015 and 2017.
Retiree: “Men have screwed it up a bit,
let’s put some smart ladies in there.”
The evolution of such suburbs is complex. In general suburbs are becoming more diverse and increasingly polarized economically, and more people are living in them today than in cities.
Following the June primary, Democratic frontrunners Morse or Bateson will have to work to attract significant numbers of Republican moderates and those with no party preference if Democrats are to pull off another Conor Lamb-type upset and topple McClintock. And since registered Republicans outnumber Democrats by over 60,000 voters, many Republicans will also have to stay home in November for such a reversal to occur.
Two local residents — former Republicans who intend to vote for a Democrat — explained why they think it’s possible for a Democrat to win here.
Jack Chittick stands on his front lawn in Sun City, a retirement community in Roseville built by Del Webb. Instead of carpool lanes, Sun City has lanes for golf carts. Chittick, an 84-year-old retiree who was a top executive at the Pirelli Tire Company, points to the hardcore Republicans who walk past his house to the golf course across the street. “I like the cleanliness of this place,” he says, “the golf course, the big homes, the shopping areas and the good hospitals.”
He doesn’t think McClintock represents the average person in the district and wants a congressperson who can make the tax structure fair for the middle class. Reflecting on his life, he admits he got “carried away” with his career as a corporate manager and the values that came with it. “I had achieved everything by myself,” he once believed, “so why couldn’t everyone?” But he had a change of heart when his wife started working with the homeless, and pointed out to him that the challenges they face were enormous.
“Democrats have a 50-50 chance,” he says, handicapping the race. “Men have screwed it up a bit, let’s put some smart ladies in there,” he adds, referring to Morse and Bateson. “I’m sure they couldn’t do worse, and they could do a lot better.”
Bob Toste is another Roseville retiree and former Republican, who “bought into the trickle down theory” before it registered with him that birth determines economic class more than any other factor. He is careful about who he talks to about politics in his neighborhood, especially on immigration issues. Toste wants someone who is sympathetic to the undocumented immigrant students called Dreamers and is angered by McClintock’s vote to repeal Obamacare. “I have good health insurance, having retired from a utility. But health insurance for our nation is very important for me. And trying to go back on that right now is horrendous,” he said.
If the Republican National Committee and its well-funded conservative political action committees pour money into CA-4 after the June primary to shore up McClintock, it will be an indication that the party brand is in deep trouble.
Come November here, Barbara Bush’s billboard admonition might come to pass. Sun City retiree Jack Chittick also wants voters to believe in something bigger than themselves – a change of political heart in District 4.
Video and images by Kelly Candaele.
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Colorado Slashes Pension Benefits for Government Workers; Senator Calls for Hiking Education Funding
Co-published by Westword
Colorado lawmakers passed landmark legislation Wednesday night reducing pension benefits for thousands of teachers, firefighters, cops and other public sector workers.
Co-published by Westword
Colorado lawmakers passed landmark legislation Wednesday night reducing pension benefits for thousands of teachers and other government workers. But the measure also included language designed to give lawmakers more information about controversial investments that have delivered hundreds of millions of dollars in fees to Wall Street firms. Now, Colorado’s senior U.S. Senator Michael Bennet, a Democrat, tells Capital & Main that Colorado must consider a ballot measure to better fund the state’s public education system.
The narrow disclosure language in the pension bill – which still keeps fee details hidden from the general public – was added following a Capital & Main investigation showing that in recent years, Colorado’s Public Employees Retirement Association (PERA) has paid more than $1 billion in such fees even as the pension fund has delivered returns that have significantly trailed a low-fee stock index fund.
The bill slashes cost-of-living increases and requires higher pension contributions from educators, firefighters, cops and other public sector workers covered by Colorado’s PERA. The changes – opposed by the state’s largest teachers union and approved after recent teacher protests at the capitol – were designed to shore up the finances of PERA, which faces a $32 billion gap between what it has promised retirees and what it has in the bank.
Much of that gap comes from Colorado lawmakers refusing for years to make full annual contributions to PERA, but a sizable portion of it stems from PERA’s shortfalls in the pension system’s investment returns. Over the last 10 years, PERA has shifted about a fifth of its money into high-risk, high-fee private equity funds, hedge funds, real estate funds and other so-called “alternative investments.” That shift has generated an average of $132 million of annual fees, all while PERA’s returns have trailed the median for public pensions as well as a standard Vanguard stock-bond index fund.
Information about the fees and the deals with alternative investment firms have been kept secret by PERA officials after state lawmakers in 2004 passed a bill allowing those officials to exempt the information from Colorado’s open records law. That was one of many such secrecy bills that passed in various states in roughly the same time period. Colorado pension overseers quickly used the new law to block the release of nearly all detailed information about the investments from retirees, the public, and also from lawmakers charged with overseeing the pension system.
In response to Capital & Main’s recent investigation into the fees and secrecy, Colorado lawmakers in the waning hours of the legislative session added language to the final pension bill allowing — though not requiring — pension officials to provide legislators information about the system’s alternative investments, but only when those legislators are in confidential executive sessions. The provision also says that if pension overseers have signed contracts with Wall Street firms that let those firms decide if information can be public, then the information can still be withheld from legislators.
“If the association cannot disclose such information without violating confidentiality provisions, then the association shall provide enough information to the legislative members of the commission . . . to inform the legislators regarding whether such investments continue to be in the public interest,” the final bill says.
A new $225 million infusion into PERA is also included in the final bill, but the prospect of Colorado continuing to make such contributions and increasing education funding runs into the Taxpayer Bill of Rights which constrains state spending. That constraint has prompted activists to begin collecting signatures for an education funding initiative in the 2018 general election.
At the capitol protest leading up to the vote to slash teachers’ pension benefits, Senator Bennet did not endorse a specific initiative, but he told Capital & Main that it is time for Colorado to consider a ballot measure to increase funding for public education.
“I believe it is overdue,” he said. “We have to create the right political circumstances to make sure that a campaign is successful and to do that we have to build support among a lot of people who don’t know that schools are underfunded in Colorado . . . I hope we find a way to do it as a state. I think we need to do it.”
Why Is Colorado’s Public Pension System in High-Fee, High-Risk Investments?
Co-published by Westword
Pension officials across America have been willing to use retirees’ money to pay huge fees for investments that may not beat low-fee stock index funds, but seem to reduce politically problematic volatility.
Did PERA pay $1 billion in fees to avoid the “political issue” of having to answer retirees’ uncomfortable questions about the ups and downs of the stock market?
Co-published by Westword
Are taxpayers and retirees willing to give billions of dollars to financial firms in exchange for the potentially false perception of financial stability? As states move to slash the retirement benefits of teachers, firefighters, cops and other government workers, it is a question at the heart of an intensifying debate over high-risk, high-fee investments that enrich Wall Street money managers, but do not necessarily deliver the outsized returns they promise.
That debate has most recently surfaced in Colorado, where in the waning days of the legislative session, lawmakers are considering legislation to slash government workers’ retirement benefits, all while the Public Employees Retirement Association continues paying roughly $140 million in fees each year to outside money managers in private equity, real estate and other “alternative investments.” In a new Denver Post op-ed, PERA board chairman Tim O’Brien has called for “shared sacrifice among all parties” to fix PERA’s shortfalls. But to date, those calls do not include any demands to reduce those annual nine-figure PERA payouts to financial firms.
With PERA’s fees increasing and its returns lagging behind a low-fee stock index fund, some critics have asked why Colorado has not considered following other pension systems that have moved money out of alternatives and put more retirees’ money into far less expensive Vanguard-style funds that simply track the broader market.
O’Brien, Denver’s city auditor, said being all-in on stocks would mean that “with all of our constituents, particularly the members, they will ask, ‘What happened to my money?’”
