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StocktonMarinaHousing

A 2000s housing development adjacent to Stockton’s debt-financed new marina. Stockton over-extended itself by borrowing from banks, the state, and other creditors in the 2000s.

In 2007 the city of Stockton, California was riding the nation’s housing boom. Property tax revenues had more than doubled over the previous seven years, and sales tax receipts were up by 65 percent. Two hours by highway from San Francisco, Stockton’s leaders did not want to become just another bedroom community for commuters, and they rejected their past as a sleepy agricultural town. Flush with cash and an influx of tens of thousands of new residents seeking the more affordable housing going up on the city’s periphery, Stockton’s politicians attempted to remake their city into a destination.

Mimicking the borrowing binge in credit markets of housing developers and home buyers, Stockton’s government issued several major series of bonds to finance what was the most ambitious downtown redevelopment scheme in recent California history. Seven bond issues in the 2000s put Stockton deep in debt to build a downtown arena, a minor league ballpark, a marina, to purchase an eight-story office building to serve as the new city hall, and to build a massive parking garage nearby. And Stockton added to this debt with a pension obligation bond issue that was intended to forward fund the city’s retirement system with $124 million, and to free up cash for other projects.

When the economy crashed in 2008, Stockton became the basement floor to which other distressed California municipalities could look and say, ‘at least we’re not down there.’ Stockton’s lawyers frankly described the crisis in their bankruptcy memo:

“The Great Recession hit Stockton hard. Housing prices plunged, causing property tax revenues to fall, and unemployment has soared during the last five years, resulting in a decline in sales tax revenues. Meanwhile, the City’s expenses have remained the same or increased. Poor decisions, lax management, and bad luck have exacerbated the City’s financial woes.”

As Stockton’s revenues dried up, the city’s financial managers slashed virtually every service and program, including basic vital services. At first the cut to the bare minimum. Then they cut far past levels considered minimal and necessary to keep the city safe and functioning. Stockton depleted its meager reserve funds, transferred funds internally between accounts, and then extracted cuts from its workforce. Labor contracts were renegotiated, and when the city’s two largest unions refused further pay cuts, Stockton unilaterally reduced their compensation by $12.5 million. Employees were unilaterally forced to take furloughs, and then the layoffs began. Between 2008 and 2012 Stockton let go 472 employees, 25 percent of its workforce. Still deficits continued. The city shuttered a fire station. All of this happened just when Stockton needed more resources than ever to deal with a record rate of foreclosures surpassing most other cities. Still revenues declined. In 2011 and 2012 Stockton entirely canceled repair and replacement projects meant to keep city infrastructure and vehicles in working order. The city was allowed to crumble.

All through the carnage of one of the largest municipal financial disasters in American history Stockton continued to make payments on its debt. But in March of 2012, after forcing city workers and residents to shoulder spending reductions, the city finally defaulted on $2 million in bond payments. Three months later Stockton filed a petition for bankruptcy.

Stockton’s bankruptcy process, boiled down to its essentials, is an effort to impose a shared pain among the city’s creditors who are owed hundreds of millions. Some of Stockton’s creditors are contractors that are owed pay for construction projects, or goods and services already provided. Others are workers owed pay and benefits for labor already provided. The other big category of creditors includes financial investors who loaned Stockton capital during the 2000s boom.

Although many of Stockton’s financial lenders gave the municipality money understanding fully that their deal with the city was a speculative investment that carried risks, they now are arguing that the compensation owed to current and former city employees should be cut in order to increase the value of their debt claims on the Stockton. In other words, the financial lenders are arguing that the risk they assumed when they bought Stockton’s bonds should be retroactively transferred to the city’s employees in the form of cuts to their pensions.

