Isaac Laquedem

How to buy PGE without breaking the law (third in a series)

Article XI, Section 9 of the Oregon Constitution says: 

No county, city, town or other municipal corporation, by vote of its citizens, or otherwise, shall become a stockholder in any joint company, corporation or association, whatever, or raise money for, or loan its credit to, or in aid of, any such company, corporation or association.

The City of Portland is a city, and Portland General Electric is a corporation.  This provision prohibits Portland from buying and owning stock in Portland General Electric.  A fair amount of the talk about public ownership of PGE has been directed to finding a way for the government to own PGE without running afoul of this provision.

The Willamette Regional Electric Company (WREC) would be a corporation, formed either as a mutual benefit nonprofit corporation under Chapter 65, Oregon Revised Statutes (ORS), or as a cooperative corporation formed under ORS Chapter 62.  Each of these types of corporation can have shareholders, but is not required to have shareholders.  In place of shareholders they can have members, who might pay either a single-premium membership fee or annual or other periodic membership dues.

WREC would have members, but not shareholders.  Membership would be open to any city or county government within WREC's service area.  The membership fees and participation in distributions would be roughly proportional to electrical consumption.

Cities and counties can be members of corporations and other associations.  They're members of all sorts of organizations now (the League of Oregon Cities is one example).  They could be members of WREC as well.  They are not raising money for WREC; that is, they are not looking for capital contributions from their citizens or other third parties to pay to WREC, and if they do not guarantee the debt of WREC then they will not be lending their credit to WREC. 

WREC should be exempt from income taxes (the closest analogue is the Eugene Water & Electric Board, which I think is exempt), but it should as a matter of policy pay property taxes to local governments even though it might be exempt.  The loss of income taxes from PGE costs the state only $10 per year, based on the taxes paid for the last few years.  PGE pays property taxes (it's centrally assessed), and WREC should pay property taxes or make equivalent payments in lieu of taxes so that its formation doesn't affect local budgets.

The legal twist that allows WREC to own PGE without owning its stock, and with the local governments having control, is in how the purchase is set up.   WREC would not buy the stock of PGE and become its sole shareholder; instead, WREC would merge with PGE in what is called a "cash merger," in which the PGE shareholder (Enron) would receive cash in liquidation of its shares, leaving WREC as the surviving corporation owning the combined assets of WREC and PGE.  WREC never becomes a shareholder of PGE as PGE disappears at the moment of merger. 

The structure works, and it has the advantages of using existing legal technology and not needing any legislative approvals.  Let's encourage our local governments to take one more try at getting PGE into the WREC room.

How to buy PGE (second of a series)

Having established on Sunday that public ownership of Portland General Electric should be accomplished by a regional authority and not by the City of Portland acting alone, I'll continue by describing how the Willamette Regional Electric Corporation (WREC) should go about buying PGE.

The first question is the price.  That one is easy.  Enron was willing to sell the company for $2.3 billion last year, and it's reasonable for WREC to offer, and Enron to accept, $2.3 billion for the company this year, possibly with a little increase.

The second question is where to get the $2.3 billion.  The cities and counties in PGE's service area have some money available, but I don't imagine that they have $2.3 billion or anywhere close to it available in spare cash.  I think that raising the money through bonds will take too long and be too contentious to work.  Assuming that the local governments can put $300 million or so into the pot on their own (which I think they can), where can they find the other $2 billion?

There's one obvious source with billions to invest: the Oregon Public Employees Retirement Fund (OPERF), the part of the state treasurer's office that invests state and local government contributions to the Public Employees Retirement System (PERS).  OPERF has $49 billion in assets and is a long-term investor.

As I understand the PERS reforms and the effect of the Supreme Court's PERS decisions, PERS needs to accrue earnings at 8% per annum for its Tier 1 participants.   If it earns less than 8% then it has to make up the deficit by charging its employer participants.  But if it earns more than 8%, it has to credit the excess to the Tier 1 participants, instead of reducing the premiums it charges the employers.  Therefore PERS (through OPERF) should finance the purchase and charge 8% interest.

Eight percent is no bargain today.  WREC could probably borrow on the commercial market for less.  However, WREC's participants need to have OPERF earning 8% on a chunk of their contributions for the next 20 years or so, or they will make up the difference, meaning that the cities and counties will be paying eight percent to PERS one way or the other, and charging their residents for it.  Why not collect it through electric rates instead of taxes? 

Would OPERF make this investment for a private buyer?  We already know the answer to that; OPERF was willing to be an investor in the Texas Pacific purchase of PGE, though not as much as 42 billion.  OPERF should be willing to put more money into PGE if the buyer is a consortium of PERS employers instead of a private buyout firm.  And the participants should be pleased to have OPERF invest their money in a public buyout.

In a later post I'll talk about how the local governments can buy PGE without violating the constitutional prohibition against investing in corporate stock.