So did PERA pay $1 billion in fees between 2009 and 2016 primarily to avoid the “political issue” of having to answer retirees’ uncomfortable questions about the ups and downs of the stock market? And is that a wise expenditure at a time when the state is threatening to slash retirement benefits for government workers who don’t get Social Security?
Many financial experts say it is nearly impossible to beat the returns of the stock market over the long haul. And to critics, PERA failing to beat even Vanguard’s simple stock-and-bond fund seems to illustrate that truism. However, O’Brien’s comments allude to the fact that on a day-to-day basis, the market is notoriously volatile. At any given moment, the S&P 500 can be a veritable roller coaster.
Idaho Pension Fund Officer:
“It may be phony happiness, but we just want to think we are happy.”
Private equity and real estate, by contrast, are not priced day to day and can therefore seem less volatile. Such investments that appear to reduce year-to-year volatility may not actually deliver the best long-term returns for pensioners, but they can reduce the scrutiny and criticism pension officials could face because the investments appear to smooth pensions’ returns on a year-to-year basis.
In recent years, pension officials across the country have been increasingly frank about their willingness to use retirees’ money to pay huge fees for investments that may not beat low-fee stock index funds, but do seem to reduce politically problematic volatility.
Last year, for instance, Oregon’s chief investment officer John Skjervem acknowledged that officials there were becoming concerned that the state has been paying huge fees for a private equity portfolio that was not meeting benchmarks. In response, he said, “For a public plan, I could make a philosophical argument that even if we do nothing but match public market returns, there’s a place for private equity because of the appraisal-based accounting, which artificially smooths our total fund volatility. And there’s a genuine benefit to that.”
Similarly, Bob Maynard, the chief investment officer of Idaho’s public pension system, admitted in 2015 that when it comes to high-fee private equity investments, “we’re happy if it gives public market returns, anything extra, because of its effect having some smoothing of the risk as seen by the accountants and actuaries.”
“The smartest money manager isn’t smarter than the market.”
He added: “It may be phony happiness, but we just want to think we are happy.”
Even if you agree that pension officials should be shelling out big cash for less volatility, Maynard’s reference to “phony happiness” raises an even deeper question about whether, in fact, high-fee investments are less volatile in the first place.
Remember — while stocks and bonds are priced on a moment-to-moment basis, alternative investments are not valued by any kind of transparent market. They are long-term investments in assets like buildings or companies that do not have an easily discernible price until they are ultimately put up for sale. In the interim, they are given valuations by the investment firms. That is, they are valued by the very money managers who are trying to sell the promise of supposedly ultra-smooth returns to pension officials who just so happen to particularly value a lack of volatility.
Concerns about those potential conflicts of interest have of late been exacerbated by recent research challenging the entire premise that alternative investments are less volatile.
Johns Hopkins University researchers Jeff Hooke and Ken Yook created a stock index fund in a 2017 study, comprised of the kinds of companies typically bought by private equity firms. Despite the similarities of the investments, the data showed that private equity firms were self-reporting far less volatility in the values of their assets than the publicly traded stocks of similar companies.
“Unlike investment pools that specialize in publicly traded securities, buyout funds determine the residual values, one-year returns, and the volatility of their fund returns, while having few checks and balances,” the researchers wrote. They concluded that “buyout fund returns are more volatile than public equity market returns” and declared, “Future investors may have second thoughts about purchasing buyout funds instead of listed securities. Moreover, past buyout-fund investors may have been unfairly induced to place monies into these investment vehicles.”
The findings came on the heels of previous academic research suggesting that private equity firms inflate the self-reported valuations of assets when they are pitching new funds to prospective investors.
For their part, PERA officials defend their overall strategy, and board trustee Marcus Pennell says Colorado cannot just put its money into an index fund, even if it could lower fees and raise returns.
“There are more sophisticated issues than just simply returns over a 100-year time period,” said Pennell, a high school physics teacher in Jefferson County. “You’ve got cash flow issues; you’ve got to actually pay benefits. So putting 100 percent of the money into stocks and [letting] it sit there doesn’t generate the kind of cash flow that you need to pay benefits. It’s more sophisticated issues in terms of the month-by-month and year-to-year operations that don’t really allow you to go 100 percent stocks and forget about it for 100 years. So while in a vacuum that might sound like a good idea, when you delve down into the details of how the operation actually functions, that doesn’t become workable.’”
Public pension systems in Nevada and Montgomery County, Pennsylvania, though, don’t appear to be running into those problems. Those two systems famously reduced their investments in high-fee Wall Street firms, and increased their investments in stocks and bonds. In the first three years of Montgomery County’s move, its fund delivered five percent returns, which beat PERA’s return in the same time period. Same thing in Nevada. Over the last decade, that state’s pension system has outpaced PERA’s earnings.
“The volatility argument was put forward by all of the lobbyists and money managers who told me at the time that I was the dumbest guy in the world for doing this, but it seemed to me to be a hollow threat and it ended up not coming to fruition,” said Pennsylvania Attorney General Josh Shapiro, a Democrat who, as Montgomery County commissioner, initiated the shift into index funds. “We had no issues with liquidity, no issues paying benefits and no issues with volatility. These are all red herrings designed to protect the status quo and the money managers. The smartest money manager isn’t smarter than the market. What I mean by that is that there’s going to be ups and downs, but over the long haul — which is what a pension fund should be focused on — nobody will outperform the market.”
Copyright Capital & Main
Pension Fund Gamble: Colorado’s $9 Billion Question Mark
Co-published by Westword
While calling on public employees to sacrifice, Colorado’s legislators have plowed one-fifth of these employees’ retirement savings into “alternative investments” that yield subpar returns.
As states and cities grapple with underfunded pension systems, they collectively pay out billions of dollars worth of fees for increasingly controversial “alternative investments.”
Co-published by Westword
When Karen Magnuson appeared before a Colorado senate panel in March, the 62-year-old retired teacher made a desperate plea: Avoid cutting her pension’s cost-of-living increase, or she and thousands of her fellow retirees throughout Colorado could be thrown into destitution.
“The costs of the things we need to live [on] keep going up and up,” said Magnuson, recounting how she is now working at a Target to make ends meet after a 32-year career teaching in Greeley, Littleton, Ault and Aurora public schools. “My calculations are telling me I better start preparing for poverty at 70. It seems that many elected officials are trying to fix PERA on the backs of retirees with little to no chance to make up for these losses,” she added, referring to the state’s Public Employees Retirement Association.
Lawmakers ignored her request. They instead voted to advance legislation reducing Magnuson’s benefits in the name of shoring up the state’s finances — a move that recently prompted a statewide teachers’ walkout and boisterous protests in a state whose public employees receive below-average pay.
California is paying nearly $1.5 billion each year in fees for its private equity investments.
As the legislature now considers the final version of the PERA reform bill in the waning days of the 2018 legislative session, the consensus among lawmakers seems to be that Colorado must ask for more sacrifice from the PERA’s more than 500,000 members, who on average receive $3,193 a month in benefits and who do not receive Social Security. And yet, despite all the talk of belt-tightening, lawmakers have not done anything to impede the nine-figure payments to one elite set of PERA beneficiaries: the wealthiest people on Earth, who live 1,600 miles to the east.
Ask legislators at Colorado’s capitol if they’ve even heard about the $1 billion of investment fees the state’s pension system paid out to external money managers between 2009 and 2016, and you will get blank stares. Ask them if they realize those are only the fees that are disclosed — and that there are likely hundreds of millions of dollars of additional fees being paid out — and they will express disbelief. Ask them if they know that state officials passed legislation — written by the financial industry — barring the details of the fee terms from being revealed to the public, and you will elicit outrage.