Franklin Advisors, Inc., part of the Franklin Resources group, better known as Franklin Templeton Investments, a San Mateo-based financial company that controls about $900 billion in assets, has been most aggressive in pushing this argument. Lawyers representing Franklin Advisers are arguing that U.S. federal bankruptcy laws trump California’s law that says pensions administered by CalPERS cannot be reduced through municipal bankruptcy. If they win, Franklin Advisers will reduce their losses by forcing CalPERS, the administrator of many of the city’s retired workers’ pensions, to pay the costs of some of their losses. This cost ultimately falls on the 1.6 million public employees who collect, or someday will collect a CalPERS pension.

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Annual total returns for investors in Franklin Advisers’ California High Yield Mutual Fund. (Source: Franklin Municipal Securities Trust Prospectus, October 1, 2013.)

Franklin Advisers manages several mutual funds which purchased Stockton’s bonds as speculative investments. If you read the bond prospectuses Stockton provided to investors like Franklin Advisers, there’s extensive disclosure of the various risks including potential default on interest payments and even loss of principal. For example, the disclosure statements for Stockton’s 2007 Pension Obligation Bonds included six pages warning investors about various risk factors that could reduce returns or even wipe out their investment. Redevelopment bonds issued by Stockton in 2006 included the warning that a drop in city revenues could lead to losses for investors. All of Stockton’s borrowing from the capital markets came with these boilerplate warnings.

Furthermore, if you read through the prospectuses that Franklin Advisers provides for investors in its mutual funds, the riskiness of investing in municipal bonds of the quality they aimed for is obvious. “You could lose money by investing in the Fund,” explains Franklin Advisers to its clients. “An issuer of debt securities [like Stockton] may fail to make interest payments and repay principal when due, in whole or in part. Changes in an issuer’s financial strength or in a security’s credit rating may affect a security’s value.” It really couldn’t be clearer than that. Well, maybe it can. Franklin Adviser’s California High Yield Municipal Fund also warns investors that:

“Because the Fund invests predominantly in California municipal securities, events in California are likely to affect the Fund’s investments and its performance. These events may include economic or political policy changes, tax base erosion, state constitutional limits on tax increases, budget deficits and other financial difficulties, and changes in the credit ratings assigned to municipal issuers of California.”

Even so, Franklin Advisers is hoping to recoup some losses that it knew were possible when it purchased Stockton’s bonds.

If Franklin Advisers succeeds, who specifically will benefit? First of all, Franklin Resources benefits, as do financial companies like it. If it can establish the precedent that municipalities must cut pensions in order to pay back bondholders, then the value of many of the bonds of distressed municipalities owned by Franklin will increase in value.

So who is Franklin Templeton?

gregjohnson

Gregory E. Johnson, grandson of the founder of Franklin Resources, Inc., currently the company’s Chairman and CEO, and owner of $4.9 million shares of Franklin Resources worth $336 million.

The real force behind Franklin Resources is the Johnson family, a clan of billionaires who inherited their wealth from Rupert Johnson, Sr., the company’s founder. In 1973 Rupert Sr. moved Frankling Resources from Wall Street to San Mateo, California. The company grew over the next four decades to become one of the largest institutional managers in the world. And Franklin Resources’ ownership remained rather closely held. Although it has 631 million shares of outstanding stock, members of the Johnson family still control close to 230 million shares, 36 percent.

The Johnsons are billionaires. Rupert Johnson, Jr., and Charles B. Johnson (who I’ve mentioned before on this blog), brothers, both own over 100 million shares in their father’s company. Charles B’s children, Charles E. Johnson, Gregory Johnson, and Jennifer Johnson all own slices of the company.

Ironically CalPERS itself owns over 467,000 shares of Franklin Resources, worth about $63 million. But that’s a mere 0.1% of Franklin Resources total market capitalization, and an even more insignificant sum, two hundredths of one percent, of CalPERS total assets under management. So CalPERS and its retirees gain nothing from their little stake in Franklin.