An Irish revolutionary of 1882 shows us the power of a name

I wrote yesterday about how the chance that our local utility is named after the City of Portland and not after some larger political or geographic unit contributed, in my view, to our local politicians focusing on how the City of Portland could buy it, rather than on who the logical public buyer should be.  That got me to thinking about the effect that names, and nicknames too, have on our perceptions.  Today's farfetched example comes from the Dublin of 1882, when on May 6 a group of conspirators (including one Dublin city councillor) who were part of a group known as the "Invincibles" murdered Thomas Burke, the British undersecretary for Ireland, killing with him the secretary, Lord Frederick Cavendish.  The crimes became known as the Phoenix Park murders and were a cause celebre for many years.

The city councillor, James Carey, turned state's evidence and testified against the others.  Most of them were hanged.  Mr. Carey left the country after testifying but was discovered on ship by one of the Invincibles named O'Donnell, who murdered him after the ship landed in South Africa.

In time, as with most similar crimes, the story was forgotten, and few people today (even in Dublin, I think) could name even one of the conspirators -- except for professors of 20th-century English literature and singers of Irish folk songs.

Why?  The Invincible who drove the getaway carriage, James Fitzharris (born in 1832), was better known around Dublin as "Skin-the-goat" because of an incident in which he killed his goat to sell its skin.  He was the only defendant to have such a colorful nickname.  Thirty-five years later, James Joyce put "Skin-the-goat" into Chapter 16 of Ulysses, choosing him no doubt in part because of his remarkable nickname.

But Mr. Fitzharris also survives in the world of song.  An Irish drinking song, "Monto," includes the stanza:  "When Carey told on Skin-the-goat / O'Donnell met him on the boat / He wished he'd never been afloat, the dirty skite. / It wasn't very sensible / To tell on the Invincibles / They stood up for their principles day and night."  (The other stanzas of "Monto" contain similar coded references to political events of the 19th century, like the political comments hidden in the Mother Goose verses.)

The Invincibles' victims were prominent officials.  Several of the Invincibles themselves, not including Mr. Fitzharris, were well-known in Dublin.  But it's the obscure James Fitzharris whose name has survived, all because one day he killed his goat and earned a unique nickname.  I kid you not.

Who to buy PGE (first of a series)

In one of Allen Drury's Advise and Consent-series novels, a character says to the prime minister of India something like "Just because it's called the 'Indian Ocean' doesn't give your country special rights over it."  I believe the debate over the future of Portland General Electric would have gone quite differently had the company been called "Multnomah General Electric" or "Tri-County General Electric," and the City Council would not have been so focused on determining how Portland could buy the company without including other local governments.

PGE doesn't serve just Portland.  Its service area (shown here as a map in PDF) includes portions of seven counties: Columbia, Washington, Multnomah, Clackamas, Yamhill, Marion, and Polk.  And it doesn't serve all of Portland, its territory most notably excluding most of Northeast and a fair amount of North Portland.  (It also doesn't serve Powell's downtown bookstore and seven other blocks of Northwest Portland between Burnside and Davis Streets.) 

Any PGE deal needs support in Salem.  It's not so easy for the City of Portland to get legislative support for its pet projects, certainly not given the makeup of the legislature.  By contrast, an organization composed of the seven PGE counties and a number of their cities would get much better treatment and any legislative help it needed.  It also would fairly reflect the interests of all the customers of PGE.  And having a broader base of taxing authority will give the organization more muscle if it should want to issue bonds.

Let's call it the Willamette River Electric Company to show that it's something bigger than Portland, as it would have to be to succeed.  (Pronounce it as an acronym, as with "WPPSS" becoming "Whoops," if you don't like the idea.)

In a later post, sparked by a discussion on Jack Bog's Blog, I'll give my thoughts on how to buy PGE.  But the place to start is to recognize that PGE is a lot bigger than Portland.

Happy Birthday, L.J.!

The day can't end without good wishes to one of the Laquedem sisters, who celebrates her birthday today.  Happy birthday, Little Jewel!

Isaac joins the pile-up on Pat Robertson

A radical mullah in Iraq, Acham al-Muzzarah, in a speech broadcast by the Arab news network al-Jazeera, has called for the assassination of the head of a western nation, demonstrating to me that some people by nature of their extremist beliefs are unlikely ever to be enlightened to the point of accepting democratic values.

Oops -- I've just checked my notes.  The location wasn't in Iraq, but in America; the network wasn't al-Jazeera, but the Christian Broadcast Network; the speaker wasn't a mullah, but a minister; and his name wasn't Acham al-Muzzarah, but Pat Robertson.

Sorry about my errors, but I don't see why they should change my conclusion.

Steve Goldschmidt v. Portland Public Schools, continued

I had grossly overestimated the school district's legal fees in defending against Steve Goldschmidt's claim for his severance package, figuring that the district must have spent at least $150,000 on attorneys and defense costs.  Today's Oregonian reports that the district has paid only $59,540 to the law firm that tried the case, one recognized for expertise in labor and employment law.  (Which means that its legal fees cost only about as much as one teacher, instead of three teachers.)