This is the little-discussed reality at PERA — just as it is at many retirement systems across the country. And lately PERA has moved to funnel even more money into an opaque fund that is a mishmash of exotic investments from timberland to hedge funds — and that has generated ever-higher fees while trailing the broader stock market.
PERA is no outlier: As states and cities throughout America grapple with underfunded pension systems, they continue to collectively pay out billions of dollars worth of fees for increasingly controversial “alternative investments” – a catch-all term for private equity, hedge funds, real estate and venture capital.
In nearly every state with revenue shortfalls, pension-reform debates primarily revolve around proposals to cut workers’ benefits.
In all, about a quarter of the $3 trillion of public retirement systems’ assets are now in “alternatives.” As of 2014, the shift into alternatives was generating $10 billion a year in fees — a 30 percent jump over the prior decade, according to the Pew Charitable Trusts.
In response, some states have lately considered bills to expand fee disclosure — and California recently passed legislation that ended up revealing that the state is paying nearly $1.5 billion each year for its private equity investments.
However, many of the highest-profile transparency efforts have followed the script of Colorado Treasurer Walker Stapleton. The second-term Republican has made headlines demanding PERA publish details of individual pensioners’ retirement benefits, but has mounted no similar effort to force the release of detailed information about the hundreds of millions of dollars Colorado pays the politically powerful financial industry. That’s the same industry that has pumped more than half a billion dollars worth of campaign contributions into state politics across the country, and whose asset managers are routinely among the top donors to the Republican Governors Association that Stapleton will be relying on if he becomes the GOP nominee for governor.
The result: in nearly every state with revenue shortfalls, the political debate over pension reform primarily revolves around proposals to cut workers’ benefits — while ever-larger payouts to financial firms are considered sacrosanct and are kept hidden from view.
The dynamic can be seen in Colorado: Few questions have been raised about why, for instance, the state’s pension fees helped Trump adviser Steve Schwarzman, the CEO of PERA money manager Blackstone, reap a personal $800 million windfall last year, all while lawmakers demand cuts to cost-of-living increases for retired teachers, firefighters, police officers and other government workers.
For their part, financial firms and their trade associations have cast themselves as part of the solution, arguing that their alternative investments have produced returns that appear to eclipse the stock market — and are therefore worth the cost and secrecy.
“The long-term outperformance of private equity funds provides an excellent investment opportunity for pension funds representing teachers, firefighters, and other public servants seeking retirement security,” said American Investment Council CEO Mike Sommers, whose group lobbies for the private equity industry in Washington. “Despite the recent strength of the stock market, investors in private equity generally received greater returns from these investments than public equities over the last 10 years.”
This argument is echoed by PERA’s chief investment officer, Amy McGarrity, who asserts that the investment strategy has made sure PERA has not fallen short of its target returns.
“We have consistently met our assumed rate of return,” she said in a recent interview at PERA’s office building a few blocks from the state capitol in Denver. She said that investing in alternatives has been part of a strategy to diversify the portfolio, so that it does not just rely on stocks.
“That does require that we pay these kinds of fees,” she said, adding that while the state paying out more than $1 billion in fees over the last few years “sounds like a gigantic number, the honest truth is, the way we’re able to generate this kind of return, which is far and above what you’re going to get in your 401(k), is because this is the price of doing business.”
Industry critics, though, say those comparisons are not as straightforward as they may seem, because the returns on longer-term investments in real estate and private equity are based on somewhat subjective calculations by the money managers themselves, rather than a daily, fluctuating stock price. They also note that many institutional investors betting big on high-fee alternatives have produced overall returns that trail low-fee stock index funds. In PERA’s case, the private equity and real estate returns have not matched the benchmarks that the system itself says should be used to measure the investments.
Such complexity — and fees — have led gurus like Warren Buffett and George Soros to warn pension funds to stay away from the investments.
“Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades,” Buffet wrote in his 2015 letter to Berkshire Hathaway shareholders. “A major reason has been fees: Many institutions pay substantial sums to consultants who, in turn, recommend high-fee managers. And that is a fool’s game. There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisers, however, are far better at generating high fees than they are at generating high returns.”
Colorado has not heeded that advice. Instead, PERA has plowed nearly one-fifth of retirees’ savings — or $9 billion — into private equity, real estate, hedge funds and a blend of other alternatives. The result: The state’s returns have been subpar by many measures.
PERA’s 2016 report shows that in the previous decade, the retirement system delivered an annualized 5.2 percent rate of return — below the 5.5 percent annualized returns for the median public pension system, according to data compiled by the Wilshire Trust Universe Comparison Service. By comparison, Vanguard’s low-fee Balanced Index Fund — comprised of 60 percent stocks and 40 percent bonds — generated 6.4 percent annualized returns in the same time period.
Those differences in return rates may seem small, but when applied to tens of billions of dollars over the course of a decade, the underperformance translates into hundreds of millions of dollars that PERA failed to reap.
In a shorter time horizon, the picture is a bit brighter: In its 2016 annual report, PERA reported a 8.5 percent return over the most recent five years — but even that has trailed a traditional Vanguard fund, and it also trailed at least one of its peers in the Intermountain West. Nevada’s public pension system, which is 12 percent smaller than PERA and has far less exposure to private equity and real estate, earned a 9.1 percent return during the same five-year period. That outperformance came at a cheaper cost: Nevada paid 75 percent less in fees than Colorado, paying a half-billion dollars less to Wall Street than PERA did.
To be sure, Colorado could simply follow the lead of Nevada or even Montgomery County, Pennsylvania, which famously shifted its assets into index funds — but moving money into lower-fee investments, even if they performed well, would not singularly solve the pension system’s challenges (nor would transforming the system into a 401k-style system, which data suggest could generate even higher fees).
One private equity firm’s contract with Colorado says the firm can use investors’ money to fly its executives around on chartered jets.
Right now, Colorado faces a $32 billion gap between the assets it has and the benefits it promises. A 2015 report from the Laura and John Arnold Foundation — which critics say has pressed for pension benefit cuts — found that much of the shortfall was created by the state government and local school districts, for failing for years to make their full employer-side contributions to the fund.
That same report, though, also noted that more than 17 percent of the gap was created by shortfalls in investment returns, as the state has continued to pay an average of $132 million in annually disclosed fees to external money managers in this decade.
“You can argue that Colorado should have used index funds, instead of wasting money on Wall Street fees,” said Johns Hopkins University professor Jeffrey Hooke, a former investment banker whose recent report shows that many pension systems heavily invested in alternatives have underperformed traditional stock and bond index funds. “The problem is that Colorado, like most state pension funds, hasn’t been able to beat the kind of simple index fund of 60 percent stocks, and 40 percent bonds that a place like Vanguard has.”
“No Industry-Standardized Method for Valuation”
Colorado began pumping state retirement money into private equity in the 1980s, before it was called private equity. Back in those pre-euphemism days, it was just explicitly called “leveraged buyouts,” and its promises of huge shareholder returns — regardless of social consequences — were popularized by Gordon Gekko in the film Wall Street.
In its simplest form, private equity executives raise money from investors like pension funds, which agree to give those executives retirees’ savings for about a decade. The private equity firms then use those resources and bank loans to buy up companies. In the Mitt Romney campaign ad version of the tale, the private equity executives then earnestly try to turn around a profit for investors by retooling the companies, making them more efficient and selling them off at a higher price. In the Occupy Wall Street version of the story — which seems to be at play in the demise of The Denver Post — the Mitt Romneys strip the companies of assets, lay off workers and make quick cash in a fire sale.
For pension funds, the move into private equity, hedge funds, real estate and other more exotic investments has always been about their potential to generate big returns that are not tied to the stock market — a situation that, in theory, insulates pensioners from the day-to-day ebb and flow of the S&P 500.
