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Wednesday, November 2, 2011

It's just a dried-up, old piece of paper

The City of Portland unveiled its new corporate welfare recipients today. But hey, they're small, startup corporations, and a lot of the beneficiaries are young, creative types, so it's cool. Never mind that pesky state constitution, which plainly declares:

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.

Just ignore that. The Sam Rands (and apparently, their counterparts in Hillsboro City Hall) can spend your money any way that makes them look good to their friends.

Anyway, this sort of disregard for the state constitution is not peculiar to Oregon, as this story illustrates. There aren't enough courtrooms in the country to keep up with all its scofflaw politicians.

Comments (30)

If I understand correctly, the way it works is the city pretty much gives the money to the seed fund — and then they manage it independently. Is the Portland Seed Fund a "municipal corporation"?

Hi Jack,

As we've discussed previously, the general fund money that established the seed fund came in an outright grant from the PDC. So the PDC does not hold any stake in the companies it invests in.

The fund's managers tell me that any return from the fund would go to the Oregon Entrepreneurs Network's Catalyst Fund, not back to city coffers.

By my reading, then, the term "stockholder" would not apply in this case because the city does not hold any stock in the fund.

Again, though, you're the lawyer, not me. I'd love to have you or your readers elaborate on your thinking.

Much appreciated,

-- Mike

The stock issue is moot. Given the language states:

"...or raise money for, or loan its credit to, or in aid of, any such company, corporation or association...."

That "OR" separates the provision from being exclusively about stock ownership.

The underlying reality is that over $2 of public money has gone to the fund, which has doled out about $200K, in over a year's existence (not including whatever has been spent on overhead, which no one will disclose).

If you look at failure rates for start-ups and incubators you'll see that it's a fool's game unless you are spreading your bets across a few dozen at a time. Funding 8 start ups, with 2 full time managers, none of whom have expressed an emphasis on job creation, amounts to little more than a luxury unemployment fund.

Read the whole sentence, Mike. "...[O]r raise money for, or loan its credit to, or in aid of, any such company, corporation or association." The city is "raising money for" these companies, isn't it?

Besides, the PDC is just a straw man for the City of Portland in these deals. Just setting up a shell intermediary shouldn't be enough to get around the constitution. That's what the New York court case is about. Click on the link. Watch the video.

Marta and I are in agreement -- her comment went up while I was busy composing mine.

Thanks, Jack.

The question, I guess, is whether the city is raising money for "any such company" by granting taxpayer dollars to the seed fund.

By my layman's understanding of the term, it doesn't seem to fit. The city granting money to the fund, but isn't raising money for any particular company.

Can you provide some legal context?

On the PDC...sorry if I wasn't clear. The PDC made the grant, with general fund money from the city, but doesn't control the investment. It's out of the PDC's hands.

-- Mike

The legal question seems to be how many layers of straw men the city needs to set up in order to get away with doing what the constitution clearly prohibits it from doing. The economic substance here is that the city is either giving money away to, or investing in, startup companies. That's unconstitutional.

Not to mention that it could be illegal under the city charter.

Hillsboro has similar issues.

You might want to get a municipal law expert on the phone and see if you can get some guidance, on or off the record. It might also make for an interesting request for an opinion from the state attorney general's office.

Many of Sam Adams and Randy Leonard's innovative ideas appear to be illegal. The water and sewer chickens are just now beginning to come home to roost.

Great suggestion. I have talked to attorneys about this previously. Their sense was that this kind of prohibition is designed to prevent governments from risking public funds in hopes or earning a direct return. They didn't feel it applied to a grant.

But I'll ask the AG and see what kind of response I get.

-- Mike

The view you're repeating is extremely narrow. The provision also prohibits "loaning" the city's "credit to, or in aid of" private companies. Nothing in there about a return. Ask a municipal law expert -- if you can find one who isn't working for the local government.

City leaders also seem to be betting that no one will challenge them in court.

That attitude has been going on for too long.
They have gone too far.
(I am not just referring to this thread's topic)
It is time that however we can manage it, that they be challenged,
don't know how much more abuse we can take, financially or simply as human beings, to be treated so shabbily by our leaders is totally disgusting.

I thought that was the magic of Portland's public/private schizophrenic arrangements. I.e, it's public when it wants access to tax revenue and certain exemptions, and private when it wants to avoid things like charters and constitutional limitations.

Laws only apply to the little people in Oregon.