Though I'm pleased that Portland Public Schools was so thrifty here, I can't help thinking that it could have been even thriftier by buying perhaps $1000 of its outside firm's legal advice before terminating Mr. Goldschmidt: it would have saved not just the next $58,000 of legal costs but also the $250,000 in damages for defaming him.

And in response to a comment on my earlier post, I've clipped the portion of the arbitrator's decision that explains his reasoning and posted it in the continuation below, putting in color the points I think are most salient to the decision and using asterisks to show my deletions.  Willamette Week has posted the entire decision as a PDF.

Steve Goldschmidt $250,000, Portland Public Schools $0

In February I wrote about the decision of Vicki Phillips, superintendent of Portland Public Schools, to fire Steve Goldschmidt, the director of human resources and brother of a former politician.  Mr. Goldschmidt's contract required PPS to pay him a substantial severance benefit if he was terminated without cause, and his contract defined "cause" narrowly.  (I had predicted on December 17, 2004 that she would terminate him within a year.)

Superintendent Phillips announced in February that PPS would not pay Mr. Goldschmidt's severance benefit and he could sue (actually, demand arbitration) if he wanted it.  It seemed unlikely to me that PPS could bring his termination within the narrow definition of "cause" described in his contract, and I recommended that the district simply pay his termination fee -- several hundreds of thousands of dollars, to be sure -- and blame Canada (not in the Southpark way, but former superintendent Ben Canada, who had negotiated Mr. Goldschmidt's contract).

Mr. Goldschmidt filed for arbitration, to no one's surprise.

A correspondent informs me that today the arbitrator ruled in favor of Mr. Goldschmidt on most of his claim against the district.  Except for certain minor items, the arbitrator has ordered the district to pay Mr. Goldschmidt's severance pay, and to pay him a further $250,000 as damages for defaming him.  The arbitrator did give the district the small solace of not ordering it to pay the fees of Mr. Goldschmidt's attorney, but I figure that what the district will pay its own attorneys (taking a reasonable guess at the number) fees and the $250,000 in additional damages -- not including the severance pay prescribed by contract -- is going to cost it the equivalent of about six teachers for the year.  It's not an auspicious start to the school year.

I've clipped some of the arbitrator's decision in the continuation below.  The whole decision will undoubtedly be out on the street tomorrow, and it offers some useful if expensive guidance to PPS on how not to fire people.

Instead of the Alexan subsidy, how about this?

Outside of the haut monde areas of the moment, the apartment market for rentals is a tenant's market.  Landlords are offering free rent, givebacks, appliances, and other goodies to entice tenants to choose their buildings instead of others, and instead of buying a house.  Some attractive apartments are available for rent for $700 to $900 per month, with two or three bedrooms, suitable for families.

The $7.5 million property tax break proposed for the Alexan tower at Portland's South Waterfront is to allow the developer to designate 48 studio (i.e., garage-sized) apartments as lower-income housing and is good for ten years.  This equals $156,000 of forgiven taxes per unit, spread over 10 years, which is $15,600 per unit per year, or about $1300 per unit per month.

Let's suppose that our local governments are willing to commit about $7.5 million over ten years to provide affordable housing.  They could get more bang for the same buck by leasing 80 units at $800 per month, for a total outlay of $64,000 per month, or $768,000 per year, or $7.68 million over ten years.  Then the government could offer the units for rent to qualifying lower-income households at a subsidized rate.  A household making $30,000 per year might reasonably be expected to pay 20% ($6,000) per year for rent, or $500 per month, which would cover 62.5% of the government's cost to rent the unit from its owner. 

Hmmm.  I think I've described Section 8 housing.  Perhaps I should stop here.

PPS to Portland: "Kid, don't forget that it's my money you're giving away"

The Whimperer cheerfully supports the City of Portland giving the developers of the proposed Alexan apartment tower a ten-year, $7.5 million property tax break, which is supposed to subsidize the rental of fifteen percent of the apartments, which is 48 of 319.  The 48 affordable units will all be studios.  The Planning Commission recommended approval of the tax break (PDF minutes from July 10, 2005 here) and the City Council is set to vote on it tomorrow.  I've been opposed to the tax break for several reasons, one of which came into focus after a conversation with one of the Genial Old Codgers of my acquaintance.

This particular G.O.C. occasionally asks me for advice about a business proposition.  When I've suggested that he pay a little extra for something, he's answered with the pithy phrase, "Kid, don't forget that it's my money you're giving away." 

Whose money would the City be giving away if it grants this tax break?  City taxes are less than half the load of the typical Multnomah County property tax bill -- I think about 25% to 30% is usual.  So of the $7.5 million that the City would excuse the developer from paying, only about $2 million (if I understand this rightly) would actually be the City's money.  The rest of it would come from, or rather, not be paid to, the school district, the Port of Portland, and the variety of special districts and bond levies that adorn our property tax statements.  It's easy to be a big spender when it's someone else's money.

Families with children won't rent the subsidized studios at the Alexan, which will be only 514 square feet each, about the size of a double garage.  I would nevertheless be pleased if a G.O.C. at Portland Public Schools would call the City and say, "Kid, don't forget that it's my money you're giving away."