“This shift reflects a search for greater yields than expected from traditional stocks and bonds, an effort to hedge other investment risks, and a desire to diversify the investment portfolio,” wrote Alicia Munnell of Boston College’s Center for Retirement Research.
Since Gov. Roy Romer’s last term, Colorado has poured billions into 257 separate private equity funds, according to government records. In that time, PERA, along with the Denver Public Schools Retirement System that it merged with in 2010, pumped cash into funds run by Wall Street giants like Goldman Sachs, Warburg Pincus and Blackstone. Pension officials also dumped money into other obscure vehicles with names that sound like the codes Enron executives used for their shell companies — stuff like Euroknights V, JC Flowers Fund II and PMI Mezzanine Fund.
In all, between 1998 and 2016 the $10.6 billion of Colorado’s private equity investments has returned $10.8 billion to the pension fund — hardly the outsized returns that industry officials tout.
Real estate is a similar story. State records obtained by Capital & Main show that PERA’s portfolio includes 100 percent direct ownership stakes in far-flung properties across America — from shopping centers in Birmingham, Alabama and Tampa, Florida to an office park in Walnut Creek, California to a Disney distribution center in Memphis.
For PERA’s $4 billion worth of real estate investments, it has received a 5.6 percent annualized return over the last decade. In that same time, Vanguard’s 60-40 stock-bond fund delivered a 6.4 percent return.
That said, when it comes to PERA’s overall returns in alternative investments, the jury is still out because a sizable chunk of Colorado’s current $3.5 billion private equity portfolio remains locked up in ongoing private equity funds. In other words, depending on how well those investments perform, PERA is set to receive more payouts. State officials, in fact, assert that over the last decade, private equity has delivered PERA an annualized 8.4 percent return, and that over the portfolio’s entire life, there has been a 10.4 percent “internal rate of return.”
That calculation, though, is typically not based on any third-party verification, but is instead based on figures from investment firms themselves — a situation that PERA officials admit makes the figures difficult to rely on.
“Differences in IRR calculations can be affected by cash-flow timing, the accounting treatment of carried interest, partnership management fees, advisory fees, organization fees, other partnership expenses, sale of distributed stock, and valuations,” state records disclose in fine print. “Importantly, there is no industry-standardized method for valuation or reporting.”
Financial experts have long raised concerns about the fungibility of such calculations, raising questions about whether or not the purported value and returns of PERA and other pension-fund portfolios represent the actual value of the assets. Both New Jersey’s public pension fund and a recent academic study underscored those concerns.
In the New Jersey case, the state’s early sale of investments in real estate funds in 2012 showed a wide discrepancy between what Wall Street firms were saying the state’s investments were worth, and what they actually sold for on the open market. A few years later, a study published by the National Bureau of Economic Research found “evidence that some underperforming managers boost reported returns” when they are trying to sell prospective investors on putting money into their new funds.
“Until a private equity fund or real estate fund is fully liquidated, pension officials don’t really know what these investments are worth — they are taking the fund managers’ word for it,” Johns Hopkins’ Jeffrey Hooke said. “The returns could just be made up.”
Questions about the veracity of stated returns have only intensified in recent months, as federal regulators have been looking into whether private equity firms massage, tweak or otherwise manipulate those calculations to obscure less-than-stellar performances. One of PERA’s largest external managers, Apollo Global Management, was reportedly subpoenaed in that investigation.
What is not fungible is PERA’s own data: Buried in the retirement system’s 2016 annual report are figures showing that in the prior 10 years, Colorado’s private equity and real estate portfolio fell short of industry benchmarks that compare returns to other, lower-fee investments. The report also showed that the system’s $1.5 billion “Opportunity Fund” has delivered just 2.8 percent annualized returns in the prior five years — that’s compared to more than 10 percent annualized returns for the stock portfolio that PERA manages in-house. PERA in 2015 increased the amount of money it aims to put into the Opportunity Fund.
Amy McGarrity said that when it comes to the Opportunity Fund, “A lot of those investments in there have the J curve” — an industry term describing when returns are weak at the beginning, but then increase as investments generate a profit. As for the other alternative investments, she said they have delivered.
“The overall goal of private equity is to outperform [the stock market] over the long term and our performance has proved that,” she told Capital & Main, asserting that the high-fee investments have generated better returns than the system’s investments in stocks and bonds. “That’s its role in the portfolio and we believe it’s been successful in fulfilling that role.”
However, there are signs that the much-ballyhooed returns of the past may not be a thing of the future.
In October, a Cambridge Associates’ report showed its private equity index trailed the S&P 500 returns over the prior five years. That followed Blackstone’s head of private equity declaring that “this is the most difficult period we’ve ever experienced.”
Eileen Appelbaum and Rosemary Batt of the left-leaning Center for Economic and Policy Research say the trends are ominous for investors like PERA.
“Industry participants claim that these funds significantly outperform the stock market, but finance economists who study the industry have found considerably more modest results,” they wrote in a 2017 report. “The overall performance of private equity funds has been declining. While private equity buyout funds once beat the S&P 500, the median buyout fund has more or less matched the performance of the stock market since 2006. These findings raise serious questions about whether the recent investment explosion in [private equity] will pay off for pension funds and other institutional investors.”
“You Better Make Sure Their Hands Aren’t In Your Pocket”
Like statistics, performance returns are notoriously squishy — depending on timetables, weighting and other tricks, a math whiz can paint different portraits. The same is true for the fees being paid to financial firms managing retirees’ money, but for a different reason: The expenditures can’t exactly be massaged with fancy formulas, but they can — and are — hidden from view.
Indeed, even as PERA officials have been providing lawmakers with meticulous actuarial estimates of the costs of retiree benefits, those same officials may not actually know precisely how much Colorado is shelling out to Wall Street firms — and even if they did know, they are not allowed to tell you.
Between 2009 and 2016, PERA disclosed spending roughly $1.2 billion to manage all of its investments. Roughly than two-thirds of those expenses were fees paid to firms managing money in the private equity, hedge fund and Opportunity Fund portfolios, even though those managers only oversaw roughly 20 percent of the state’s overall investments.
On paper, PERA seems to be paying about 0.4 percent in fees on the system’s $47 billion in assets — not among the highest fee rates among pension funds, but also not among the lowest, according to a 2015 study published by the Maryland Public Policy Institute.
The trouble is, those are only the fees that are disclosed to the public — and there are many more fees that go unreported.
PERA, for instance, publishes a list of private equity firms it does business with — but it does not publish a list of managers in its real estate portfolio or the Opportunity Fund. You have to make a formal request for those records. Similarly, PERA publishes the aggregate annual cost of the flat management fees charged by its external firms — usually around two percent of an investment. The retirement system, though, does not disclose the so-called “carried interest” fees that financial managers extract from the system’s investments when those investments increase in value. That fee is typically 20 percent of the earnings, which according to Hooke means the system in practice is likely paying nearly double the amount of fees it admits to in its annual reports.
There also could be hidden fees that Colorado officials are not privy to — the kind that were flagged by law enforcement officials in a series of recent cases brought against a pair of private equity firms in which PERA has collectively invested more than $1.7 billion since the 1990s. In the Security and Exchange Commission’s actions against those two firms, Apollo and Blackstone, the regulatory agency said the managers failed to disclose fees they were charging to the underlying companies they were buying with investors’ money.
Those fees charged to investors’ assets are not necessarily fully shared with the investors themselves — they can be akin to your financial planner using your investment money to buy bars of gold, and then quietly breaking pieces off the bars for himself. And if you think those are isolated incidents, think again: In 2014 the director of SEC’s office of compliance said, “When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50 percent of the time.”
PERA board member Lynn Turner said that when it comes to the debate over investment expenses, “The issue is what you get in return for what you pay. If you pay higher fees, but get higher returns for those fees then you could from other investments, then it is worth paying those fees.”