The investors in Franklin Resources who would benefit from a win in court against CalPERS and Stockton would include the wealthy individuals who own shares in Franklin’s municipal bond mutual funds. Municipal bonds have always been a preferred investment of wealthy households because of their federal tax exemption. Wealthy California investors have the added incentive to buy into funds like Franklin Advisers’ California High Yield Municipal Fund because income from it (which flows from the interest payments that Stockton and other cities pay) is exempt from California’s relatively high state income tax. The after tax value of tax-exempt municipal securities to wealthy individuals and couples in the top federal and state tax brackets is often more than double the value of what’s available in the corporate bond market, and the risk of default is generally less. Now it would seem Franklin hopes to reduce that risk to its wealthy clients even further.

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Easily the biggest winners of this year’s World Series are the owners of the San Francisco Giants baseball club. The Giants franchise is owned by a limited partnership called San Francisco Baseball Associates, L.P. There are 32 partners invested in the club, but it’s widely understood that most just possess a couple million in share equity, while a few hold the controlling shares. None of the owners are purported to be very active in the team’s management except Lawrence Baer, a minority owner and president and CEO of the club.

Share values in the Giants partnership have grown enormously since roughly two-dozen investors bought the baseball club in 1992 for about $100 million. At last estimate the Giants franchise was valued at $643 million. With their second World Series title in under three years sealed and their fan-base rapidly growing, that price is likely to have shot up. So who exactly is getting rich?

Charles B. Johnson

The largest Giants shareholder is Charles B. Johnson, estimated net worth of around $4-5 billion. That makes Johnson the wealthiest man in baseball. Whatever money Johnson has made off the Giants is small potatoes compared to the fortune he started with.

Johnson’s money comes from Franklin Resources, a mutual fund company his father founded. Johnson is pretty much Bay Area royalty, about as elite in both the social and economic sense as they come. He’s a trustee of Stanford’s conservative Hoover Institution, and has been a member of the corporate policy lobbying group the Bay Area Council.

Johnson lavishes money on conservative, anti-labor causes and political candidates. Just this year Johnson gave $200,000 to Karl Rove’s American Crossroads super PAC, and $50,000 to the pro-Mitt Romney Restore Our Future super PAC, in addition to many other causes. Johnson is also the largest funder of the campaign against California’s Proposition 30 which would raise taxes on the super wealthy to fund education; he gave an anti-30 committee $200,000. Johnson has also contributed $50,000 to Proposition 32, the California ballot initiative that would virtually ban union money in California politics.

Charles B. Johnson’s home, the Carolands Chateau in Hillsbourough, CA.

Earlier this year Johnson held lavish fundraising events for Mitt Romney in his opulent Hillsborough mansion, the Carolands Chateau. In previous years Johnson invited George W. Bush to hold fundraisers at Carolands also.

Charles Johnson’s partner in business at Franklin Resources, a man named Harmon Burns, was until 2006 the largest share owner of the Giants. His death in that year passed his shares on to his wife, who then died in 2009 leaving the stake to be split between their daughters, Tori and Trina. In other words, majority ownership of the Giants rest with three people whose fortunes come from the Franklin Resources, Inc. company.

Peter Magowan, the Giants’ former managing partner who is credited as the catalyst for bringing the current group of owners together to buy the team in 1993, remains a large shareholder. Like his fellow owners, Magowan’s money doesn’t originate in baseball. And like more than a few of his fellow owners Magowan inherited his fortune. Magowan also shares the conservative, anti-labor values of some of his fellow Giants owners.

Peter Magowan (picture from Caterpillar, Inc.’s web site).

His grandfather was the founder of the investment bank behemoth Merrill Lynch (now part of Bank of America) and also a founder of the Safeway Corporation. Magowan’s father ran Safeway, and Magowan himself was elevated to the position of CEO of Safeway in 1979. By then the company had become the supermarket titan it is today.