Just as the Oregonian protects their publisher, the establishment protects their own. That's why Sammy's little envelope full of cash didn't raise any eyebrows at the DOJ. That's why everybody look the other way when Neil drove the babysitter...home. Endemic corruption is endemic.

That's why it's always surprising when a cop gets arrested: we all know that most of them get a ride home and a finger wag.

I'm going to break it down once more:

No…city…shall…raise money for…or in aid of…any…company...

Now the question is, did the city raise money..., or did the the city give money...? Does it make a difference?

Mike Rogoway, I'm surprised by your innocence.

First, you didn't read fully what Jack posted and note the importance of "or". In fact, you should have researched our constitution on this matter before you wrote your article, which maybe you did.

Secondly, you come back with obscuring "raising money", and claim "granting money" isn't "raising money". I'm a layman too, and if I get a grant for my favorite charity, I'm always applauded for "raising money". Ask Cilvia for an interpretation, besides the AG.

It appears that Sam wants to claim that he gave the money away with no strings attached so therefore he wasn't "raising money". So you can't raise money to aid a company, but you can tax people and give the money away to people that you like and that is okay. See the difference?

The city has a side account entrusted to PERB/OIC in the city's name. The side account is commingled with PERF for investment purposes, and the balance goes up or down with the investment returns. It is an alternative pot from which PERB demanded employer contributions are taken. The calculation of the demand is wholly independent of the existence or non-existence of such funds, and are made over time over at least 20 years. The legal wizards crafted plausible legality (the ruse) by insisting that none of the profits would be returned to city because the entire account balance would eventually be exhausted by paying employer contributions (which are themselves only plausibly enforceable).

If the investment is a total loss then the city would still be demanded to pay the PERB demanded employer contributions just as if they had not "pre-funded" the account. The "pre-funding," by way of issuing bonds, was not accompanied by an overt contractual release from any future liability. Pretended liability in the future was used to set the amount of the bond, but that liability was not reduced one cent.

I contend that because there was no release from liability that the account remains an asset of the city. (Is it criminal to not even include a footnote as the current balance of such side accounts in an audit?)

It generally takes only one level of indirection to bamboozle a non-lawyer. I'll take the position that not a single lawyer is tripped up, other than on the issue of loyalty.

The AG will be forced to say that the city's scheme is legal, otherwise he will have to confront the continuing illegality of maintaining side accounts in the name of the public entities that took out pension obligation bonds, and at the outset the design and issuance of such bonds.

Our city auditor, the elected one and the one that does all the work, recently insisted that the safety-worker pension obligations due in the future should be similarly pre-funded. This necessarily implies the issuance of bonds with the proceeds deposited somewhere for investment purposes, most likely the PDC.

I contend that no such bond should issue unless it is accompanied by a complete release of liability as to the tier-one and tier-two safety workers and that both tiers are terminated as to future work. It could be reduced to a cash payout now, where the recipient can put it in any IRA of their own choosing.

Rest assured, these loans/grants are just tiny test cases for much bigger ones to follow. The next one will certainly be a loan, but with the risk of loss borne exclusively by the taxpayers, and thus the functional equivalent of an illegal gift.

Ron, that is completely unintelligible. Perhaps that's what the city intends.

What happened to my comment?

It's fun to look at the minutia of the law to see if it is legal. And what wrangling might be done to make it legal. But another good question is the bigger question. SHOULD it be done. I think sometimes that can get lost in the conversation.

The tone on this blog would clearly an opinion of NO, it shouldn't be done. So the question becomes "Why not?" What's wrong with public investment in the private sector?

Then I answer my own question. Because our government seems to consistently mismanage the heck out of things. Due to corruption? Lack of wisdom and foresight? Cronyism? I dunno.

Another good question is what should be done about it. Start by blogging, get some attention and outrage going so that the players mitigate their behavior? Sue to get the courts to uphold the letter of constitution? But would they uphold the letter of the law here? I doubt it. Call me a cynic but my personal bias is the courts are becoming more and more a part of the "club" everyday.
And that's the George Carlin usage of "club." Miss that guy...

Thanks for the blog Jack. Great way to wake up in the morning.

I would say that I wouldn't put my money into any of the companies described in Rogoway's article.....But oops! the city did it for me!
I am not a lawyer, but even I can see the disasterous road that direct government investment in private companies can be.
Locally, the PDC is just can't wait!

It seems that Oregon courts give governments a lot of wiggle room on this issue. I haven't looked too hard, but I have not yet found a case in which the state or a local government was found in violation of the Constitution.