He added, though, that in light of the SEC’s recent fee cases, one of PERA’s toughest jobs is to police their own money managers.
“If you aren’t looking over their shoulder, you better make sure their hands aren’t in your pocket,” said Turner, who noted that as the SEC’s chief accountant he saw private equity firms use fee schemes to siphon money from investors. “When we see these people getting in trouble for what they are doing, any pension fund should ask if we should be doing business with these people. We shouldn’t turn a blind eye. I would like to see a lot more transparency and a lot more proactive due diligence about whether we should remain in business with them.”
“How Can They Tell If the Fees Are Excessive?”
With so much public money at stake — and with periodic shenanigans surrounding all that cash — legislators, state auditors, journalists, watchdog groups and PERA members themselves may at some point want to dig more deeply into the situation. But if that time ever comes, they will run into a wall of secrecy, thanks to a bill quietly passed in 2004 by unanimous votes in the Republican-controlled legislature.
The legislation was originally “developed by the venture capital industry,” according to PERA records — and it mimicked similar bills that the financial industry was then passing in most states as public pensions at the time were investing ever more money in higher-risk, higher-fee alternative investments. Colorado’s two-paragraph legislation gave PERA the right to hide all information about private equity, debt and timber investments if pension trustees determined that “disclosure of such information would jeopardize the value of the investment.”
PERA’s alternative investment portfolio was then a fraction of the size of its current portfolio. Witnesses from a private equity industry lobbying group called the Pension Preservation Alliance told lawmakers that financial firms were weaponizing open records laws — using them to get pension funds to disclose commercial trade secrets about their competitors’ investment strategies.
“Here’s the problem: PERA cannot decide to make an investment in a company until it receives and reviews enough proprietary information in that company to satisfy its investment concerns, but the company won’t share that level of information if it is at risk of public disclosure,” Pension Preservation Alliance executive director John Frew told senators in testimony supporting the legislation. Without an exemption, Frew asserted, “some alternative investment partners may choose to avoid public investments altogether.”
Lobbyists for the private equity industry reassured lawmakers that PERA could be judicious in its use of the exemptions, and could still disclose plenty of information about its Wall Street relationships. But a few months after Republican Gov. Bill Owens signed the final bill, PERA’s board unanimously approved a sweeping motion exempting all of its contracts with alternative investment firms — and all itemized fee information — from the state’s open records laws.
“The Colorado Open Records Act protects investment firms worried about the disclosure of trade secrets and confidential commercial and financial data — that sort of information typically is redacted from government contracts before they are made public,” said Jeff Roberts, executive director of the Colorado Freedom of Information Coalition, which advocates for more transparency. “So it’s difficult to understand why another provision in the law gives the pension fund so much discretion to withhold just about any information about alternative investments. When the records are closed, how can pension participants and taxpayers evaluate the investments? How can they tell if the fees are excessive?”
When in 2014, the SEC sounded an alarm about private equity fees, a prominent law firm began encouraging its Wall Street clients to pressure public officials nationwide to invoke these exemptions to prevent information from flowing to media organizations.
“We have recently observed a surge in freedom-of-information requests made by media outlets to state pension funds,” said a bulletin from Ropes & Gray. “The requests tend to focus on information about advisers’ treatment of fees and expenses…Record-keepers at state investment entities may reflexively assume that all information requested should be disclosed. But a prompt response, supported by the applicable state law, can help ensure that confidential information that is exempt from FOIA disclosure is in fact not released.”
Why do firms and pension systems want to keep these documents secret? There are clues in contracts republished by the website Naked Capitalism after Pennsylvania officials inadvertently posted them on the state government’s website.
A Blackstone contract, for instance, gives that private equity behemoth authority to charge fees to firms it has bought with investors’ capital — precisely the authority that the SEC regulators said that Blackstone abused in its 2015 case against the company.
A separate Apollo contract gives that firm the right to charge management fees on pensioners’ money, even if Apollo hasn’t yet invested the cash in the market, and it additionally says Apollo can use investors’ money to fly its executives around on chartered jets. The Apollo document also admits that when it reports asset values to its investors, those valuations may differ from “the values that would have been established by any person” and may differ from “the actual prices” that the assets may fetch on the open market.
PERA has collectively committed more than $230 million of retirees’ savings to those same Blackstone and Apollo funds whose rights those contracts outline.
“There are two groups of people who want to keep all this info secret — the pension plans and the fund managers — because they know that if these documents become public, people can see the true risks and costs of these investments, and how they they are not nearly as lucrative as the industry would have you believe,” said South Carolina State Treasurer Curtis Loftis, a Republican who has for years demanded more transparency from his state’s pension fund. “Put it this way: If the average businessperson read one of these private equity contracts they would never invest their own money in a private equity deal because they’d be able to see that these agreements favor nobody but the private equity firms.”
McGarrity told Capital & Main that under PERA’s interpretation of confidentiality law passed in 2004, pension overseers refuse to disclose fee and investment terms to not only the public, but also to legislators overseeing the system. She said that PERA staff and trustees have access to the information they need, and the public entrusts those officials to do their jobs.
“Almost all public funds do exempt these types of investments from open records acts and it’s really to enable us to participate with these partnerships and get to invest in these types of funds,” she said.
When asked why lawmakers are not allowed to even see fee details and investment terms that have nothing to do with a Wall Street firm’s commercial trade secrets, she said: “I don’t really have…I’m not really prepared to answer that question.”
At a recent “Red for Ed” rally at Colorado’s state capitol, many teachers had their own answers to the same question — and they were not forgiving.
Gina Kirkpatrick, a 37-year-old Spanish-language arts teacher at Kepner Legacy Middle School in Denver, said that while she had never previously heard of the fees and the secrecy, she was not surprised because “I feel like there’s corruption at every level.”
Jennifer Strand, a 56-year-old teacher from Mitchell High School in Colorado Springs was even more direct, declaring: “PERA doesn’t want people who receive benefits to know all this. They don’t want us to know how they may be mismanaging our funds. My god, I’m going to retire in six years and I’m petrified that I’m not going to have any retirement. And with all the proposed changes, they want us to cover their bad mistakes, they want us to pay for it.”
Lynn Turner, the former SEC auditor, conceded that he too was frustrated with the fees and secrecy — and said one solution may involve bringing the management of private equity and real estate investments in-house, much as the teachers’ pension system does in Ontario, Canada.
“If we or a group of public pensions can do our own thing and be more efficient and get the same returns, then there’s no sense in paying these firms tons of money,” he said. “My hope would be that over time we would figure out how to do that with other funds — and then they wouldn’t have to pay these fees, and the fees we do pay would be lower because the big firms would have to reduce their costs to be competitive. It’s something we should look into because right now, we are basically transferring a lot of wealth from Americans who are putting up the money to those guys on Wall Street.”
McGarrity made a broader argument, insisting that any question about transparency and fees is really “a question of our custodianship and the trust that [PERA members] engender in us every day. I think over time, we’ve generated the kind of investment performance that [is] keeping our members in retirement security.”
That kind of explanation, though, didn’t fly with Jeff Buck. Basking in the warm spring sun in a sea of red T-shirts at the education rally, the 52-year-old math teacher said he still remembers that a decade ago, a debt refinancing deal at the Denver teachers’ retirement fund ended up going bad, while generating a huge payout for financial firms. Today’s PERA situation, he said, is more of the same.
“It doesn’t surprise me, because this is the game that’s now being played in finance,” said Buck, who has been in Denver Public Schools 19 years. “In the United States in general, money is flowing towards the top half a percent, and away from everyone else. This is the same effect. Everything is sort of getting looted right now, and if you are aren’t doing better than 15 percent or so, which is what the S&P did, then you are not generating great returns. They can pat themselves on the back if they want, but I don’t see it.”