Like Charles Johnson, Peter Magowan is a reactionary conservative who actively throws money against social justice causes. Magowan has lavished hundreds of thousands of dollars on Republican Party candidates John McCain, Carley Fiorina, and Paul Ryan. Earlier this year Magowan gave Karl Rove’s American Crossroads a $75,000 contribution toward defeating Barack Obama and other Democrats in key states, as well as $25,000 to the Restore Our Future super PAC. Earlier this year Magowan gave Wisconsin governor Scott Walker a $10,000 contribution to fight the recall campaign initiated against him by labor unions after Walker attempted to abolish collective bargaining.

Magowan is known as an anti-union corporate manager from his earlier years running Safeway. When Safeway was taken private in an LBO orchestrated by KKR in 1986, Magowan led an effort to bust up unions inside the company and drive down wages so as to drive up profits for the new private equity owners. “Our intention is to discuss with the unions those divisions that are having profitability problems, in our opinion entirely because of the fact that we pay higher labor costs than our competition in several markets that we operate,” Magowan told the LA Times during the company’s restructuring.

In addition to his current ownership stake in the Giants, Magowan also sits on the boards of Caterpillar, Inc. and DiamlerChrysler. Caterpillar has been widely criticized for selling bulldozers to the Israeli government through U.S. Foreign Military Sales Program. These bulldozers are used to demolish the homes, businesses, and farms of Palestinians.

The Giants owners aren’t just conservative tycoons. Among the minority owners of the Giants are some Democrats also. Giants owner Philip Halperin runs the Silver Giving Foundation, a philanthropy he created with money he amassed while working as a partner in the Weston Presidio private equity firm. Halperin’s official biography on the Stanford Freeman Spogli Institute for International Studies web site (where he sits on the advisory board trustee) says that at Weston he was, “focused on information technology, consumer branding, telecommunications and media,” and that he “previously worked at Lehman Brothers and Montgomery Securities.”

Halperin contributes relatively small amounts to the Democratic Party and candidates in any given year. He also sits on the board of Autonomy Virage, a company that specializes in developing surveillance systems for corporate and military clients.

More than several of the Giants minority owners are real estate tycoons, a fitting source of wealth given that the Giants baseball franchise itself has been a major force in a broader effort by San Francisco’s landlords to further gentrify the entire city and drive up land values. The Giants’ downtown stadium seamless connects the financial district (the product of 1960s and 1970s urban “renewal”) with China Basin and Mission Bay. The latter areas have seen enormous real estate investment in the 1990s and 2000s, including numerous luxury condo and high-rise apartment projects ringing the AT&T Park and the University of California’s brand new medical school campus (around which biotech companies are in a frenzied push to claim land).

Some of the Giants’ current owners have been keen to cash in on this speculative frenzy. An article from a 1997 issue of the San Francisco Business Times describes one case:

“In March, Allan Byer, a minority partner of the San Francisco Giants and owner of the Byer California clothing manufacturing company, beat out three other investors to plunk down $3.15 million for an aging and empty brick warehouse at 128 King St. On paper, the deal makes little sense. According to the San Francisco Tax Assessor’s office, the building is worth just $316,194. Why pay 10 times that much for an old building that hasn’t earned a dime in decades? The answer lies directly across the street, where in the middle of November, the Giants will hold a groundbreaking ceremony to start construction of PacBell Park, the team’s new 42,000-seat stadium. On opening day in April 2000, tens of thousands of people will stream into the stadium for the game, most of them passing directly in front of Byer’s property, which by then likely will house two or more restaurants — tables packed and cash registers humming.”

Other big shot real estate investors who own minority stakes in the Giants include David S. Wolff of the Wolff Companies, and Scott Seligman of the Seligman Group. Wolff controls a huge portfolio of Houston office properties.