Here are some of the top hits I found.

State ex rel. Eckles v. Woolley, 302 Ore. 37:

SAIF was not a corporation as a form for conducting business enterprise with private investment by and for the profit of stockholders or a corporation as a form of organizing municipal authority and services with territorially-defined taxing authority

Carruthers v. Port of Astoria, 249 Ore. 329:

The port proposed to sell revenue bonds to finance the construction of a building, wharves, conveyors, and a plant to be used in the production of aluminum. Plaintiff alleged that the proposed action was in violation of Or. Const. art. XI, §§ 7, 9 and that a public purpose was not involved. The company that was going to use the plant unconditionally promised to repay the bonds in the form of rentals over 25 years, which was the life span of the bonds. On appeal, the court found that the proposed plan did not violate the Oregon Constitution and there was a valid public purpose. The court stated that, based on the restrictions set forth in the proposal, there was no way that the taxpayers or other property of the port would be held accountable in taxes or otherwise in the event of default, therefore, the court found that there was no constitutional violation. The court determined that there was a valid public purpose because the proposed plan was predicated upon its finding of a general benefit to the economy of the community. The court noted that a finding of benefits to the private company would not defeat the determination of a public benefit.

Johnson v. School Dist., 128 Ore. 9:

Appellee argued that the insurer, a mutual fire insurance company, could not issue a nonassessable policy to the school district because, as a cash premium policy, it violated Ore. Const. art. XI, § 9. Finding that there was no constitutional violation, the court reversed the judgment. The court held that if the contract of insurance subjected the school district to a contingent liability, it was in violation of the constitution and ultra vires. Section 6408, Ore. L. provided that a mutual insurance company was authorized to issue nonassessable policies only so long as it had assets of not less than $ 200,000 and a net cash surplus of not less than $ 100,000. In other words, the authority to issue such policies continued until the company was unable to maintain the financial standard fixed by the statute. Therefore, the court concluded that the statute authorizes the issuance of nonassessable policies. Because liability to assessment ceases on payment of the cash premium there was no violation of the letter or the spirit of Ore. Const. art. XI, § 9.

Well then it looks like the provision may have been gutted by the courts already. I kind of get annoyed when a constitution is changed without it being rewritten...but I guess the argument is that it hasn't changed I just mistook the meaning or intent.

“So the question becomes "Why not?" What's wrong with public investment in the private sector?”

Another way to answer this.

The only self-regulating measure capitalism has, and it’s an effective one, is the punishment of those who make mistakes. In a normal free market when you sell lousy products or make dumb decisions you lose your money. And the fear of losing money encourages better decisions. This self-regulation doesn’t exist when the gov “invests”, because there is little or no fear of losing other people’s (tax payer’s) money. (Or when it “bails out” a failed business.)

I would think that from a business perspective, a government that violates its own rules to cater to the political whim of the day makes an untrustworthy partner to do business with.

As JO noted, the larger question is "should this be done?" When governments (theoretically) have a finite amount of money (see Jack's sidebar on the amount of COP debt), then choices should be made as to the best use of the money. We can discuss what that might be, but I would guess this tossing of money at start-ups would fall far, far down the list of options.

Precisely why this is another glaring indicator how screwed up the political priorities have become in CoP.

umpire:...but I would guess this tossing of money at start-ups would fall far, far down the list of options.

I would also guess that tossing $80 million down a hole at a Powell Butte project that isn't needed should be far, far down the list as well - but it wasn't.

I have written about this before, last May, Council chambers filled with businesses and citizens pleading not to go forward with the June bid of $80 million, weren't listened to, and we need to remember that Nick Fish provided that third vote needed to go along with the Sam/Rand twins.

Sam/Rand/Fish triplets?
Sly Saltzman slipped away and disappeared for that vote. What about Fritz? She did vote No that day, but in my view she doesn't stray far enough from the others.

Well theoretically the threat of getting your butt kicked in the next election should urge our officials to more caution with the public funds. But in practice this doesn't happen.
My theory is that since money plays such a big part in elections using tax dollars to curry favor becomes a winning strategy.
Man I hope that theory is incorrect.

It just looks like what we got are people who are good at campaigning and/or getting money and getting elected, they have got that down and good to get in and then it seems decisions are based on what it will take to stay in.

In my view, that does not make for leaders who are wise in decision making or who provide good stewardship of our city finances or livability.

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