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Los Angeles Close to Enacting Regulations on Airbnb
After years of pressure from housing advocates and residents, the L.A. City Council is close to limiting short-term property rentals to 120 days a year.
Cities across the U.S. have done it, from New York to Santa Monica, and San Francisco to Louisville, Kentucky. All have adopted laws to regulate Airbnb and other temporary home-rental platforms, and now Los Angeles is on track to join them.
The Los Angeles City Council voted 15-0 on Wednesday to move forward on a set of proposed home-sharing regulations that have been slowly moving through City Hall for nearly three years. Further hearings and analysis are required before a final draft of the measure returns to the City Council to be voted into law. Proponents expect Mayor Eric Garcetti to sign the ordinance following council approval.
The measure establishes a permitting system and places a 120-day annual limit on short-term rentals of a property. Two nuisance violations can get a host’s permit revoked.
The business world calls the home-sharing platform a “disruptive innovation.” But “disruptive” also applies to what it can do to a neighborhood, according to Judith Goldman of Keep Neighborhoods First. The coalition of tenants, housing advocates, local businesses, hotel owners and workers has advocated since 2013 for home-sharing regulations in Los Angeles.
“In different neighborhoods around the city, people were seeing problems,” she said of the impetus to start organizing with people in Los Angeles communities from Mar Vista to Silverlake. “They see neighbors disappearing, people being evicted. People thought that they had neighbors, but instead they had party houses with a revolving door of strangers.”
Municipal regulation attempts across the nation (and around the world) continue to pop up even as home-sharing platform companies achieve ever greater visibility and clout. Airbnb is only one such platform; HomeAway, and its subsidiary VRBO were valued at nearly $3 billion in 2015.
The origins of Airbnb trace back to 2007, when two guys in San Francisco had the idea to make a few bucks letting out-of-town visitors stay at their apartment when local hotels were full. The company, most recently valued at $31 billion, is ranked as the second most-valuable startup in the U.S.
Airbnb has accrued celebrity cache in addition to investment dollars. In 2016, Ashton Kutcher argued against proposed regulations in Chicago, saying he liked the “authentic experience” Airbnb accommodations provided. He was also an early investor. John Legend recently partnered with the company to curate exclusive “nightlife experiences” for users of the travel platform.
The home-sharing model does bring in cash to Californians — $1 billion to hosts in 2016, Airbnb reported.
But who are the hosts? In Los Angeles, commercial operators control multiple units across many platforms and are responsible for a significant portion of home-share listings, said Susan Hunter of the L.A. Tenants Union. A study by the Los Angeles Alliance for a New Economy showed that leasing companies make up 6 percent of listings and net 35 percent of revenue while on-site hosts comprise 52 percent of listings but earn only 11 percent.
According to Hunter, the lucrative aspects of short-term rentals displace tenants and challenge an already-squeezed housing market.
Her organization hears complaints of repairs neglected, management harassment and the perennial party atmosphere that can occur in areas where there are a lot of home-share units. Loud vacationers who make noise all night can make it difficult for neighboring tenants. Some property owners permanently transition apartments to short-term rentals when long-term tenants move out. “The certificate of occupancy is for a housing unit [but] it’s [functioning] as a transitional unit — which is a hotel. That’s where it’s depleting our housing stock.”
That pits tenants against tourists, she said.
That issue manifests in other cities. A McGill University study shows 12 percent of Airbnb hosts in New York City are commercial operators who control multiple units in many buildings. This, the study concludes, removes units from the New York rental market. The scarcity drives up rental prices.
New York has had an ordinance on the city books since 2010 that prohibits the short-term rental of a residence in a building of three or more dwellings when the resident is not present. Authorities say their focus is on the commercial operators, but resources are thin and the law has been tough to enforce.
The various local measures across the U.S. differ greatly and there are challenges as to resources to enforce them and degrees of industry resistance. Chicago’s ordinance is complex in terms of how many units are allowable and what exemptions are permitted.
Austin passed an ordinance in 2016 regulating short-term rentals in residential areas that are not occupied by the owner of the property. The city is gradually phasing out these rentals, with a ban going into effect in 2022. The new law is being challenged in court with the help of the Texas Public Policy Foundation, a conservative think-tank.
Santa Monica has had a tough time enforcing its own home-sharing ordinance, passed in 2015. According to a city study, between June 2015 and October 2017, only 187 of the 950 estimated short-term rentals in Santa Monica were licensed. But the city recently prevailed in court against an injunction by HomeAway and Airbnb to suspend the law.
Airbnb’s cradle, San Francisco, came under legal attack from the company for its restrictions; the suit was settled out of court.
Potential lack of enforcement is a concern with the pending Los Angeles measure. Even supporters who want to see it pass are a little skeptical of the city’s ability to monitor the 120-day rental window.
Rick Coca, Communications Director and Senior Advisor for Councilmember Jose Huizar, an architect of the ordinance, responded to doubts. “If there are bad operators with quality-of-life complaints related to their home-sharing logged against them and they are trying to extend their home-sharing beyond the 120 days, it will be extremely difficult for them to do so. And if there are substantial complaints logged during the 120-period, they can have their original permits revoked.”
Skeptical or not, supporters see the L.A. ordinance as a beachhead.
“There’s no way we’re going to perfect this thing in time to help stop the hemorrhaging of the housing that we’re losing,” said Hunter. “The push right now is just get this thing moving. It will give us a starting point so that we can fight back for the housing we’ve lost.”
Richard Cordray’s Surprise Donors: The Lending Industry
Co-published by International Business Times
Cordray resigned as the head of the Consumer Financial Protection Bureau in November. Almost all the contributions from the lending industry came between December 2017 and January 2018.
Co-published by International Business Times
As director of the Consumer Financial Protection Bureau, Richard Cordray racked up a record of enforcement actions against major lenders. That record, however, has not prevented Cordray’s Ohio gubernatorial campaign from reaping a financial windfall from donors in the lending industry — including some who work at firms that had business before the CFPB, according to campaign finance records reviewed by Capital & Main.
Seeking the Democratic nomination for governor of the Buckeye State, he has raised more than $82,000 from donors in the lending industry. Almost all the contributions to Cordray, itemized by the National Institute on Money in State Politics, came between December 2017 and January 2018. Cordray resigned his CFBP post in November.
The latest polling shows Cordray has a double-digit lead over former U.S. Rep. Dennis Kucinich, his closest challenger in the May 8 primary. Polls also suggest he would perform better than Kucinich against the likely Republican candidate.
Asked about the donations, Cordray spokesperson Mike Gwin pointed to the candidate’s reputation as a “tough but fair regulator.”
Indeed, the perception on Capitol Hill was that Cordray was tougher than he should have been. He “enraged big financial institutions and their supporters in Washington,” The New York Times observed. And at a recent United States House Committee on Financial Services hearing, chairman Jeb Hensarling (R-TX), declared that the CFPB under Cordray “was perhaps the single most powerful and unaccountable agency in the history of the republic.”
But not all affected by the CFPB feel the same. On a single day, Sanjiv Das, CEO of Caliber Home Loans, and his partner Kusum Das, donated more than $25,000 to Cordray. Caliber has faced a barrage of consumer complaints alleging that the company has been unresponsive to struggling homeowners who are trying to renegotiate the terms of their underwater mortgages.
In 2014, documents obtained by the Legal Aid Society of Southwest Ohio showed that Caliber used money from public pension funds administered by its parent company, Lone Star — which also owns a check-cashing and payday loan business — to purchase over 17,000 distressed mortgages at an auction held by the U.S. Department of Housing and Urban Development in a five-month span, The New York Times reported. Caliber foreclosed on more than 1,500 of those mortgages; one in 10 of them was in Ohio.