Scott Seligman’s company owns the Sterling Bank & Trust, and numerous office properties in California, Nevada, and Michigan. Seligman has been singled out as the ugly face of gentrification in San Francisco by non other than Lawrence Ferlinghetti, the famed poet and owner of City Lights books. Back in 2001 Seligman was in the process of evicting tenants from a building he controlled in the Mid-Market area (the same part of San Francisco now being colonized by Twitter thanks to a big tax break the Board of Supervisors gave the company). In a press release Ferlinghetti lashed out:

“A developer from Michigan, Scott Seligman, who runs Sterling Bank and Seligman Western Enterprises, wants to gentrify the Mid-Market zone. Not to make the City a better place but to make his bank account a little fatter. He wants a better class of tenant. No more photographers or poets or translators or editors or painters. No more small businesses serving the City. No more small nonprofits, like Streetside Stories, which publishes work by 650 middle school kids every year to foster a love of reading and writing.”

Ferlinghetti was trying to draw a line: “It’s long past time for San Francisco—the people who live here and care about the place, the politicians, the small businesses, the kids who will inherit either a theme park or an exciting, urbane City—to stand up and stop the development juggernaut.”

AT&T Park from the air, obviously a jewel in king gentrification’s crown.

Of course the development juggernaut stumbled for a couple years, but then raged on. The Giants new ballpark was a key piece in advancing the juggernaut not only because it linked gentrifying regions of the city, but also because it secured a much desired form of high-priced entertainment for the tech and finance employees quickly populating trendy neighborhoods like Soma and the Mission. These highly paid, college educated urban pioneers have driven out thousands of long-time residents, mostly Black and Latino families whose existence sullies the theme park atmosphere, and who can’t pay the rapidly rising rents making men like Seligman very wealthy.

Meanwhile tickets to a Giants baseball game have shot up in price, making an outing to even the most mundane mid-season match too costly for some San Franciscans. Ball games have become something of a posh affair. The restaurants that ring AT&T Park are pricey, as is the food and drink inside the games.

Nowadays many of Silicon Valley’s big companies —Google, Yahoo, Facebook— send fleets of company buses into San Francisco’s hipster enclaves like Noe Valley, the Mission, Bernal Heights and Soma to pick up their twenty to forty-something year-old engineers and code geeks, shuttling them on these private transit systems directly to work with onboard wi-fi and other so-called perks to keep them satiated. In the 1990s it was no surprise that the young workforce fueling California’s booming technology capital wanted to live in an exciting city and shunned the quiet suburbia of Palo Alto, Cupertino, and Santa Clara. They wanted city lights, “gritty” urban experiences, 2 AM burritos on 24th Street, over-priced coffee along Valencia, art galleries on Natoma, endless music and clubs, and yes, of course they’d want baseball. Most importantly, they’d be willing to shell out hundreds of dollars or more every year for tickets.

The owners of San Francisco Baseball Associates, L.P., and the companies, foundations, and non-profit corporations they control, own, or direct.

So it should be no surprise that filling out the minority owners of the Giants baseball club are mostly technology executives. They had both the money to burn thanks to their IPOs and buyouts, and they had the larger reasons of class interest to make what was seemingly a philanthropic investment in the 1990s when the Giants almost left San Francisco for Florida. The team’s majority owner back then complained he had been losing money after voters thrice rejected his efforts to get public funds to build a new stadium. Many observers thought the new owners were simply sacrificing a few million to keep the team in San Francisco; the Giants were also a pretty mediocre ball club then, and attendance at games, held out at the windy Candlestick Park, wasn’t the greatest. When the new owners took over they ended up getting millions in public subsidies to build the new downtown stadium by the water. Even though they claim to have been the first franchise to “go private” with ballpark financing, the Giants’ owners did in fact receive at least $80 million in infrastructure upgrades paid for by taxpayers. The stadium also sits on public land, leased to the Giants at a very cheap rate.

Of course the new owners weren’t philanthropists. They were operating as sharp business executives. The baseball club was a keen real estate investment, and a very strategic investment toward their larger project of keeping San Francisco hegemonic in the tech economy. This larger vision of urban development has involved rapidly eradicating working class communities and replacing them with yuppified landscapes populated by mostly white college educated newcomers. Surprisingly few in San Francisco have consistently criticized the Giants baseball club for playing a key part in this harsh gentrification campaign executed on a city-wide level.