Another major Cordray donor is Steven Streit, CEO of Green Dot, which issues prepaid debit cards and was at the center of a 2016 controversy after a technical glitch caused account balance issues for 58,000 people for a few days. The glitch — slammed by Ohio Democratic Senator Sherrod Brown and New Jersey Democratic Senator Bob Menendez — did not result in any enforcement action from Cordray’s CFPB; earlier, a separate outage at another debit card company led the agency to issue fines. (Note: An earlier version of this story misstated the number of people affected by the 2016 outage.)
Other donors from the finance industry include Meredith Fuchs, a senior vice president and chief counsel at Capital One. She previously served as Cordray’s former chief of staff at CFPB and has donated $8,000 to his gubernatorial campaign. David Stevens, CEO of the Mortgage Bankers Association, has donated $2,500, as has PayPal CEO Dan Schulman.
The Cordray campaign declined to comment on the specific contributions. Gwin, the campaign spokesperson, noted that Cordray obtained consumer relief far in excess of the financial industry donations he has received. “At the CFPB, [Cordray] fought ferociously for people who were getting cheated, ultimately putting $12 billion back in the pockets of 30 million Americans who were mistreated by predatory financial institutions,” he said. Gwin added that Cordray “is committed to implementing robust payday lending reform in Ohio to protect workers and families”; legislation that would cap payday loan interest rates is currently making its way through the Ohio legislature.
Cordray has raised more than $3 million for his campaign, while Kucinich has raised just over $592,000, none of which has come from the lending industry.
Republican frontrunner Mike DeWine, Ohio’s attorney general, has raised just under $5 million, with more than $262,000 coming from players in the financial industry. Republican Lt. Gov. Mary Taylor has raised $2 million, none of it coming from the financial sector.
But one of Taylor’s top donors has made it clear who Republicans would like to face in November. On May 2, BuzzFeed News revealed that a television ad seeking to sway Democratic primary voters — portraying Cordray as a “Republican Lite” — is underwritten by Thomas George, one of the top donors to Republican Lt. Gov. Mary Taylor’s campaign. George has given $12,7000 to Taylor directly, according to BuzzFeed News, and $250,000 to a pro-Taylor political action committee.
The preference for Cordray’s Democratic rival may be in part due to controversies surrounding the latter’s own finances. Kucinich’s campaign recently came under fire after it was revealed that the former congressman initially failed to disclose that he had received $20,000 in speaking fees from the Syria Solidarity Movement, a group that supports the government of Syrian dictator Bashar al-Assad. The committee was originally founded to facilitate the North American tour of Mother Agnes-Mariam de la Croix, a Syrian Catholic nun who denies the government’s responsibility for chemical weapons attacks.
According to the Committee to Protect Journalists, in 2012 Agnes set up a reporting trip to the Syrian city of Homs — a trip that one of its participants told the CPJ was a government “trap” for foreign journalists, resulting in the killing of one.
On April 26, Kucinich announced he was returning the money, writing in a letter to Cleveland’s The Plain Dealer that he does not support the Assad regime, “its repressive practices, its brutality to political opponents, or its security state apparatus.”
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Blue State/Red District: The Education of Mimi Walters
Co-published by International Business Times
Lowering taxes, shrinking the size of federal government and reducing the deficit were issues that played well in Mimi Walters’ conservative Orange County district. Then came the Parkland massacre.
Hillary Clinton beat Donald Trump in CA-45, a sign that at least some of its conservative voters might be more loyal to ideals of diversity and tolerance than they are to their party.
Early in her political career Congresswoman Mimi Walters, a Republican from inland Orange County, California, minted her reputation as a gun-rights advocate. From 2004 to 2008, while representing the county’s southern coastal cities in the state Assembly, she twice voted against bills requiring the microstamping of bullets from automatic firearms, despite law enforcement’s support of the measure. Later, while serving in the state Senate, she said nay to background checks for ammunition buyers, to banning large-capacity conversion kits and to prohibiting people under domestic violence restraining orders from obtaining firearms.
Since she began representing California’s 45th Congressional District, Walters has had fewer opportunities to prove her Second Amendment bona fides; gun-related bills have rarely come up for a vote in House Speaker Paul Ryan’s Congress. But gun-rights groups continue to contribute to her campaigns. For her 2018 reelection campaign, gun groups have invested $5,150 in Walters, the third-largest contribution from gun groups to a single candidate in this cycle so far.
Before Parkland, the subject of gun rights almost never came up in Walters’ campaign statements, social media feeds or literature; it was just one part of the agreed-upon conservative platform, along with opposing abortion and beefing up the military. The issues Walters has chosen to focus on — lowering taxes, shrinking the size of federal government, reducing the deficit — have played well in historically conservative CA-45, where Republicans enjoy a nine-point registration advantage. On November 8, 2016, Walters won re-election with a 17-point margin.
The Cook Political Report has changed Congresswoman Walters’ district from solid red to “lean Republican.”
But a lot has happened since then. For starters, despite Walters’ victory, Hillary Clinton beat Donald Trump in the district by five points, a sign that at least some of Walters’ conservative constituents might be more loyal to ideals of diversity and tolerance than they are to their party. (Irvine, the largest city in the district, is 40 percent Asian.) Nor has Trump’s reputation improved since he became president and promptly issued an executive order banning travel to the U.S. from seven Muslim-majority countries.
There are even some signs that Congressional Republicans more broadly have fallen from favor in Orange County. When Walters voted in May of 2017 in favor of the Republican replacement for the Affordable Care Act, a plan that would have left an estimated 23 million people uninsured, the Cook Political Report changed CA-45 from solid red to “lean Republican.”
Trump also pulled the U.S. out of the Paris Agreement. “That’s when a lot of people sprang into action, meeting with Walters and her staff,” says Kathleen Treseder, an ecology professor at the University of California, Irvine. Last October, Walters officially changed from a climate-change skeptic to a believer, Treseder says, and joined the Congressional Climate Solutions Caucus. Her voters, Walters’ staff explained, persuaded her.
After Parkland, Walters’ social media feeds became overrun with gun-control advocates.
Finally, a group of Parkland teenagers launched the #NeverAgain movement in response to the mass shooting at their high school, potentially altering the calculus of National Rifle Association monetary campaign support versus voter preference in the 2018 election. A survey conducted by the Public Policy Institute of California in late March found that California voters’ concerns about school shootings had risen dramatically, with 73 percent of respondents admitting they were worried about a mass shooting at their public school.
Orange County high school students, many in Walters’ district, and nearing voting age, rallied against guns in March and April, joining national events. And Rep. Walters’ social media feeds became overrun with gun-control advocates. From mid-February to late March, any conversation that Walters started — on tax reform, avocados or her own successful amendment to reduce sex-trafficking — was directed back to firearms in replies and comments.
“Gun control, Mimi,” answered @amysls, aka Amy Jones. “Focus.”
Thirty years ago, many CA-45 cities were in the throes of master-planned sprawl. Manicured suburbs mingled with strawberry fields and orange groves, remnants of the vast agricultural fields the suburbs displaced. Their curvy streets, lined with houses that are, literally, all the same, bespoke a politics of its own. Irvine, as Los Angeles architect William Pereira designed it in the late 1960s, reflected a dreamy utopianism, where children could safely play within traffic-calmed enclaves, high walls sheltering them from thoroughfares where cars moved at near-freeway speeds. As it was later constructed by the Irvine Company’s Raymond Watson, Irvine became an assemblage of little villages, buffered by tidy parks and shopping centers from the ragged, needy world beyond.
Irvine is no longer the bastion of white Midwestern transplants that it was in the 1980s.
Irvine no longer smells like an orange grove. Most of the strawberry fields have been replaced with more carefully plotted communities and some random sprawl. Nor is the city still the bastion of white Midwestern transplants that it was in the 1980s. Twenty percent of eligible voting-age adults in Irvine hail from South Asian or Asian countries or have parents that do. Among U.S. cities, only Honolulu has a larger Asian plurality.
That concentration of immigrants and first-generation Americans is not everywhere present in the district. Mission Viejo, for example, is less than 10 percent Asian. But overall, one-fourth of registered voters in the district are naturalized citizens, according to a survey conducted by California 45th, a grassroots, nonpartisan research group, in May of 2017. While 46 percent of voters in the district who were citizens at birth have registered as Republicans, 72 percent of naturalized citizens are either Democrats or no-party-preference voters.
Two of Mimi Walters’ Democratic challengers in the June primary say they were motivated to run because of Trump’s travel ban.
If previous polls and studies have shown that immigrants don’t participate in elections with the same enthusiasm as other voters, Trump’s travel ban may have politicized them — along with Iranian-Americans and Arab-Americans in the district. Two of Walters’ five Democratic challengers in the June primary — Dave Min, whose parents immigrated from South Korea in the 1970s, and Kia Hamadanchy, a first-generation Iranian-American and Irvine native — say they were motivated to run because of the travel ban. Hamadanchy says his grandmother has not been allowed to visit him in America since the ban went into effect.
“When people tell me to go back where I came from,” says the 32-year-old Hamadanchy, who graduated from Irvine’s Northwood High School, “I tell them that’s exactly what I’m doing.”
In past elections, the gun control issue — along with the environment, immigration policy and health care — might have taken a back seat to the economy, which residents of Orange County’s fiscally conservative cities consistently rank as their number one issue. They have voted, by and large, in the interest of keeping their federal and state taxes low, even as many of them invest relatively high local taxes in well-staffed public schools. (Eighty-six communities and school districts in Orange County are subject to a special tax, referred to as the “Mello-Roos tax,” that helps pay for schools, roads, parks and other public amenities.)
As of the 2018 tax year, however, homeowners who itemize — more than 40 percent of the district — will have a $10,000 limit placed on the state and local taxes they can deduct from their federal taxable income. That will make a difference to the district’s wealthier residents. “If you can afford to live in a Mello-Roos development, that 10-grand limit is going to cost you,” says Alexandra Cole, a Mission Viejo resident who teaches political science at California State University, Northridge and leads the California 45th team. Two other Orange County legislators, Dana Rohrabacher and Darrell Issa, voted against the tax bill under pressure from their constituents. Walters supported it wholeheartedly.
“She keeps posting about how it will benefit the district,” Cole says. “But the problem I have as a constituent is at no time does she ever say how it will benefit the district, because so many of us take those state-and-local tax deductions.” For instance, she says, “I have 14-year-old twins. Once they turn 17, they reach the age where the child tax credit expires, and I’m paying higher taxes.”
When Cole conducted a survey of CA-45 voters’ opinions on the tax bill, she found only 45 percent of them supported the bill, while 47 percent opposed it — including, significantly, 63 percent of no-party-preference voters.
“That’s harsh,” she says. “People are really concerned that their taxes are going to go up.”
Cole is cautious, however, about suggesting any of it means a Democratic win in November. CA-45 is still a red district and even the no-party-preference voters, who now make up more than a quarter of the district’s voters, skew conservative on the economy, if not on the environment or immigration.
“There’s this real tunnel vision,” Cole says, “thinking that everyone’s angry and they’re going to rise up in this big blue wave in November. But you can’t rely on fantasies. You have to rely on what are issues that are of concern to people.”
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Timothy Snyder on Putin, Junk News and the Trump Trap
The historian’s last two books speak clearly and directly to a world in which democracy is in crisis.
The title alone suggested that historian Timothy Snyder saw what was coming during the 2016 presidential campaign, when he wrote On Tyranny: Twenty Lessons from the Twentieth Century. Later, he would finish all but the last chapter of his newest book, The Road to Unfreedom: Russia, Europe, America, before Donald Trump was elected president. Snyder had spent a year traveling across the U.S. talking to people in churches, synagogues and other venues, which, he told Capital & Main by phone from Seattle, “helped me write the last chapter of Road. The two books worked together.”
Indeed, both books speak clearly and directly to a world in which democracy is in crisis. In our conversation, shortened and edited here for clarity, Snyder talks about Trump’s assault on democracy, his dangerous connection to Putin’s Russia, as well as what we might do to turn this all around. Snyder will speak in the Los Angeles area tonight and Tuesday morning. See here for details.
Capital & Main: Why is the recent history of Russia and Ukraine, and the European Union important for us here in the U.S.?
Timothy Snyder: The lines from Ukraine in 2014, to the U.S. in 2016, are extraordinarily strong and clear. Things that begin in Russia could end here. Tendencies in Russia, like wealth and inequality, can have similar consequences. I realized during the Ukrainian revolution and Russian invasion of Ukraine in 2014 that I had to account for the extraordinary effectiveness of Russian propaganda. Americans and Europeans were not looking at the actual events. Instead, they were reacting to these propaganda tropes. I realized we’re starting to enter into a new world where a significant event like a revolution or a war can be made over by Internet and television propaganda. That’s a development which led directly to what happened to the U.S. in the 2016 election.
You write in the new book that freedom “depends upon citizens who are able to make a distinction between what is true and what they want to hear.”
If you think the truth is just what makes you feel good, then the people who make you feel good temporarily are going to be able to take away your freedom and prosperity in the long run. People on the left and the right share a certain amount of blame for that in our culture. The facts allow you to protect yourself from the ruler. This is fundamental to democracy.
Does Russia represent a major warning for us in this regard?
What the Russians have achieved is a system that kind of looks like a democracy — people vote every so often, but nobody believes in it anymore. That’s a really distressing place to be. You go to vote because it’s expected, but you don’t believe in it. You don’t believe in anything at all. The Trump phenomenon moves us in that direction, because Mr. Trump is himself a fictional character. He operates in a world of almost complete unreality and Americans are having an ever-harder time finding common ground for conversation, partly because more and more of us believe in political fictions and fewer of us are sure where we should look to try and get the facts.
What are the potential consequences of Trump’s alleged collusion with Vladimir Putin?
The first is that we cannot expect the executive branch to pursue policies that will be in the interest of the U.S. On domestic policy we’re not doing anything to make the country stronger for the future. We’re not securing our elections, we’re not building up the state department, we’re not working on climate change. We’re not doing the things that would be fundamental to protect ourselves from the Russians in particular.
What are the dangers of Trump’s instinct towards creating an oligarchy?
Oligarchy for the Greeks meant rule by the few. For Aristotle, by the wealthy few. We have to watch out for three things. We are a country with an ever greater concentration of wealth. Wealth and inequality in the U.S. now is as bad or maybe a little worse than it was in 1929. And in any country, that makes democracy difficult, because when people are too wealthy or too poor, it’s very hard to communicate, to feel like you’re in the same civic space.
The second thing to watch out for is Russia. Putin has shown how you can govern in conditions of extreme wealth and inequality, by ritualizing elections, and by a policy of constant everyday spectacle where you have the media under your control and you provide people with reasons to be outraged all the time.
The third thing is Mr. Trump himself. His view of how the world works is quite rightly characterized as an instinct. “The rules are for losers, and they don’t apply to people like me. I want to make deals with other men who see the world in the same way.” That world view doesn’t have to be interesting or sophisticated to do an awful lot of damage. You find the other guys who break all the rules and try to make a deal with them. That, in itself, is devastating, because it weakens American power. Our virtue is that we have certain rules. Nobody looks at us anymore as a champion of any kind of principle.
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